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<SEC-DOCUMENT>0000950129-02-001261.txt : 20020415
<SEC-HEADER>0000950129-02-001261.hdr.sgml : 20020415
ACCESSION NUMBER: 0000950129-02-001261
CONFORMED SUBMISSION TYPE: 10-K
PUBLIC DOCUMENT COUNT: 15
CONFORMED PERIOD OF REPORT: 20011231
FILED AS OF DATE: 20020313
FILER:
COMPANY DATA:
COMPANY CONFORMED NAME: BAKER HUGHES INC
CENTRAL INDEX KEY: 0000808362
STANDARD INDUSTRIAL CLASSIFICATION: OIL & GAS FILED MACHINERY & EQUIPMENT [3533]
IRS NUMBER: 760207995
STATE OF INCORPORATION: DE
FISCAL YEAR END: 1231
FILING VALUES:
FORM TYPE: 10-K
SEC ACT: 1934 Act
SEC FILE NUMBER: 001-09397
FILM NUMBER: 02573951
BUSINESS ADDRESS:
STREET 1: 3900 ESSEX LANE
CITY: HOUSTON
STATE: TX
ZIP: 77027
BUSINESS PHONE: 7134398600
MAIL ADDRESS:
STREET 1: 3900 ESSEX LAND
CITY: HOUSTON
STATE: TX
ZIP: 77210
</SEC-HEADER>
<DOCUMENT>
<TYPE>10-K
<SEQUENCE>1
<FILENAME>h94456e10-k.txt
<DESCRIPTION>BAKER HUGHES INCORPORATED - DECEMBER 31, 2001
<TEXT>
<PAGE>
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
---------------
Commission File Number 1-9397
---------------
BAKER HUGHES INCORPORATED
(Exact Name of Registrant as Specified in its Charter)
DELAWARE 76-0207995
(State or Other Jurisdiction (IRS Employer Identification No.)
of Incorporation or Organization)
3900 ESSEX LANE, SUITE 1200, HOUSTON, TEXAS 77027-5177
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code: (713) 439-8600
---------------
Securities Registered Pursuant to Section 12(b) of the Act:
<Table>
<Caption>
Name of Each Exchange
Title of Each Class On Which Registered
------------------- ---------------------
<S> <C>
Common Stock, $1 Par Value Per Share New York Stock Exchange
Pacific Exchange
Swiss Exchange
</Table>
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 [X] NO [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
---------------
At March 1, 2002, the registrant has outstanding 336,743,642 shares of
Common Stock, $1 par value. The aggregate market value of the Common Stock on
such date (based on the closing price on February 28, 2002 reported by the New
York Stock Exchange) held by nonaffiliates was approximately $11,869,371,200.
---------------
DOCUMENTS INCORPORATED BY REFERENCE
Portions of Registrant's 2001 Proxy Statement for the Annual Meeting of
Stockholders to be held April 24, 2002 are incorporated by reference into Part
III.
================================================================================
<PAGE>
PART I
ITEM 1. BUSINESS
Baker Hughes Incorporated (the "Company") is a Delaware corporation engaged
in the oilfield and process industries. In addition, the Company manufactures
and sells other products and provides services to industries that are not
related to the oilfield or continuous process industries. The Company conducts
certain of its operations through subsidiaries, affiliates, ventures,
partnerships or alliances. The Company was formed in April 1987 in connection
with the combination of Baker International Corporation and Hughes Tool Company.
The Company acquired Western Atlas Inc. ("Western Atlas") in a merger completed
on August 10, 1998.
As used herein, the "Company" may refer to Baker Hughes Incorporated or its
subsidiaries. The use of the terms Company and Baker Hughes are not intended to
connote particular corporate status or relationships.
For additional industry segment information for the three years ended
December 31, 2001, see Note 10 of the Notes to Consolidated Financial Statements
in Item 8 herein.
OILFIELD
The Oilfield segment of the Company consists of six operating divisions:
Baker Atlas, Baker Hughes INTEQ, Baker Oil Tools, Baker Petrolite, Centrilift
and Hughes Christensen. The Company, through its Oilfield segment, is a major
supplier of wellbore-related products, technology services and systems to the
oil and gas industry on a worldwide basis and provides equipment, products and
services for drilling, formation evaluation, completion and production of oil
and gas wells. These divisions have been aggregated because the long-term
financial performance of these divisions is affected by similar economic
conditions and the consolidated results are evaluated regularly by the chief
operating decision maker in deciding how to allocate resources and in assessing
performance. The principal markets for this segment include all major oil and
gas producing regions of the world, including North America, Latin America,
Europe, Africa, the Middle East and the Far East.
Baker Atlas. The Company, through its Baker Atlas division, is a premier
provider of a complete range of downhole well logging technology and services,
including advanced formation evaluation, production and reservoir engineering
and petrophysical and geophysical data acquisition services. In addition, the
Company provides perforating and completion technologies, pipe recovery and data
management, processing and analysis. This diverse range of services is
applicable through the life cycle of a reservoir - initially, in support of the
drilling process, continuing through the prospect evaluation and appraisal phase
and finally, to production and reservoir management. In performing well logging
services, the Company transmits electronic instrumentation and sensor packages
into the borehole by means of an electrical wireline, drill pipe, coiled tubing
or well tractor. The surface-controlled instrumentation gathers measurements,
collects samples and performs experiments downhole. The measurements are
recorded digitally and can be displayed on a continuous graph, or well log,
against depth or time. These well logs are processed, analyzed and interpreted
to determine physical attributes of the well, which can indicate the volume of
hydrocarbon present, the extent of the reservoir and its producibility.
Perforating services are offered by both Baker Atlas and the Company's Baker Oil
Tools division and provide a pathway through the casing and cement sheath in
wells so that the hydrocarbon can enter the wellbore from the formation. These
services and information that these divisions provide allow oil and gas
companies to define, reduce and manage their risk. The Company's largest
competitors in the downhole logging and perforating markets include Schlumberger
Limited ("Schlumberger") and Halliburton Company ("Halliburton").
Baker Hughes INTEQ. The Company, through its Baker Hughes INTEQ division, is
a major supplier of real-time drilling and evaluation services to the oil and
gas industry. These services include directional and horizontal drilling
technologies, drilling fluid systems, logging-while-drilling,
measurement-while-drilling, mud logging, coring and subsurface surveying. The
Company provides high-end technology solutions that oil and gas companies
require to drill complex wells in challenging reservoir environments. Baker
Hughes INTEQ is an industry leader in the design and planning of wells that
incorporate complex trajectories set to intercept multiple reservoir targets. As
exploration and development is increasingly conducted in the costlier offshore
deepwater areas, there is an increased demand for the Company's drilling
technology to reduce cost through optimized performance. In the upper hole
sections of an oil and gas well, the Company's survey services and high
performance drilling motors can help to provide safe and efficient drilling of
the formations. In the directional portion of the well, the Company's
1
<PAGE>
rotary steering technology is combined with logging-while-drilling technology to
allow clients to drill three-dimensional well trajectories while taking
measurements to evaluate the formations drilled. The measurements are
transmitted to the surface through the use of pulse telemetry, a system where
differential pressure patterns are transmitted through a fluid column to the
surface for decoding. The Company's visualization technology at the surface
allows this real-time data to be overlaid on images of the reservoir, permitting
engineers to steer the well while watching graphical representation of the
drilling assembly moving through the reservoir. These technologies allow access
to, and the efficient drilling of, reservoirs that could not have been developed
effectively five years ago. The Company competes principally with Halliburton
and Schlumberger in these products and services.
The Company, through its Baker Hughes INTEQ division, also produces and
markets drilling fluids (muds) and specialty chemicals and provides technical
services for the use of the muds and chemicals in oil and gas well drilling.
Drilling fluids typically contain barite or bentonite and may use a water or oil
base. The main purpose of the drilling fluid is to provide stability within the
wellbore by cleaning the bottom of a hole as it removes cuttings and transports
them to the surface, by cooling the bit and drill string, by controlling
formation pressures and by sealing porous well formations. To provide optimized
stability and future oil production, a fluid is often customized for a wellbore
as the well-site engineer monitors the interaction between the drilling fluid
and the formation. The Company also furnishes on-site, around-the-clock
laboratory analysis and examination of circulated and recovered drilling fluids
and recovered drill cuttings to detect the presence of hydrocarbons and identify
the formations penetrated by the drill bit. The Company's principal competitors
for these products and services are Smith International, Inc. ("Smith") and
Halliburton.
Baker Oil Tools. The Company, through its Baker Oil Tools division, is a
premier provider of downhole completion, workover and fishing equipment and
services. Downhole completion product lines include packers, flow control
equipment, subsurface safety valves, liner hangers and sand control systems.
Packers are used in the wellbore to seal the space between the production tubing
and the casing, to protect the casing from reservoir pressures and corrosive
formation fluids and to maintain the separation of production zones. Casing is
steel pipe used to line the well bore to keep the wall of the drilled hole from
caving in, to prevent fluids from moving from one formation to another and to
improve the efficiency of extracting oil and gas from producing wells.
Production tubing is the pipe through which the oil and gas flows from the
producing zone under the ground to the surface of the well. Flow control
equipment provides additional means to control and adjust the flow of downhole
fluids from producing zones, while subsurface safety valves shut off all flow of
fluids to the surface in the event of an emergency. New technology developments
in this area include intelligent completion systems, which can provide lower
customer operating costs through remote actuation and the opportunity for
enhanced production by controlling selective zone production based on real time
reservoir data. The Company is a major worldwide manufacturer and provider of
packers, flow control and safety valve equipment. Its principal competitors in
this area are Halliburton, Schlumberger and Weatherford International Inc.
("Weatherford").
The Company also manufactures and sells liner hanger systems which the
Company's customers use to suspend and set strings of casing pipe in wells. The
Company's new technology developments in this area include multi-lateral
completions systems, which provide multiple downhole casing pipes to be tied to
one main wellbore casing pipe with pressure seal integrity. The Company is a
leading worldwide producer of liner hangers and multi-lateral systems. Its
primary competitors in this area are Halliburton and Weatherford.
The Company offers sand control equipment (gravel pack tools, screens,
fluids and pumping) and services that prevent sand from entering the wellbore
and reducing productivity. The Company has expanded its marine vessel, high
pressure, "frac-pack" service capabilities. The frac-pack service involves
injecting fluids and propants into the formation to expand the formation and
increase the rate of production. Propants are spherical-shaped particles
(generally made of a silicant) that, when forced into fissures in the formation,
expand the fissures and maintain the expansion. The Company's new technology
developments in this area include expanding solid and sand screen pipe
technologies. By expanding pipe and screen downhole, the internal flow areas are
increased, which, in turn, allows for enhanced production. The Company is a
leading provider of sand control equipment and services. Its primary competitors
are Halliburton, Schlumberger and BJ Services Company.
For the workover segment of the market, the Company provides mechanical
services tools and inflatable packers. The inflatable products enable
thru-tubing remedial operations that utilize coiled tubing rigs. The inflatable
packers are also used in the open hole environment for testing the potential of
a well during the drilling phase prior to the installation of casing. The
inflatable packers also become an integral part of the casing (external
2
<PAGE>
casing packer) to provide zone separation. The Company's primary competitors for
these product lines are Halliburton, Schlumberger and Weatherford.
The Company also provides fishing equipment and services using specialized
tools to locate, dislodge and retrieve twisted off, dropped or damaged pipe,
tools or other objects from inside the wellbore, potentially hundreds or
thousands of feet below the surface. In addition, milling, cutting and whipstock
services are offered to clean out wellbores or mill windows in the casing to
drill a sidetrack, or multi-lateral well. The Company's fishing services are
also offered in a thru-tubing product line, making it compatible with coiled
tubing workover operations. The Company is a leading provider of fishing
services. Its major competitors are Weatherford and Smith.
The Company also provides other completion, remedial and production products
and services, including control systems for surface and subsurface safety valves
and surface flow lines and flow regulators and packers used in secondary
recovery waterflood projects. The Company's primary competitors are Halliburton
and Schlumberger.
Baker Petrolite. The Company, through its Baker Petrolite division, is a
premier provider of oilfield specialty chemicals and integrated chemical
technology solutions for petroleum production, transportation and refining.
Chemicals that the Company provides include specialty chemicals that production
segments of the petroleum industry use, as well as industrial chemicals that
customers use in refining, wastewater treatment and cooling and boiler water
processes. The Company also provides chemical technology solutions to other
industrial markets throughout the world including petrochemicals, fuel
additives, plastics, imaging, adhesives, steel and crop protection. The Company
believes that its primary competitors are Ondeo Nalco Energy Services, LP and
the Betz Dearborn division of Hercules, Inc.
Centrilift. The Company, through its Centrilift division, is a market leader
for oilfield electric submersible pumping systems, which help raise oil to the
surface. These pumping systems consist of an electric submersible pump placed
inside the oil well near the productive formation, power and control cables
between the pump and the surface and a surface control system. The Company
manufactures the critical components of the systems, including variable speed
motor controllers and specialty armored power cables designed for oilfield use.
Its major competitor is Schlumberger.
Hughes Christensen. The Company, through its Hughes Christensen division, is
a leading manufacturer and marketer of Tricone(R) roller cone drill bits and
polycrystalline diamond compact fixed cutter bits for the worldwide oil, gas,
mining and geothermal industries. The Company believes that its principal
competitors in this area are Smith, Halliburton and Schlumberger for oil and gas
applications, and Sandvik Smith and Varel International, Inc. for other
applications.
PROCESS
The Process segment of the Company consists of two operating divisions:
EIMCO Process Equipment and BIRD Machine. Through its Process segment, the
Company manufactures, markets and services a broad range of separation and
treatment solutions and continuous and batch centrifuges and specialty filters
to a wide range of markets.
EIMCO Process Equipment. The Company, through its EIMCO Process Equipment
division ("EIMCO"), provides a broad range of separation and treatment solutions
to a wide range of process industries including minerals processing, power
generation, pulp and paper production, municipal water and wastewater,
industrial water and wastewater, chemical processing, steel production and
refining. EIMCO designs, manufactures and installs customer-specific solutions
that can improve process performance and productivity. The Company's product
lines include vacuum filters (drum, disc and horizontal belt filters), pressure
filters (filter presses and belt presses), sedimentation products (thickeners,
hi-rate thickeners, Deep Cone(TM) paste thickeners, E-Cat(TM) clarifier
thickeners and EIMCO(R) clarifiers), Wemco(R) flotation cells, Pyramid(TM)
column cells, biological treatment equipment (Carrousel(R) system, aerators,
digestors and Advent integral systems), KnowledgeScape(R) process control
systems and specialty equipment (solvent-oil dewaxer and ClariDisc(R) filters).
EIMCO has one of the largest bases of installed equipment in the industry. The
Company's principal competitors include Krauss Maffei, Outokumpu, Metso Minerals
(formerly Svedala), U.S. Filter, Westec and Ahlstrom.
3
<PAGE>
BIRD Machine. The Company, through its BIRD Machine division, manufactures a
broad range of continuous and batch centrifuges and specialty filters, which are
each widely used in the municipal, industrial, chemical, minerals and
pharmaceutical markets to separate, dewater or classify process and waste
streams. The Company's principal competitors in its continuous centrifuge
product line are Alfa-Laval/Sharples Tomoe, Westfalia and Flottweg. There are
numerous small and large companies that compete in the batch centrifuge and
filter product lines.
The Company provides parts, repairs and services for all of its process
equipment product lines through a global network of personnel and facilities
strategically located to serve the customer community. The Company also offers
equipment and operation services for processes that utilize many of the
Company's process equipment product and service lines.
Petreco. The Company has a 49% interest in the voting power of Petreco, an
entity created by the Company and Sequel Holdings, Inc. ("Sequel"). Petreco was
formed in October 2001, and the Company contributed $16.6 million of net assets
of the refining and production product line of its Process segment for the
Petreco formation. Petreco sells process equipment to oil and gas production
(including electrostatic de-salters and hydrocyclones) and refining
applications.
WESTERN GECO
The Company owns a 30% interest in a venture, Western GECO, formed in late
2000, with Schlumberger owning the remaining 70%. Western GECO is a leading
provider of seismic data acquisition and processing services to assist oil and
gas companies in evaluating the producing potential of sedimentary basins and in
locating productive hydrocarbon zones. Seismic data is acquired by producing
sound waves which move through the ground and are recorded by audio instruments.
The recordings are then analyzed to determine the characteristics of the
geologic formations through which the sound waves moved and the extent that oil
and gas may be trapped in or moving through those formations. This analysis is
known as a seismic survey. Western GECO conducts seismic surveys on land, in
deep waters and across shallow-water transition zones worldwide. These seismic
surveys encompass high-resolution, two-dimensional and three-dimensional surveys
for delineating exploration targets. Western GECO also conducts time-lapse,
four-dimensional seismic surveys for monitoring reservoir fluid movement over
time. Seismic information can reduce field development and production costs by
reducing turnaround time, lowering drilling risks and minimizing the number of
wells necessary to explore and develop reservoirs. Western GECO's major
competitors in providing these services are Compagnie Generale de Geophysique,
Veritas DGC, Inc. and Petroleum Geo-Services ASA.
EXPLORATION AND PRODUCTION ACTIVITIES
The Company owns a 40% interest in the OML-114 project (formerly OPL-230), a
Nigerian oil and gas exploration and production operation. The Company's intent
to hold or divest of this project could change in the future depending on the
relative value of the project and the viability of an offer from a third party
with respect to a proposed transaction regarding the project. The Company
divested all of its other exploration and production properties in 2000 and 2001
and does not expect to actively pursue additional interests in exploration and
production properties.
MARKETING, COMPETITION AND ECONOMIC CONDITIONS
The Company markets the products of each of its principal industry segments
primarily through the Company's own sales organizations on a product line basis,
although certain of its products and services are marketed through supply
stores, independent distributors or sales representatives. The Company
ordinarily provides technical and advisory services to assist in its customers'
use of the Company's products and services. Stockpoints and service centers for
oilfield products and services are located in areas of drilling and production
activity throughout the world. The Company markets its oilfield products and
services in nearly all of the oil-producing countries. For process products and
services, stockpoints and service centers are located near the operations of the
Company's customers, and the Company markets process products and services
throughout the world. In certain areas outside the United States, the Company
utilizes licensees, sales representatives and distributors.
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The Company's products and services are sold in highly competitive markets,
and its revenues and earnings can be affected by changes in competitive prices,
fluctuations in the level of activity in major markets, general economic
conditions and governmental regulation. The Company competes with the oil and
gas industry's largest integrated oilfield service providers. The Company
believes that the principal competitive factors in the industries that it serves
are product and service quality, availability and reliability; health, safety
and environmental standards; technical proficiency and price.
Further information concerning marketing, competition and economic
conditions is contained under the caption "Business Environment" in "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations".
INTERNATIONAL OPERATIONS
The Company operates in over 70 countries worldwide, and its operations are
subject to the risks inherent in doing business in multiple countries with
various laws and differing political structures and situations. These risks
include, but are not limited to, war, boycotts, political changes, terrorism,
expropriation, foreign exchange or currency restrictions, taxes and changes in
currency exchange rates. Although it is impossible to predict the likelihood of
such occurrences or their effect on the Company, management believes these risks
to be acceptable. However, there can be no assurance that an occurrence of any
one or more of these events would not have a material adverse effect on the
Company's operations.
RESEARCH AND DEVELOPMENT; PATENTS
The Company is engaged in research and development activities directed
primarily toward the improvement of existing products and services, the design
of specialized products to meet specific customer needs and the development of
new products and processes. For information regarding the amounts of research
and development expense in each of the three years ended December 31, 2001, see
Note 14 of the Notes to Consolidated Financial Statements in Item 8 herein.
The Company has followed a policy of seeking patent and trademark protection
both inside and outside the United States for products and methods that appear
to have commercial significance. The Company believes its patents and trademarks
to be adequate for the conduct of its business, and while it regards patent and
trademark protection important to its business and future prospects, it
considers its established reputation, the reliability and quality of its
products and the technical skills of its personnel to be more important. The
Company aggressively pursues protection of its patents against patent
infringement worldwide.
BUSINESS DEVELOPMENTS
OILFIELD
In February 2002, the Company acquired Apollo Services, Inc. ("Apollo") for
its Baker Hughes INTEQ division drilling fluids product line. Apollo is
primarily engaged in the drying, injection and transfer of drill cuttings from
oil and gas wells.
In February 2002, the Company and Luna Innovations Incorporated ("Luna
Innovations") formed a venture named Luna Energy, L.L.C. ("Luna Energy") to
develop, manufacture, commercialize, sell, market and distribute downhole fiber
optic and other sensors for oil and gas exploration, production, transportation
and refining applications. The Company and Luna Innovations own 40% and 60%
interests, respectively, in Luna Energy.
PROCESS
In the year 2000, the Company had announced plans to sell Baker Process as
an entire business unit, but has since determined that it would consider selling
the Baker Process operations as individual units. The Company has separated the
product lines comprising Baker Process into three separate operational business
units to provide focus and to allow these business units to better meet the
needs of their individual client bases. These operations were reconstituted into
the three original business units that were put together in 1999 to form Baker
Process: EIMCO Process Equipment, BIRD Machine and a production and refining
product line.
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On October 30, 2001, the Company and Sequel created an entity to operate
under the name of Petreco International ("Petreco"). The Company contributed
$16.6 million of net assets of the refining and production product line of its
Baker Process segment to Petreco, consisting primarily of intangible assets,
accounts receivable and inventories. Petreco profits are shared by the Company
and Sequel in 49% and 51% interests, respectively. Sequel is entitled to a
liquidation preference upon the liquidation or sale of Petreco.
EMPLOYEES
At December 31, 2001, the Company had approximately 26,800 employees, as
compared to approximately 24,500 employees at December 31, 2000. Approximately
2,370 employees at December 31, 2001, were represented under collective
bargaining agreements that terminate at various times through September 30,
2006. The Company believes that its relations with its employees are
satisfactory.
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EXECUTIVE OFFICERS
The following table shows as of March 6, 2002, the name of each executive
officer of the Company, together with his age and all offices presently held
with the Company.
<Table>
<Caption>
NAME AGE
<S> <C> <C>
Michael E. Wiley 51 Chairman of the Board, President and Chief Executive Officer of the Company
since August 2000. Employed by Atlantic Richfield Company as President and
Chief Operating Officer from 1997 to 2000 and as Executive Vice President from
1997 to 1998. Employed by Vastar Resources, Inc. as Chairman of the Board
from 1994 to 2000 and President and Chief Executive Officer from 1996 to 1997.
Employed by the Company in 2000.
Andrew J. Szescila 54 Senior Vice President and Chief Operating Officer of the Company since 2000.
Employed as President of Baker Hughes Oilfield Operations from January to
October 2000. Served as Senior Vice President of the Company since 1997 and
Vice President of the Company from 1995 to 1997. Employed as President of
Hughes Christensen Company from 1989 to 1997 and President of Baker Service
Tools from 1988 to 1989. Served as President of BJ Services International
from 1987 to 1988. Employed by the Company in 1973.
George S. Finley 51 Senior Vice President - Finance and Administration and Chief Financial Officer
of the Company since 1999. Employed as Senior Vice President and Chief
Administrative Officer of the Company from 1995 to 1999, Controller from 1987
to 1993 and Vice President from 1990 to 1995. Served as Chief Financial
Officer of Baker Hughes Oilfield Operations from 1993 to 1995. Employed by
the Company in 1982.
Alan R. Crain, Jr. 50 Vice President and General Counsel of the Company since October 2000.
Executive Vice President, General Counsel and Secretary of Crown, Cork & Seal
Company, Inc. from 1999 to 2000. Vice President and General Counsel, 1996 to
1999, and Assistant General Counsel, 1988 to 1996, of Union Texas Petroleum
Holding, Inc. Employed by the Company in 2000.
Greg Nakanishi 50 Vice President, Human Resources of the Company since November 2000. Employed
as President of GN Resources from 1989 to 2000. Employed by the Company in
2000.
Alan J. Keifer 47 Vice President and Controller of the Company since July 1999. Employed as
Western Hemisphere Controller of Baker Oil Tools from 1997 to 1999 and
Director of Corporate Audit for the Company from 1990 to 1996. Employed by
the Company in 1990.
John A. O'Donnell 53 Vice President of the Company since 2000. Employed as Vice President,
Business Process Development, of the Company from 1997 to 2002; Vice
President, Manufacturing, of Baker Oil Tools from 1990 to 1997 and Plant
Manager of Hughes Tool Company from 1975 to 1990. Employed by the Company in
1975.
Ray Ballantyne 52 Vice President of the Company since 1998 and President, Baker Hughes INTEQ
since 1999. Employed as Vice President, Marketing, Technology and Business
Development, of the Company from 1998 to 1999; Vice President, Worldwide
Marketing, of Baker Oil Tools from 1992 to 1998 and Vice President,
International Operations, of Baker Service Tools, from 1989 to 1992. Employed
by the Company in 1975.
</Table>
7
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<Table>
<S> <C> <C>
David H. Barr 52 Vice President of the Company and President of Baker Atlas since 2000.
Employed as Vice President, Supply Chain Management, of Cooper Cameron from
1999 to 2000. Mr. Barr also held the following position with the Company:
Vice President, Business Process Development, from 1997 to 1998 and the
following positions with Hughes Tool Company/Hughes Christensen: Vice
President, Production and Technology, from 1994 to 1997; Vice President,
Diamond Products, from 1993 to 1994; Vice President, Eastern Hemisphere
Operations, from 1990 to 1993 and Vice President, North American Operations,
from 1988 to 1990. Employed by the Company in 1972.
James R. Clark 51 Vice President of the Company and President of Baker Petrolite Corporation
since 2001. President and Chief Executive Officer of Consolidated Equipment
Companies, Inc. from 2000 to 2001 and President of Sperry-Sun from 1996 to
1999. Employed by the Company in 2001.
William P. Faubel 46 Vice President of the Company and President of Centrilift since 2001. Vice
President, Marketing, of Hughes Christensen from 1994 to 2001 and served as
Region Manager for various Hughes Christensen areas (both domestic and
international) from 1986 to 1994. Employed by a predecessor of the Company,
Hughes Tool Company, in 1977.
Edwin C. Howell 54 Vice President of the Company since 1995 and President of Baker Oil Tools
since 1992. Employed as President of Baker Service Tools from 1989 to 1992 and
Vice President - General Manager of Baker Performance Chemicals (the
predecessor of Baker Petrolite) from 1984 to 1989. Employed by the Company in
1975.
Douglas J. Wall 49 Vice President of the Company and President of Hughes Christensen since 1997.
Served as President and Chief Executive Officer of Western Rock Bit Company
Limited, Hughes Christensen's former distributor in Canada, from 1991 to 1997.
Previously employed as General Manager of Century Valve Company from 1989 to
1991 and Vice President, Contracts and Marketing, of Adeco Drilling &
Engineering from 1980 to 1989. Employed by the Company in 1997.
</Table>
There are no family relationships among the executive officers of the
Company.
ENVIRONMENTAL MATTERS
The Company's operations are subject to U.S. federal, state and local
regulations with regard to air and water quality and other environmental
matters. The Company believes that it is in substantial compliance with these
regulations. Regulation in this area continues to evolve and changes in
standards of enforcement of existing regulations, as well as the enactment and
enforcement of new legislation, may require the Company and its customers to
modify, supplement or replace equipment or facilities or to change or
discontinue present methods of operation.
During the year ended December 31, 2001, the Company spent approximately
$15.8 million to comply with U.S. federal, state and local provisions regulating
the discharge of materials into the environment or otherwise relating to the
protection of the environment (collectively, "Environmental Regulations"). In
the upcoming year ending December 31, 2002, the Company expects to spend a total
of approximately $17 million to comply with the Environmental Regulations. Based
upon current information, the Company believes that its compliance with
Environmental Regulations will not have a material adverse effect upon the
capital expenditures, earnings and competitive position of the Company because
the Company has either made adequate reserves for such compliance expenditures
or the cost to the Company for such compliance is expected to be small in
comparison with the Company's overall net worth.
The Company estimates that it will incur approximately $4 million in capital
expenditures for environmental control equipment during the year ending December
31, 2002 and approximately $3 million in capital expenditures in 2003. The
Company believes that capital expenditures for environmental control equipment
for the years 2002 and 2003 will not have a material adverse effect upon the
financial condition of the Company because the
8
<PAGE>
aggregate amount of these expenditures is expected to be small in comparison
with the Company's overall net worth.
The Comprehensive Environmental Response, Compensation and Liability Act
(known as "Superfund") imposes liability for the release of a "hazardous
substance" into the environment. Superfund liability is imposed without regard
to fault and even if the waste disposal was in compliance with the then current
laws and regulations. With the joint and several liability imposed under
Superfund, a potentially responsible party ("PRP") may be required to pay more
than its proportional share of such costs. The Company and several of its
subsidiaries and divisions have been identified as PRPs at various sites
discussed below. The United States Environmental Protection Agency (the "EPA")
and appropriate state agencies are supervising investigative and cleanup
activities at these sites.
(a) Baker Petrolite Corporation ("Petrolite"), Hughes Christensen Company, a
Baker Hughes INTEQ predecessor entity, Baker Oil Tools and a former
subsidiary were named in April 1984 as PRPs at the Sheridan Superfund
Site located in Hempstead, Texas. The Texas Natural Resource
Conservation Commission ("TNRCC") is overseeing the remedial work at
this site. The Sheridan Site Trust was formed to manage the site
remediation, and the Company participates as a member of the Sheridan
Site Trust. Sheridan Site Trust officials estimate the total remedial
and administrative costs to be approximately $30 million, of which the
Company's estimated contribution is approximately 2%.
(b) In May 1987, Baker Performance Chemicals Incorporated (subsequently
merged into Petrolite) entered into an Agreed Administrative Order with
the Texas Water Commission (currently, the TNRCC) with respect to soil
and groundwater contamination at the Odessa - Hillmont site located in
Odessa, Texas. Baker Performance Chemicals used the site as a chemical
blending plant. The contaminated soil has been removed and the site
continues in the groundwater recovery and treatment phase at an annual
cost to the Company of approximately $25,000.
(c) In December 1987, a former subsidiary of the Company was named a
respondent in an EPA Administrative Order for Remedial Design and
Remedial Action associated with the Middlefield-Ellis-Whisman (known as
"MEW") Study Area, an eight-square mile soil and groundwater
contamination site located in Mountain View, California. Several PRPs
for the site have estimated the total cost of remediation to be
approximately $80 million. The conclusion of extensive investigations
conducted by the Company's third-party environmental consultants is that
the activities of the former subsidiary's operating facility in the MEW
Study Area could not have been the source of any contamination in the
soil or groundwater within the MEW Study Area. As a result of the
Company's environmental investigations and a resulting report delivered
to the EPA in September 1991, the EPA has informed the Company that no
further work needs to be performed on the former subsidiary's site, and
further, the EPA has indicated that it does not believe there is a
contaminant source on the property. Although the Company's former
subsidiary continues to be named in the EPA's Administrative Order, the
Company believes the Administrative Order is not valid with respect to
the Company's former subsidiary and is seeking the withdrawal of the
Administrative Order with respect to that subsidiary.
(d) In January 1996, the TNRCC named Petrolite as a PRP at the McBay Oil and
Gas State Superfund Site in Grapevine, Texas. According to Petrolite's
records, it sold product to McBay Oil and Gas Company, but did not
transport waste to the site. Documentation of the product sales has been
sent to the TNRCC. Based on available information, the Company does not
believe that Petrolite has any liability for contamination at this site.
(e) In July 1997, Petrolite was named by the EPA as a PRP at the Shore
Refinery Site, Kilgore, Texas. According to Petrolite's records, it did
not arrange for the disposal, treatment or transportation of hazardous
substances or used oil in relation to the site, and to date, the EPA has
not produced any documentation linking the Company or any of its
subsidiaries or divisions to the environmental conditions at the site.
The Company does not believe that it has any liability for contamination
at this site.
(f) In June 1999, the EPA named Hughes Tool Company (now known as Hughes
Christensen) as a PRP at the Li Tungsten Site in Glen Cove, New York.
The Company believes that it has contributed a de minimis amount of
hazardous substance to the site and has responded to the EPA's inquiry.
A third-party consultant is
9
<PAGE>
conducting investigative studies at the site to determine a suitable
remedial action plan, as well as the total estimated cost for
remediation.
(g) In January 1999, Baker Oil Tools, Petrolite and predecessor entities of
Petrolite were named as PRPs by the State of California's Department of
Toxic Substances Control for the Gibson site in Bakersfield, California.
The combined volume that Baker Hughes companies contributed to the site
is estimated to be less than 0.5%. The preliminary cost estimate for
remediation of the site is approximately $14 million.
(h) In December 2000, the EPA named Petrolite as a PRP at the Casmalia
Disposal Site, Santa Barbara County, California. The EPA estimated that
the volumetric portion of waste the Teir Group of PRPs (of which
Petrolite is a member) transported and placed at the site is less than
0.1% of the total material. The EPA has estimated the total cost of
remediation to range from $225 million to $290 million. Petrolite is
considered a de minimis contributor and is negotiating a settlement.
(i) In 2001, Hughes Christensen (formerly Hughes Tool Company), Baker Oil
Tools, Baker Hughes INTEQ and a former subsidiary of the Company were
named as PRPs in the Force State Superfund Site located in Brazoria
County, Texas. The TNRCC is overseeing the investigation and remediation
at the Force State Site. Although the investigation of the site is
incomplete, preliminary cost estimates for the closure of the site are
approximately $3 million, with the total contribution from the Company's
divisions estimated to be 25% of that cost.
While PRPs in Superfund actions have joint and several liability for all
costs of remediation, it is not possible at this time to quantify the Company's
ultimate exposure because the projects are either in the investigative or early
remediation stage. Based upon current information, the Company does not believe
that probable or reasonably possible expenditures in connection with the sites
described above are likely to have a material adverse effect on the Company's
financial condition because:
(1) the Company has established adequate reserves to cover the estimate the
Company presently believes will be its ultimate liability with respect
to the matter,
(2) the Company and its subsidiaries have only limited involvement in the
sites based upon a volumetric calculation, as described above,
(3) other PRPs involved in the sites have substantial assets and may
reasonably be expected to pay their share of the cost of remediation,
(4) the Company has adequate resources, insurance coverage or contractual
indemnities from third parties to cover the ultimate liability, and
(5) the Company believes that its ultimate liability is small compared with
the Company's overall net worth.
The Company is subject to various other governmental proceedings and
regulations, including foreign regulations, relating to environmental matters,
but the Company does not believe that any of these matters is likely to have a
material adverse effect on its financial condition or results of operation.
"Environmental Matters" contains forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended. The words "will,"
"believe," "to be," "expects" and similar expressions are intended to identify
forward-looking statements. The Company's expectations regarding its compliance
with Environmental Regulations and its expenditures to comply with Environmental
Regulations, including (without limitation) its capital expenditures on
environmental control equipment, are only its forecasts regarding these matters.
These forecasts may be substantially different from actual results, which may be
affected by the following factors: changes in Environmental Regulations;
unexpected, adverse outcomes with respect to sites where the Company has been
named as a PRP, including (without limitation) the sites described above; the
discovery of new sites of which the Company is not aware and where additional
expenditures may be required to comply with Environmental Regulations; an
unexpected discharge of hazardous materials in the course of the Company's
business or operations; an acquisition of one or more new businesses; a
catastrophic event causing discharges into the
10
<PAGE>
environment of hydrocarbons; and a material change in the allocation to the
Company of the volume of discharge and a resulting change in the Company's
liability as a PRP with respect to a site.
ITEM 2. PROPERTIES
The Company operates 69 manufacturing plants, ranging in size from
approximately 1,500 to 0.3 million square feet of manufacturing space. The total
area of the plants is more than 3.8 million square feet, of which approximately
2.3 million square feet (62%) are located in the United States, 0.4 million
square feet (10%) are located in the Western Hemisphere exclusive of the United
States, 0.9 million square feet (23%) are located in Europe, and 0.2 million
square feet (5%) are located in the Eastern Hemisphere exclusive of Europe.
These manufacturing plants by industry segment and geographic area appear in the
table below. The Company also owns or leases and operates various customer
service centers and shops and sales and administrative offices throughout the
geographic areas in which it operates.
<Table>
<Caption>
OTHER OTHER
WESTERN EASTERN
UNITED STATES HEMISPHERE EUROPE HEMISPHERE TOTAL
------------- ---------- ------ ---------- -----
<S> <C> <C> <C> <C> <C>
Oilfield 29 9 8 11 57
Process 6 2 3 1 12
</Table>
The Company believes that its manufacturing facilities are well maintained.
The Company also has a significant investment in service vehicles, rental tools,
manufacturing and other equipment.
ITEM 3. LEGAL PROCEEDINGS
The Company and its subsidiaries are involved in litigation or proceedings
that have arisen in the Company's ordinary business activities. The Company
insures against these risks to the extent deemed prudent by its management, but
no assurance can be given that the nature and amount of such insurance will be
sufficient to fully indemnify the Company against liabilities arising out of
pending and future legal proceedings. Many of these insurance policies contain
self-insured retentions in amounts the Company deems prudent.
The Company has been named as a defendant in a number of shareholder class
action suits filed by purported shareholders shortly after the Company's
December 8, 1999 announcement regarding the accounting issues it discovered at
its Baker Hughes INTEQ division. These suits, which seek unspecified monetary
damages, have been consolidated in the federal district court for the Southern
District of Texas pursuant to the Private Securities Litigation Reform Act of
1995. The Company filed Motions to Dismiss in both the shareholder derivative
suit and the class action. The federal district court granted the Company's
Motions on both actions. No appeal was filed in the shareholder derivative suit,
but the class action case is currently on appeal at the U.S. Fifth Circuit Court
of Appeals. The Company believes the allegations in these suits are without
merit, and the Company intends to vigorously defend these lawsuits. Even so, an
adverse outcome in this class action litigation could have an adverse effect on
the Company's financial condition or results of operations.
See also "Item 1. Business - Environmental Matters".
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
11
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Common Stock, $1.00 par value per share (the "Common Stock"), of the
Company is principally traded on The New York Stock Exchange. The Common Stock
is also traded on the Pacific Exchange and the Swiss Exchange. At March 1, 2002,
there were approximately 75,581 stockholders and approximately 23,314
stockholders of record.
For information regarding quarterly high and low sales prices on the New
York Stock Exchange for the Common Stock during the two years ended December 31,
2001 and information regarding dividends declared on the Common Stock during the
two years ended December 31, 2001, see Note 15 of the Notes to Consolidated
Financial Statements in Item 8 herein.
12
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
The Selected Financial Data should be read in conjunction with "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations" and with "Item 8. Financial Statements and Supplementary Data"
herein.
<Table>
<Caption>
THREE MONTHS
YEAR ENDED ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, SEPTEMBER 30,
-------------------------------------------------- ------------- -------------
(In millions, except per share amounts) 2001 2000 1999 1998 1997 1997
--------------------------------------- ---------- ---------- ---------- ---------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Revenues $ 5,382.2 $ 5,233.8 $ 4,936.5 $ 6,310.6 $ 1,572.8 $ 5,343.6
Costs and expenses:
Cost of revenues 3,831.8 4,009.6 4,009.8 5,138.4 1,156.3 4,188.2
Selling, general and administrative 818.6 759.6 741.9 876.3 215.7 538.8
Merger related costs -- -- (1.6) 219.1 -- --
Unusual charge 1.6 69.6 4.8 215.8 -- 52.1
Acquired in-process research and
development -- -- -- -- -- 118.0
---------- ---------- ---------- ---------- ---------- ----------
Total 4,652.0 4,838.8 4,754.9 6,449.6 1,372.0 4,897.1
---------- ---------- ---------- ---------- ---------- ----------
Operating income (loss) 730.2 395.0 181.6 (139.0) 200.8 446.5
Equity in income (loss) of affiliates 45.8 (4.6) 7.0 6.7 1.9 2.8
Interest expense (126.4) (173.3) (167.0) (149.0) (24.5) (91.4)
Interest income 12.2 4.8 5.1 3.6 1.2 3.6
Gain on trading securities -- 14.1 31.5 -- -- --
Spin-off related costs -- -- -- -- -- (8.4)
---------- ---------- ---------- ---------- ---------- ----------
Income (loss) from continuing operations
before income taxes, extraordinary loss
and cumulative effect of accounting
change 661.8 236.0 58.2 (277.7) 179.4 353.1
Income taxes (223.1) (133.7) (24.9) (18.4) (68.0) (160.7)
---------- ---------- ---------- ---------- ---------- ----------
Income (loss) from continuing operations
before extraordinary loss and cumulative
effect of accounting change 438.7 102.3 33.3 (296.1) 111.4 192.4
Extraordinary loss (1.5) -- -- -- -- --
Cumulative effect of accounting change 0.8 -- -- -- -- (12.1)
---------- ---------- ---------- ---------- ---------- ----------
Income (loss) from continuing operations 438.0 102.3 33.3 (296.1) 111.4 180.3
Income (loss) from discontinued
operations of UNOVA, Inc., net of tax -- -- -- -- 2.8 (154.9)
---------- ---------- ---------- ---------- ---------- ----------
Net income (loss) $ 438.0 $ 102.3 $ 33.3 $ (296.1) $ 114.2 $ 25.4
========== ========== ========== ========== ========== ==========
Per share of common stock:
Income (loss) from continuing
operations before extraordinary loss
and cumulative effect of accounting
change
Basic $ 1.31 $ 0.31 $ 0.10 $ (0.92) $ 0.35 $ 0.64
Diluted 1.30 0.31 0.10 (0.92) 0.34 0.63
Dividends 0.46 0.46 0.46 0.46 0.12 0.46
Financial Position:
Working capital $ 1,484.8 $ 1,498.8 $ 1,158.2 $ 1,381.2 $ 1,466.8 $ 1,433.8
Total assets 6,676.2 6,489.1 7,182.1 7,788.3 7,208.3 7,064.8
Long-term debt 1,682.4 2,049.6 2,706.0 2,726.3 1,605.3 1,473.3
Stockholders' equity 3,327.8 3,046.7 3,071.1 3,165.1 3,483.4 3,455.7
</Table>
NOTES TO SELECTED FINANCIAL DATA
(1) In August 1998, the Board of Directors of the Company approved a change in
the fiscal year-end of the Company from September 30 to December 31,
effective with the calendar year beginning January 1, 1998. A three-month
transition period from October 1, 1997 through December 31, 1997 precedes
the start of the 1998 fiscal year.
13
<PAGE>
(2) See Note 6 of the Notes to Consolidated Financial Statements in Item 8
herein for a description of the Western GECO venture formed by the Company
in November 2000.
(3) During 1998, the Company acquired WEDGE DIA-LOG, Inc. and 3-D Geophysical,
Inc. for $218.5 million in cash and $117.5 million in cash, respectively.
The Company also made several smaller acquisitions with an aggregate
purchase price of $121.6 million. The purchase method of accounting was
used to record these acquisitions. During the year ended September 30,
1997, the Company acquired Petrolite Corporation ("Petrolite") for 19.3
million shares of the Company's common stock and the assumption of
Petrolite's outstanding vested and unvested employee stock options,
resulting in total consideration of $751.2 million, and acquired Drilex
International Inc. ("Drilex") for 2.7 million shares of the Company's
common stock. The Petrolite acquisition was accounted for as a purchase,
and the Drilex acquisition was accounted for using the pooling of interests
method. In connection with the Petrolite acquisition, the Company wrote off
$118.0 million of in-process research and development because the
technological feasibility of the projects in-process had not been
established, and there was no alternative future use at that date.
(4) In August 1998, the Company completed a merger with Western Atlas, Inc.
("Western Atlas") accounted for using the pooling of interests method. In
connection with the merger, the Company recorded merger related costs of
$219.1 million for transaction costs, employee related costs, integration
costs, the write-off of the carrying value of a product line and the
triggering of change in control rights contained in certain stock options
plans of Western Atlas and the Company.
(5) See Note 2 of the Notes to Consolidated Financial Statements in Item 8
herein for a description of the unusual charges in 2001, 2000 and 1999. The
unusual charge in 1998 consisted of cash charges for severance benefits,
charges to combine operations and consolidate facilities, and
environmental and litigation reserves. The noncash portion of the charge
consisted of charges for impairment of inventory and rental tools, the
write-down of a former consolidated joint venture, the write-off and
write-down of certain assets, a ceiling test charge for the Company's oil
and gas properties and a write-down of real estate held for sale. In 1998,
the charges reflected in cost of revenues, selling, general and
administrative expense and unusual charge were $305.0 million, $68.7
million and $215.8 million, respectively. The unusual charge in the year
ended September 30, 1997 consisted of charges in connection with certain
1997 acquisitions to combine the acquired operations with those of the
Company, the write-down of a low margin product line and the write-down of
the Company's investment in a subsidiary held for sale to its net
realizable value.
(6) See Note 1 of the Notes to Consolidated Financial Statements in Item 8
herein for a description of the cumulative effect of accounting change in
2001 related to the adoption of Statement of Financial Accounting Standards
No. 133, Accounting for Derivative Instruments and Hedging Activities. In
the year ended September 30, 1997, the Company changed its method of
accounting for the impairment of long-lived assets and for long-lived
assets held for disposal.
14
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Management's Discussion and Analysis of Financial Condition and Results of
Operations ("MD&A") should be read in conjunction with the consolidated
financial statements of the Company for the years ended December 31, 2001, 2000
and 1999 and the related Notes to Consolidated Financial Statements contained in
Item 8 herein.
FORWARD-LOOKING STATEMENTS
MD&A and certain statements in the Notes to Consolidated Financial
Statements include forward-looking statements within the meaning of Section 27A
of the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended, (each a "Forward-Looking Statement"). The
words "anticipate," "believe," "expect," "plan," "intend," "estimate,"
"project," "forecasts," "will," "could," "may" and similar expressions, and the
negative thereof, are intended to identify forward-looking statements. Baker
Hughes' expectations about its business outlook, customer spending, oil and gas
prices and the business environment for the Company and the industry in general
are only its forecasts regarding these matters. These forecasts may be
substantially different from actual results, which are affected by the following
factors: the effect of competition; the level of petroleum industry exploration
and production expenditures; drilling rig and oil and gas industry manpower and
equipment availability; the Company's ability to implement and effect price
increases for its products and services; the Company's ability to control its
costs; the availability of sufficient manufacturing capacity and subcontracting
capacity at forecasted costs to meet the Company's revenue goals; the ability of
the Company to introduce new technology on its forecasted schedule and at its
forecasted cost; the ability of the Company's competitors to capture market
share; world economic conditions; price of, and the demand for, crude oil and
natural gas; drilling activity; weather; the legislative environment in the
United States and other countries; Organization of Petroleum Exporting Countries
("OPEC") policy; war or extended period of conflict involving the United States,
the Middle East and other major petroleum-producing or consuming regions; acts
of war or terrorism, the development of technology that lowers overall finding
and development costs; the condition of the capital and equity markets and the
timing of any of the foregoing. See "Business Environment" for a more detailed
discussion of certain of these factors.
Baker Hughes' expectations regarding its level of capital expenditures
described in "Liquidity and Capital Resources" below are only its forecasts
regarding these matters. In addition to the factors described in the previous
paragraph and in "Business Environment," these forecasts may be substantially
different from actual results, which are affected by the following factors: the
accuracy of the Company's estimates regarding its spending requirements;
regulatory, legal and contractual impediments to spending reduction measures;
the occurrence of any unanticipated acquisition or research and development
opportunities; changes in the Company's strategic direction; the need to replace
any unanticipated losses in capital assets and the factors listed in "Item 1.
Business-Environmental Matters".
BUSINESS ENVIRONMENT
The Company has eight operating divisions each with separate management
teams and infrastructure that offer different products and services. The
divisions have been aggregated into two reportable segments - "Oilfield" and
"Process".
The Oilfield segment consists of six operating divisions - Baker Atlas,
Baker Hughes INTEQ, Baker Oil Tools, Baker Petrolite, Centrilift and Hughes
Christensen - that manufacture and sell equipment and provide related services
used in exploring for, developing and producing hydrocarbon reserves. The
Oilfield segment also includes the Company's interest in an oil and gas property
in Nigeria and its investment in Western GECO. In 2001, revenues from the
Oilfield segment accounted for 94.1% of total revenues.
The Process segment consists of two operating divisions - EIMCO Process
Equipment and BIRD Machine - that manufacture and sell process equipment for
separating solids from liquids and liquids from liquids through filtration,
sedimentation, centrifugation and flotation processes.
The business environment for the Company's Oilfield segment and its
corresponding operating results can be significantly affected by the level of
energy industry capital expenditures for the exploration and production of oil
15
<PAGE>
and gas reserves. These expenditures are influenced strongly by oil company
expectations about the supply and demand for crude oil and natural gas products
and by the energy price environment that results from supply and demand
imbalances.
Key factors currently influencing the worldwide crude oil and gas markets
are:
o Production control - the degree to which OPEC nations and other large
producing countries, such as Mexico, Norway, and Russia, are willing and
able to control production and exports of crude oil to reduce supply and
support their targeted oil price while meeting their market share
objectives.
o Global economic growth - particularly the impact of the U.S. and Western
European economies and economic activity in Japan, China, South Korea and
the developing areas of Asia where the correlation between energy demand
and economic growth is strong. The International Energy Agency forecasted
in February 2001 worldwide oil demand growth of approximately 0.5%,
compared with the 2.0% averaged for the 10 years ending December 2000.
During 2001, the U.S. economy went into a recession that is expected to
continue into 2002. An important factor in the global economic growth in
2002 is the timing and strength of the U.S. economic recovery.
o Oil and gas storage inventories - relative to historic levels. Inventory
levels offer a measure of the balance between supply and demand. North
American natural gas inventories at the beginning of November 2001 (the
start of the 2001/2002 winter withdrawal season) were at record high
levels. Continued high inventories, without an increase in demand, indicate
a market that is amply supplied.
o Technological progress - in the design and application of new products that
allow oil and gas companies to drill fewer wells and to drill, complete and
produce wells faster and at lower cost.
o Maturity of the resource base - of known hydrocarbon reserves in the North
Sea, U.S., Canada and Latin America.
o Pace of new investment - access to capital and the reinvestment of
available cash flow into existing and emerging markets.
o Price volatility - the impact of widely fluctuating commodity prices on the
stability of the market and subsequent impact on customer spending.
o Possible supply disruptions - from key oil exporting countries, including,
but not limited to, Iraq, Saudi Arabia and other Middle Eastern countries,
due to political instability or military activity.
o Weather - the impact of variations in temperatures as compared with normal
weather patterns and the related effect on demand for oil and natural gas.
OIL AND GAS PRICES
Generally, customers' expectations about their prospects from oil and gas
sales and customers' expenditures to explore for or produce oil and gas rise or
fall with corresponding changes in the prices of oil or gas. Accordingly,
changes in these expenditures will normally result in increased or decreased
demand for the Company's products and services in its Oilfield segment. Crude
oil and natural gas prices are summarized in the table below as averages of the
daily closing prices during each of the periods indicated.
<Table>
<Caption>
2001 2000 1999
--------- --------- ---------
<S> <C> <C> <C>
West Texas Intermediate Crude ($/bbl) $ 25.96 $ 30.37 $ 19.37
U.S. Spot Natural Gas ($/MMBtu) 3.96 4.30 2.19
</Table>
Oil prices averaged $25.96/bbl in 2001, ranging from a low of $17.45/bbl to
a high of $32.19/bbl. Slower economic growth and higher OPEC production levels
contributed to an increase in inventories and a moderation in oil prices. Oil
prices over the course of the year fell from levels above OPEC's self-declared
targeted price zone in
16
<PAGE>
the first half of 2001 to levels below OPEC's targeted price zone in the second
half of the year. In November 2001, OPEC abandoned defense of its targeted price
zone as it sought cooperation with certain non-OPEC countries, particularly
Russia, Norway and Mexico, to jointly reduce production in an effort to reduce
inventories and support prices.
During 2001, natural gas prices averaged $3.96/MMBtu, down from the
$4.30/MMBtu average price for 2000. Prices ranged from a high of $10.20/MMBtu in
January to a low of $1.74/MMBtu in November. The decline in natural gas prices
was driven by a decrease in demand for natural gas due to slowing U.S. economic
growth, offset only partially by increased demand from fuel switching back to
natural gas. A modest increase in production also contributed to the decline in
prices. At the beginning of the 2001/2002 withdrawal season, inventories were at
record high levels following record storage injections during the summer of
2001. Mild weather and the U.S. recession continued to moderate demand and
allowed year-over-year storage surpluses to grow through the remainder of 2001,
resulting in softer prices.
RIG COUNTS
The Company is engaged in the oilfield service industry providing products
and services that are used in exploring for, developing and producing oil and
gas reservoirs. When drilling or workover rigs are active, they consume the
products and services produced by the oilfield service industry. The rig counts
act as a leading indicator of consumption of products and services used in
drilling, completing, producing and processing hydrocarbons.
Rig count trends are governed by the exploration and development spending by
oil and gas companies, which in turn is influenced by current and future price
expectations for oil and natural gas. Rig counts therefore reflect the relative
strength and stability of energy prices. The Company's rig counts are summarized
in the table below as averages for each of the periods indicated and are based
on weekly rig counts for the U.S. and Canada and monthly rig counts for all
other areas.
<Table>
<Caption>
2001 2000 1999
---- ---- ----
<S> <C> <C> <C>
U.S. - Land 1,003 778 519
U.S. - Offshore 153 140 106
Canada 341 345 245
----- ----- -----
North America 1,497 1,263 870
----- ----- -----
Latin America 262 227 186
North Sea 56 45 39
Other Europe 39 38 42
Africa 53 46 42
Middle East 179 156 140
Asia Pacific 157 140 139
----- ----- -----
Outside North America 746 652 588
----- ----- -----
Worldwide 2,243 1,915 1,458
===== ===== =====
U.S. Workover Rigs 1,211 1,056 835
===== ===== =====
</Table>
INDUSTRY OUTLOOK
Caution is advised that the factors described above in "Forward Looking
Statements" and "Business Environment" could negatively impact the Company's
expectations for oil demand, oil and gas prices and drilling activity.
Oil - Oil prices are expected to average between $18/bbl and $22/bbl in
2002. Sustained oil prices in this range and an outlook that prices are likely
to remain in this range are expected to support the Company's forecast of
customer spending. Oil prices are particularly susceptible to changes in oil
supply as oil demand growth in 2002 compared with 2001 is expected to be the
lowest year-to-year growth in a decade. Prices could fall to $13/bbl to $15/bbl
by mid-year, resulting in lower than forecasted spending, if one or more of the
following occurs: OPEC is unwilling or unable to control its production; Russia
or other major non-OPEC producers are unwilling or unable to restrain their
production; or the U.S. economic recovery is delayed into late 2002 or 2003.
Prices could rise to $23/bbl to $25/bbl, or more, if one or more of the
following occur: the U.S. and worldwide economic recovery
17
<PAGE>
occurs sooner or is stronger than forecasted; OPEC or key non-OPEC oil-exporting
countries, particularly Russia, constrain oil production; or a supply disruption
occurs, resulting from political or military action in a key oil exporting
region.
North America Natural Gas - U.S. natural gas prices are expected to average
between $2.25/MMBtu and $2.75/MMBtu in 2002. Prices are expected to average
between $1.90/MMBtu and $2.20/MMBtu in the first half of 2002 as year-over-year
inventory surpluses and weak demand continue to influence prices. As a result of
lower natural gas prices during this period, spending by the Company's customers
directed at developing natural gas supplies (and therefore, drilling activity)
is expected to remain soft. In the second half of the year, the impact of a
growing U.S. economy and production declines resulting from lower spending in
the second half of 2001 and the first half of 2002 are expected to result in a
tighter supply/demand balance in the market. As a result, prices could exceed
$3.00/MMBtu by year end. Prices could trade lower if weather is milder than
normal, if the economic recovery is delayed, or if production levels are
maintained despite lower drilling activity. Prices could trade higher if weather
is more extreme than normal, if the economic recovery occurs sooner or is
stronger than expected, or if production levels fall more than expected as a
result of lower drilling activity.
Customer Spending - Based upon the Company's discussions with its major
customers and its review of published industry surveys and reports and the
Company's outlook for oil and gas prices described above, the anticipated
customer spending trends are as follows:
o North America - Spending in North America, primarily towards developing
natural gas supplies, is expected to be down 15% to 20% in 2002 compared
with 2001.
o Outside North America - Customer spending, primarily directed at
developing oil supplies, is expected to be flat to up 5% in 2002
compared with 2001.
o Total spending is expected to be down 5% to 7% in 2002 compared with
2001.
Drilling Activity - Based upon the Company's outlooks for oil and natural
gas prices and customer spending described above, the Company's outlook for
drilling activity, as measured by the Baker Hughes rig count, is as follows:
o The North American rig count is expected to decline between 15% to 20%
in 2002 compared with 2001.
o Drilling activity outside of North America is expected to increase 3% to
5% in 2002 compared with 2001.
COMPANY OUTLOOK
The trends as described above relating to declining rig counts, decreased
customer spending and low oil and gas prices began in late 2001 and have
continued to develop in 2002. As a result, the Company expects that 2002 will
not be as strong as 2001, with revenues expected to decline by approximately 5%
to 7% as compared with 2001, with related declines in operating results.
Recent changes in currency laws and other economic events in Argentina are
expected to negatively impact the Company. Changes mandated by law may prevent
the Company from being able to fully recover outstanding receivables from its
customers and losses are expected as a result of the devaluation of the
Argentine Peso. In addition, the uncertain economic environment in Argentina
will likely negatively impact the exploration and production spending plans of
the Company's customers in Argentina in 2002 and beyond, thus reducing the
demand for the Company's products. The Company is responding to this situation
in a number of ways, including negotiating with its customers for acceptable
payment terms on outstanding receivables, increasing the use of U.S. Dollar
based invoicing (or U.S. Dollar equivalent pricing and invoicing), adjusting
pricing and contracts to reflect the changes in Argentina's currency, and
shipping products to Argentina directly from outside the country with payment
made offshore in U.S. Dollar or equivalent currency. Although the Company has
provided for its best estimate of uncollectible receivables at December 31,
2001, it is uncertain at this time as to the ultimate resolution of these
matters and the impact on the Company; however, the Company estimates potential
losses related to the devaluation and uncollectible receivables could be between
$5 million and $10 million. In 2001, revenues from
18
<PAGE>
Argentina were less than 3% of the Company's total revenue; accordingly, the
impact on the Company's total revenues in 2002 is not expected to be
significant.
Historically, the Venezuelan economy has experienced high inflation and a
weakening currency. Recently, Venezuela has experienced additional political and
economic uncertainties, including large fluctuations in exchange rates with the
U.S. Dollar. This creates additional uncertainties for the business environment
and market for the Company's products and services. The Company continues to
closely monitor the economic situation in Venezuela and is taking appropriate
actions to minimize its exposure to these risks.
CRITICAL ACCOUNTING POLICIES
The Company has defined a critical accounting policy as one that is both
important to the portrayal of the Company's financial condition and results of
operations and requires the management of the Company to make difficult,
subjective or complex judgments. Estimates and assumptions about future events
and their effects cannot be perceived 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.
The Company believes the following are the most critical accounting polices
used in the preparation of the Company's consolidated financial statements as
well as the significant judgments and uncertainties affecting the application of
these policies.
REVENUE RECOGNITION
Inherent in the Company's revenue recognition policy is the determination of
collectibility, which requires the Company to use estimates and exercise
judgment. The Company routinely monitors its customers' payment history and
current credit worthiness to determine that collectibility is reasonably
assured. This requires the Company to make frequent judgments and estimates in
order to determine the appropriate amount of allowances needed for doubtful
accounts. The Company records provisions for doubtful accounts when it becomes
evident that the customer will not be able to make the required payments either
at contractual due dates or in the future. Adverse changes in the financial
condition of the Company's customers could require additional allowances for
doubtful accounts.
INVENTORY
The Company records inventory at the lower of cost or market. The Company
regularly reviews inventory quantities on hand and records provisions for excess
or obsolete inventory based primarily on its estimated forecast of product
demand, market conditions, production requirements and technological
developments. Significant or unanticipated changes to the Company's forecasts
could require additional provisions for excess or obsolete inventory.
IMPAIRMENT OF LONG-LIVED ASSETS
Long-lived assets, which include property, plant and equipment, goodwill and
other intangibles, and other assets comprise a significant amount of the
Company's total assets. The Company makes judgments and estimates in conjunction
with the carrying value of these assets, including amounts to be capitalized,
depreciation and amortization methods and useful lives. Additionally, the
carrying values of these assets are periodically reviewed for impairment or
whenever events or changes in circumstances indicate that the carrying amounts
may not be recoverable. An impairment loss is recorded in the period in which it
is determined that the carrying amount is not recoverable. This requires the
Company to make long-term forecasts of its future revenues and costs related to
the assets subject to review. These forecasts require assumptions about demand
for the Company's products and services, future market conditions and
technological developments. Significant and unanticipated changes to these
assumptions could require a provision for impairment in a future period.
19
<PAGE>
INCOME TAXES
The Company uses the liability method for reporting income taxes, under
which current and deferred tax liabilities and assets are recorded in accordance
with enacted tax laws and rates. Under this method, the amounts of deferred tax
liabilities and assets at the end of each period are determined using the tax
rate expected to be in effect when taxes are actually paid or recovered. A
valuation allowance to reduce deferred tax assets is established when it is more
likely than not that some portion or all of the deferred tax assets will not be
realized. While the Company has considered future taxable income and ongoing
prudent and feasible tax planning strategies in assessing the need for the
valuation allowance, there can be no guarantee that the Company will be able to
realize its deferred tax assets.
The Company operates under many legal forms and in more than 70 countries.
As a result, the Company is subject to many domestic and foreign tax
jurisdictions and to many tax agreements and treaties among the various taxing
authorities. Determination of taxable income in any jurisdiction requires the
interpretation of the related tax laws and regulations and the use of estimates
and assumptions regarding significant future events. Changes in tax laws,
regulations, agreements and treaties, foreign currency exchange restrictions or
the Company's level of operations or profitability in each taxing jurisdiction
could have an impact upon the amount of income taxes that the Company provides
during any given year.
WESTERN GECO
On November 30, 2000, the Company and Schlumberger and certain wholly owned
subsidiaries of Schlumberger created a venture by transferring the seismic
fleets, data processing assets, exclusive and nonexclusive multiclient surveys
and other assets of the Company's Western Geophysical division and
Schlumberger's Geco-Prakla business unit. The venture operates under the name of
Western GECO. In conjunction with the transaction, the Company received $493.4
million in cash from Schlumberger in exchange for the transfer of a portion of
the Company's ownership in Western GECO. The Company also contributed $15.0
million in working capital to Western GECO. The Company did not recognize any
gain or loss resulting from the initial formation of the venture due to the
Company's material continued involvement in the operations of Western GECO. In
addition, as soon as practicable after November 30, 2004, the Company or
Schlumberger will make a cash true-up payment to the other party based on a
formula comparing the ratio of the net present value of sales revenue from each
party's contributed multiclient seismic libraries during the four-year period
ending November 30, 2004 and the ratio of the net book value of those libraries
as of November 30, 2000. The maximum payment that either party will be required
to make as a result of this adjustment is $100.0 million.
Summarized financial information for Western Geophysical included in the
Company's consolidated financial statements are as follows for the years ended
December 31 (in millions):
<Table>
<Caption>
2000 (1) 1999
-------- --------
<S> <C> <C>
Revenues $ 723.7 $ 946.7
Income (loss) before income taxes (2) 56.9 (75.3)
Expenditures for capital assets and multiclient seismic data 309.6 319.5
</Table>
(1) Financial information for the eleven months ended November 30, 2000, the
effective close date of the transaction.
(2) Includes unusual items and corporate allocations excluding interest.
RESULTS OF OPERATIONS
REVENUES
Revenues for 2001 were $5,382.2 million, an increase of 2.8% compared with
2000. Excluding revenues from Western Geophysical, revenues increased 19.3%
compared with 2000. Oilfield revenues, excluding Western Geophysical, were
$5,063.4 million, an increase of 20.9% compared with 2000. Oilfield revenues in
North America, which account for 44.6% of total Oilfield revenues, increased
28.2% compared with 2000. This increase reflects the increased drilling activity
in this area, as evidenced by a 18.5% increase in the North American rig count,
and improved pricing for the Company's products and services. Outside North
America, Oilfield revenues increased 15.7% compared with 2000. This increase
reflects the improvement in international drilling activity, particularly in
20
<PAGE>
the North Sea, Latin America, and the Middle East. Revenues from crude oil
production from the Company's interest in the Nigerian property decreased to
$58.9 million in 2001 from $132.1 million in 2000 primarily due to the decrease
in the price of oil and as a result of the Company reaching the cost recovery
threshold in its operating agreement.
Revenues for 2000 were $5,233.8 million, an increase of 6.0% compared with
1999. This increase reflects increased drilling activity, as evidenced by the
31.3% increase in the average worldwide rig count, increased oil and natural gas
prices and improved pricing for the Company's products and services offset by
the ongoing weakness in the seismic market. Approximately 55.6% of the Company's
2000 revenues were derived from sources outside North America. Revenues from
production of crude oil from the Nigerian property increased to $132.1 million
in 2000 from $68.2 million in 1999 due to higher crude oil prices and increased
productions.
GROSS MARGIN
Gross margin was 28.8%, 23.4% and 18.8% for 2001, 2000 and 1999,
respectively. As discussed in "Unusual Charges", during 1999 the Company
recorded unusual charges in cost of revenues of $72.1 million. Excluding these
charges and Western Geophysical, gross margin in 2000 and 1999 was 25.3% and
21.0%, respectively. The increases in gross margin in 2001 and 2000 are
primarily the result of pricing improvements for the Company's products and
services, primarily in North America, continued cost management measures
throughout the Company and higher utilization of the Company's assets.
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative ("SG&A") expenses for 2001 were $818.6
million, an increase of 7.8% compared with 2000. SG&A expenses as a percentage
of revenues increased to 15.2% for 2001 from 14.5% in 2000. These increases were
primarily due to increased costs to support the higher revenue level, increased
employee incentive costs and decreased foreign exchange gains.
SG&A expenses for 2000 were $759.6 million, an increase of 2.4% compared
with 1999. As discussed in "Unusual Charges", during 1999 the Company recorded
an unusual credit of $20.3 million in SG&A expenses. Excluding this unusual
credit, SG&A expenses decreased 0.4% in 2000 compared with 1999. SG&A expenses
as a percentage of revenues decreased from 15.4% in 1999 to 14.5% in 2000. The
decreases primarily related to increased foreign exchange gains, partially
offset by increases in employee incentive costs.
UNUSUAL CHARGES
2001
During 2001, the Company recorded unusual charges of $9.2 million. The
Company accrued cash charges of $6.0 million that consisted of severance for
approximately 100 employees due to the restructuring of the German operations of
BIRD Machine, a division of the Process segment. The Company paid $1.1 million
of this accrued severance in 2001. Based on current estimates, the Company
expects that the remainder of the accrued severance will be paid in 2002 or when
the employees leave the Company. The noncash portion of the charge was $3.2
million, of which $2.2 million related to the ceiling test write-down for the
Company's oil and gas property in Nigeria.
The Company recorded unusual credits of $7.6 million, which included $4.2
million related to a reduction of an unusual charge accrual originally recorded
in 2000 and a gain of $3.4 million on the disposition of its interest in a joint
venture.
2000
In October 2000, the Company's Board of Directors approved the Company's
plan to substantially exit the oil and gas exploration business. The Company
sold its interests in its China, Gulf of Mexico and Gabon oil and gas properties
and recorded a loss of $75.5 million on the sale of these properties. The
Company also wrote off its remaining undeveloped oil and gas exploration
properties resulting in a loss of $16.2 million. The Company accrued cash
charges of $13.3 million for severance costs for approximately 50 employees and
other contractual
21
<PAGE>
obligations. The Company has paid $2.6 million of this accrued severance through
2001. Based on current estimates, the Company expects that the remainder of the
accrued severance will be paid during 2002 or as the employees leave the
Company. In 2001, the Company paid $2.4 million of accrued contractual
obligations and reduced the accrual by $4.2 million to reflect the current
estimates of remaining expenditures. The remaining contractual obligations will
be paid as the Company settles with the various counterparties.
The Company has retained its interest in an oil and gas property in Nigeria.
The Company's intent to hold or divest this project could change in the future
depending on the relative value of the project and the value and viability of an
offer from a third party with respect to a proposed transaction regarding the
project.
The Company also recorded a noncash unusual charge of $6.0 million for
employee related obligations resulting from the Western GECO formation.
The Company recorded unusual credits of $41.4 million related to net
reductions to unusual charge accruals from prior years of $28.5 million and
gains of $12.9 million on the sale of various product lines within the Oilfield
and Process segments.
1999
As a result of continuing low activity levels, predominantly for the
Company's seismic products and services, the Company recorded charges during the
fourth quarter of 1999 of $122.8 million. The cash portion of the charges was
$50.7 million and consisted of severance benefits, expected costs to settle
contractual obligations and terminate leases on certain marine vessels and other
cash charges. As of December 31, 2000, all activities were completed and the
related accruals fully utilized through cash payments or adjustments. The
noncash portion of the charges was $72.1 million and related to the write-off
and write-down of certain assets utilized in the Company's seismic business.
During 1999, the Company realized unusual gains totaling $54.8 million. The
Company sold two large excess real estate properties for $68.1 million and
realized net gains totaling $39.5 million. In addition, the Company sold certain
assets related to its previous divestiture of a joint venture and realized a net
gain of $15.3 million.
During 1999, the Company reviewed the remaining balances of the accruals for
cash charges recorded in 1998 and prior years and made net reductions of $11.4
million to reflect the current estimates of remaining expenditures. These net
reductions included reversals of previously recorded accruals that will not be
utilized and related primarily to severance accruals and lease obligations. In
addition, for accruals related to certain terminated lease obligations,
revisions were made to increase previously recorded amounts based on current
information and estimates of expected cash flows related to these leases.
The unusual items described above were reflected in the following captions
of the consolidated statement of operations for the year ended December 31, 1999
(in millions):
<Table>
<Caption>
CHARGES CREDITS ADJUSTMENTS TOTAL
------- ------- ----------- -----
<S> <C> <C> <C> <C>
Cost of revenues $ 72.1 $ -- $ -- $ 72.1
Selling, general and administrative -- (15.3) (5.0) (20.3)
Unusual charge 50.7 (39.5) (6.4) 4.8
-------- -------- -------- --------
Total $ 122.8 $ (54.8) $ (11.4) $ 56.6
======== ======== ======== ========
</Table>
EQUITY IN INCOME (LOSS) OF AFFILIATES
Equity in income (loss) of affiliates relates to the Company's share of the
income (loss) of affiliates accounted for using the equity method of accounting.
The increase in 2001 compared with 2000 is primarily due to the inclusion of a
full year of the Company's 30% share of the net income of Western GECO, a
venture formed in November 2000.
Included in equity in income (loss) of affiliates for 2001 and 2000 was
$10.3 million related to the write-off of certain assets associated with Western
GECO and $9.5 million for restructuring and integration charges associated with
Western GECO, respectively.
22
<PAGE>
INTEREST EXPENSE
Interest expense for 2001 decreased $46.9 million compared with 2000. The
decrease was primarily due to lower debt levels coupled with lower average
interest rates on short-term debt and commercial paper. Average short-term debt
and commercial paper for 2001 was $259.7 million compared with $929.0 million
for 2000. The approximate average interest rate on short-term debt and
commercial paper was 4.0% for 2001 compared with 6.3% for 2000.
Interest expense for 2000 increased $6.3 million compared with 1999. The
increase was primarily due to higher average interest rates on the Company's
short-term debt and commercial paper. Average short-term debt and commercial
paper for 2000 was $929.0 million compared with $962.0 million for 1999. The
approximate average interest rate on short-term debt and commercial paper was
6.3% for 2000 compared with 5.2% for 1999.
INTEREST INCOME
Interest income primarily relates to income earned on cash and cash
equivalents. Interest income for 2001 increased $7.4 million compared with 2000
primarily due to $5.4 million of interest income recognized from a settlement
with the Internal Revenue Service ("IRS") related to an examination of certain
1994 through 1997 pre-acquisition tax returns and related refund claims of
Western Atlas.
GAIN ON TRADING SECURITIES
In the fourth quarter of 1999, the Company announced its intention to sell
its holdings in Tuboscope, Inc., now known as Varco International, Inc.
("Varco"), and reclassified these holdings from available-for-sale securities to
trading securities. As a result of this decision, the Company recognized a
pre-tax gain of $31.5 million in the fourth quarter of 1999. During 2000, the
Company disposed of these holdings and recorded additional pre-tax gains of
$14.1 million.
INCOME TAXES
The Company's effective tax rates differ from the statutory income tax rate
of 35% due to different tax rates on international operations, the
non-deductibility of certain goodwill amortization, incremental taxes due to
Western GECO and IRS settlements.
During 2001, additional taxes of $14.8 million from the Western GECO venture
arose due to unbenefitted foreign losses and due to taxes assessed in
jurisdictions on a deemed profit basis. In addition, a $23.5 million benefit was
recognized as a result of the settlement of the IRS examination of certain 1994
through 1997 pre-acquisition tax returns and related refund claims of Western
Atlas.
During 2000, the Company provided $9.4 million of foreign and additional
U.S. taxes as a result of the repatriation of the proceeds from the formation of
the Western GECO venture. The formation of the venture also reduced the expected
amount of foreign source income against which to use the Company's foreign tax
credit carryover; therefore, the Company provided $35.6 million for additional
U.S. taxes with respect to future repatriation of earnings necessary to utilize
the foreign tax credit carryover.
During 1999, the Company recognized a tax benefit of $18.1 million through
the reversal of previously deferred taxes after settling the IRS examination of
its 1994 and 1995 tax years.
LIQUIDITY AND CAPITAL RESOURCES
The Company's capital requirements have principally related to working
capital needs, payment of dividends, and capital expenditures. These
requirements have been met through a combination of bank debt and internally
generated funds.
In 2001, net cash inflows from operating activities totaled $720.8 million,
an increase of $157.3 million compared with 2000. This increase was primarily
due to increased profitability and improved balance sheet
23
<PAGE>
management. Net cash inflows in 2000 increased $20.3 million compared with 1999.
This slight increase related to higher net income, partially offset by increases
in working capital.
Expenditures for capital assets and multiclient seismic data totaled $319.0
million, $599.2 million and $640.4 million for 2001, 2000 and 1999,
respectively. Excluding Western Geophysical, expenditures for capital assets
were $319.0 million, $289.6 million and $320.9 million for 2001, 2000 and 1999,
respectively. The majority of these expenditures was for rental tools and costs
associated with the implementation of SAP R/3.
The Company generates proceeds from the disposal or sale of assets in either
the normal course of its business or from non-recurring asset sales. During
2001, the Company generated total proceeds of $77.7 million, which included
non-recurring asset sales of $7.4 million related to the sale of a product line
and the disposition of the Company's interest in a joint venture. During 2000,
the Company generated total proceeds of $213.0 million. Non-recurring asset
sales totaled $124.5 million and included sales of product lines, the sale of
the Company's interests in its China, Gulf of Mexico and Gabon oil and gas
properties, and the sale of real estate held for sale. During 1999, the Company
generated total proceeds of $154.2 million, which included non-recurring asset
sales of $68.1 million related to the sale of two large excess real estate
properties.
In 2001, the Company redeemed its outstanding Liquid Yield Options Notes at
a redemption price of $786.13 per $1,000 principal amount, for a total of $301.8
million. The redemption was funded through the issuance of commercial paper. In
connection with the early extinguishment of debt, the Company recorded an
extraordinary loss of $2.3 million ($1.5 million after tax). The Company expects
that the redemption will not have a significant impact on interest expense in
future periods. In 2001, commercial paper and short-term borrowings were reduced
by $73.0 million primarily due to cash flow from operations. In 2000, commercial
paper and short-term borrowings were reduced by $669.4 million primarily due to
cash flow from operations, $117.7 million in proceeds from a sale/leaseback
transaction and $493.4 million in proceeds from the formation of Western GECO.
In 1999, the Company borrowed $1,010.7 million from the public debt market. The
proceeds were used to repay commercial paper and short-term borrowings of $816.0
million as well as $150.0 million in long-term debt.
Total debt outstanding at December 31, 2001 was $1,694.6 million, a decrease
of $368.3 million compared with December 31, 2000. Debt was repaid using cash
flow from operations, proceeds from the disposal or sale of assets and proceeds
from the issuance of common stock. The debt to equity ratio was 0.51 at December
31, 2001 compared with 0.68 at December 31, 2000. The Company's long-term
objective is to maintain a debt to equity ratio between 0.40 and 0.60.
At December 31, 2001, the Company had $1,289.9 million of credit facilities
with commercial banks, of which $800.5 million was committed. There were no
direct borrowings under these facilities during the years ended December 31,
2001 and 2000; however, to the extent the Company has outstanding commercial
paper, available borrowings under the committed credit facilities are reduced.
At December 31, 2001 and 2000, the Company had $95.0 million and $215.0 million,
respectively, in commercial paper outstanding under this program, with a
weighted average interest rate of 2.0% and 6.5%, respectively. The committed
facilities mature in September 2003. If the credit facilities are not renewed,
the Company would pursue other borrowing alternatives.
Cash flow from operations is expected to be the principal source of
liquidity in 2002. The Company believes that cash flow from operations, combined
with existing credit facilities, will provide the Company with sufficient
capital resources and liquidity to manage its operations, meet debt obligations
and fund projected capital expenditures. The Company currently expects 2002
capital expenditures to be between $300.0 million and $340.0 million, excluding
acquisitions. The expenditures are expected to be used primarily for normal,
recurring items necessary to support the growth of the Company.
There are no provisions in the Company's debt or lease agreements that would
accelerate their repayment or require collateral or material changes in terms
due to a reduction in the Company's debt ratings or stock price. Other than
normal operating leases, the Company does not have any off-balance sheet
financing arrangements such as securitization agreements, liquidity trust
vehicles or special purpose entities. As such, the Company is not materially
exposed to any financing, liquidity, market or credit risk that could arise if
the Company had engaged in such financing arrangements.
24
<PAGE>
The words "expected" and "expects" are intended to identify Forward-Looking
Statements in "Liquidity and Capital Resources". See "Forward-Looking
Statements" and "Business Environment" above for a description of risk factors
related to these Forward-Looking Statements.
The following tables summarize the Company's contractual cash obligations
and commercial commitments as of December 31, 2001 (in millions):
<Table>
<Caption>
Payments due by Period
--------------------------------------------------------------
Less Than 2 - 3 4 - 5 After
Contractual Cash Obligations Total 1 year Years Years 5 Years
- ---------------------------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Total debt $ 1,694.6 $ 12.2 $ 620.4 $ 0.1 $ 1,061.9
Operating leases 286.0 54.5 82.0 39.6 109.9
Unconditional purchase obligations 138.2 138.2 -- -- --
---------- ---------- ---------- ---------- ----------
Total contractual cash obligations $ 2,118.8 $ 204.9 $ 702.4 $ 39.7 $ 1,171.8
========== ========== ========== ========== ==========
</Table>
<Table>
<Caption>
Amount of Commitment Expiration by Period
--------------------------------------------------------------
Total
Amounts Less Than 2 - 3 4 - 5 After
Commercial Commitments Committed 1 year Years Years 5 Years
- ---------------------- --------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Standby letters of credit $ 187.8 $ 162.0 $ 22.5 $ 3.3 $ --
Guarantees for:
Lease on seismic vessel 96.4 96.4 -- -- --
Other 36.9 8.0 8.7 -- 20.2
---------- ---------- ---------- ---------- ----------
Total commercial commitments $ 321.1 $ 266.4 $ 31.2 $ 3.3 $ 20.2
========== ========== ========== ========== ==========
</Table>
RELATED PARTY TRANSACTIONS
The Company has investments in affiliates that are accounted for using the
equity method of accounting. The most significant of these affiliates is Western
GECO. In conjunction with the formation of Western GECO, the Company transferred
to the venture a lease on a seismic vessel. The Company is the sole guarantor of
this lease obligation; however, Schlumberger has indemnified the Company for 70%
of the total lease obligation. At December 31, 2001, the remaining commitment
under this lease is $96.4 million. The lease expires in 2002. As soon as
practicable after November 30, 2004, the Company or Schlumberger will make a
cash true-up payment to the other party based on a formula comparing the ratio
of the net present value of sales revenue from each party's contributed
multiclient seismic libraries during the four-year period ending November 30,
2004 and the ratio of the net book value of those libraries as of November 30,
2000. The maximum payment that either party will be required to make as a result
of this adjustment is $100.0 million.
In November 2000, the Company entered into an agreement with Western GECO
whereby Western GECO subleased a facility from the Company for a period of ten
years at current market rates. During 2001, the Company received $5.9 million of
rental income from Western GECO related to this lease.
At December 31, 2001 and 2000, net accounts receivable from affiliates
totaled $33.5 million and $11.4 million, respectively. There were no other
significant related party transactions.
ACCOUNTING STANDARDS
On January 1, 2001, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 133, Accounting for Derivative Instruments and Hedging
Activities, as amended by SFAS Nos. 137 and 138. SFAS No. 133 establishes
accounting and reporting standards for derivative instruments and hedging
activities that require an entity to recognize all derivatives as an asset or
liability measured at fair value. Depending on the intended use of the
derivative and its effectiveness, changes in its fair value will be reported in
the period of change as either a component of earnings or a component of
accumulated other comprehensive loss. The adoption of SFAS No. 133 on January 1,
2001 resulted in a gain of $0.8 million, net of tax, recorded as the cumulative
effect of an accounting change in the consolidated statement of operations and a
gain of $1.2 million, net of tax, recorded in accumulated other comprehensive
loss. During 2001, all of the $1.2 million gain was reclassified into earnings
upon maturity of the contracts.
25
<PAGE>
In June 2001, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 141, Business Combinations. SFAS No. 141 requires that all business
combinations initiated after June 30, 2001 be accounted for under the purchase
method and addresses the initial recognition and measurement of goodwill and
other intangible assets acquired in a business combination. Business
combinations accounted for under the pooling of interests method prior to June
30, 2001 were not changed. The adoption of SFAS No. 141 by the Company did not
have an impact on the consolidated financial statements of the Company.
In June 2001, the FASB issued SFAS No. 142, Goodwill and Other Intangible
Assets. SFAS No. 142 addresses the initial recognition and measurement of
intangible assets acquired in a business combination and the accounting for
goodwill and other intangible assets subsequent to their acquisition. SFAS No.
142 provides that intangible assets with finite useful lives be amortized and
that goodwill and intangible assets with indefinite lives not be amortized, but
rather be tested at least annually for impairment. SFAS No. 142 requires that a
transitional impairment test be performed within six months of adoption and any
transitional impairment loss will be recognized as the cumulative effect of a
change in accounting principle. The Company will adopt SFAS No. 142 effective
January 1, 2002. The cessation of amortization expense related to goodwill and
goodwill associated with equity method investments under the guidelines of SFAS
No. 142 will result in a reduction of approximately $52.5 million in annual
amortization expense in 2002. The Company has not completed its analysis of the
impact of the adoption of SFAS No. 142 as it relates to the possible impairment
of goodwill.
In June 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement
Obligations. SFAS No. 143 addresses financial accounting and reporting for
obligations associated with the retirement of long-lived assets and the
associated asset retirement costs. SFAS No. 143 requires that the fair value of
a liability associated with an asset retirement be recognized in the period in
which it is incurred if a reasonable estimate of fair value can be made. The
associated retirement costs are capitalized as part of the carrying amount of
the long-lived asset and subsequently depreciated over the life of the asset.
The Company has not completed its analysis of the impact, if any, of the
adoption of SFAS No. 143 on its consolidated financial statements. The Company
will adopt SFAS No. 143 for its fiscal year beginning January 1, 2003.
In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment
or Disposal of Long-Lived Assets. SFAS No. 144 addresses the financial
accounting and reporting for the impairment or disposal of long-lived assets.
SFAS No. 144 replaces SFAS No. 121, Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of. SFAS No. 144 provides
updated guidance concerning the recognition and measurement of an impairment
loss for certain types of long-lived assets and modifies the accounting and
reporting of discontinued operations. SFAS No. 144 is not expected to materially
change the methods used by the Company to measure impairment losses on
long-lived assets, but may result in future dispositions being reported as
discontinued operations to a greater extent than is currently permitted. The
Company will adopt SFAS No. 144 for its fiscal year beginning January 1, 2002.
EURO CONVERSION
A single European currency (the "Euro") was introduced on January 1, 1999,
at which time the conversion rates between the old, or legacy, currencies and
the Euro were set for participating member countries. The legacy currencies in
those countries were used as legal tender through December 31, 2001 and will be
used for a short transition period subsequent to December 31, 2001. Thereafter,
the legacy currencies will be canceled, and Euro bills and coins will be used in
the participating countries.
Prior to December 31, 2001, the Company converted its legacy currency based
financial records to the Euro. In addition, the Company reviewed existing
contracts and agreements with customers and vendors to assess the potential
impact of converting to the Euro. The Company did not experience any problems or
issues in converting its financial records and systems to the Euro that, in the
opinion of management, materially or adversely affected the consolidated
financial condition of the Company. In addition, due to the nature of the
Company's business as it relates to customers and vendors, it does not expect
any significant problems related to the Euro to arise subsequent to December 31,
2001 that could materially or adversely affect the financial condition of the
Company.
The word "expect" is intended to identify a Forward-Looking Statement in
"Euro Conversion." The Company's anticipation regarding the lack of significance
of the Euro introduction on the Company's operations is only its forecast
regarding this matter. This forecast may be substantially different from actual
results, which are affected
26
<PAGE>
by factors such as the following: the failure of the Company to implement SAP
R/3 or another Euro compliant computer system or unforeseen difficulties in
updating computer systems to accommodate the Euro in any new geographic location
that prices in Euros or in any newly acquired entity; the inability of third
parties to adequately address their own Euro systems issues, including vendors,
contractors, financial institutions, U.S. and foreign governments and customers;
and the lack of alternatives available to the Company.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to certain market risks that are inherent in the
Company's financial instruments that arise in the normal course of business. The
Company may enter into derivative financial instrument transactions to manage or
reduce market risk. The Company does not enter into derivative financial
instrument transactions for speculative purposes. A discussion of the Company's
primary market risk exposure in financial instruments is presented below.
LONG-TERM DEBT
The Company is subject to interest rate risk on its long-term fixed interest
rate debt. Commercial paper borrowings, other short-term borrowings and variable
rate long-term debt do not give rise to significant interest rate risk because
these borrowings either have maturities of less than three months or have
variable interest rates. All other things being equal, the fair market value of
the Company's debt with a fixed interest rate will increase as interest rates
fall and the fair market value will decrease as interest rates rise. This
exposure to interest rate risk is managed by borrowing money that has a variable
interest rate or using interest rate swaps to change fixed interest rate
borrowings to variable interest rate borrowings.
At December 31, 2001, the Company had fixed rate debt aggregating $1,524.9
million and variable rate debt aggregating $169.7 million. The following table
sets forth, as of December 31, 2001 and 2000, the Company's principal cash flows
for its long-term debt obligations, which bear a fixed rate of interest and are
denominated in U.S. Dollars, and the related weighted average effective interest
rates by expected maturity dates. Additionally, the table sets forth the
notional amounts and weighted average interest rates of the Company's interest
rate swaps by expected maturity (dollar amounts in millions).
<Table>
<Caption>
2001 2002 2003 2004 2005 2006 THEREAFTER TOTAL
---- ---- ---- ---- ---- ---- ---------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
As of December 31, 2001:
Long-term debt (1) $ - $ 0.7 $ 100.1 $ 350.0 $ 0.1 $ - $ 1,074.0 $ 1,524.9
Weighted average
interest rates 10.26% 6.04% 8.12% 8.00% 6.93% 7.14%
Fixed to variable swaps: (2)
Notional amount $ 100.0 $ 325.0
Pay rate 5.74%(5) 5.73%(4)
Receive rate 7.88% 6.25%
As of December 31, 2000:
Long-term debt (1) $ 1.8 $ 1.0 $ 100.0 $ 350.0 $ - $ - $ 1,459.1(3) $ 1,911.9
Weighted average
interest rates 13.69% 8.00% 6.04% 8.12% 5.99% 6.39%
Fixed to variable swaps: (2)
Notional amount $ 325.0
Pay rate 6.01%(4)
Receive rate 6.25%
</Table>
(1) Fair market value of long-term debt is $1,576.9 million and $1,874.3
million at December 31, 2001 and 2000, respectively.
(2) Fair market value of the interest rate swaps is a $1.3 million asset and a
$9.6 million liability at December 31, 2001 and 2000, respectively.
(3) Includes the Liquid Yield Options Notes ("LYONS") with an accreted value of
$296.2 million at December 31, 2000. The LYONS were redeemed for cash in
May 2001.
(4) Average six-month LIBOR for the Japanese Yen, the Euro and the Swiss Franc
plus 3.16%.
(5) Three-month LIBOR plus 2.7625%.
27
<PAGE>
INVESTMENTS
During 2000, the Company sold its investment in common stock and common
stock warrants of Varco at an average price of $18.70 per share. Total proceeds
from the sale of the Company's investment in the common stock and the warrants
were $72.7 million.
CRUDE OIL CONTRACTS
During the year ended December 31, 2001, the Company entered into two crude
oil contracts to mitigate price risk associated with production from the
Company's interest in an oil producing property in Nigeria. Based on the
Company's outlook for crude oil prices, the Company elected to terminate these
contracts prior to their maturity dates. Accordingly, the contracts were
terminated on October 3, 2001, and the Company received a cash payment of $4.4
million. In accordance with SFAS No. 133, the net gain recognized in earnings in
2001 from all crude oil contracts was $3.1 million and is reported in revenue in
the consolidated statements of operations.
During the year ended December 31, 2000, the Company had entered into two
contracts to mitigate price risk associated with the Company's interest in an
oil producing property in Nigeria. The fair value of these contracts at December
31, 2000 was a $3.1 million unrecorded asset.
FOREIGN CURRENCY AND FOREIGN CURRENCY FORWARD CONTRACTS
The Company's operations are conducted around the world in a number of
different currencies. The majority of the Company's foreign subsidiaries have
designated the local currency as their functional currency. As such, future
earnings are subject to change due to changes in foreign currency exchange rates
when transactions are denominated in currencies other than the Company's
functional currencies. To minimize the need for foreign currency contracts, the
Company is generally able to manage its foreign currency exposure by maintaining
a minimal consolidated net asset or net liability position in a currency other
than the functional currency.
At December 31, 2001, the Company had entered into foreign currency forward
contracts with notional amounts of $8.5 million, $1.0 million and $0.7 million
to hedge exposure to currency fluctuations in the Canadian Dollar, the
Indonesian Rupiah and the Euro, respectively. These contracts are cash flow
hedges. Based on year-end quoted market prices for contracts with similar terms
and maturity dates, no asset or liability was recorded as the forward price is
substantially the same as the contract price.
At December 31, 2000, the Company had entered into foreign currency forward
contracts with notional amounts of $50.0 million, $0.3 million and $0.2 million
to hedge against exposure to fluctuations in the British Pound, the South
African Rand and the Euro, respectively. The fair market value of these forward
contracts was a $1.5 million unrecorded asset.
The counterparties to the Company's forward contracts are major financial
institutions. The credit ratings and concentration of risk of these financial
institutions are monitored on a continuing basis. In the unlikely event that the
counterparties fail to meet the terms of a foreign currency contract, the
Company's exposure is limited to the foreign currency rate differential.
Certain borrowings of the Company are denominated in currencies other than
its functional currency. At December 31, 2001, these nonfunctional currency
borrowings totaled $14.8 million with exposures between the U.S. Dollar and the
Euro, the Saudi Riyal, the Brazilian Real, the Thai Baht and the Malaysian
Ringgit. A 10% depreciation of the U.S. Dollar against these currencies would
not have a material adverse effect on the future earnings of the Company.
28
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
MANAGEMENT REPORT OF FINANCIAL RESPONSIBILITIES
The management of Baker Hughes Incorporated is responsible for the
preparation and integrity of the accompanying consolidated financial statements
and all other information contained in this Annual Report. The consolidated
financial statements have been prepared in conformity with generally accepted
accounting principles and include amounts that are based on management's
informed judgments and estimates.
In fulfilling its responsibilities for the integrity of financial
information, management maintains and relies on the Company's system of internal
control. This system includes written policies, an organizational structure
providing division of responsibilities, the selection and training of qualified
personnel and a program of financial and operational reviews by a professional
staff of corporate auditors. The system is designed to provide reasonable
assurance that assets are safeguarded, transactions are executed in accordance
with management's authorization and accounting records are reliable as a basis
for the preparation of the consolidated financial statements. Management
believes that, as of December 31, 2001, the Company's internal control system
provides reasonable assurance that material errors or irregularities will be
prevented or detected within a timely period and is cost effective.
Management recognizes its responsibility for fostering a strong ethical
climate so that the Company's affairs are conducted according to the highest
standards of personal and corporate conduct. This responsibility is
characterized and reflected in the Company's Standards of Conduct which are
distributed throughout the Company. Management maintains a systematic program to
assess compliance with the policies included in the standards.
The Board of Directors, through its Audit/Ethics Committee composed solely
of nonemployee directors, reviews the Company's financial reporting, accounting
and ethical practices. The Audit/Ethics Committee recommends to the Board of
Directors the selection of independent public accountants and reviews their fee
arrangements. It meets periodically with the independent public accountants,
management and the corporate auditors to review the work of each and the
propriety of the discharge of their responsibilities. The independent public
accountants and the corporate auditors have full and free access to the
Audit/Ethics Committee, without management present, to discuss auditing and
financial reporting matters.
/s/ MICHAEL E. WILEY /s/ G. STEPHEN FINLEY /s/ ALAN J. KEIFER
Michael E. Wiley G. Stephen Finley Alan J. Keifer
Chairman, President and Senior Vice President - Vice President and
Chief Executive Officer Finance and Administration, Controller
and Chief Financial Officer
29
<PAGE>
INDEPENDENT AUDITORS' REPORT
Stockholders of Baker Hughes Incorporated:
We have audited the accompanying consolidated balance sheets of Baker Hughes
Incorporated and its subsidiaries as of December 31, 2001 and 2000, and the
related consolidated statements of operations, stockholders' equity and cash
flows for each of the three years in the period ended December 31, 2001. Our
audits also included the financial statement schedule II, valuation and
qualifying accounts. These financial statements and financial statement schedule
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements and financial statement
schedule based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of Baker Hughes Incorporated and
its subsidiaries at December 31, 2001 and 2000, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2001, in conformity with accounting principles generally accepted
in the United States of America. Also, in our opinion, such financial statement
schedule, when considered in relation to the basic consolidated financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
As described in Note 1 to the consolidated financial statements, effective
as of January 1, 2001, the Company adopted Statement of Financial Accounting
Standards Nos. 133, 137 and 138, which established new accounting and reporting
standards for derivative instruments and hedging activities.
/s/ DELOITTE & TOUCHE LLP
Houston, Texas
February 13, 2002
30
<PAGE>
BAKER HUGHES INCORPORATED
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<Table>
<Caption>
YEAR ENDED DECEMBER 31,
--------------------------------------
2001 2000 1999
---------- ---------- ----------
<S> <C> <C> <C>
Revenues $ 5,382.2 $ 5,233.8 $ 4,936.5
---------- ---------- ----------
Costs and expenses:
Cost of revenues 3,831.8 4,009.6 4,009.8
Selling, general and administrative 818.6 759.6 741.9
Merger related costs -- -- (1.6)
Unusual charge 1.6 69.6 4.8
---------- ---------- ----------
Total 4,652.0 4,838.8 4,754.9
---------- ---------- ----------
Operating income 730.2 395.0 181.6
Equity in income (loss) of affiliates 45.8 (4.6) 7.0
Interest expense (126.4) (173.3) (167.0)
Interest income 12.2 4.8 5.1
Gain on trading securities -- 14.1 31.5
---------- ---------- ----------
Income before income taxes, extraordinary loss
and cumulative effect of accounting change 661.8 236.0 58.2
Income taxes (223.1) (133.7) (24.9)
---------- ---------- ----------
Income before extraordinary loss and cumulative 438.7 102.3 33.3
effect of accounting change
Extraordinary loss (net of $0.8 income tax benefit) (1.5) -- --
Cumulative effect of accounting change (net of
$0.5 income tax expense) 0.8 -- --
---------- ---------- ----------
Net income $ 438.0 $ 102.3 $ 33.3
========== ========== ==========
Basic earnings per share:
Income before extraordinary loss and cumulative
effect of accounting change $ 1.31 $ 0.31 $ 0.10
Extraordinary loss -- -- --
Cumulative effect of accounting change -- -- --
---------- ---------- ----------
Net income $ 1.31 $ 0.31 $ 0.10
========== ========== ==========
Diluted earnings per share:
Income before extraordinary loss and cumulative
effect of accounting change $ 1.30 $ 0.31 $ 0.10
Extraordinary loss -- -- --
Cumulative effect of accounting change -- -- --
---------- ---------- ----------
Net income $ 1.30 $ 0.31 $ 0.10
========== ========== ==========
</Table>
See Notes to Consolidated Financial Statements
31
<PAGE>
BAKER HUGHES INCORPORATED
CONSOLIDATED BALANCE SHEETS
(IN MILLIONS, EXCEPT PAR VALUE)
<Table>
<Caption>
DECEMBER 31,
------------------------
2001 2000
---------- ----------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 45.4 $ 34.6
Accounts receivable - less allowance for doubtful accounts:
December 31, 2001, $74.1; December 31, 2000, $81.8 1,365.3 1,310.4
Inventories 1,049.8 898.5
Other current assets 236.7 243.1
---------- ----------
Total current assets 2,697.2 2,486.6
Investment in affiliates 929.0 869.3
Property - less accumulated depreciation:
December 31, 2001, $1,628.0; December 31, 2000, $1,518.0 1,375.8 1,378.7
Goodwill and other intangibles - less accumulated amortization:
December 31, 2001, $395.8; December 31, 2000, $362.5 1,414.4 1,498.1
Other assets 259.8 256.4
---------- ----------
Total assets $ 6,676.2 $ 6,489.1
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 573.0 $ 469.3
Short-term borrowings and current portion of long-term debt 12.2 13.3
Accrued employee compensation 318.8 250.6
Other accrued liabilities 308.4 254.6
---------- ----------
Total current liabilities 1,212.4 987.8
Long-term debt 1,682.4 2,049.6
Deferred income taxes 210.3 158.6
Other long-term liabilities 243.3 246.4
Commitments and contingencies
Stockholders' equity:
Common stock, one dollar par value (shares authorized -
750.0; outstanding 336.0 at December 31, 2001 and 333.7 at
December 31, 2000) 336.0 333.7
Capital in excess of par value 3,119.3 3,065.7
Retained earnings (accumulated deficit) 182.3 (101.3)
Accumulated other comprehensive loss (309.8) (251.4)
---------- ----------
Total stockholders' equity 3,327.8 3,046.7
---------- ----------
Total liabilities and stockholders' equity $ 6,676.2 $ 6,489.1
========== ==========
</Table>
See Notes to Consolidated Financial Statements
32
<PAGE>
BAKER HUGHES INCORPORATED
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<Table>
<Caption>
ACCUMULATED OTHER COMPREHENSIVE
INCOME (LOSS)
-----------------------------------------
UNREALIZED
CAPITAL RETAINED FOREIGN GAIN (LOSS)
IN EXCESS EARNINGS CURRENCY ON SECURITIES PENSION
COMMON OF (ACCUMULATED TRANSLATION AVAILABLE LIABILITY
STOCK PAR VALUE DEFICIT) ADJUSTMENT FOR SALE ADJUSTMENT TOTAL
------ --------- ------------ ----------- ------------- ---------- -----
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1998 $ 327.1 $ 2,931.8 $ 66.1 $ (155.4) $ (0.1) $ (4.4) $ 3,165.1
Comprehensive income:
Net income 33.3
Other comprehensive income
(loss) (net of tax of $2.0,
$0.04 and $0.9, respectively) (30.2) 0.1 1.7
Total comprehensive income 4.9
Cash dividends ($0.46 per share) (150.9) (150.9)
Stock issued pursuant to employee
stock plans 2.7 49.3 52.0
--------- --------- -------- -------- -------- --------- ---------
BALANCE, DECEMBER 31, 1999 329.8 2,981.1 (51.5) (185.6) -- (2.7) 3,071.1
Comprehensive income:
Net income 102.3
Other comprehensive loss (net
of tax of $0.7 and $2.0,
respectively) (59.5) (3.6)
Total comprehensive income 39.2
Cash dividends ($0.46 per share) (152.1) (152.1)
Stock issued pursuant to employee
stock plans 3.9 84.6 88.5
--------- --------- -------- -------- -------- --------- ---------
BALANCE, DECEMBER 31, 2000 333.7 3,065.7 (101.3) (245.1) -- (6.3) 3,046.7
Comprehensive income:
Net income 438.0
Other comprehensive loss (net
of tax of ($0.2) and $3.2,
respectively) (52.5) (5.9)
Total comprehensive income 379.6
Cash dividends ($0.46 per share) (154.4) (154.4)
Stock issued pursuant to employee
stock plans 2.3 53.6 55.9
--------- --------- -------- -------- -------- --------- ---------
BALANCE, DECEMBER 31, 2001 $ 336.0 $ 3,119.3 $ 182.3 $ (297.6) $ -- $ (12.2) $ 3,327.8
========= ========= ======== ======== ======== ========= =========
</Table>
See Notes to Consolidated Financial Statements
33
<PAGE>
BAKER HUGHES INCORPORATED
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN MILLIONS)
<Table>
<Caption>
YEAR ENDED DECEMBER 31,
--------------------------------------
2001 2000 1999
---------- ---------- ----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 438.0 $ 102.3 $ 33.3
Adjustments to reconcile net income to net cash
flows from operating activities:
Depreciation, depletion and amortization 344.7 611.5 790.7
Provision (benefit) for deferred income taxes 74.0 49.0 (47.2)
Loss on extinguishment of debt 2.3 -- --
Noncash portion of unusual charges 3.2 22.2 72.1
Gain on trading securities -- (14.1) (31.5)
(Gain) loss on disposal or sale of assets (35.7) 27.9 (47.8)
Equity in (income) loss of affiliates (45.8) 4.6 (7.0)
Change in operating accounts (59.9) (239.9) (219.4)
---------- ---------- ----------
Net cash flows from operating activities 720.8 563.5 543.2
Cash flows from investing activities:
Expenditures for capital assets and multiclient
seismic data (319.0) (599.2) (640.4)
Proceeds from disposal or sale of assets 77.7 213.0 154.2
Proceeds from sale of trading securities -- 72.7 --
---------- ---------- ----------
Net cash flows from investing activities (241.3) (313.5) (486.2)
Cash flows from financing activities:
Net repayments of commercial paper and other
short-term debt (67.9) (753.1) (816.0)
Repayment of indebtedness (301.8) -- (150.0)
Borrowings of long-term debt -- -- 1,010.7
Proceeds from sale of interest in affiliate 9.0 493.4 --
Proceeds from sale/leaseback -- 117.7 --
Proceeds from issuance of common stock 50.1 70.9 47.6
Dividends (154.4) (152.1) (150.9)
---------- ---------- ----------
Net cash flows from financing activities (465.0) (223.2) (58.6)
Effect of foreign exchange rate changes on cash (3.7) (7.8) 1.0
---------- ---------- ----------
Increase (decrease) in cash and cash equivalents 10.8 19.0 (0.6)
Cash and cash equivalents, beginning of year 34.6 15.6 16.2
---------- ---------- ----------
Cash and cash equivalents, end of year $ 45.4 $ 34.6 $ 15.6
========== ========== ==========
</Table>
See Notes to Consolidated Financial Statements
34
<PAGE>
BAKER HUGHES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of Baker Hughes
Incorporated and all majority owned subsidiaries (the "Company"). Investments in
which the Company owns 20% to 50% and exercises significant influence over
operating and financial policies are accounted for using the equity method of
accounting. All significant intercompany accounts and transactions have been
eliminated in consolidation. In the Notes to Consolidated Financial Statements,
all dollar and share amounts in tabulations are in millions of dollars and
shares, respectively, unless otherwise indicated.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities, disclosure of contingent assets and liabilities at the
date of the financial statements, and the reported amounts of revenues and
expenses during the reporting period. Future events and their effects cannot be
perceived with certainty. Accordingly, the Company's accounting estimates
require the exercise of judgment. While management believes that the estimates
and assumptions used in the preparation of the consolidated financial statements
are appropriate, actual results could differ from those estimates. Estimates are
used for, but are not limited to, determining the following: allowance for
doubtful accounts and inventory valuation reserves, recoverability of long-lived
assets, useful lives used in depreciation and amortization, income taxes and
related valuation allowances, and insurance, environmental, legal and
restructuring accruals. The accounting estimates used in the preparation of the
consolidated financial statements may change as new events occur, as more
experience is acquired, as additional information is obtained and as the
Company's operating environment changes.
REVENUE RECOGNITION
The Company's products and services are generally sold based upon purchase
orders or contracts with the customer that include fixed or determinable prices
and that do not include right of return or other similar provisions or other
significant post delivery obligations. Revenue is recognized for products upon
delivery and when title passes or when services are rendered and only when
collectibility is reasonably assured. Certain revenues from the Company's
Process segment are reported on the percentage of completion method of
accounting using measurements of progress towards completion appropriate for the
products and services being provided. Provisions for estimated warranty returns
or similar types of items are made at the time the related revenue is
recognized.
CASH EQUIVALENTS
The Company considers all highly liquid investments with an original
maturity of three months or less at the time of purchase to be cash equivalents.
INVENTORIES
Inventories are stated at the lower of cost or market. Cost is primarily
determined on the average cost method and includes the cost of materials, labor
and manufacturing overhead.
PROPERTY AND DEPRECIATION
Property is stated at cost less accumulated depreciation, which is generally
provided by using the straight-line method over the estimated useful lives of
the individual assets. The Company manufactures a substantial portion of its
rental tools and equipment, and the cost of these items, which includes direct
and indirect manufacturing costs, are capitalized and carried in inventory until
the tool is completed and transferred into the rental tool fleet.
35
<PAGE>
BAKER HUGHES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Significant improvements and betterments are capitalized if they extend the
useful life of the asset. Routine repairs and maintenance are expensed when
incurred.
The Company has substantially completed its development and implementation
of SAP R/3 as an enterprise-wide software system. External direct costs of
consulting services and payroll-related cost of employees who worked full-time
on the implementation of the system were capitalized and classified in machinery
and equipment. Costs associated with business process reengineering were
expensed as incurred. Amortization of a pro-rata amount of the capitalized costs
began as the system was implemented at each of the Company's operations.
The Company uses the full-cost method of accounting for its investment in
oil and gas properties. Under this method, the Company capitalizes all
acquisition, exploration, and development costs incurred for the purpose of
finding oil and gas reserves. Depreciation, depletion, and amortization of oil
and gas properties are computed using the unit-of-production method based upon
production and estimates of proved reserves.
GOODWILL AND OTHER INTANGIBLES AND AMORTIZATION
Goodwill arising from acquisitions is amortized using the straight-line
method over the lesser of its expected useful life or 40 years. Other
intangibles are stated at cost and are amortized on a straight-line basis over
the asset's estimated useful life.
IMPAIRMENT OF LONG-LIVED ASSETS
Long-lived assets, which includes property, plant and equipment, goodwill
and other intangibles, and certain other assets are reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount
may not be recoverable. An impairment loss is recorded in the period in which it
is determined that the carrying amount is not recoverable. The determination of
recoverability is made based upon the estimated undiscounted future net cash
flows, excluding interest expense. The impairment loss is determined by
comparing the fair value, as determined by a discounted cash flow analysis, with
the carrying value of the related assets.
INCOME TAXES
The Company uses the liability method for reporting income taxes, under
which current and deferred tax liabilities and assets are recorded in accordance
with enacted tax laws and rates. Under this method, the amounts of deferred tax
liabilities and assets at the end of each period are determined using the tax
rate expected to be in effect when taxes are actually paid or recovered. Future
tax benefits are recognized to the extent that realization of such benefits is
more likely than not.
Deferred income taxes are provided for the estimated income tax effect of
temporary differences between financial and tax bases in assets and liabilities.
Deferred tax assets are also provided for certain tax credit carryforwards. A
valuation allowance to reduce deferred tax assets is established when it is more
likely than not that some portion or all of the deferred tax assets will not be
realized.
The Company intends to indefinitely reinvest earnings of certain non-U.S.
subsidiaries in operations outside the United States; accordingly, the Company
does not provide U.S. income taxes for such earnings.
The Company operates under many legal forms and in more than 70 countries.
As a result, the Company is subject to many domestic and foreign tax
jurisdictions and to many tax agreements and treaties among the various taxing
authorities. Determination of taxable income in any jurisdiction requires the
interpretation of the related tax laws and regulations and the use of estimates
and assumptions regarding significant future events. Changes in tax laws,
regulations, agreements and treaties, foreign currency exchange restrictions or
the Company's level of operations or profitability in each taxing jurisdiction
could have an impact upon the amount of income taxes that the Company provides
during any given year.
36
<PAGE>
BAKER HUGHES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
ENVIRONMENTAL MATTERS
Remediation costs are accrued based on estimates of known environmental
remediation exposure using currently available facts, existing environmental
permits and technology and presently enacted laws and regulations. The Company's
estimates of costs are developed based on internal evaluations and, when
necessary, recommendations from external environmental consultants. Such
accruals are recorded when it is probable that the Company will be obligated to
pay amounts for environmental site evaluation, remediation or related costs, and
such amounts can be reasonably estimated. If the obligation can only be
estimated within a range, the Company accrues the minimum amount in the range.
Such accruals are recorded even if significant uncertainties exist over the
ultimate cost of the remediation. Ongoing environmental compliance costs,
including maintenance and monitoring costs, are expensed as incurred. Where the
Company has been identified as a potentially responsible party in a United
States federal "Superfund" site, the Company accrues its share of the estimated
remediation costs of the site based on the ratio of the estimated volume of
waste contributed to the site by the Company to the total volume of waste at the
site.
STOCK BASED COMPENSATION
The Company accounts for its stock based compensation using the intrinsic
value method of accounting in accordance with Accounting Principles Board
Opinion No. 25, Accounting for Stock Issued to Employees ("APB No. 25"). Under
this method, no compensation expense is recognized when the number of shares
granted are known and the exercise price of the employee stock option is equal
to or greater than the market price of the Company's common stock on the grant
date.
FOREIGN CURRENCY TRANSLATION
The majority of the Company's foreign subsidiaries have designated the local
currency as their functional currency and, as such, gains and losses resulting
from balance sheet translation of foreign operations are included as a separate
component of accumulated other comprehensive loss within stockholders' equity.
For those foreign subsidiaries that have designated the U.S. Dollar as the
functional currency, gains and losses resulting from balance sheet translation
of foreign operations are included in the consolidated statements of operations
as incurred.
DERIVATIVE FINANCIAL INSTRUMENTS
The Company monitors its exposure to various business risks including
commodity price, foreign exchange rate and interest rate risks and occasionally
uses derivative financial instruments to manage the impact of certain of these
risks. The Company's policies do not permit the use of derivative financial
instruments for speculative purposes. The Company uses forward exchange
contracts and currency swaps to hedge certain firm commitments and transactions
denominated in foreign currencies. The Company uses interest rate swaps to
manage interest rate risk. The Company also uses crude oil swaps and collars to
hedge price risk associated with the Company's crude oil production.
On January 1, 2001, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 133, Accounting for Derivative Instruments and Hedging
Activities, as amended by SFAS Nos. 137 and 138. SFAS No. 133 establishes
accounting and reporting standards for derivative instruments and hedging
activities that require an entity to recognize all derivatives as an asset or
liability measured at fair value. Depending on the intended use of the
derivative and its effectiveness, changes in its fair value will be reported in
the period of change as either a component of earnings or a component of
accumulated other comprehensive loss. The adoption of SFAS No. 133 on January 1,
2001 resulted in a gain of $0.8 million, net of tax, recorded as the cumulative
effect of an accounting change in the consolidated statement of operations and a
gain of $1.2 million, net of tax, recorded in accumulated other comprehensive
loss. During 2001, all of the $1.2 million gain was reclassified into earnings
upon maturity of the contracts.
To qualify for hedge accounting, the derivative must qualify either as a
fair value hedge, cash flow hedge or a hedge of the net investment in foreign
operations. A fair value hedge is a hedge of a recognized asset or liability or
an unrecognized firm commitment. Both the effective and ineffective portions of
the changes in the fair value
37
<PAGE>
BAKER HUGHES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
of the derivative, along with the gain or loss on the hedged item, are recorded
in earnings and reported in the consolidated statements of operations on the
same line as the hedged item. A cash flow hedge is a hedge of a forecasted
transaction or the variability of cash flows to be received or paid in the
future related to a recognized asset or liability. The effective portion of the
changes in the fair value of the derivative is recorded in accumulated other
comprehensive loss. When the hedged item is realized, the gain or loss included
in accumulated other comprehensive loss is reported on the same line in the
consolidated statements of operations as the hedged item. In addition, both the
fair value changes excluded from the Company's effectiveness assessments and the
ineffective portion of the changes in the fair value of derivatives used as cash
flow hedges are immediately recognized in earnings. The Company is not currently
hedging any of its net investments in foreign operations.
At the inception of any new derivative, the Company designates the
derivative as a cash flow hedge or fair value hedge. The Company documents all
relationships between hedging instruments and the hedged items, as well as its
risk management objectives and strategy for undertaking various hedge
transactions. The Company assesses whether the derivatives that are used in
hedging transactions are highly effective in offsetting changes in cash flows of
the hedged item at both the inception of the hedge and on an ongoing basis.
NEW ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 141, Business Combinations. SFAS No. 141 requires that all business
combinations initiated after June 30, 2001 be accounted for under the purchase
method of accounting and addresses the initial recognition and measurement of
goodwill and other intangible assets acquired in a business combination.
Business combinations accounted for under the pooling of interests method prior
to June 30, 2001 were not changed. The adoption of SFAS No. 141 by the Company
did not have an impact on the consolidated financial statements of the Company.
In June 2001, the FASB issued SFAS No. 142, Goodwill and Other Intangible
Assets. SFAS No. 142 addresses the initial recognition and measurement of
intangible assets acquired in a business combination and the accounting for
goodwill and other intangible assets subsequent to their acquisition. SFAS No.
142 provides that intangible assets with finite useful lives be amortized and
that goodwill and intangible assets with indefinite lives not be amortized, but
rather be tested at least annually for impairment. SFAS No. 142 requires that a
transitional impairment test be performed within six months of adoption and any
transitional impairment loss will be recognized as the cumulative effect of a
change in accounting principle. The Company will adopt SFAS No. 142 effective
January 1, 2002. The cessation of amortization expense related to goodwill and
goodwill associated with equity method investments under the guidelines of SFAS
No. 142 will result in a reduction of approximately $52.5 million in annual
amortization expense in 2002. The Company has not completed its analysis of the
impact of the adoption of SFAS No. 142 as it relates to the possible impairment
of goodwill.
In June 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement
Obligations. SFAS No. 143 addresses financial accounting and reporting for
obligations associated with the retirement of long-lived assets and the
associated asset retirement costs. SFAS No. 143 requires that the fair value of
a liability associated with an asset retirement be recognized in the period in
which it is incurred if a reasonable estimate of fair value can be made. The
associated retirement costs are capitalized as part of the carrying amount of
the long-lived asset and subsequently depreciated over the life of the asset.
The Company has not completed its analysis of the impact, if any, of the
adoption of SFAS No. 143 on its consolidated financial statements. The Company
will adopt SFAS No. 143 for its fiscal year beginning January 1, 2003.
In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment
or Disposal of Long-Lived Assets. SFAS No. 144 addresses the financial
accounting and reporting for the impairment or disposal of long-lived assets.
SFAS No. 144 replaces SFAS No. 121, Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of. SFAS No. 144 provides
updated guidance concerning the recognition and measurement of an impairment
loss for certain types of long-lived assets and modifies the accounting and
reporting of discontinued operations. SFAS No. 144 is not expected to materially
change the methods used by the Company to measure impairment losses on
long-lived assets, but may result in future dispositions being reported as
discontinued operations to a greater extent than is currently permitted. The
Company will adopt SFAS No. 144 for its fiscal year beginning January 1, 2002.
38
<PAGE>
BAKER HUGHES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
RECLASSIFICATIONS
Certain reclassifications have been made to the prior years' consolidated
financial statements to conform with the current year presentation.
NOTE 2. UNUSUAL ITEMS
2001
During 2001, the Company incurred items resulting in a net unusual charge of
$1.6 million. Unusual items included charges of $9.2 million offset by credits
of $7.6 million. The table set forth below summarizes these transactions:
<Table>
<Caption>
ACCRUED
BALANCE AT
DECEMBER 31,
TOTAL CHARGE PAYMENTS 2001
------------ -------- ------------
<S> <C> <C> <C>
Cash charge:
Severance for approximately 100 employees $ 6.0 $ (1.1) $ 4.9
------ ====== ======
Noncash charges:
Ceiling test charge for oil and gas properties 2.2
Other noncash charges 1.0
------
Subtotal noncash charges 3.2
------
Total cash and noncash charges 9.2
Unusual credits (7.6)
------
Total unusual charge $ 1.6
======
</Table>
The severance relates to the restructuring of the German operations of BIRD
Machine, a division of the Process segment. The employee groups to be terminated
will be engineering, field service and support personnel. The amount accrued for
severance is based upon the positions eliminated and the Company's specific or
statutory severance plans in place for these operations and does not include any
portion of the employees' salary through their severance dates. Based on current
estimates, the Company expects that the remainder of the accrued severance will
be paid during 2002 or when the employees leave the Company.
During 2001, the Company recorded an unusual credit of $4.2 million as a
reduction to an unusual charge accrual recorded in 2000 to reflect the current
estimate of remaining expenditures. The reduction related to adjustments to its
estimated costs to settle contractual obligations based on new events and
information. The Company recognized a gain of $3.4 million on the disposition of
its interest in a joint venture within the Oilfield segment and received net
proceeds of $6.0 million from this transaction. These items are reflected as
unusual credits in the consolidated statement of operations.
39
<PAGE>
BAKER HUGHES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2000
During 2000, the Company incurred items resulting in a net unusual charge of
$69.6 million. Unusual items included charges of $111.0 million offset by
credits of $41.4 million. The table set forth below summarizes these
transactions:
<Table>
<Caption>
ACCRUED
BALANCE AT
TOTAL DECEMBER 31,
CHARGE PAYMENTS ADJUSTMENTS 2001
------ -------- ----------- ------------
<S> <C> <C> <C> <C>
Cash charges:
Severance for approximately 50 employees $ 5.5 $ (2.6) $ -- $ 2.9
Other contractual obligations 7.8 (2.4) (4.2) 1.2
--------- --------- --------- ---------
Subtotal cash charges 13.3 $ (5.0) $ (4.2) $ 4.1
--------- ========= ========= =========
Noncash charges:
Write-off of undeveloped oil and gas properties 16.2
Venture formation expenses 6.0
---------
Subtotal noncash charges 22.2
---------
Total cash and noncash charges 35.5
Loss on sale of oil and gas properties 75.5
Unusual credits (41.4)
---------
Total unusual charge $ 69.6
=========
</Table>
In October 2000, the Company's Board of Directors approved the Company's
plan to substantially exit the oil and gas exploration business. The Company
sold its interests in its China, Gulf of Mexico and Gabon oil and gas properties
and recorded a loss of $75.5 million on the sale of these properties. Net
proceeds from these sales were $53.4 million and were used to repay outstanding
indebtedness. The Company also wrote off its remaining undeveloped exploration
properties in other foreign jurisdictions resulting in a loss of $16.2 million.
The Company accrued cash charges of $13.3 million for costs resulting from
exiting the business, including severance and other employee-related costs and
costs to settle contractual obligations. The employee groups to be terminated
will be executive, engineering, field service and support personnel. The amount
accrued for severance is based upon the positions eliminated and the Company's
specific or statutory plans in place for these operations and does not include
any portion of the employees' salary through their severance dates. Based on
current estimates, the Company expects that the remainder of the accrued
severance will be paid during 2002 or as the employees leave the Company. The
contractual obligations will be paid as the Company settles with the various
counterparties.
The Company incurred fees of $6.0 million in connection with the formation
of Western GECO, a venture formed by the Company in 2000.
During 2000, the Company recorded an unusual credit of $28.5 million as net
reductions to unusual charge accruals recorded in 1999 and prior years to
reflect current estimates of remaining expenditures. The net reductions
primarily related to severance accruals, legal accruals and accruals for lease
obligations. In addition, the Company recognized gains of $12.9 million on the
sale of various product lines within the Oilfield and Process segments. The
Company received net proceeds from these sales of $41.7 million. These items are
reflected as unusual credits in the consolidated statement of operations.
40
<PAGE>
BAKER HUGHES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1999
As a result of continuing low activity levels, predominantly for the
Company's seismic products and services, the Company recorded charges during the
fourth quarter of 1999 totaling $122.8 million as summarized below:
<Table>
<Caption>
ACCRUED
BALANCE AT
TOTAL DECEMBER 31,
CHARGE PAYMENTS ADJUSTMENTS 2001
------ -------- ----------- ------------
<S> <C> <C> <C> <C>
Cash charges:
Severance for approximately 800 employees $ 12.5 $ (8.8) $ (3.7) $ --
Lease termination and other contractual
obligations 36.0 (21.4) (14.6) --
Other cash charges 2.2 (0.7) (1.5) --
-------- -------- -------- --------
Subtotal cash charges 50.7 $ (30.9) $ (19.8) $ --
======== ======== ========
Noncash charges - impairment of property and
equipment 72.1
--------
Total cash and noncash charges $ 122.8
========
</Table>
The employee groups to be terminated were executive, marketing, field
service and support personnel of which substantially all were either terminated
by the Company or transferred as of December 31, 2000 to Western GECO. The
amount accrued for severance was based upon the positions eliminated and the
Company's specific or statutory severance plans in place for these operations
and did not include any portion of the employees' salary through their severance
dates.
The Company accrued $36.0 million related to expected costs to settle
contractual obligations based upon management's decision to reduce or abandon
certain operations and based on the terms of the applicable agreements. These
costs consisted primarily of the cost of terminating leases on certain marine
vessels that were taken out of service and removed from the fleet.
The impairment of property included the write-off or write-down of certain
assets utilized in the Company's seismic business. These assets were scrapped or
otherwise disposed of and consisted of $51.1 million of land and marine
recording equipment, $1.4 million of data processing equipment and $19.6 million
of marine vessels that were sold or otherwise abandoned. Write-down amounts were
generally determined by use of internal appraisal techniques to assess the
estimated fair value to be realized upon disposal.
During 1999, the Company realized unusual gains totaling $54.8 million. The
Company sold two large excess real estate properties and realized net gains
totaling $39.5 million. The Company received net proceeds of $68.1 million. In
addition, the Company sold certain assets related to its previous divestiture of
a joint venture and realized a net gain of $15.3 million.
During 1999, the Company reviewed the remaining balances of the accruals for
merger and unusual cash charges recorded in 1998 and prior years and made net
reductions of $13.0 million to reflect the current estimates of remaining
expenditures. These net reductions included reversals of previously recorded
accruals that will not be utilized and that relate primarily to severance
accruals and lease obligations. In addition, for accruals related to certain
terminated lease obligations, revisions were made to increase previously
recorded amounts based on current information and estimates of expected cash
flows related to these leases.
The unusual items described above were reflected in the following captions
of the consolidated statement of operations for the year ended December 31,
1999:
<Table>
<Caption>
CHARGES CREDITS ADJUSTMENTS TOTAL
------- ------- ----------- -----
<S> <C> <C> <C> <C>
Cost of revenues $ 72.1 $ -- $ -- $ 72.1
Selling, general and administrative -- (15.3) (5.0) (20.3)
Merger related costs -- -- (1.6) (1.6)
Unusual charge 50.7 (39.5) (6.4) 4.8
-------- -------- -------- --------
Total $ 122.8 $ (54.8) $ (13.0) $ 55.0
======== ======== ======== ========
</Table>
41
<PAGE>
BAKER HUGHES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 3. INCOME TAXES
The provision for income taxes is comprised of the following for the years
ended December 31:
<Table>
<Caption>
2001 2000 1999
-------- -------- --------
<S> <C> <C> <C>
Current:
United States $ 1.9 $ 2.1 $ 3.0
Foreign 146.8 82.7 71.8
-------- -------- --------
Total current 148.7 84.8 74.8
-------- -------- --------
Deferred:
United States 74.0 18.5 (30.4)
Foreign 0.4 30.4 (19.5)
-------- -------- --------
Total deferred 74.4 48.9 (49.9)
-------- -------- --------
Provision for income taxes $ 223.1 $ 133.7 $ 24.9
======== ======== ========
</Table>
The geographic sources of income before income taxes, extraordinary loss and
cumulative effect of accounting changes are as follows for the years ended
December 31:
<Table>
<Caption>
2001 2000 1999
-------- -------- --------
<S> <C> <C> <C>
United States $ 206.8 $ (12.0) $ 76.0
Foreign 455.0 248.0 (17.8)
-------- -------- --------
Total $ 661.8 $ 236.0 $ 58.2
======== ======== ========
</Table>
Tax benefits of $5.5 million, $5.8 million and $4.2 million associated with
the exercise of employee stock options were allocated to equity and recorded in
capital in excess of par value in the years ended December 31, 2001, 2000 and
1999, respectively.
The provision for income taxes differs from the amount computed by applying
the U.S. statutory income tax rate to income before income taxes, extraordinary
loss and cumulative effect of accounting changes for the reasons set forth below
for the years ended December 31:
<Table>
<Caption>
2001 2000 1999
-------- -------- --------
<S> <C> <C> <C>
Statutory income tax at 35% $ 231.6 $ 82.6 $ 20.4
Formation-related taxes for Western GECO -- 45.0 --
Incremental effect of joint venture operations 14.8 2.2 --
Incremental effect of foreign operations (2.5) (13.7) (39.4)
Net tax (benefit) charge related to foreign losses (7.4) 11.7 52.0
Nondeductible goodwill amortization 10.0 8.2 9.3
State income taxes - net of U.S. tax benefit 2.7 1.3 2.0
IRS audit agreement and refund claims (23.5) -- (18.1)
Other - net (2.6) (3.6) (1.3)
-------- -------- --------
Provision for income taxes $ 223.1 $ 133.7 $ 24.9
======== ======== ========
</Table>
During 2001, incremental taxes of $14.8 million from the Western GECO
venture arose due to unbenefitted foreign losses and due to taxes assessed in
jurisdictions on a deemed profit basis. In addition, a current year benefit of
$23.5 million was recognized as a result of the settlement of the Internal
Revenue Service ("IRS") examination of certain 1994 through 1997 pre-acquisition
tax returns and related refund claims of Western Atlas, Inc. The Company
recognized interest income of $5.4 million associated with this settlement.
During 2000, as a result of the repatriation of the proceeds from the
formation of the Western GECO venture, the Company incurred $3.4 million of
foreign withholdings and other taxes and provided $6.0 million of additional
U.S. taxes. In addition, the formation of the venture reduced the expected
amount of foreign source income available in the future to utilize the Company's
foreign tax credit carryover; accordingly, the Company provided $35.6 million
for additional U.S. taxes with respect to future repatriation of earnings
necessary to utilize the foreign tax credit carryover. Such amounts, aggregating
$45.0 million, are presented in the above income tax rate reconciliation table
under the caption "Formation-related taxes for Western GECO."
42
<PAGE>
BAKER HUGHES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
During 1999, the Company recognized a tax benefit of $18.1 million through
the reversal of previously provided deferred taxes after settling the IRS
examination of its 1994 and 1995 U.S. tax years.
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes, as well as operating loss
and tax credit carryforwards. The tax effects of the Company's temporary
differences and carryforwards are as follows at December 31:
<Table>
<Caption>
2001 2000
-------- --------
<S> <C> <C>
Deferred tax assets:
Receivables $ 15.8 $ 16.5
Inventory 100.7 97.2
Employee benefits 20.3 17.2
Other accrued expenses 54.9 64.1
Operating loss carryforwards 59.3 146.9
Tax credit carryforwards 186.9 178.5
Other 61.7 57.8
-------- --------
Subtotal 499.6 578.2
Valuation allowances (45.4) (56.4)
-------- --------
Total 454.2 521.8
-------- --------
Deferred tax liabilities:
Property 124.8 114.2
Other assets 106.8 126.1
Goodwill 115.6 107.3
Undistributed earnings of foreign subsidiaries 74.9 74.9
Other 59.8 66.1
-------- --------
Total 481.9 488.6
-------- --------
Net deferred tax (liability) asset $ (27.7) $ 33.2
======== ========
</Table>
A valuation allowance is recorded when it is more likely than not that some
portion or all of the deferred tax assets will not be realized. The ultimate
realization of the deferred tax assets depends on the ability to generate
sufficient taxable income of the appropriate character in the future and in the
appropriate taxing jurisdictions. The Company has provided a valuation allowance
for operating loss carryforwards in certain non-U.S. jurisdictions where its
operations have decreased, currently ceased or the Company has withdrawn
entirely.
Provision has been made for U.S. and additional foreign taxes for the
anticipated repatriation of certain earnings of foreign subsidiaries of the
Company. The Company considers the undistributed earnings of its foreign
subsidiaries above the amount already provided to be indefinitely reinvested.
These additional foreign earnings could become subject to additional tax if
remitted, or deemed remitted, as a dividend; however, the additional amount of
taxes payable is not practicable to estimate.
At December 31, 2001, the Company had approximately $104.1 million of
foreign tax credits and $61.3 million of general business credits available to
offset future payments of federal income taxes, expiring in varying amounts
between 2004 and 2022. The Company's $21.5 million alternative minimum tax
credits carryforward may be carried forward indefinitely under current U.S. law.
The operating loss carryforwards without a valuation allowance will expire in
varying amounts over the next twenty years.
43
<PAGE>
BAKER HUGHES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 4. EARNINGS PER SHARE
A reconciliation of the number of shares used for the basic and diluted
earnings per share ("EPS") computations is as follows for the years ended
December 31:
<Table>
<Caption>
2001 2000 1999
---- ---- ----
<S> <C> <C> <C>
Weighted average common shares outstanding for basic EPS 335.6 330.9 328.2
Effect of dilutive securities - stock plans 1.8 2.0 1.7
------ ------ ------
Adjusted weighted average common shares outstanding for diluted EPS 337.4 332.9 329.9
====== ====== ======
Future potentially anti-dilutive shares excluded from diluted EPS:
Options with option price greater than market price 4.6 3.6 10.2
Liquid Yield Options Notes ("LYONS") convertible into common stock -- 7.2 7.2
</Table>
NOTE 5. INVENTORIES
Inventories are comprised of the following at December 31:
<Table>
<Caption>
2001 2000
---------- ----------
<S> <C> <C>
Finished goods $ 856.9 $ 706.0
Work in process 81.7 82.0
Raw materials 111.2 110.5
---------- ----------
Total $ 1,049.8 $ 898.5
========== ==========
</Table>
NOTE 6. INVESTMENTS IN AFFILIATES
The Company has investments in affiliates that are accounted for using the
equity method of accounting. The most significant of these affiliates is Western
GECO, which was formed on November 30, 2000 between the Company and Schlumberger
Limited ("Schlumberger"), and certain wholly owned subsidiaries of Schlumberger,
with the Company and Schlumberger owning 30% and 70% of the venture,
respectively. The Company contributed certain assets of its Western Geophysical
division with a net book value of $1.1 billion, consisting primarily of
multiclient seismic data and property and $15.0 million in working capital to
Western GECO. The Company did not recognize any gain or loss resulting from the
initial formation of the venture due to the Company's material continued
involvement in the operations of Western GECO. The Company incurred fees and
expenses of approximately $16.6 million in connection with the transaction. Of
this total, $10.6 million of direct costs were capitalized to the Company's
investment and $6.0 million were recorded as an unusual charge in the Company's
consolidated statement of operations for the year ended December 31, 2000.
In conjunction with the transaction, the Company received $493.4 million in
cash from Schlumberger in exchange for the transfer of a portion of the
Company's ownership in Western GECO. Additionally, as soon as practicable after
November 30, 2004, the Company or Schlumberger will make a cash true-up payment
to the other party based on a formula comparing the ratio of the net present
value of sales revenue from each party's contributed multiclient seismic data
libraries during the four-year period ending November 30, 2004 and the ratio of
the net book value of those libraries as of November 30, 2000. The maximum
payment that either party will be required to make as a result of this
adjustment is $100.0 million. In conjunction with the formation of Western GECO,
the Company transferred to the venture a lease on a seismic vessel. The Company
is the sole guarantor of this lease obligation; however, Schlumberger has
indemnified the Company for 70% of the total lease obligation. At December 31,
2001, the remaining commitment under this lease is $96.4 million. The Company
also entered into an agreement with Western GECO whereby Western GECO subleased
a facility from the Company for a period of ten years at current market rates.
During 2001, the Company received $5.9 million of rental income from Western
GECO.
Included in the caption "Equity in income (loss) of affiliates" in the
Company's consolidated statement of operations for 2001 and 2000 was $10.3
million for asset impairment charges associated with Western GECO and $9.5
million for restructuring and integration charges associated with Western GECO,
respectively.
44
<PAGE>
BAKER HUGHES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
On October 30, 2001, the Company and Sequel Holdings, Inc. ("Sequel")
created an entity to operate under the name of Petreco International
("Petreco"). The Company contributed $16.6 million of net assets of the refining
and production product line of its Process segment to Petreco consisting
primarily of intangible assets, accounts receivable and inventories. In
conjunction with the transaction, the Company received $9.0 million in cash and
two promissory notes totaling $10.0 million. Petreco profits are shared by the
Company and Sequel in 49% and 51% interests, respectively. Sequel is entitled to
a liquidation preference upon the liquidation or sale of Petreco. The Company
accounts for its ownership in Petreco using the equity method of accounting and
did not recognize any gain or loss from the initial formation of the entity due
to the Company's material continued involvement in the operations of Petreco.
Summarized unaudited combined financial information for all equity method
affiliates is as follows as of December 31:
<Table>
<Caption>
2001 2000
---------- ----------
<S> <C> <C>
Combined operating results:
Revenues $ 1,752.9 $ 228.6
========== ==========
Operating income (loss) $ 226.1 $ (14.9)
========== ==========
Net income (loss) $ 118.2 $ (21.4)
========== ==========
Combined financial position:
Current assets $ 2,045.9 $ 1,565.5
Noncurrent assets 1,043.0 945.1
---------- ----------
Total assets $ 3,088.9 $ 2,510.6
========== ==========
Current liabilities $ 961.2 $ 690.1
Noncurrent liabilities 130.2 12.5
Stockholders' equity 1,997.5 1,808.0
---------- ----------
Total liabilities and stockholders' equity $ 3,088.9 $ 2,510.6
========== ==========
</Table>
At December 31, 2001 and 2000, net accounts receivable from affiliates
totaled $33.5 million and $11.4 million, respectively. As of December 31, 2001
and 2000, the excess of the Company's investment over the Company's equity in
affiliates is $303.4 million and $291.5 million, respectively. This amount is
being amortized over 40 years and the amortization is included in the Company's
equity in income (loss) of affiliates.
NOTE 7. PROPERTY, GOODWILL AND OTHER INTANGIBLES
Property, plant and equipment is comprised of the following at December 31:
<Table>
<Caption>
DEPRECIATION
PERIOD 2001 2000
------------ --------- ---------
<S> <C> <C> <C>
Land $ 37.8 $ 40.0
Buildings and improvements 5 - 40 years 534.1 517.1
Machinery and equipment 2 - 15 years 1,457.7 1,412.2
Rental tools and equipment 1 - 10 years 852.2 811.2
Oil and gas properties, full cost method 122.0 116.2
--------- ---------
Total property 3,003.8 2,896.7
Accumulated depreciation and depletion (1,628.0) (1,518.0)
--------- ---------
Property - net $ 1,375.8 $ 1,378.7
========= =========
</Table>
45
<PAGE>
BAKER HUGHES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Goodwill and other intangibles are as follows at December 31:
<Table>
<Caption>
AMORTIZATION
PERIOD 2001 2000
------------ ---------- ----------
<S> <C> <C> <C>
Goodwill 5 - 40 years $ 1,607.8 $ 1,640.5
Other intangible assets 3 - 40 years 202.4 220.1
---------- ----------
Total goodwill and other intangibles 1,810.2 1,860.6
Accumulated amortization (395.8) (362.5)
---------- ----------
Goodwill and other intangibles - net $ 1,414.4 $ 1,498.1
========== ==========
</Table>
NOTE 8. INDEBTEDNESS
Total debt consisted of the following at December 31:
<Table>
<Caption>
2001 2000
---------- ----------
<S> <C> <C>
Short-term debt with a weighted average interest rate of 4.90% at $ 89.1 $ 42.1
December 31, 2001 (7.43% at December 31, 2000)
Commercial Paper with a weighted average interest rate of 2.00% at
December 31, 2001 (6.51% at December 31, 2000) 95.0 215.0
5.8% Notes due February 2003 with an effective interest rate of 6.04%,
net of unamortized discount of $0.1 at December 31, 2001 ($0.4 at
December 31, 2000) 99.9 99.6
8% Notes due May 2004 with an effective interest rate of 8.08%, net
of unamortized discount of $0.3 at December 31, 2001 ($0.5 at
December 31, 2000) 99.7 99.5
7.875% Notes due June 2004 with an effective interest rate of 8.13%,
net of unamortized discount of $1.0 at December 31, 2001 ($1.4 at
December 31, 2000) 251.2 248.6
Liquid Yield Option Notes due May 2008 with a yield to maturity of 3.5%
per annum, net of unamortized discount of $88.9 at December 31, 2000 -- 296.2
6.25% Notes due January 2009 with an effective interest rate of 6.38%,
net of unamortized discount of $2.2 at December 31, 2001 ($2.5 at
December 31, 2000) 321.9 322.5
6% Notes due February 2009 with an effective interest rate of 6.11%,
net of unamortized discount of $1.2 at December 31, 2001 ($1.3 at
December 31, 2000) 198.8 198.7
8.55% Debentures due June 2024 with an effective interest rate of 8.80%,
net of unamortized discount of $2.5 at December 31, 2001 ($2.6 at
December 31, 2000) 147.5 147.4
6.875% Notes due January 2029 with an effective interest rate of 7.08%,
net of unamortized discount of $9.4 at December 31, 2001 ($9.6 at
December 31, 2000) 390.6 390.4
Other debt 0.9 2.9
---------- ----------
Total debt 1,694.6 2,062.9
Less short-term debt and current maturities 12.2 13.3
---------- ----------
Long-term debt $ 1,682.4 $ 2,049.6
========== ==========
</Table>
At December 31, 2001, the Company had $1,289.9 million of credit facilities
with commercial banks, of which $800.5 million were committed. The committed
facilities mature in September 2003. The Company's policy is to classify
commercial paper and short-term borrowings as long-term debt to the extent of
its committed facilities because the Company has the ability under these credit
agreements and the intent to maintain these obligations
46
<PAGE>
BAKER HUGHES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
for longer than one year. There were no borrowings under these credit facilities
during the years ended December 31, 2001 and 2000.
On May 25, 2001, the Company redeemed its outstanding LYONS at a redemption
price of $786.13 per $1,000 principal amount, for a total of $301.8 million. The
redemption was funded through the issuance of commercial paper. In connection
with the early extinguishment of debt, the Company recorded an extraordinary
loss of $2.3 million ($1.5 million after tax) which represents the write-off of
the remaining debt issuance costs.
Maturities of debt at December 31, 2001 are as follows: 2002 - $12.2
million; 2003 - $272.6 million; 2004 - $347.8 million; 2005 - $0.1 million; 2006
- - $0.0 million and $1,061.9 million thereafter.
NOTE 9. FINANCIAL INSTRUMENTS
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments include cash and short-term
investments, receivables, payables, debt, interest rate swaps, crude oil
contracts and foreign currency contracts. Except as described below, the
estimated fair value of such financial instruments at December 31, 2001 and 2000
approximate their carrying value as reflected in the consolidated balance
sheets. The fair value of the Company's debt, interest rate swaps, crude oil
contracts and foreign currency contracts has been estimated based on year-end
quoted market prices.
The estimated fair value of the Company's debt at December 31, 2001 and
2000 was $1,761.7 million and $2,131.5 million, respectively, which differs from
the carrying amounts of $1,694.6 million and $2,062.9 million, respectively,
included in the consolidated balance sheets.
INTEREST RATE SWAPS
The Company entered into an interest rate swap agreement in February 1999
for a notional amount of $325.0 million. The Company receives interest at a rate
of 6.25% and pays interest at a rate equal to the average of 6-month LIBOR for
the Yen, Euro and Swiss Franc plus a 3.16% spread. The interest rate swap
settles semi-annually and terminates in January 2009.
The Company entered into a second interest rate swap agreement in June 2001
for a notional amount of $100.0 million on which the Company receives interest
at a rate of 7.875% and pays interest at a rate of three-month LIBOR plus a
spread of 2.7625%. The interest rate swap settles semi-annually and terminates
in June 2004.
In accordance with SFAS No. 133, these two interest rate swap agreements
have been designated and have qualified as fair value hedging instruments. They
were fully effective, resulting in no net gain or loss recorded in the
consolidated statement of operations in 2001. In the unlikely event that the
counterparty fails to meet the terms of the interest rate swap agreements, the
Company's exposure is limited to the interest rate differentials.
The fair value of these contracts at December 31, 2001 and 2000 was a $1.3
million recognized asset, under SFAS No. 133, and a $9.6 million unrecorded
liability, respectively.
CRUDE OIL CONTRACTS
During the year ended December 31, 2001, the Company entered into two crude
oil contracts to mitigate price risk associated with production from the
Company's interest in an oil producing property in Nigeria. Based on the
Company's outlook on crude oil prices, the Company elected to terminate these
contracts prior to their maturity date. Accordingly, the contracts were
terminated on October 3, 2001 and the Company received a cash payment of $4.4
million. In accordance with SFAS No. 133, the net gain recognized in earnings in
2001 from all crude oil contracts was $3.1 million and is reported in revenue in
the consolidated statement of operations.
47
<PAGE>
BAKER HUGHES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
During the year ended December 31, 2000, the Company had entered into two
crude oil contracts to mitigate price risk associated with the Company's
interest in an oil producing property in Nigeria. The fair value of these
contracts at December 31, 2000 was a $3.1 million unrecorded asset.
FOREIGN CURRENCY FORWARD CONTRACTS
At December 31, 2001, the Company had entered into foreign currency forward
contracts with notional amounts of $8.5 million, $1.0 million and $0.7 million
to hedge exposure to currency fluctuations in the Canadian Dollar, the
Indonesian Rupiah and the Euro, respectively. These contracts are cash flow
hedges. Based on year-end quoted market prices for contracts with similar terms
and maturity dates, no asset or liability was recorded as the forward price is
substantially the same as the contract price.
At December 31, 2000, the Company had entered into foreign currency forward
contracts with notional amounts of $50.0 million, $0.3 million and $0.2 million
to hedge against exposure to fluctuations in the British Pound, the South
African Rand and the Euro, respectively. The fair value of these forward
contracts at December 31, 2000, was a $1.5 million unrecorded asset.
The counterparties to the Company's forward contracts are major financial
institutions. The credit ratings and concentration of risk of these financial
institutions are monitored on a continuing basis. In the unlikely event that the
counterparties fail to meet the terms of a foreign currency contract, the
Company's exposure is limited to the foreign currency rate differential.
During 2001, the Company entered into several foreign currency contracts to
hedge exposure to currency fluctuations for specific transactions or balances.
The impact on the consolidated statement of operations was not significant for
these contracts either individually or in the aggregate.
CONCENTRATION OF CREDIT RISK
The Company sells its products and services to numerous companies in the
oil and gas industry. Although this concentration could affect the Company's
overall exposure to credit risk, management believes that the Company is exposed
to minimal risk since the majority of its business is conducted with major
companies within the industry. The Company performs periodic credit evaluations
of its customers' financial condition and generally does not require collateral
for its accounts receivable. In some cases, the Company will require payment in
advance or security in the form of a letter of credit or bank guarantee.
The Company maintains cash deposits with major banks that from time to time
may exceed federally insured limits. The Company periodically assesses the
financial condition of the institutions and believes that the risk of any loss
is minimal.
NOTE 10. SEGMENT AND RELATED INFORMATION
The Company currently has eight operating divisions that have separate
management teams and infrastructures that offer different products and services.
The divisions have been aggregated into two reportable segments, "Oilfield" and
"Process".
The Oilfield segment consists of six operating divisions - Baker Atlas,
Baker Hughes INTEQ, Baker Oil Tools, Baker Petrolite, Centrilift, and Hughes
Christensen - that manufacture and sell equipment and provide services used in
the drilling, completion, production and maintenance of oil and gas wells and in
reservoir measurement and evaluation. They have been aggregated because the
long-term financial performance of these divisions is affected by similar
economic conditions and the consolidated results are evaluated regularly by the
chief operating decision maker in deciding how to allocate resources and in
assessing performance. The principal markets for this segment include all major
oil and gas producing regions of the world, including North America, Latin
America, Europe, Africa, the Middle East and the Far East. Customers include
major multi-national, independent and national or state-owned oil companies. The
Oilfield segment also includes the Company's interest in an oil and gas property
in Nigeria and its investment in Western GECO and other less significant equity
method investments.
48
<PAGE>
BAKER HUGHES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The Process segment consists of two operating divisions - EIMCO Process
Equipment and BIRD Machine- that manufacture and sell process equipment for
separating solids from liquids and liquids from liquids through filtration,
sedimentation, centrifugation and flotation processes. The principal markets for
this segment include all regions of the world where there are significant
industrial and municipal wastewater applications and base metals activity.
Customers include municipalities, contractors, engineering companies and pulp
and paper, minerals, industrial and oil and gas producers. The Process segment
also includes the Company's investment in Petreco.
The accounting policies of each segment are the same as those described in
Note 1 of Notes to Consolidated Financial Statements. The Company evaluates the
performance of its segments based on income before income taxes, accounting
changes, unusual items and interest income and expense. Intersegment sales and
transfers are not significant.
Summarized financial information is shown in the following table. The
"Other" column includes corporate related items, results of insignificant
operations and, as it relates to segment profit (loss), income and expense not
allocated to reportable segments.
<Table>
<Caption>
OILFIELD PROCESS OTHER TOTAL
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
2001
Revenues $ 5,063.4 $ 318.8 $ -- $ 5,382.2
Equity in income (loss) of affiliates 56.0 0.1 (10.3) 45.8
Segment profit (loss) 932.6 (14.4) (256.4) 661.8
Total assets 5,807.6 296.1 572.5 6,676.2
Investment in affiliates 902.8 26.2 -- 929.0
Capital expenditures 294.2 2.6 22.2 319.0
Depreciation, depletion and amortization 323.6 8.7 12.4 344.7
2000
Revenues $ 4,910.8 $ 323.0 $ -- $ 5,233.8
Equity in income (loss) of affiliates 4.9 -- (9.5) (4.6)
Segment profit (loss) 573.9 (5.2) (332.7) 236.0
Total assets 5,597.9 332.3 558.9 6,489.1
Investment in affiliates 869.3 -- -- 869.3
Capital expenditures 565.0 2.5 31.7 599.2
Depreciation, depletion and amortization 591.3 11.9 8.3 611.5
1999
Revenues $ 4,546.7 $ 389.8 $ -- $ 4,936.5
Equity in income of affiliates 7.0 -- -- 7.0
Segment profit (loss) 360.8 (22.3) (280.3) 58.2
Total assets 6,297.7 420.7 463.7 7,182.1
Investment in affiliates 40.2 -- -- 40.2
Capital expenditures 572.1 6.6 61.7 640.4
Depreciation, depletion and amortization 769.5 12.3 8.9 790.7
</Table>
For the years ended December 31, 2001, 2000 and 1999, there were no
revenues attributable to one customer that accounted for more than 10% of total
revenues for any segment.
The following table presents the details of "Other" segment loss for the
years ended December 31:
<Table>
<Caption>
2001 2000 1999
-------- -------- --------
<S> <C> <C> <C>
Corporate expenses $ (130.3) $ (99.2) $ (94.9)
Interest - net (114.2) (168.5) (161.9)
Unusual charge - net (1.6) (69.6) (4.8)
Unusual charges to costs of revenues and SG&A -- -- (51.8)
Gain on sale of securities -- 14.1 31.5
Unusual charge related to equity method investments (10.3) (9.5) --
Merger related costs -- -- 1.6
-------- -------- --------
Total $ (256.4) $ (332.7) $ (280.3)
======== ======== ========
</Table>
49
<PAGE>
BAKER HUGHES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following table presents the details of "Other" total assets at
December 31:
<Table>
<Caption>
2001 2000 1999
---------- ---------- ----------
<S> <C> <C> <C>
Current deferred tax asset $ 181.3 $ 190.5 $ 141.6
Net property 176.3 170.9 145.6
Accounts receivable 44.0 34.9 29.9
Other tangible assets 85.6 85.6 62.5
Other 85.3 77.0 84.1
---------- ---------- ----------
Total $ 572.5 $ 558.9 $ 463.7
========== ========== ==========
</Table>
The following table presents consolidated revenues by country based on the
location of the use of the product or service for the years ended December 31:
<Table>
<Caption>
2001 2000 1999
---------- ---------- ----------
<S> <C> <C> <C>
United States $ 2,082.0 $ 2,034.9 $ 1,874.2
United Kingdom 340.8 349.0 411.4
Norway 312.2 279.2 274.1
Canada 303.9 289.7 234.5
Venezuela 233.0 277.4 228.3
Other countries (approximately 65 countries) 2,110.3 2,003.6 1,914.0
---------- ---------- ----------
Total $ 5,382.2 $ 5,233.8 $ 4,936.5
========== ========== ==========
</Table>
The following table presents net property by country based on the location
of the asset at December 31:
<Table>
<Caption>
2001 2000 1999
---------- ---------- ----------
<S> <C> <C> <C>
United States $ 799.1 $ 758.0 $ 947.4
United Kingdom 108.7 133.7 183.4
Nigeria 83.0 78.6 91.9
Norway 48.1 37.3 43.0
Venezuela 37.4 45.4 53.6
Other countries 299.5 325.7 365.4
Western Geophysical mobile assets* -- -- 369.0
---------- ---------- ----------
Total $ 1,375.8 $ 1,378.7 $ 2,053.7
========== ========== ==========
</Table>
* These assets represent marine seismic vessels, land crews and related
equipment that are mobile and move frequently between countries. Data
processing centers, land and buildings have been included in the countries
where these assets were located.
NOTE 11. EMPLOYEE STOCK PLANS
The Company has stock option plans that provide for the issuance of
incentive and non-qualified stock options to directors, officers and other key
employees at an exercise price equal to or greater than the fair market value of
the stock at the date of grant. These stock options generally vest over three
years. Vested options are exercisable in part or in full at any time prior to
the expiration date of ten years from the date of grant. As of December 31,
2001, 7.6 million shares were available for future option grants.
50
<PAGE>
BAKER HUGHES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following table summarizes the activity for the Company's stock option
plans (shares in thousands):
<Table>
<Caption>
WEIGHTED
AVERAGE
NUMBER EXERCISE PRICE
OF SHARES PER SHARE
---------- --------------
<S> <C> <C>
Outstanding at December 31, 1998 13,332 $ 27.24
Granted 557 22.07
Exercised (1,096) 17.42
Forfeited (1,058) 33.03
---------- ----------
Outstanding at December 31, 1999 11,735 27.39
Granted 2,154 27.40
Exercised (2,471) 21.16
Forfeited (766) 27.79
---------- ----------
Outstanding at December 31, 2000 10,652 28.80
Granted 1,850 40.97
Exercised (2,291) 22.05
Forfeited (344) 30.01
---------- ----------
Outstanding at December 31, 2001 9,867 $ 32.61
========== ==========
</Table>
The following table summarizes information for stock options outstanding at
December 31, 2001 (shares in thousands):
<Table>
<Caption>
OUTSTANDING EXERCISABLE
------------------------------------------ --------------------------
WEIGHTED
AVERAGE
REMAINING WEIGHTED WEIGHTED
CONTRACTUAL AVERAGE AVERAGE
RANGE OF EXERCISE LIFE EXERCISE EXERCISE
PRICES SHARES (IN YEARS) PRICE SHARES PRICE
----------------- ---------- ----------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
$ 1.17 $ 14.86 154 3.83 $ 10.19 138 $ 9.66
$ 16.81 $ 21.00 3,144 6.30 20.82 2,606 20.78
$ 21.06 $ 26.07 1,343 7.28 22.82 554 22.73
$ 28.25 $ 40.25 1,174 7.01 36.30 743 35.85
$ 43.63 $ 47.81 4,052 7.24 44.80 2,243 47.79
---------- ---------- ---------- ---------- ----------
Total 9,867 6.87 $ 32.61 6,284 $ 32.13
========== ========== ========== ========== ==========
</Table>
The Company also has an employee stock purchase plan whereby eligible
employees may purchase shares of the Company's common stock at a price equal to
85% of the lower of the closing price of the Company's common stock on the first
or last trading day of the Company's fiscal year. A total of 1.5 million shares
are remaining for issuance under the plan. Employees purchased 0.6 million
shares in 2001, 1.1 million shares in 2000 and 1.5 million shares in 1999.
As allowed by SFAS No. 123, the Company has elected to continue to follow
APB No. 25 in accounting for its employee stock plans. Under APB No. 25, the
Company does not recognize compensation expense upon the issuance of its stock
options because the option terms are fixed and the exercise price is equal to or
greater than the market price of the underlying stock on the grant date.
51
<PAGE>
BAKER HUGHES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SFAS No. 123 requires the disclosure of pro forma net income and EPS as if
the Company had adopted the fair value method as of January 1, 1995. Under SFAS
No. 123, the fair value of stock based awards to employees is calculated through
the use of option pricing models. These models also require subjective
assumptions, including future stock price volatility and expected time to
exercise, which greatly affect the calculated values. The Company's calculations
were made using the Black-Scholes option pricing model with the following
weighted average assumptions:
<Table>
<Caption>
ASSUMPTIONS
--------------------------------------------------------
RISK-FREE EXPECTED
DIVIDEND EXPECTED INTEREST LIFE
YIELD VOLATILITY RATE (IN YEARS)
-------- ---------- --------- ----------
<S> <C> <C> <C> <C>
2001 1.1% 53.0% 3.4% 3.1
2000 1.7% 59.6% 5.0% 3.2
1999 2.2% 55.4% 6.5% 5.0
</Table>
The weighted average fair values of options granted in 2001, 2000 and 1999
were $15.04, $11.15 and $11.77 per share, respectively. If the Company had
recognized compensation expense based on these values, the Company's net income
and EPS would have been reduced to the pro forma amounts indicated below:
<Table>
<Caption>
2001 2000 1999
---------- ---------- ----------
<S> <C> <C> <C>
Net income
As reported $ 438.0 $ 102.3 $ 33.3
Pro forma 412.0 81.6 6.2
Basic EPS
As reported $ 1.31 $ 0.31 $ 0.10
Pro forma 1.23 0.25 0.02
Diluted EPS
As reported $ 1.30 $ 0.31 $ 0.10
Pro forma 1.22 0.25 0.02
</Table>
These pro forma calculations may not be indicative of future amounts since
the pro forma disclosure does not apply to options granted prior to 1996 and
additional awards in future years are anticipated.
NOTE 12. EMPLOYEE BENEFIT PLANS
DEFINED BENEFIT PENSION PLANS AND POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
The Company has various noncontributory defined benefit pension plans
covering various domestic and foreign employees. Generally, the Company makes
annual contributions to the plans in amounts necessary to meet or exceed minimum
governmental funding requirements. The Company also provides certain
postretirement health care and life insurance benefits other than pensions
("Postretirement Benefits") to substantially all U.S. employees who retire and
have met certain age and service requirements. During 2001, the Company approved
amendments to the Postretirement Benefits plan for certain employees to enhance
their health care benefits, which will be effective January 1, 2002.
52
<PAGE>
BAKER HUGHES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The reconciliation of the beginning and ending balances of benefit
obligations and fair value of plan assets, and the funded status of the plans
are as follows for the years ended December 31:
<Table>
<Caption>
PENSION BENEFITS POSTRETIREMENT BENEFITS
---------------------- -----------------------
2001 2000 2001 2000
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Change in benefit obligation:
Benefit obligation at beginning of year $ 220.8 $ 210.0 $ 120.4 $ 113.7
Service cost 4.5 6.2 1.6 1.7
Interest cost 14.8 14.2 8.9 8.3
Plan participants' contributions 0.5 1.1 -- --
Amendments -- -- 12.2 --
Actuarial loss 17.2 7.1 16.3 11.6
Settlement/curtailment gain (13.5) -- -- (1.6)
Benefits paid (10.2) (10.3) (15.7) (13.3)
Exchange rate adjustment (5.0) (7.5) -- --
-------- -------- -------- --------
Benefits obligation at end of year 229.1 220.8 143.7 120.4
-------- -------- -------- --------
Change in plan assets:
Fair value of plan assets at beginning of year 323.8 299.0 -- --
Actual return (loss) on plan assets (40.3) 35.2 -- --
Employer contribution 7.5 4.8 -- --
Plan participants' contributions 0.5 1.1 -- --
Benefits paid (10.2) (10.3) -- --
Exchange rate adjustment (3.2) (6.0) -- --
-------- -------- -------- --------
Fair value of plan assets at end of year 278.1 323.8 -- --
-------- -------- -------- --------
Funded status - over (under) 49.0 103.0 (143.7) (120.4)
Unrecognized actuarial (gain)loss 62.3 (8.0) 16.9 0.7
Unrecognized prior service cost 0.8 1.0 9.7 (3.0)
-------- -------- -------- --------
Net amount recognized 112.1 96.0 (117.1) (122.7)
Benefits paid - October to December 1.1 0.7 4.1 3.5
-------- -------- -------- --------
Net amount recognized $ 113.2 $ 96.7 $ (113.0) $ (119.2)
======== ======== ======== ========
</Table>
Amounts recognized in the consolidated balance sheet are as follows at
December 31:
<Table>
<Caption>
PENSION BENEFITS POSTRETIREMENT BENEFITS
-------------------------- --------------------------
2001 2000 2001 2000
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Prepaid benefit cost $ 143.6 $ 128.8 $ -- $ --
Accrued benefit liability (30.4) (32.1) (113.0) (119.2)
Minimum liability (19.3) (10.1) -- --
Intangible asset 0.5 0.4 -- --
Accumulated other comprehensive income 18.8 9.7 -- --
---------- ---------- ---------- ----------
Net amount recognized $ 113.2 $ 96.7 $ (113.0) $ (119.2)
========== ========== ========== ==========
</Table>
Actuarial assumptions used to determine costs and benefit obligation for
these plans are as follows for the years ended December 31:
<Table>
<Caption>
PENSION BENEFITS POSTRETIREMENT BENEFITS
------------------------------------ ------------------------------------
2001 2000 1999 2001 2000 1999
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Discount rate 6.53% 6.96% 6.95% 7.0% 7.75% 7.50%
Expected return on plan assets 8.68% 8.69% 8.68%
Rate of compensation increase 3.75% 3.98% 3.92%
</Table>
53
<PAGE>
BAKER HUGHES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The components of net pension and postretirement costs are as follows for
the years ended December 31:
<Table>
<Caption>
PENSION BENEFITS POSTRETIREMENT BENEFITS
------------------------------------ ------------------------------------
2001 2000 1999 2001 2000 1999
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Service cost $ 4.5 $ 6.2 $ 6.2 $ 1.6 $ 1.7 $ 2.0
Interest cost 14.8 14.2 13.7 8.9 8.3 8.1
Expected return on plan assets (27.8) (25.4) (22.5) -- -- --
Amortization of prior service cost -- -- -- (0.5) (0.5) (0.4)
Recognized actuarial (gain) loss 0.5 0.2 0.5 -- (0.1) --
-------- -------- -------- -------- -------- --------
Net periodic benefit cost (8.0) (4.8) (2.1) 10.0 9.4 9.7
Curtailment effect recognized -- -- (0.2) -- -- --
-------- -------- -------- -------- -------- --------
Net periodic benefit cost $ (8.0) $ (4.8) $ (2.3) $ 10.0 $ 9.4 $ 9.7
======== ======== ======== ======== ======== ========
</Table>
The projected benefit obligation, accumulated benefit obligation, and fair
value of plan assets for the pension plans with accumulated benefit obligations
in excess of plan assets were $116.7 million, $112.4 million and $72.3 million,
respectively, as of December 31, 2001, and $109.3 million, $99.9 million and
$66.8 million, respectively, as of December 31, 2000. The Company's
postretirement benefit plan is not funded.
Assumed health care cost trend rates have a significant effect on the
amounts reported for the Postretirement Benefits plan. As of December 31, 2001,
the health care cost trend rate was 7.3% for employees under age 65 and 8.3% for
participants over age 65 with each declining gradually each successive year
until it reaches 5.0% for both employees under age 65 and over age 65 in 2007.
The assumed health care cost trend rate used in measuring the accumulated
benefit obligation for Postretirement Benefits was adjusted in 2000. A
one-percentage-point change in assumed health care cost trend rates would have
the following effects:
<Table>
<Caption>
ONE PERCENTAGE ONE PERCENTAGE
POINT INCREASE POINT DECREASE
-------------- --------------
<S> <C> <C>
Effect on total of service and interest cost components $ 0.7 $ (0.6)
Effect on postretirement benefit obligation 9.6 (8.5)
</Table>
DEFINED CONTRIBUTION PLANS
During the periods reported, generally all of the Company's U.S. employees
were eligible to participate in the Company sponsored Thrift Plan, which is a
401(k) plan under the Internal Revenue Code of 1986, as amended. The Company
sponsored Thrift Plan allows eligible employees to elect to contribute from 1%
to 15% of their salaries to an investment trust. Employee contributions are
matched in cash by the Company at the rate of $1.00 per $1.00 employee
contribution for the first 3% and $0.50 per $1.00 employee contribution for the
next 2% of the employee's salary. Such contributions vest immediately. In
addition, the Company makes a cash contribution for all eligible employees
between 2% and 5% of their salary depending on the employee's age. Such
contributions become fully vested to the employee after five years of
employment. The Thrift Plan provides for nine different investment options, for
which the employee has sole discretion in determining how both the employer and
employee contributions are invested. The Company's contribution to the Thrift
Plan and other defined contribution plans amounted to $63.7 million, $57.5
million and $55.5 million in 2001, 2000 and 1999, respectively.
For certain non-U.S. employees who are not eligible to participate in the
Thrift Plan, the Company provides a non-qualified defined contribution plan that
provides basically the same benefits as the Thrift Plan. In addition, the
Company provides a non-qualified supplemental retirement plan ("SRP") for
certain officers and employees whose benefits under the Thrift Plan are limited
by federal tax law. The SRP also allows the eligible employees to defer a
portion of their eligible compensation and provides for employer matching and
base contributions pursuant to limitations. Both non-qualified plans are fully
funded and invested through trusts, the assets of which are included in the
Company's consolidated balance sheet. The Company's contributions to these
non-qualified plans were $4.2 million, $2.4 million and $2.0 million for 2001,
2000 and 1999, respectively.
54
<PAGE>
BAKER HUGHES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
POST EMPLOYMENT BENEFITS
During the periods reported, the Company provided certain postemployment
disability and medical benefits to substantially all qualifying former or
inactive U.S. employees. Disability income benefits ("Disability Benefits"),
available at the date of hire, are provided through a qualified plan which has
been funded by contributions from the Company and employees. The primary asset
of the plan is a guaranteed insurance contract with an insurance company. The
asset currently earns interest at 5.7%. The actuarially determined obligation is
calculated at a discount rate of 7.25%. Disability Benefits (income) expense was
$(1.9) million, $0.4 million and $1.3 million in 2001, 2000 and 1999,
respectively. The continuation of medical, life insurance and Thrift Plan
benefits while on disability and the service related salary continuance benefits
("Continuation Benefits") are also provided through a qualified plan. Expense
for Continuation Benefits, which is primarily interest cost on the projected
benefit obligation, was $2.7 million, $2.6 million and $5.9 million, for 2001,
2000 and 1999, respectively. During 2000, the Company changed its salary
continuance benefits to a non-service related plan.
The following table sets forth the funded status and amounts recognized in
the Company's consolidated balance sheets for Disability Benefits and
Continuation Benefits at December 31:
<Table>
<Caption>
2001 2000
---------- ----------
<S> <C> <C>
Actuarial present value of accumulated benefit obligation $ (45.2) $ (42.1)
Plan assets at fair value 15.5 15.0
---------- ----------
Accumulated benefit obligation in excess of plan assets (29.7) (27.1)
Prior service costs (0.5) (0.6)
Unrecognized net (gain)/loss 3.6 (0.9)
---------- ----------
Postemployment liability $ (26.6) $ (28.6)
========== ==========
</Table>
Health care cost assumptions used to measure the Continuation Benefits
obligation are similar to the assumptions used in determining the obligation for
postretirement health care benefits. A discount rate of 6.50% in 2001 and 7.25%
in 2000 was used in the accounting for Continuation Benefits.
NOTE 13. COMMITMENTS AND CONTINGENCIES
LEASES
At December 31, 2001, the Company had long-term non-cancelable operating
leases covering certain facilities and equipment. The minimum annual rental
commitments, net of amounts due under subleases, for each of the five years in
the period ending December 31, 2006 are $54.5 million, $47.8 million, $34.2
million, $23.1 million and $16.5 million, respectively, and $109.9 million in
the aggregate thereafter. The Company has not entered into any significant
capital leases.
In September 2000, the Company sold four facilities for approximately
$117.7 million. The proceeds were used to repay outstanding indebtedness. The
facilities were leased back from the purchaser over a period of 15 years at
current market rates. One of these facilities was subsequently subleased to
Western GECO at current market rates for a period of 10 years, in conjunction
with the formation of the venture.
LITIGATION
The Company and its subsidiaries are involved in litigation or proceedings
that have arisen in the Company's ordinary business activities. The Company
insures against these risks to the extent deemed prudent by its management, but
no assurance can be given that the nature and amount of such insurance will be
sufficient to fully indemnify the Company against liabilities arising out of
pending and future legal proceedings. Many of these insurance policies contain
self-insured retentions in amounts the Company deems prudent.
The Company has been named as a defendant in a number of shareholder class
action suits filed by purported shareholders shortly after the Company's
December 8, 1999 announcement regarding the accounting issues it discovered at
its INTEQ division. These suits, which seek unspecified monetary damages, have
been consolidated in
55
<PAGE>
BAKER HUGHES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
the federal district court for the Southern District of Texas pursuant to the
Private Securities Litigation Reform Act of 1995. The Company filed Motions to
Dismiss in both the shareholder derivative suit and the class action. The
federal district court granted the Company's Motions on both actions. No appeal
was filed in the shareholder derivative suit, but the class action case is
currently on appeal at the U. S. Fifth Circuit Court of Appeals. The Company
believes the allegations in these suits are without merit, and the Company
intends to vigorously defend these lawsuits. Even so, an adverse outcome in this
class action litigation could have an adverse effect on the Company's results of
operations or financial condition.
ENVIRONMENTAL MATTERS
The Company's past and present operations include activities which are
subject to extensive federal and state environmental regulations.
The Company has been identified as a potentially responsible party ("PRP")
in remedial activities related to various "Superfund" sites. Applicable United
States federal law imposes joint and several liability on each PRP for the
cleanup of these sites leaving the Company with the uncertainty that it may be
responsible for the remediation cost attributable to other PRPs who are unable
to pay their share of the remediation costs. Generally, the Company has
estimated its share of such total cost based on the ratio that the estimated
volume of waste contributed to the site by the Company bears to the total
estimated volume of waste disposed at the site. The Company has accrued what it
believes to have been its pro rata share of the total estimated cost of
remediation of these Superfund sites based upon such a volumetric calculation.
No accrual has been made under the joint and several liability concept since the
Company believes that the probability that it will have to pay material costs
above its volumetric share is remote. The Company believes there are other PRPs
who have greater involvement on a volumetric calculation basis, who have
substantial assets and who may be reasonably expected to pay their share of the
cost of remediation. In some cases, the Company has insurance coverage or
contractual indemnities from third parties to cover the ultimate liability.
At December 31, 2001 and 2000, the Company had accrued $17.6 million and
$14.1 million, respectively, for remediation costs, including the Superfund
sites referred to above. The measurement of the accruals for remediation costs
is subject to uncertainty, including the evolving nature of environmental
regulations and the difficulty in estimating the extent and type of remediation
activity that will be utilized. The Company believes that the likelihood of
material losses in excess of those amounts recorded is remote.
OTHER
In the normal course of business with customers, vendors and others, the
Company is contingently liable for performance under letters of credit and other
bank issued guarantees totaling approximately $187.8 million at December 31,
2001. The Company also had commitments outstanding for purchase obligations
related to capital expenditures and inventory under purchase orders and
contracts of approximately $138.2 million at December 31, 2001. In addition, at
December 31, 2001, the Company has guaranteed debt of third parties totaling
$36.9 million. It is not practicable to estimate the fair value of these
financial instruments and management does not expect any material losses from
these financial instruments. In conjunction with the formation of Western GECO,
the Company transferred to the venture a lease on a seismic vessel. The Company
is the sole guarantor of this lease obligation; however, Schlumberger has
indemnified the Company for 70% of the total lease obligation. At December 31,
2001, the remaining commitment under this lease is $96.4 million.
NOTE 14. OTHER SUPPLEMENTAL INFORMATION
Supplemental consolidated statement of operations information is as follows
for the years ended December 31:
<Table>
<Caption>
2001 2000 1999
-------- -------- --------
<S> <C> <C> <C>
Rental expense (generally transportation equipment $ 96.9 $ 138.1 $ 169.1
and warehouse facilities)
Research and development 129.6 118.0 99.8
</Table>
56
<PAGE>
BAKER HUGHES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Supplemental consolidated statement of cash flows information is as follows
for the years ended December 31:
<Table>
<Caption>
2001 2000 1999
-------- -------- --------
<S> <C> <C> <C>
Sources (uses) of cash in:
Accounts receivable $ (64.9) $ (138.8) $ 219.3
Inventories (150.6) (54.5) 190.3
Accounts payable 110.2 (27.2) (88.3)
Accrued employee compensation and other current liabilities 112.5 (7.9) (179.0)
Deferred revenue and other long-term liabilities (8.0) (11.8) (175.3)
Other assets and liabilities (59.1) 0.3 (186.4)
-------- -------- --------
Net effect of change in operating accounts $ (59.9) $ (239.9) $ (219.4)
======== ======== ========
Income taxes paid $ 97.7 $ 116.0 $ 118.7
Interest paid 122.2 172.6 148.8
</Table>
The formation of Petreco in 2001 and Western GECO in 2000 included the
following cash and noncash amounts for the year ended December 31:
<Table>
<Caption>
2001 2000
-------- --------
<S> <C> <C>
Assets (liabilities) reclassified:
Working capital - net $ 1.8 $ 15.6
Property - net 1.3 416.0
Goodwill and other intangibles 33.5 259.8
Multiclient seismic data and other assets (1.0) 707.4
Long-term liabilities (0.5) (77.6)
-------- --------
Noncash assets and liabilities reclassified to investment in affiliates 35.1 1,321.2
Less proceeds from sale of interest in affiliate (9.0) (493.4)
-------- --------
Net investment in venture at formation $ 26.1 $ 827.8
======== ========
</Table>
NOTE 15. QUARTERLY DATA (UNAUDITED)
<Table>
<Caption>
FIRST SECOND THIRD FOURTH TOTAL
QUARTER QUARTER QUARTER QUARTER YEAR
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
2001*
Revenues $ 1,228.5 $ 1,342.0 $ 1,436.0 $ 1,375.7 $ 5,382.2
Gross profit** 338.5 380.2 427.2 404.5 1,550.4
Net income 71.1 103.8 137.1 126.0 438.0
Basic earnings per share 0.21 0.31 0.41 0.37 1.31
Diluted earnings per share 0.21 0.31 0.41 0.37 1.30
Dividends per share $ 0.11 $ 0.12 $ 0.11 $ 0.12 $ 0.46
Common stock market prices:
High $ 44.99 $ 41.50 $ 36.17 $ 37.70
Low $ 36.31 $ 32.85 $ 26.29 $ 28.60
2000*
Revenues $ 1,240.8 $ 1,255.5 $ 1,353.7 $ 1,383.8 $ 5,233.8
Gross profit** 252.1 286.9 334.2 351.0 1,224.2
Net income (loss) 15.4 62.7 65.2 (41.0) 102.3
Basic earnings (loss) per share 0.04 0.19 0.20 (0.12) 0.31
Diluted earnings (loss) per share 0.04 0.19 0.20 (0.12) 0.31
Dividends per share $ 0.11 $ 0.12 $ 0.11 $ 0.12 $ 0.46
Common stock market prices:
High $ 30.25 $ 37.88 $ 39.31 $ 42.94
Low $ 20.25 $ 26.00 $ 30.38 $ 32.44
</Table>
* See Note 2 for unusual charges.
** Represents revenues less cost of revenues.
57
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information concerning the directors of the Company is set forth in the
section entitled "Election of Directors" in the Proxy Statement of the Company
for the Annual Meeting of Stockholders to be held April 24, 2002, which section
is incorporated herein by reference. For information regarding executive
officers of the Company, see "Item 1. Business - Executive Officers." Additional
information regarding compliance by directors and executive officers with
Section 16(a) of the Securities Exchange Act of 1934, as amended, is set forth
under the section entitled "Compliance with Section 16(a) of the Securities
Exchange Act of 1934" in the Proxy Statement for the Annual Meeting of
Stockholders to be held on April 24, 2002, which section is incorporated herein
by reference.
ITEM 11. EXECUTIVE COMPENSATION
Information for this item is set forth in the section entitled "Executive
Compensation" in the Proxy Statement of the Company for the Annual Meeting of
Stockholders to be held April 24, 2002, which section is incorporated herein by
reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information concerning security ownership of certain beneficial owners and
management is set forth in the sections entitled "Voting Securities" and
"Security Ownership of Management" in the Proxy Statement of the Company for the
Annual Meeting of Stockholders to be held April 24, 2002, which sections are
incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information concerning certain relationships and related transactions with
management is set forth in the section entitled "Certain Relationships and
Related Transactions" in the Proxy Statement of the Company for the Annual
Meeting of Stockholders to be held April 24, 2002, which section is incorporated
herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) List of Documents filed as part of this Report
(1) Financial Statements
All financial statements of the Registrant as set forth under
Item 8 of this Annual Report on Form 10-K.
(2) Financial Statement Schedules
Schedule II Valuation and Qualifying Accounts
58
<PAGE>
(3) Exhibits
Each exhibit identified below is filed as a part of this report.
Exhibits designated with an "*" are filed as an exhibit to this
Annual Report on Form 10-K. Exhibits previously filed as
indicated below are incorporated by reference.
3.1 Restated Certificate of Incorporation (filed as Exhibit 3.1 to
Annual Report of Baker Hughes Incorporated on Form 10-K for
the year ended December 31, 1998).
3.2* Bylaws of Baker Hughes Incorporated restated as of
January 30, 2002.
3.3 Certificate of Amendment to Restated Certificate of
Incorporation (filed as Exhibit 4.2 to Baker Hughes
Incorporated Registration Statement on Form S-3 dated
September 27, 1999).
4.1 Rights of Holders of the Company's Long-Term Debt. The Company
has no long-term debt instrument with regard to which the
securities authorized thereunder equal or exceed 10% of the
total assets of the Company and its subsidiaries on a
consolidated basis. The Company agrees to furnish a copy of
its long-term debt instruments to the SEC upon request.
4.2 Restated Certificate of Incorporation (filed as Exhibit 3.1 to
Annual Report of Baker Hughes Incorporated on Form 10-K for
the year ended December 31, 1998).
4.3* Bylaws of Baker Hughes Incorporated restated as of January 30,
2002 (filed as Exhibit 3.2 of this Form 10-K).
4.4 Certificate of Amendment to Restated Certificate of
Incorporation (filed as Exhibit 4.2 to Baker Hughes
Incorporated Registration Statement on Form S-3 dated
September 27, 1999).
4.5 Indenture dated as of May 15, 1994 between Western Atlas Inc.
and The Bank of New York, Trustee, providing for the issuance
of securities in series (filed as Exhibit 4.6 to Annual Report
of Baker Hughes Incorporated on Form 10-K for the year ended
December 31, 1999).
10.1 Employment Agreement by and between Baker Hughes Incorporated
and Michael E. Wiley dated as of July 17, 2000 (filed as
Exhibit 10.1 to Quarterly Report of Baker Hughes Incorporated
on Form 10-Q for the quarter ended June 30, 2000).
10.2 Severance Agreement between Baker Hughes Incorporated and
Michael E. Wiley dated as of July 17, 2000 (filed as Exhibit
10.2 to Quarterly Report of Baker Hughes Incorporated on Form
10-Q for the quarter ended June 30, 2000).
10.3 Severance Agreement between Baker Hughes Incorporated and G.
Stephen Finley dated as of July 23, 1997 (filed as Exhibit
10.6 to Annual Report of Baker Hughes Incorporated on Form
10-K for the year ended September 30, 1997).
10.4 Severance Agreement between Baker Hughes Incorporated and
Andrew J. Szescila dated as of July 23, 1997 (filed as Exhibit
10.13 to Annual Report of Baker Hughes Incorporated on Form
10-K for the year ended September 30, 1997).
10.5 Form of Amendment 1 to Severance Agreement between Baker
Hughes Incorporated and each of G. Stephen Finley and Andrew
J. Szescila effective November 11, 1998 (filed as Exhibit 10.7
to Annual Report of Baker Hughes Incorporated on Form 10-K for
the year ended December 31, 1998).
10.6 Severance Agreement between Baker Hughes Incorporated and Alan
R. Crain, Jr. dated as of October 25, 2000 (filed as Exhibit
10.6 to Annual Report of Baker Hughes Incorporated on Form
10-K for the year ended December 31, 2000).
59
<PAGE>
10.7 Severance Agreement between Baker Hughes Incorporated and Greg
Nakanishi dated as of November 1, 2000 (filed as Exhibit 10.7
to Annual Report of Baker Hughes Incorporated on Form 10-K for
the year ended December 31, 2000).
10.8 Agreement regarding restricted stock award issued to Michael
E. Wiley on August 15, 2000 in the amount of 150,000 shares of
Company Common Stock (filed as Exhibit 10.8 to Annual Report
of Baker Hughes Incorporated on Form 10-K for the year ended
December 31, 2000).
10.9 Agreement regarding supplemental restricted stock award issued
to Michael E. Wiley on August 15, 2000 in the amount of 83,000
shares of Company Common Stock (filed as Exhibit 10.9 to
Annual Report of Baker Hughes Incorporated on Form 10-K for
the year ended December 31, 2000).
10.10 Amended and Restated 1991 Employee Stock Bonus Plan of Baker
Hughes Incorporated (filed as Exhibit 10.15 to Annual Report
of Baker Hughes Incorporated on Form 10-K for the year ended
September 30, 1997), as amended by Amendment No. 1997-1 to the
Amended and Restated 1991 Employee Stock Bonus Plan (filed as
Exhibit 10.16 to Annual Report of Baker Hughes Incorporated on
Form 10-K for the year ended September 30, 1997) and as
amended by Amendment No. 1999-1 to the Amended and Restated
1991 Employee Stock Bonus Plan (filed as Exhibit 10.11 to
Annual Report of Baker Hughes Incorporated on Form 10-K for
the year ended December 31, 1998).
10.11 Restated 1987 Stock Option Plan of Baker Hughes Incorporated
(amended as of October 24, 1990) (filed as Exhibit 10.17 to
Annual Report of Baker Hughes Incorporated on Form 10-K for
the year ended September 30, 1997).
10.12 Baker Hughes Incorporated Supplemental Retirement Plan (filed
as Exhibit 10.14 to Annual Report of Baker Hughes Incorporated
on Form 10-K for the year ended September 30, 1997), as
amended by Amendment No. 1997-1 to the Baker Hughes
Incorporated Supplemental Retirement Plan (filed as Exhibit
10.20 to Annual Report of Baker Hughes Incorporated on Form
10-K for the year ended September 30, 1997) and as amended by
Amendment No. 1999-1 to the Baker Hughes Incorporated
Supplemental Retirement Plan (filed as Exhibit 10.16 to Annual
Report of Baker Hughes Incorporated on Form 10-K for the year
ended December 31, 1998).
10.13 Executive Severance Policy (filed as Exhibit 10.12 to Annual
Report of Baker Hughes Incorporated on Form 10-K for the year
ended December 31, 1999).
10.14 1993 Stock Option Plan (filed as Exhibit 10.18 to Annual
Report of Baker Hughes Incorporated on Form 10-K for the year
ended December 31, 1998), as amended by Amendment No. 1997-1
to the 1993 Stock Option Plan (filed as Exhibit 10.23 to
Annual Report of Baker Hughes Incorporated on Form 10-K for
the year ended September 30, 1997) and as amended by Amendment
No. 1999-1 to the 1993 Stock Option Plan (filed as Exhibit
10.20 to Annual Report of Baker Hughes Incorporated on Form
10-K for the year ended December 31, 1998).
10.15 1993 Employee Stock Bonus Plan (filed as Exhibit 10.21 to
Annual Report of Baker Hughes Incorporated on Form 10-K for
the year ended December 31, 1998), as amended by Amendment No.
1997-1 to the 1993 Employee Stock Bonus Plan (filed as Exhibit
10.25 to Annual Report of Baker Hughes Incorporated on Form
10-K for the year ended September 30, 1997) and as amended by
Amendment No. 1999-1 to the 1993 Employee Stock Bonus Plan
(filed as Exhibit 10.23 to Annual Report of Baker Hughes
Incorporated on Form 10-K for the year ended December 31,
1998).
10.16 Amended and Restated Director Compensation Deferral Plan
(filed as Exhibit 10.24 to Annual Report of Baker Hughes
Incorporated on Form 10-K for the year ended December 31,
1998).
10.17 1995 Employee Annual Incentive Compensation Plan (filed as
Exhibit 10.20 to Annual Report of Baker Hughes Incorporated on
Form 10-K for the year ended December 31, 1999), as amended by
Amendment No. 1997-1 to the 1995 Employee Annual Incentive
Compensation Plan (filed as Exhibit 10.25 to Annual Report of
Baker Hughes Incorporated on Form 10-K for the year ended
September 30, 1997), and as amended by Amendment No. 1999-1 to
the 1995 Employee Annual Incentive
60
<PAGE>
Compensation Plan (filed as Exhibit 10.27 to Annual Report of
Baker Hughes Incorporated on Form 10-K for the year ended
December 31, 1998).
10.18 Long Term Incentive Plan (filed as Exhibit 10.31 to Annual
Report of Baker Hughes Incorporated on Form 10-K for the year
ended September 30, 1997), as amended by Amendment No. 1999-1
to Long Term Incentive Plan (filed as Exhibit 10.32 to Annual
Report of Baker Hughes Incorporated on Form 10-K for the year
ended December 31, 1998).
10.19 1998 Employee Stock Option Plan (filed as Exhibit 10.33 to
Annual Report of Baker Hughes Incorporated on Form 10-K for
the year ended December 31, 1998), as amended by Amendment No.
1999-1 to 1998 Employee Stock Option Plan (filed as Exhibit
10.34 to Annual Report of Baker Hughes Incorporated on Form
10-K for the year ended December 31, 1998).
10.20 Form of Credit Agreement, dated as of October 1, 1998, among
Baker Hughes Incorporated and fourteen banks for $750,000,000,
in the aggregate for all banks (filed as Exhibit 10.35 to
Annual Report of Baker Hughes Incorporated on Form 10-K for
the year ended December 31, 1998).
10.21 Form of Credit Agreement dated as of October 1, 1998 among
Baker Hughes Incorporated and fourteen banks for $250,000,000,
in the aggregate for all banks (filed as Exhibit 10.36 to
Annual Report of Baker Hughes Incorporated on Form 10-K for
the year ended December 31, 1998), as amended by Form of First
Amendment of Credit Agreement dated as of September 29, 1999
among Baker Hughes Incorporated and fourteen banks for
$250,000,000, in the aggregate for all banks (filed as Exhibit
10.29 to Annual Report of Baker Hughes Incorporated on Form
10-K for the year ended December 31, 1999) and as amended by
Form of Second Amendment of Credit Agreement dated as of
September 25, 2000 among Baker Hughes Incorporated and
fourteen banks for $250,000,000, in the aggregate for all
banks (filed as Exhibit 10.35 to Annual Report of Baker Hughes
Incorporated on Form 10-K for the year ended December 31,
2000).
10.22 Form of Stock Option Agreement for executives effective
January 26, 2000 (filed as Exhibit 10.36 to Annual Report of
Baker Hughes Incorporated on Form 10-K for the year ended
December 31, 2000).
10.23 Form of Stock Option Agreement for executive officers
effective October 1, 1998 (filed as Exhibit 10.37 to Annual
Report of Baker Hughes Incorporated on Form 10-K for the year
ended December 31, 2000).
10.24 Form of Nonqualified Stock Option Agreement for employees
effective October 1, 1998 (filed as Exhibit 10.39 to Annual
Report of Baker Hughes Incorporated on Form 10-K for the year
ended December 31, 1998).
10.25 Form of Nonqualified Stock Option Agreement for directors
effective October 25, 1998 (filed as Exhibit 10.39 to Annual
Report of Baker Hughes Incorporated on Form 10-K for the year
ended December 31, 2000).
10.26* Form of Nonqualified Stock Option Agreement for directors
effective October 25, 1995.
10.27* Form of Nonqualified Stock Option Agreement for employees
effective October 25, 1995.
10.28* Form of Incentive Stock Option Agreement for employees
effective October 25, 1995.
10.29 Agreement regarding restricted stock award issued to Alan R.
Crain, Jr. on October 25, 2000 in the amount of 7,500 shares
of Company Common Stock (filed as Exhibit 10.43 to Annual
Report of Baker Hughes Incorporated on Form 10-K for the year
ended December 31, 2000).
10.30 Agreement regarding restricted stock award issued to Greg
Nakanishi on November 1, 2000 in the amount of 5,000 shares of
Company Common Stock (filed as Exhibit 10.44 to Annual Report
of Baker Hughes Incorporated on Form 10-K for the year ended
December 31, 2000).
61
<PAGE>
10.31 Agreement regarding restricted stock award issued to Andrew J.
Szescila on January 24, 2001 in the amount of 25,000 shares of
Company Common Stock (filed as Exhibit 10.45 to Annual Report
of Baker Hughes Incorporated on Form 10-K for the year ended
December 31, 2000).
10.32 Agreement and Plan of Merger among Baker Hughes Incorporated,
Baker Hughes Delaware I, Inc. and Western Atlas Inc. dated as
of May 10, 1998 (filed as Exhibit 2.1 to Form 8-K dated May
20, 1998).
10.33 Tax Sharing Agreement dated October 31, 1997, between Western
Atlas Inc. and UNOVA, Inc. (filed as Exhibit 10.19 to Western
Atlas Inc.'s Form 10-Q for the quarter ended September 30,
1997).
10.34 Employee Benefits Agreement dated October 31, 1997, between
Western Atlas Inc. and UNOVA, Inc. (filed as Exhibit 10.21 to
Western Atlas Inc.'s Form 10-Q for the quarter ended September
30, 1997).
10.35 Master Formation Agreement by and among the Company,
Schlumberger Limited and certain wholly owned subsidiaries of
Schlumberger Limited dated as of September 6, 2000 (filed as
Exhibit 2.1 to Form 8-K dated September 7, 2000).
10.36 Shareholders' Agreement by and among Schlumberger Limited,
Baker Hughes Incorporated and other parties listed on the
signature pages thereto dated November 30, 2000 (filed as
Exhibit 10.1 to form 8-K dated November 30, 2000).
10.37 Corporate Executive Loan Program (filed as Exhibit 10.50 to
Annual Report of Baker Hughes Incorporated on Form 10-K for
the year ended December 31, 1998).
10.38* Amendment 1 to Employment Agreement, effective April 25, 2001,
by and between Baker Hughes Incorporated and Michael E. Wiley;
Amendment 2 to Employment Agreement, effective December 5,
2001, by and between Baker Hughes Incorporated and Michael E.
Wiley and Amendment 3 to Employment Agreement, effective
December 5, 2001, by and between Baker Hughes Incorporated and
Michael E. Wiley.
10.39* Severance Agreement, dated as of July 23, 1997, by and between
Baker Hughes Incorporated and Edwin C. Howell, as amended by
Amendment 1 to Severance Agreement, effective November 11,
1998.
10.40* Severance Agreement, dated as of December 3, 1997, by and
between Baker Hughes Incorporated and Douglas J. Wall, as
amended by Amendment 1 to Severance Agreement, effective
November 11, 1998.
10.41* Form of Baker Hughes Incorporated Nonqualified Stock Option
Agreement for executive officers, dated January 24, 2001.
10.42* Form of Severance Agreement, dated as of March 1, 2001, by and
between Baker Hughes Incorporated and certain executives,
executed by James R. Clark (dated March 1, 2001) and William
P. Faubel (dated May 29, 2001).
10.43* Form of Baker Hughes Incorporated Nonqualified Stock Option
Agreement for employees, dated January 30, 2002.
10.44* Form of Baker Hughes Incorporated Incentive Stock Option
Agreement for employees, dated January 30, 2002.
10.45* Form of Stock Matching Agreement, executed on March 1, 2001,
by and between Baker Hughes Incorporated and James Roderick
Clark, as amended by Amendment 1 to Stock Matching Agreement,
with the Amendment effective March 6, 2002.
21.1 Subsidiaries of Registrant.
62
<PAGE>
23.1 Consent of Deloitte & Touche LLP.
(b) Reports on Form 8-K
None.
63
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized on the 6th
day of March, 2002.
BAKER HUGHES INCORPORATED
By /s/ MICHAEL E. WILEY
-----------------------------------------
(Michael E. Wiley, Chairman of the Board,
President and Chief Executive Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this report has been signed below by the following persons on behalf of
the registrant and in the capacities and on the dates indicated.
<Table>
<Caption>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ MICHAEL E. WILEY Chairman of the Board, President and March 6, 2002
- --------------------------------------- Chief Executive Officer (principal
(Michael E. Wiley) executive officer)
/s/ G. S. FINLEY Senior Vice President - Finance and March 6, 2002
- --------------------------------------- Administration and Chief Financial
(G. S. Finley) Officer (principal financial officer)
/s/ ALAN J. KEIFER Vice President and Controller March 6, 2002
- --------------------------------------- (principal accounting officer)
(Alan J. Keifer)
/s/ VICTOR G. BEGHINI Director March 6, 2002
- ---------------------------------------
(Victor G. Beghini)
/s/ JOSEPH T. CASEY Director March 6, 2002
- ---------------------------------------
(Joseph T. Casey)
Director March , 2002
- ---------------------------------------
(Edward P. Djerejian)
/s/ ANTHONY G. FERNANDES Director March 6, 2002
- ---------------------------------------
(Anthony G. Fernandes)
/s/ EUNICE M. FILTER Director March 6, 2002
- ---------------------------------------
(Eunice M. Filter)
/s/ CLAIRE W. GARGALLI Director March 6, 2002
- ---------------------------------------
(Claire W. Gargalli)
/s/ RICHARD D. KINDER Director March 6, 2002
- ---------------------------------------
(Richard D. Kinder)
/s/ JAMES F. MCCALL Director March 6, 2002
- ---------------------------------------
(James F. McCall)
/s/ J. LARRY NICHOLS Director March 6, 2002
- ---------------------------------------
(J. Larry Nichols)
</Table>
64
<PAGE>
<Table>
<S> <C> <C>
/s/ H. JOHN RILEY, JR. Director March 6, 2002
- ---------------------------------------
(H. John Riley, Jr.)
/s/ CHARLES L. WATSON Director March 6, 2002
- ---------------------------------------
(Charles L. Watson)
</Table>
65
<PAGE>
BAKER HUGHES INCORPORATED
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
<Table>
<Caption>
Balance at Charged to Balance at
Beginning Cost and End of
(In millions) of Period Expenses Deductions Period
- ------------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Year ended December 31, 2001:
Reserve for doubtful accounts receivable $ 81.8 $ 18.0 $ (25.7) $ 74.1
Reserve for inventories 195.5 91.8 (68.1) 219.2
Year ended December 31, 2000:
Reserve for doubtful accounts receivable 56.2 38.2 (12.6) 81.8
Reserve for inventories 175.3 68.9 (48.7) 195.5
Year ended December 31, 1999:
Reserve for doubtful accounts receivable 50.1 23.5 (17.4) 56.2
Reserve for inventories 229.6 31.2 (85.5) 175.3
</Table>
66
<PAGE>
INDEX TO EXHIBITS
<Table>
<Caption>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
3.1 Restated Certificate of Incorporation (filed as Exhibit 3.1 to
Annual Report of Baker Hughes Incorporated on Form 10-K for
the year ended December 31, 1998).
3.2* Bylaws of Baker Hughes Incorporated restated as of January 30,
2002.
3.3 Certificate of Amendment to Restated Certificate of
Incorporation (filed as Exhibit 4.2 to Baker Hughes
Incorporated Registration Statement on Form S-3 dated
September 27, 1999).
4.1 Rights of Holders of the Company's Long-Term Debt. The Company
has no long-term debt instrument with regard to which the
securities authorized thereunder equal or exceed 10% of the
total assets of the Company and its subsidiaries on a
consolidated basis. The Company agrees to furnish a copy of
its long-term debt instruments to the SEC upon request.
4.2 Restated Certificate of Incorporation (filed as Exhibit 3.1 to
Annual Report of Baker Hughes Incorporated on Form 10-K for
the year ended December 31, 1998).
4.3* Bylaws of Baker Hughes Incorporated restated as of January 30,
2002 (filed as Exhibit 3.2 of this Form 10-K).
4.4 Certificate of Amendment to Restated Certificate of
Incorporation (filed as Exhibit 4.2 to Baker Hughes
Incorporated Registration Statement on Form S-3 dated
September 27, 1999).
4.5 Indenture dated as of May 15, 1994 between Western Atlas Inc.
and The Bank of New York, Trustee, providing for the issuance
of securities in series (filed as Exhibit 4.6 to Annual Report
of Baker Hughes Incorporated on Form 10-K for the year ended
December 31, 1999).
10.1 Employment Agreement by and between Baker Hughes Incorporated
and Michael E. Wiley dated as of July 17, 2000 (filed as
Exhibit 10.1 to Quarterly Report of Baker Hughes Incorporated
on Form 10-Q for the quarter ended June 30, 2000).
10.2 Severance Agreement between Baker Hughes Incorporated and
Michael E. Wiley dated as of July 17, 2000 (filed as Exhibit
10.2 to Quarterly Report of Baker Hughes Incorporated on Form
10-Q for the quarter ended June 30, 2000).
10.3 Severance Agreement between Baker Hughes Incorporated and G.
Stephen Finley dated as of July 23, 1997 (filed as Exhibit
10.6 to Annual Report of Baker Hughes Incorporated on Form
10-K for the year ended September 30, 1997).
10.4 Severance Agreement between Baker Hughes Incorporated and
Andrew J. Szescila dated as of July 23, 1997 (filed as Exhibit
10.13 to Annual Report of Baker Hughes Incorporated on Form
10-K for the year ended September 30, 1997).
10.5 Form of Amendment 1 to Severance Agreement between Baker
Hughes Incorporated and each of G. Stephen Finley and Andrew
J. Szescila effective November 11, 1998 (filed as Exhibit 10.7
to Annual Report of Baker Hughes Incorporated on Form 10-K for
the year ended December 31, 1998).
10.6 Severance Agreement between Baker Hughes Incorporated and Alan
R. Crain, Jr. dated as of October 25, 2000 (filed as Exhibit
10.6 to Annual Report of Baker Hughes Incorporated on Form
10-K for the year ended December 31, 2000).
</Table>
<PAGE>
<Table>
<Caption>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
10.7 Severance Agreement between Baker Hughes Incorporated and Greg
Nakanishi dated as of November 1, 2000 (filed as Exhibit 10.7
to Annual Report of Baker Hughes Incorporated on Form 10-K for
the year ended December 31, 2000).
10.8 Agreement regarding restricted stock award issued to Michael
E. Wiley on August 15, 2000 in the amount of 150,000 shares of
Company Common Stock (filed as Exhibit 10.8 to Annual Report
of Baker Hughes Incorporated on Form 10-K for the year ended
December 31, 2000).
10.9 Agreement regarding supplemental restricted stock award issued
to Michael E. Wiley on August 15, 2000 in the amount of 83,000
shares of Company Common Stock (filed as Exhibit 10.9 to
Annual Report of Baker Hughes Incorporated on Form 10-K for
the year ended December 31, 2000).
10.10 Amended and Restated 1991 Employee Stock Bonus Plan of Baker
Hughes Incorporated (filed as Exhibit 10.15 to Annual Report
of Baker Hughes Incorporated on Form 10-K for the year ended
September 30, 1997), as amended by Amendment No. 1997-1 to the
Amended and Restated 1991 Employee Stock Bonus Plan (filed as
Exhibit 10.16 to Annual Report of Baker Hughes Incorporated on
Form 10-K for the year ended September 30, 1997) and as
amended by Amendment No. 1999-1 to the Amended and Restated
1991 Employee Stock Bonus Plan (filed as Exhibit 10.11 to
Annual Report of Baker Hughes Incorporated on Form 10-K for
the year ended December 31, 1998).
10.11 Restated 1987 Stock Option Plan of Baker Hughes Incorporated
(amended as of October 24, 1990) (filed as Exhibit 10.17 to
Annual Report of Baker Hughes Incorporated on Form 10-K for
the year ended September 30, 1997).
10.12 Baker Hughes Incorporated Supplemental Retirement Plan (filed
as Exhibit 10.14 to Annual Report of Baker Hughes Incorporated
on Form 10-K for the year ended September 30, 1997), as
amended by Amendment No. 1997-1 to the Baker Hughes
Incorporated Supplemental Retirement Plan (filed as Exhibit
10.20 to Annual Report of Baker Hughes Incorporated on Form
10-K for the year ended September 30, 1997) and as amended by
Amendment No. 1999-1 to the Baker Hughes Incorporated
Supplemental Retirement Plan (filed as Exhibit 10.16 to Annual
Report of Baker Hughes Incorporated on Form 10-K for the year
ended December 31, 1998).
10.13 Executive Severance Policy (filed as Exhibit 10.12 to Annual
Report of Baker Hughes Incorporated on Form 10-K for the year
ended December 31, 1999).
10.14 1993 Stock Option Plan (filed as Exhibit 10.18 to Annual
Report of Baker Hughes Incorporated on Form 10-K for the year
ended December 31, 1998), as amended by Amendment No. 1997-1
to the 1993 Stock Option Plan (filed as Exhibit 10.23 to
Annual Report of Baker Hughes Incorporated on Form 10-K for
the year ended September 30, 1997) and as amended by Amendment
No. 1999-1 to the 1993 Stock Option Plan (filed as Exhibit
10.20 to Annual Report of Baker Hughes Incorporated on Form
10-K for the year ended December 31, 1998).
10.15 1993 Employee Stock Bonus Plan (filed as Exhibit 10.21 to
Annual Report of Baker Hughes Incorporated on Form 10-K for
the year ended December 31, 1998), as amended by Amendment No.
1997-1 to the 1993 Employee Stock Bonus Plan (filed as Exhibit
10.25 to Annual Report of Baker Hughes Incorporated on Form
10-K for the year ended September 30, 1997) and as amended by
Amendment No. 1999-1 to the 1993 Employee Stock Bonus Plan
(filed as Exhibit 10.23 to Annual Report of Baker Hughes
Incorporated on Form 10-K for the year ended December 31,
1998).
10.16 Amended and Restated Director Compensation Deferral Plan
(filed as Exhibit 10.24 to Annual Report of Baker Hughes
Incorporated on Form 10-K for the year ended December 31,
1998).
10.17 1995 Employee Annual Incentive Compensation Plan (filed as
Exhibit 10.20 to Annual Report of Baker Hughes Incorporated on
Form 10-K for the year ended December 31, 1999), as amended
</Table>
<PAGE>
<Table>
<Caption>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
by Amendment No. 1997-1 to the 1995 Employee Annual Incentive
Compensation Plan (filed as Exhibit 10.25 to Annual Report of
Baker Hughes Incorporated on Form 10-K for the year ended
September 30, 1997), and as amended by Amendment No. 1999-1 to
the 1995 Employee Annual Incentive Compensation Plan (filed as
Exhibit 10.27 to Annual Report of Baker Hughes Incorporated on
Form 10-K for the year ended December 31, 1998).
10.18 Long Term Incentive Plan (filed as Exhibit 10.31 to Annual
Report of Baker Hughes Incorporated on Form 10-K for the year
ended September 30, 1997), as amended by Amendment No. 1999-1
to Long Term Incentive Plan (filed as Exhibit 10.32 to Annual
Report of Baker Hughes Incorporated on Form 10-K for the year
ended December 31, 1998).
10.19 1998 Employee Stock Option Plan (filed as Exhibit 10.33 to
Annual Report of Baker Hughes Incorporated on Form 10-K for
the year ended December 31, 1998), as amended by Amendment No.
1999-1 to 1998 Employee Stock Option Plan (filed as Exhibit
10.34 to Annual Report of Baker Hughes Incorporated on Form
10-K for the year ended December 31, 1998).
10.20 Form of Credit Agreement, dated as of October 1, 1998, among
Baker Hughes Incorporated and fourteen banks for $750,000,000,
in the aggregate for all banks (filed as Exhibit 10.35 to
Annual Report of Baker Hughes Incorporated on Form 10-K for
the year ended December 31, 1998).
10.21 Form of Credit Agreement dated as of October 1, 1998 among
Baker Hughes Incorporated and fourteen banks for $250,000,000,
in the aggregate for all banks (filed as Exhibit 10.36 to
Annual Report of Baker Hughes Incorporated on Form 10-K for
the year ended December 31, 1998), as amended by Form of First
Amendment of Credit Agreement dated as of September 29, 1999
among Baker Hughes Incorporated and fourteen banks for
$250,000,000, in the aggregate for all banks (filed as Exhibit
10.29 to Annual Report of Baker Hughes Incorporated on Form
10-K for the year ended December 31, 1999) and as amended by
Form of Second Amendment of Credit Agreement dated as of
September 25, 2000 among Baker Hughes Incorporated and
fourteen banks for $250,000,000, in the aggregate for all
banks (filed as Exhibit 10.35 to Annual Report of Baker Hughes
Incorporated on Form 10-K for the year ended December 31,
2000).
10.22 Form of Stock Option Agreement for executives effective
January 26, 2000 (filed as Exhibit 10.36 to Annual Report of
Baker Hughes Incorporated on Form 10-K for the year ended
December 31, 2000).
10.23 Form of Stock Option Agreement for executive officers
effective October 1, 1998 (filed as Exhibit 10.37 to Annual
Report of Baker Hughes Incorporated on Form 10-K for the year
ended December 31, 2000).
10.24 Form of Nonqualified Stock Option Agreement for employees
effective October 1, 1998 (filed as Exhibit 10.39 to Annual
Report of Baker Hughes Incorporated on Form 10-K for the year
ended December 31, 1998).
10.25 Form of Nonqualified Stock Option Agreement for directors
effective October 25, 1998 (filed as Exhibit 10.39 to Annual
Report of Baker Hughes Incorporated on Form 10-K for the year
ended December 31, 2000).
10.26* Form of Nonqualified Stock Option Agreement for directors
effective October 25, 1995.
10.27* Form of Nonqualified Stock Option Agreement for employees
effective October 25, 1995.
10.28* Form of Incentive Stock Option Agreement for employees
effective October 25, 1995.
10.29 Agreement regarding restricted stock award issued to Alan R.
Crain, Jr. on October 25, 2000 in the amount of 7,500 shares
of Company Common Stock (filed as Exhibit 10.43 to Annual
Report of Baker Hughes Incorporated on Form 10-K for the year
ended December 31, 2000).
</Table>
<PAGE>
<Table>
<Caption>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
10.30 Agreement regarding restricted stock award issued to Greg
Nakanishi on November 1, 2000 in the amount of 5,000 shares of
Company Common Stock (filed as Exhibit 10.44 to Annual Report
of Baker Hughes Incorporated on Form 10-K for the year ended
December 31, 2000).
10.31 Agreement regarding restricted stock award issued to Andrew J.
Szescila on January 24, 2001 in the amount of 25,000 shares of
Company Common Stock (filed as Exhibit 10.45 to Annual Report
of Baker Hughes Incorporated on Form 10-K for the year ended
December 31, 2000).
10.32 Agreement and Plan of Merger among Baker Hughes Incorporated,
Baker Hughes Delaware I, Inc. and Western Atlas Inc. dated as
of May 10, 1998 (filed as Exhibit 2.1 to Form 8-K dated May
20, 1998).
10.33 Tax Sharing Agreement dated October 31, 1997, between Western
Atlas Inc. and UNOVA, Inc. (filed as Exhibit 10.19 to Western
Atlas Inc.'s Form 10-Q for the quarter ended September 30,
1997).
10.34 Employee Benefits Agreement dated October 31, 1997, between
Western Atlas Inc. and UNOVA, Inc. (filed as Exhibit 10.21 to
Western Atlas Inc.'s Form 10-Q for the quarter ended September
30, 1997).
10.35 Master Formation Agreement by and among the Company,
Schlumberger Limited and certain wholly owned subsidiaries of
Schlumberger Limited dated as of September 6, 2000 (filed as
Exhibit 2.1 to Form 8-K dated September 7, 2000).
10.36 Shareholders' Agreement by and among Schlumberger Limited,
Baker Hughes Incorporated and other parties listed on the
signature pages thereto dated November 30, 2000 (filed as
Exhibit 10.1 to form 8-K dated November 30, 2000).
10.37 Corporate Executive Loan Program (filed as Exhibit 10.50 to
Annual Report of Baker Hughes Incorporated on Form 10-K for
the year ended December 31, 1998).
10.38* Amendment 1 to Employment Agreement, effective April 25, 2001,
by and between Baker Hughes Incorporated and Michael E. Wiley;
Amendment 2 to Employment Agreement, effective December 5,
2001, by and between Baker Hughes Incorporated and Michael E.
Wiley and Amendment 3 to Employment Agreement, effective
December 5, 2001, by and between Baker Hughes Incorporated and
Michael E. Wiley.
10.39* Severance Agreement, dated as of July 23, 1997, by and between
Baker Hughes Incorporated and Edwin C. Howell, as amended by
Amendment 1 to Severance Agreement, effective November 11,
1998.
10.40* Severance Agreement, dated as of December 3, 1997, by and
between Baker Hughes Incorporated and Douglas J. Wall, as
amended by Amendment 1 to Severance Agreement, effective
November 11, 1998.
10.41* Form of Baker Hughes Incorporated Nonqualified Stock Option
Agreement for executive officers, dated January 24, 2001.
10.42* Form of Severance Agreement, dated as of March 1, 2001, by and
between Baker Hughes Incorporated and certain executives,
executed by James R. Clark (dated March 1, 2001) and William
P. Faubel (dated May 29, 2001).
10.43* Form of Baker Hughes Incorporated Nonqualified Stock Option
Agreement for employees, dated January 30, 2002.
</Table>
<PAGE>
<Table>
<Caption>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
10.44* Form of Baker Hughes Incorporated Incentive Stock Option
Agreement for employees, dated January 30, 2002.
10.45* Form of Stock Matching Agreement, executed on March 1, 2001,
by and between Baker Hughes Incorporated and James Roderick
Clark, as amended by Amendment 1 to Stock Matching Agreement,
with the Amendment effective March 6, 2002.
21.1 Subsidiaries of Registrant.
23.1 Consent of Deloitte & Touche LLP.
</Table>
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-3.2
<SEQUENCE>3
<FILENAME>h94456ex3-2.txt
<DESCRIPTION>BYLAWS
<TEXT>
<PAGE>
EXHIBIT 3.2
BYLAWS
OF
BAKER HUGHES INCORPORATED
Restated as of
January 30, 2002
<PAGE>
Table of Contents
<Table>
<Caption>
Page No.
--------
<S> <C>
ARTICLE I - OFFICES.....................................................................................1
Section 1. Registered Office.................................................................1
Section 2. Other Offices.....................................................................1
ARTICLE II - MEETINGS OF STOCKHOLDERS...................................................................1
Section 1. Place of Meetings.................................................................1
Section 2. Annual Meeting of Stockholders....................................................1
Section 3. Quorum; Adjourned Meetings and Notice Thereof.....................................1
Section 4. Voting............................................................................2
Section 5. Proxies...........................................................................2
Section 6. Special Meetings..................................................................2
Section 7. Notice of Stockholders' Meetings..................................................2
Section 8. Waiver of Notice..................................................................3
Section 9. Maintenance and Inspection of Stockholder List....................................3
Section 10. Stockholder Action by Written Consent Without a Meeting...........................3
Section 11. Inspectors of Election............................................................3
Section 12. Procedure for Stockholders' Meetings..............................................4
Section 13. Order of Business.................................................................4
Section 14. Procedures for Bringing Business before an Annual Meeting.........................4
Section 15. Procedures for Nominating Directors...............................................5
ARTICLE III - DIRECTORS.................................................................................6
Section 1. Number and Qualification of Directors.............................................6
Section 2. Election and Term of Office.......................................................6
Section 3. Resignation and Removal of Directors..............................................6
Section 4. Vacancies.........................................................................7
Section 5. Powers............................................................................7
Section 6. Place of Directors' Meetings......................................................8
Section 7. Regular Meetings..................................................................8
Section 8. Special Meetings..................................................................8
Section 9. Quorum............................................................................8
Section 10. Action Without Meeting............................................................8
Section 11. Telephonic Meetings...............................................................8
Section 12. Meetings and Action of Committees.................................................9
Section 13. Special Meetings of Committees....................................................9
Section 14. Minutes of Committee Meetings.....................................................9
Section 15. Compensation of Directors.........................................................9
Section 16. Indemnification..................................................................10
</Table>
- i -
<PAGE>
<Table>
<S> <C>
ARTICLE IV - OFFICERS..................................................................................12
Section 1. Officers.........................................................................12
Section 2. Election of Officers.............................................................12
Section 3. Subordinate Officers.............................................................13
Section 4. Removal and Resignation of Officers..............................................13
Section 5. Vacancies in Offices.............................................................13
Section 6. Chairman of the Board............................................................13
Section 7. Vice Chairman of the Board.......................................................13
Section 8. President........................................................................13
Section 9. Vice Presidents..................................................................13
Section 10. Secretary........................................................................14
Section 11. Chief Financial Officer..........................................................14
Section 12. Treasurer and Controller.........................................................14
ARTICLE V - CERTIFICATE OF STOCK.......................................................................15
Section 1. Certificates.....................................................................15
Section 2. Signatures on Certificates.......................................................15
Section 3. Statement of Stock Rights, Preferences, Privileges...............................15
Section 4. Lost, Stolen or Destroyed Certificates...........................................15
Section 5. Transfers of Stock...............................................................16
Section 6. Fixing Record Date...............................................................16
Section 7. Registered Stockholders..........................................................16
ARTICLE VI - GENERAL PROVISIONS........................................................................16
Section 1. Dividends........................................................................16
Section 2. Payment of Dividends.............................................................16
Section 3. Checks...........................................................................16
Section 4. Corporate Contracts and Instruments..............................................17
Section 5. Fiscal Year......................................................................17
Section 6. Manner of Giving Notice..........................................................17
Section 7. Waiver of Notice.................................................................17
ARTICLE VII - AMENDMENTS...............................................................................17
Section 1. Amendment by Directors...........................................................17
Section 2. Amendment by Stockholders........................................................18
</Table>
- ii -
<PAGE>
BYLAWS
OF
BAKER HUGHES INCORPORATED
ARTICLE I
OFFICES
Section 1. Registered Office. The registered office shall be in the
City of Wilmington, County of New Castle, State of Delaware.
Section 2. Other Offices. The Corporation may also have offices at such
other places both within and without the State of Delaware as the Board of
Directors may from time to time determine or the business of the Corporation may
require.
ARTICLE II
MEETINGS OF STOCKHOLDERS
Section 1. Place of Meetings. All meetings of the stockholders shall be
held at such place, if any, either within or without the State of Delaware as
shall be designated from time to time by the Board of Directors and stated in
the notice of the meeting.
Section 2. Annual Meetings of Stockholders. An annual meeting of
stockholders shall be held on the fourth Wednesday in April in each year, if not
a legal holiday, and if a legal holiday, then on the next business day
following, at 11:00 a.m. or at such other date and time as may be determined
from time to time by resolution adopted by the Board of Directors, for the
purpose of electing, subject to Article III, Section 2 hereof, one class of the
directors of the Corporation, and transacting such other business as may
properly be brought before the meeting.
Section 3. Quorum; Adjourned Meetings and Notice Thereof. A majority of
the stock issued and outstanding and entitled to vote at any meeting of
stockholders, the holders of which are present in person or represented by
proxy, without regard to class or series, shall constitute a quorum for the
transaction of business except as otherwise provided by law, by the Certificate
of Incorporation, or by these Bylaws. If a separate vote by a class or classes
or series is required, a majority of the outstanding shares of such class or
classes or series present in person or represented by proxy shall constitute a
quorum entitled to take action with respect to that vote on that matter. A
quorum, once established, shall not be broken by the withdrawal of enough votes
to leave less than a quorum and the votes present may continue to transact
business until adjournment provided that any action taken (other than
adjournment) is approved by at least a majority of the shares required to
constitute a quorum. If, however, such quorum shall not be present or
represented at any meeting of the stockholders, a majority of the voting stock
<PAGE>
represented in person or by proxy may adjourn the meeting from time to time,
without notice other than announcement at the meeting, until a quorum shall be
present or represented. At such adjourned meeting at which a quorum shall be
present or represented, any business may be transacted which might have been
transacted at the meeting as originally noticed. If the adjournment is for more
than 30 days, or if after the adjournment a new record date is fixed for the
adjourned meeting, a notice of the adjourned meeting shall be given to each
stockholder of record entitled to vote thereat.
Section 4. Voting. When a quorum is present at any meeting, the
affirmative vote of the holders of a majority of the stock having voting power
present in person or represented by proxy shall decide any question brought
before such meeting, or, if a separate vote by a class or series or classes or
series is required, the affirmative vote of the holders of a majority of the
stock of such class or series or classes or series having voting power present
in person or represented by proxy shall decide any question brought before such
meeting unless the question is one upon which by express provision of the
statutes or the Certificate of Incorporation or these Bylaws, a different vote
is required in which case such express provision shall govern and control the
decision of such question.
Section 5. Proxies. At each meeting of the stockholders, each
stockholder having the right to vote may vote in person or may authorize another
person or persons to act for him by proxy authorized by an instrument in writing
or by a transmission, including by telephone and electronic transmission,
permitted by law filed in accordance with the procedure established for the
meeting. Any copy, facsimile telecommunication or other reliable reproduction of
the writing or transmission created pursuant to this Section may be substituted
or used in lieu of the original writing or transmission for any and all purposes
for which the original writing or transmission could be used, provided that such
copy, facsimile telecommunication or other reproduction shall be a complete
reproduction of the entire original writing or transmission. Each stockholder
shall have one vote for each share of stock having voting power, registered in
his name on the books of the Corporation on the record date set by the Board of
Directors as provided in Article V, Section 6 hereof.
Section 6. Special Meetings. Special meetings of the stockholders, for
any purpose, or purposes, unless otherwise prescribed by statute or by the
Certificate of Incorporation, may be called at any time by the Board of
Directors or by a committee of the Board of Directors which has been duly
designated by the Board of Directors and whose powers and authority, as provided
in a resolution of the Board of Directors or in these Bylaws, include the power
to call such meetings. Special meetings of stockholders of the Corporation may
not be called by any other person or persons. Business transacted at any special
meeting of stockholders shall be limited to the purposes stated in the notice.
Section 7. Notice of Stockholders' Meetings. If mailed, notice to
stockholders shall be deemed given when deposited in the mail, postage prepaid,
directed to the stockholder at such stockholder's address as it appears on the
records of the corporation. Without limiting the manner by which notice
otherwise may be given effectively to stockholders, any notice to stockholders
may be given by electronic transmission in the manner provided in, and subject
to the provisions of, Section 232 of the Delaware General Corporation Law, as
amended.
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Section 8. Waiver of Notice. Attendance of a person at a meeting shall
constitute a waiver of notice to such person of such meeting, except when the
person objects at the beginning of the meeting to the transaction of any
business because the meeting is not lawfully called or convened.
Section 9. Maintenance and Inspection of Stockholder List. The officer
or agent who has charge of the stock ledger of the Corporation shall prepare and
make, at least 10 days before every meeting of stockholders, a complete list of
the stockholders entitled to vote at the meeting, arranged in alphabetical
order, and showing the address of each stockholder and the number of shares
registered in the name of each stockholder. Such list shall be open to the
examination of any stockholder, for any purpose germane to the meeting, during
ordinary business hours, for a period of at least ten days prior to the meeting,
in the manner provided by law. The list shall also be produced and kept open at
the time and place of the meeting during the whole time thereof, and may be
inspected by any stockholder who is present. The stock ledger of the Corporation
shall be the only evidence as to who are the stockholders entitled to examine
such list or to vote at any meetings of stockholders.
Section 10. Stockholder Action by Written Consent Without a Meeting. No
action shall be taken by stockholders except at an annual or special meeting of
stockholders, and stockholders may not act by written consent.
Section 11. Inspectors of Election. Before any meeting of stockholders,
the Board of Directors may appoint any persons other than nominees for office to
act as inspectors of election at the meeting or its adjournment. If no
inspectors of election are so appointed, the chairman of the meeting may, and on
the request of any stockholder or a stockholder's proxy shall, appoint
inspectors of election at the meeting. The number of inspectors shall be either
one or three. If inspectors are appointed at a meeting on the request of one or
more stockholders or proxies, the holders of a majority of shares or their
proxies present at the meeting shall determine whether one or three inspectors
are to be appointed. If any person appointed as inspector fails to appear or
fails or refuses to act, the chairman of the meeting may, and upon the request
of any stockholder or a stockholder's proxy shall, appoint a person to fill such
vacancy.
The duties of these inspectors shall be as follows:
(a) To ascertain the number of shares outstanding and the voting power
of each;
(b) To determine the shares represented at a meeting and the validity
of proxies and ballots;
(c) To count all votes and ballots;
(d) To determine and retain for a reasonable period a record of the
disposition of any challenges made to any determination by the
inspectors; and
(e) To certify their determination of the number of shares represented
at the meeting and their count of all votes and ballots.
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Section 12. Procedure for Stockholders' Meetings. Meetings of the
stockholders shall be presided over by the Chairman of the Board of Directors,
or in his absence, by the Vice Chairman, the President or by any Vice President,
or, in the absence of any of such officers, by a chairman to be chosen by a
majority of the stockholders entitled to vote at the meeting who are present in
person or by proxy. The Secretary, or, in his absence, any person appointed by
the chairman, shall act as secretary of all meetings of the stockholders.
Section 13. Order of Business. The order of business at all meetings of
stockholders shall be as determined by the chairman of the meeting. The chairman
shall also determine the procedure at the meeting, including such regulation of
the manner of voting and the conduct of discussion as seem to him or her in
order. The chairman of the meeting shall have the power to adjourn the meeting
to another place, if any, date and time. The date and time of the opening and
closing of the polls for each matter upon which the stockholders will vote at
the meeting shall be announced at the meeting.
Section 14. Procedures for Bringing Business before an Annual Meeting.
Notwithstanding anything in these Bylaws to the contrary, no business shall be
conducted at an annual meeting of the stockholders except in accordance with the
procedures set forth in this Section 14; provided, however, that nothing in this
Section 14 shall be deemed to preclude discussion by any stockholder of any
business properly brought before the annual meeting in accordance with such
procedures.
At an annual meeting of the stockholders, only such business shall be
conducted as shall have been properly brought before the meeting. To be properly
brought before an annual meeting, business must be (1) specified in the notice
of meeting (or any supplement thereto) given by or at the direction of the
Board, (2) otherwise properly brought before the meeting by or at the direction
of the Board, or (3) otherwise properly brought before the meeting by a
stockholder. In addition to any other applicable requirements, for business to
be properly brought before an annual meeting by a stockholder, the stockholder
must have given timely notice thereof in writing to the Secretary of the
Corporation. To be timely, a stockholder's notice must be delivered to or mailed
and received at the principal executive offices of the Corporation not less than
120 days in advance of the first annual anniversary of the date of the
Corporation's proxy statement released to stockholders in connection with the
previous year's annual meeting of stockholders, except that if no annual meeting
was held in the previous year or the date of the annual meeting has been changed
by more than 30 calendar days from the date contemplated at the time of the
previous year's proxy statement, notice by the stockholder to be timely must be
so received not later than the close of business on the tenth day following the
day on which such notice of the date of the annual meeting was mailed or such
public disclosure was made. Any adjournment(s) or postponement(s) of the
original meeting whereby the meeting will convene or reconvene within 30 days
from the original date shall be deemed for purposes of notice to be a
continuation of the original meeting and no business may be brought before any
such meeting unless timely notice of such business was given to the Secretary of
the Corporation for the meeting as originally scheduled. A stockholder's notice
to the Secretary shall set forth as to each matter the stockholder proposes to
bring before the annual meeting (i) a brief description of the
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business desired to be brought before the annual meeting and their reasons for
conducting such business at the annual meeting, (ii) the name and record address
of the stockholder proposing such business, (iii) the class and number of shares
of the Corporation which are beneficially owned by the stockholders, and (iv)
any material interest of the stockholder in such business.
The chairman of an annual meeting shall, if the facts warrant,
determine and declare to the meeting that business was not properly brought
before the meeting in accordance with the provisions of this Section 14, and if
he should so determine, he shall so declare to the meeting and any such business
not properly brought before the meeting shall not be transacted.
Section 15. Procedures for Nominating Directors. Notwithstanding
anything in these Bylaws to the contrary, only persons who are nominated in
accordance with the procedures hereinafter set forth in this Section 15 shall be
eligible for election as directors of the Corporation.
Nominations of persons for election to the Board of Directors of the
Corporation may be made at a meeting of stockholders only (1) by or at the
direction of the Board of Directors or (2) by any stockholder of the Corporation
entitled to vote for the election of directors at the meeting who complies with
the notice procedures set forth in this Section 15. Such nominations, other than
those made by or at the direction of the Board of Directors, shall be made
pursuant to timely notice in writing to the Secretary of the Corporation. To be
timely, a stockholder's notice shall be delivered to or mailed and received at
the principal executive offices of the Corporation not less than 120 days, nor
more than 150 days, in advance of the first annual anniversary of the date of
the Corporation's proxy statement released to stockholders in connection with
the previous year's annual meeting of stockholders, except that if no annual
meeting was held in the previous year or the date of the annual meeting has been
changed by more than 30 calendar days from the date contemplated at the time of
the previous year's proxy statement, notice by the stockholder to be timely must
be so received not later than the close of business on the tenth day following
the day on which such notice of the date of the annual meeting was mailed or
such public disclosure was made. Any adjournment(s) or postponement(s) of the
original meeting whereby the meeting will convene or reconvene within 30 days
from the original date shall be deemed for purposes of notice to be a
continuation of the original meeting and no nominations by a shareholder of
persons to be elected directors of the Corporation may be made at any such
meeting other than pursuant to a notice that was timely for the meeting on the
date originally scheduled. Such stockholder's notice shall set forth: (i) as to
each person whom the stockholder proposes to nominate for election or
re-election as a director, all information relating to such person that is
required to be disclosed in solicitations of proxies for election of directors,
or is otherwise required, in each case pursuant to Regulation 14A under the
Securities Exchange Act of 1934, as amended, or any successor regulation thereto
(including such person's written consent to being named in the proxy statement
as a nominee and to serving as a director if elected); and (ii) as to the
stockholder giving notice (A) the name and address, as they appear on the
Corporation's books, of such stockholder, and (B) the class and number of shares
of the Corporation which are beneficially owned by such stockholder. At the
request of the Board of Directors, any person nominated by the Board of
Directors for election as a director shall furnish to the Secretary of the
Corporation that information required to be set forth in a stockholder's notice
of nomination that pertains to the nominee.
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The chairman of the meeting shall, if the facts warrant, determine and
declare to the meeting that a nomination was not made in accordance with the
procedures prescribed by this Section 15, and if he should so determine, he
shall so declare to the meeting and the defective nomination shall be
disregarded.
ARTICLE III
DIRECTORS
Section 1. Number and Qualification of Directors. The Board of
Directors shall consist of a minimum of 9 and a maximum of 12 directors. The
number of directors shall be fixed from time to time within the minimum and the
maximum number established by the then elected Board of Directors. The number of
directors until changed by the Board shall be 12. The maximum number of
directors may not be increased by the Board of Directors to exceed 16 without
the affirmative vote of 75% of the members of the entire Board. The directors
need not be stockholders. No officer of the Corporation may serve on a board of
directors of any company having a present or retired employee on the
Corporation's Board of Directors. No person may stand for election as a director
if within the previous one (1) year he has resigned from the Board as a result
of the tenure provisions of Article III, Section 3 hereof regarding service for
more than 10, 11 or 12 consecutive years on the Board. No person associated with
an organization whose services are contracted by the Corporation shall serve on
the Corporation's Board of Directors; provided, however, that this prohibition
may be waived by a majority of the members of the whole Board if the Board in
its judgment determines that such waiver would be in the best interest of the
Corporation.
Section 2. Election and Term of Office. The Board of Directors shall be
divided into three classes, Class I, Class II and Class III. The number of
directors in each class shall be the whole number contained in the quotient
arrived at by dividing the authorized number of directors by three, and if a
fraction is also contained in such quotient, then if such fraction is 1/3, the
extra director shall be a member of Class III, and if the fraction is 2/3, one
of the extra directors shall be a member of Class III and the other a member of
Class II. Each director shall serve for a term ending on the date of the third
annual meeting following the annual meeting at which such director was elected.
One class of the directors shall be elected at each annual meeting of the
stockholders. If any such annual meeting is not held or the directors are not
elected thereat, the directors may be elected at any special meeting of
stockholders held for that purpose. All directors shall hold office until their
respective successors are elected and qualified or until their earlier death,
resignation or removal.
Section 3. Resignation and Removal of Directors. No person who is
concurrently a director and an employee of the Corporation shall be qualified to
serve as a director of the Corporation from and after the time of any diminution
in such person's duties or responsibilities as an officer, the time they leave
the employ of the Corporation for any reason or their 70th birthday; provided,
however, that if any such person resigns from the board of directors upon such
event, such person shall thereafter be deemed qualified to serve as a director
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of the Corporation for so long as such person is otherwise qualified to so serve
pursuant to the following sentence. No person shall be qualified to serve as a
director of the corporation on or after the date of the annual meeting of
stockholders following: (i) his 70th birthday; (ii) the third anniversary of his
retirement from his principal occupation; (iii) unless he is an officer of the
Corporation, the date on which he has served on the Corporation's Board of
Directors a total of 10 complete years; (iv) any fiscal year in which he has
failed to attend at least 66% of the meetings of the Board of Directors and any
committees of the Board of Directors on which such director serves; or (v) the
first anniversary of any change in his employment (other than a promotion or
lateral movement within the same organization); provided that such a person
shall be deemed to be qualified to serve as a director if so determined by a
majority of the members of the whole Board (excluding the director whose
resignation would otherwise be required) if the Board in its judgment determines
that such waiver would be in the best interest of the Corporation. Any director
may be removed for cause by the holders of a majority of the shares of the
Corporation entitled to vote in the election of directors; stockholders may not
remove any director without cause. The Board of Directors may not remove any
director for or without cause, and no recommendation by the Board of Directors
that a director be removed for cause may be made to the stockholders except by
the affirmative vote of not less than 75% of the members of the whole Board.
Section 4. Vacancies. Except as otherwise provided by statute or the
Certificate of Incorporation, in the case of any increase in the number of
directors, such additional director or directors shall be proposed for election
to terms of office that will most nearly result in each class of directors
containing 1/3 of the entire number of members of the whole Board, and, unless
such position is to be filled by a vote of the stockholders at an annual or
special meeting, shall be elected by a majority vote of the directors then in
office, although less than a quorum, or by a sole remaining director. In the
case of any vacancy in the Board of Directors, however created, the vacancy or
vacancies shall be filled by majority vote of the directors then in office,
although less than a quorum, or by a sole remaining director. In the event one
or more directors shall resign, effective at a future date, such vacancy or
vacancies shall be filled as provided herein. Directors so chosen or elected
shall hold office for the remaining term of the directorship to which appointed.
Any director elected or chosen as provided herein shall serve for the unexpired
term of office or until his successor is elected and qualified or until his
earlier death, resignation or removal.
In the event of any decrease in the authorized number of directors, (a)
each director then serving as such shall nevertheless continue as a director of
the class of which he is a member until the expiration of his current term, or
his prior death, resignation or removal, and (b) the newly eliminated
directorships resulting from such decrease shall be apportioned by the Board of
Directors to such class or classes as shall, so far as possible, bring the
number of directors in the respective classes into conformity with the formula
in Section 2 hereof as applied to the newly authorized number of directors.
Section 5. Powers. The property and business of the Corporation shall
be managed by or under the direction of its Board of Directors. In addition to
the powers and authorities by these Bylaws expressly conferred upon them, the
Board may exercise all such powers of the Corporation and do all such lawful
acts and things as are not by statute, by the
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Certificate of Incorporation or by these Bylaws directed or required to be
exercised or done by the stockholders.
Section 6. Place of Directors' Meetings. The directors may hold their
meetings and have one or more offices, and keep the books of the Corporation
outside the State of Delaware.
Section 7. Regular Meetings. Regular meetings of the Board of Directors
may be held without notice at such time and place as shall from time to time be
determined by the Board. Except as otherwise provided by statute, any business
may be transacted at any regular meeting of the Board of Directors.
Section 8. Special Meetings. Special meetings of the Board of Directors
may be called by the Chairman of the Board, the Vice Chairman or the President
on at least 24 hours' notice, or such shorter period as the person calling deems
appropriate, to each director. Special meetings shall be called by the President
or the Secretary in like manner and on like notice on the written request of a
majority of the total number of directors.
Section 9. Quorum. At all meetings of the Board of Directors a majority
of the authorized number of directors shall be necessary and sufficient to
constitute a quorum for the transaction of business, and the vote of a majority
of the directors present at any meeting at which there is a quorum, shall be the
act of the Board of Directors, except as may be otherwise specifically provided
by statute, by the Certificate of Incorporation or by these Bylaws. If a quorum
shall not be present at any meeting of the Board of Directors, the directors
present thereat may adjourn the meeting from time to time, without notice other
than announcement at the meeting, until a quorum shall be present. If only one
director is authorized, such sole director shall constitute a quorum. A meeting
at which a quorum is initially present may continue to transact business
notwithstanding the withdrawal of directors, if any action is approved by at
least a majority of the required quorum for such meeting.
Section 10. Action Without Meeting. Unless otherwise restricted by
statute, the Certificate of Incorporation or these Bylaws, any action required
or permitted to be taken at any meeting of the Board of Directors or of any
committee thereof may be taken without a meeting, if all members of the Board or
committee, as the case may be, consent thereto in writing or by electronic
transmission, and the writing or writings or electronic transmission or
transmissions are filed with the minutes of proceedings of the Board or
committee. Such filing shall be in paper form if the minutes are maintained in
paper form and shall be in electronic form if the minutes are maintained in
electronic form.
Section 11. Telephonic Meetings. Unless otherwise restricted by the
Certificate of Incorporation or these Bylaws, members of the Board of Directors,
or any committee designated by the Board of Directors, may participate in a
meeting of the Board of Directors, or any committee, by means of conference
telephone or similar communications equipment by means of which all persons
participating in a meeting can hear each other, and such participation in a
meeting shall constitute presence in person at such meeting.
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Section 12. Meetings and Action of Committees. The Board of Directors
may from time to time designate committees of the Board of Directors, with such
lawfully delegable powers and duties as it thereby confers, to serve at the
pleasure of the Board of Directors and shall, for those committees and any
others provided for herein, elect a director or directors to serve as the member
or members, designating, if it desires, other directors as alternate members who
may replace any absent or disqualified member at any meeting of the committee.
In the absence or disqualification of any member of any committee and any
alternate member in his or her place, the member or members of the committee
present at the meeting and not disqualified from voting, whether or not he or
she or they constitute a quorum, may by unanimous vote appoint another member of
the Board of Directors to act at the meeting in the place of the absent or
disqualified member. The Board of Directors shall, by resolution passed by a
majority of the whole Board, designate one member of each committee as chairman
of such committee. Each such chairman shall hold such office for a period not in
excess of five years, and shall upon surrender of such chairmanship resign from
membership on such committee. Any such committee, to the extent provided in the
resolution of the Board of Directors, shall have and may exercise all the powers
and authority of the Board of Directors in the management of the business and
affairs of the Corporation, and may authorize the seal of the corporation to be
affixed to all papers which may require it; but no such committee shall have the
power or authority in reference to the following matters: (i) approving or
adopting, or recommending to the stockholders, any action or matter expressly
required by the Delaware General Corporation Law to be submitted to stockholders
for approval or (ii) adopting, amending or repealing any bylaw of the
Corporation.
Section 13. Special Meetings of Committees. Special meetings of
committees may be called by the Chairman of such committee, the Chairman of the
Board or the President, on at least 24 hours' notice, or such shorter period as
the person calling deems appropriate, to each member. Alternate members shall
have the right to attend all meetings of the committee. The Board of Directors
may adopt rules of the government of any committee not inconsistent with the
provisions of these Bylaws. If a committee is comprised of an odd number of
members, a quorum shall consist of a majority of that number. If the committee
is comprised of an even number of members, a quorum shall consist of 1/2 of that
number. If a committee is comprised of two members, a quorum shall consist of
both members; all matters shall be determined by a majority vote of the members
present. Action may be taken by any committee without a meeting if all the
members thereof consent thereto in writing or by electronic transmission, and
the writing or writings or electronic transmission or transmissions are filed
with the minutes of the proceedings of such committee. Such filing shall be in
paper form if the minutes are maintained in paper form and shall be electronic
form if the minutes are maintained in electronic form.
Section 14. Minutes of Committee Meetings. Each Committee shall keep
regular minutes of its meetings and report the same to the Board of Directors
when requested.
Section 15. Compensation of Directors. Unless otherwise restricted by
the Certificate of Incorporation or these Bylaws, the Board of Directors shall
have the authority to fix the compensation of directors. The directors may be
paid their expenses, if any, of attendance at each meeting of the Board of
Directors and may be paid a fixed sum for attendance at each meeting of the
Board of Directors or a stated salary as director. No such payment shall
preclude any director from serving the Corporation in any other capacity and
receiving compensation
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therefor. Members of special or standing committees may be allowed like
compensation for attending committee meetings.
Section 16. Indemnification. (a) The Corporation shall indemnify every
person who is or was a party or is or was threatened to be made a party to any
threatened, pending or completed action, suit, or proceeding, whether civil,
criminal, administrative or investigative (other than an action by or in the
right of the Corporation), by reason of the fact that he is or was a director,
officer or employee of the Corporation or any of its direct or indirect wholly
owned subsidiaries or, while a director, officer or employee of the Corporation
or any of its direct or indirect wholly owned subsidiaries, is or was serving at
the request of the Corporation or any of its direct or indirect wholly owned
subsidiaries, as a director, officer or employee, of another corporation,
partnership, joint venture, trust, employee benefit plan or other enterprise,
against expenses (including counsel fees), judgments, fines, and amounts paid in
settlement actually and reasonably incurred by him in connection with such
action, suit or proceeding, to the full extent permitted by applicable law;
provided that the Corporation shall not be obligated to indemnify any such
person against any such action, suit or proceeding which is brought by such
person against the Corporation or any of its direct or indirect wholly owned
subsidiaries or the directors of the Corporation or any of its direct or
indirect wholly owned subsidiaries, other than an action brought by such person
to enforce his rights to indemnification hereunder, unless a majority of the
Board of Directors of the Corporation shall have previously approved the
bringing of such action, suit or proceeding, and provided further that the
Corporation shall not be obligated to indemnify any such person against any
action, suit or proceeding arising out of any adjudicated criminal, dishonest or
fraudulent acts, errors or omissions of such person or any adjudicated willful,
intentional or malicious acts, errors or omissions of such person.
(b) The Corporation shall indemnify every person who is or was a party
or is or was threatened to be made a party to any threatened, pending or
completed action, suit, or proceeding, whether civil, criminal, administrative
or investigative, by reason of the fact that he is or was licensed to practice
law and an employee (including an employee who is or was an officer) of the
Corporation or any of its direct or indirect wholly owned subsidiaries and,
while acting in the course of such employment committed or is alleged to have
committed any negligent acts, errors or omissions in rendering professional
legal services at the request of the Corporation or pursuant to his employment
(including, without limitation, rendering written or oral legal opinions to
third parties) against expenses (including counsel fees), judgments, fines, and
amounts paid in settlement actually and reasonably incurred by him in connection
with such action, suit or proceeding, to the full extent permitted by applicable
law; provided that the Corporation shall not be obligated to indemnify any such
person against any action, suit or proceeding arising out of any adjudicated
criminal, dishonest or fraudulent acts, errors or omissions of such person or
any adjudicated willful, intentional or malicious acts, errors or omissions of
such person.
(c) The Corporation shall indemnify every person who was or is a party
or is threatened to be made a party to any threatened, pending or completed
action or suit by or in the right of the Corporation to procure a judgment in
its favor by reason of the fact that he is or was a director, officer, or
employee of the Corporation, or any of its direct or indirect wholly owned
subsidiaries or, while a director, officer, or employee of the Corporation or
any of its direct or indirect wholly owned subsidiaries, is or was serving at
the request of the Corporation or any of its direct or
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indirect wholly owned subsidiaries, as a director, officer, or employee of
another corporation, partnership, joint venture, trust, employee benefit plan,
or other enterprise against expenses (including attorneys' fees) actually and
reasonably incurred by him in connection with the defense or settlement of such
action or suit if he acted in good faith and in a manner he reasonably believed
to be in or not opposed to the best interests of the Corporation and except that
no indemnification shall be made in respect of any claim, issue or matter as to
which such person shall have been adjudged to be liable to the Corporation
unless and only to the extent that the Court of Chancery or the court in which
such action or suit was brought shall determine upon application that, despite
the adjudication of liability but in view of all the circumstances of the case,
such person is fairly and reasonably entitled to indemnity for such expenses
which the Court of Chancery or such other court shall deem proper.
(d) To the extent that a director, officer, or employee of the
Corporation, or any of its direct or indirect wholly owned subsidiaries, has
been successful on the merits or otherwise in defense of any action, suit or
proceeding referred to in subsections (a), (b) and (c) of this section, or in
defense of any claim, issue or matter therein, he shall be indemnified against
expenses (including attorneys' fees) actually and reasonably incurred by him in
connection therewith.
(e) Any indemnification under subsections (a), (b) and (c) of this
section (unless ordered by a court) shall be made by the Corporation only as
authorized in the specific case upon a determination that indemnification of the
director, officer, or employee is proper in the circumstances because he has met
the applicable standard of conduct set forth in subsections (a), (b) and (c) of
this section. Such determination shall be made (1) by a majority vote of the
directors who were not parties to such action, suit or proceeding, (2) by a
committee or such directors designated by majority vote of such directors even
though less than a quorum, or (3) if there are no such directors, or if such
directors so direct, by independent legal counsel in a written opinion, or (4)
by the stockholders. If a claim under this Section 16 is not paid in full by the
Corporation within 60 days after a written claim has been received by the
Corporation, except in the case of a claim for an advancement of expenses, in
which case the applicable period shall be 20 days, the indemnitee may at any
time thereafter bring suit against the Corporation to recover the unpaid amount
of the claim. If successful in whole or in part in any such suit, or in a suit
brought by the Corporation to recover an advancement of expenses pursuant to the
terms of an undertaking, the indemnitee shall be entitled to be paid also the
expense of prosecuting or defending such suit. In (i) any suit brought by the
indemnitee to enforce a right to indemnification hereunder (but not in a suit
brought by the indemnitee to enforce a right to an advancement of expenses) it
shall be a defense that, and (ii) in any suit brought by the Corporation to
recover an advancement of expenses pursuant to the terms of an undertaking, the
Corporation shall be entitled to recover such expenses upon a final adjudication
that, the indemnitee has not met any applicable standard for indemnification set
forth in the Delaware General Corporation Law. Neither the failure of the
Corporation (including its directors who are not parties to such action, a
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committee of such directors, independent legal counsel, or its stockholders) to
have made a determination prior to the commencement of such suit that
indemnification of the indemnitee is proper in the circumstances because the
indemnitee has met the applicable standard of conduct set forth in the Delaware
General Corporation Law, nor an actual determination by the Corporation
(including its directors who are not parties to such action, a committee of such
directors, independent legal counsel, or its stockholders) that the indemnitee
has not met such applicable standard of conduct, shall create a presumption that
the indemnitee has not met the applicable standard of conduct or, in the case of
such a suit brought by the indemnitee, be a defense to such suit. In any suit
brought by the indemnitee to enforce a right to indemnification or to an
advancement of expenses hereunder, or brought by the Corporation to recover an
advancement of expenses pursuant to the terms of an undertaking, the burden of
proving that the indemnitee is not entitled to be indemnified, or to such
advancement of expenses, under this Section 16 or otherwise shall be on the
Corporation.
(f) Expenses (including attorneys' fees) incurred by an present or
former officer or director of the Corporation or any of its direct or indirect
wholly owned subsidiaries in defending a civil, criminal, administrative or
investigative action, suit or proceeding shall be paid by the Corporation in
advance of the final disposition of such action, suit or proceeding upon receipt
of an undertaking by or on behalf of such director or officer to repay such
amount if it shall ultimately be determined that he is not entitled to be
indemnified by the Corporation as authorized in this Section 16. Such expenses
incurred by other employees and agents may be so paid upon such terms and
conditions, if any, as the Board of Directors deems appropriate.
(g) The indemnification and advancement of expenses provided by, or
granted pursuant to, this Section 16 shall not be deemed exclusive of any other
rights to which those seeking indemnification or advancement of expenses may be
entitled under any provision of law, the Corporation's Certificate of
Incorporation, the Certificate of Incorporation or Bylaws or other governing
documents of any direct or indirect wholly owned subsidiary of the Corporation,
or any agreement, vote of stockholders or disinterested directors or otherwise,
both as to action in his official capacity and as to action in another capacity
while holding any of the positions or having any of the relationships referred
to in this Section 16.
(h) The indemnification and advancement of expenses provided by, or
granted pursuant to, this Section 16 shall, unless otherwise provided when
authorized or ratified, continue as to a person who has ceased to be a director,
officer or employee and shall inure to the benefit of the heirs, executors and
administrators of such a person.
ARTICLE IV
OFFICERS
Section 1. Officers. The officers of the Corporation shall be a
Chairman of the Board, a Vice Chairman of the Board, a President, a Chief
Financial Officer, a Vice President, a Secretary, a Treasurer and a Controller.
The Corporation may also have, at the discretion of the Board of Directors, one
or more additional Vice Presidents, and such other officers as may be appointed
in accordance with the provisions of Section 3 of this Article.
Section 2. Election of Officers. The officers of the Corporation,
except such officers as may be appointed in accordance with the provisions of
Section 3 or Section 5 of this Article, shall be chosen by the Board of
Directors, and each shall serve at the pleasure of the
- 12 -
<PAGE>
Board, subject to the rights, if any, of any officer under any contract of
employment.
Section 3. Subordinate Officers. The Board of Directors may appoint,
and may empower the President to appoint, such other officers as the business of
the Corporation may require, each of whom shall hold office for such period,
have such authority and perform such duties as are provided in the Bylaws or as
the Board of Directors may from time to time determine.
Section 4. Removal and Resignation of Officers. Any officer may be
removed, either with or without cause, by the Board of Directors, at any regular
or special meeting thereof, or except in case of an officer chosen by the Board
of Directors, by any officer upon whom such power of removal may be conferred by
the Board of Directors, provided that such removal shall not prejudice the
remedy of such officer for breach of any contract of employment.
Any officer may resign at any time by giving written notice to the
Corporation. Any such resignation shall take effect on receipt of such notice or
at any later time specified therein. Unless otherwise specified therein, the
acceptance of such resignation shall not be necessary to make it effective. Any
such resignation is without prejudice to the rights, if any, of the Corporation
under any contract to which the officer is a party.
Section 5. Vacancies in Offices. A vacancy in any office because of
death, resignation, removal, disqualification or any other cause shall be filled
in the manner prescribed in these Bylaws for regular appointments to such
office.
Section 6. Chairman of the Board. The Chairman of the Board shall, if
present, preside at all meetings of the Board of Directors and of the
stockholders, and shall exercise and perform such other powers and duties as may
be from time to time assigned to him by the Board of Directors or prescribed by
the Bylaws.
Section 7. Vice Chairman of the Board. The Vice Chairman of the Board
shall exercise and perform such powers and duties as may be from time to time
assigned to him by the Board of Directors or prescribed in these Bylaws. In the
absence of the Chairman of the Board, the Vice Chairman of the Board shall
preside at all meetings of the stockholders and the Board of Directors.
Section 8. President. The President shall be the chief executive
officer of the Corporation and shall, subject to the control of the Board of
Directors, have general supervision, direction and control of the business and
the officers of the Corporation. In the absence of the Chairman of the Board and
the Vice Chairman of the Board, the President shall preside at all meetings of
the stockholders and the Board of Directors. He shall have the general powers
and duties of management usually vested in the office of President of a
corporation, and shall have such other powers and duties as may be prescribed by
the Board of Directors or the Bylaws.
Section 9. Vice Presidents. In the absence or disability of the
President, the Vice Presidents, if any, in order of their rank as fixed by the
Board of Directors, or if not ranked, the Vice President designated by the
President, shall perform all the duties of the President, and
- 13 -
<PAGE>
when so acting shall have all the powers of, and be subject to all the
restrictions upon, the President. The Vice Presidents shall have such other
powers and perform such other duties as from time to time may be prescribed for
them respectively by the Board of Directors, these Bylaws or the President.
Section 10. Secretary. The Secretary shall keep or cause to be kept, at
the principal office or such other place as the Board of Directors may order, a
book of minutes of all meetings and actions of directors, committees of
directors and stockholders, with the time and place of holding, whether regular
or special, and, if special, how authorized, the notice thereof given, the names
of those present at directors' and committee meetings, the number of shares
present or represented at stockholders' meetings, and the proceedings thereof.
The Secretary shall keep, or cause to be kept, at the principal office
or at the office of the Corporation's transfer agent or registrar, a share
register, or a duplicate share register, showing the names of all stockholders
and their addresses, the number and classes of shares held by each, the number
and date of certificates issued for the same, and the number and date of
cancellation of every certificate surrendered for cancellation.
The Secretary shall give, or cause to be given, notice of all meetings
of the stockholders and of the Board of Directors required by these Bylaws or by
law to be given, and he shall keep the seal of the Corporation, if one be
adopted, in safe custody, and shall have such other powers and perform such
other duties as may be prescribed by the Board of Directors or by the Bylaws.
Section 11. Chief Financial Officer. The Chief Financial Officer shall
keep and maintain, or cause to be kept and maintained, adequate and correct
books and records of accounts of the properties and business transactions of the
Corporation, including accounts of its assets, liabilities, receipts,
disbursements, gains, losses, capital, retained earnings and shares. The books
of account shall be open at all times to inspection by any director.
The Chief Financial Officer shall deposit all moneys and other
valuables in the name and to the credit of the Corporation with such
depositories as may be designated by the Board of Directors. He shall disburse
the funds of the Corporation as may be ordered by the Board of Directors, shall
render to the President and Directors, whenever they request it, an account of
all of his transactions as Chief Financial Officer and of the financial
condition of the Corporation, and shall have other powers and perform such other
duties as may be prescribed by the Board of Directors or the Bylaws.
Section 12. Treasurer and Controller. The Treasurer and the Controller
shall each have such powers and perform such duties as from time to time may be
prescribed for him by the Board of Directors, the President or these Bylaws.
- 14 -
<PAGE>
ARTICLE V
CERTIFICATE OF STOCK
Section 1. Certificates. Shares of the stock of the Corporation may be
represented by certificates or uncertificated. Owners of shares of the stock of
the Corporation shall be recorded in the share register of the Corporation, and
ownership of such shares shall be evidenced by a certificate or book-entry
notation in the share register of the Corporation. Any certificates representing
such shares shall be signed by, or in the name of the Corporation by, the
Chairman or Vice Chairman of the Board of Directors, or the President or a Vice
President, and by the Secretary or any Assistant Secretary, if one be appointed,
or the Treasurer or an Assistant Treasurer of the Corporation, certifying the
number of shares represented by the certificate owned by such stockholder in the
Corporation.
Section 2. Signature on Certificates. Any or all of the signatures on
the certificate may be a facsimile. In case any officer, transfer agent or
registrar who has signed or whose facsimile signature has been placed upon a
certificate shall have ceased to be such officer, transfer agent or registrar
before such certificate is issued, it may be issued by the Corporation with the
same effect as if he were such officer, transfer agent or registrar at the date
of issue.
Section 3. Statement of Stock Rights, Preferences, Privileges. If the
Corporation shall be authorized to issue more than one class of stock or more
than one series of any class, the powers, designations, preferences and
relative, participating, optional or other special rights of each class of stock
or series thereof and the qualification, limitations or restrictions of such
preferences and/or rights shall be set forth in full or summarized on the face
or back of the certificate which the Corporation shall issue to represent such
class or series of stock, provided that, except as otherwise provided by
statute, in lieu of the foregoing requirements, there may be set forth on the
face or back of the certificate which the Corporation shall issue to represent
such class or series of stock, a statement that the Corporation will furnish
without charge to each stockholder who so requests the powers, designations,
preferences and relative, participating, optional or other special rights of
each class of stock or series thereof and the qualifications, limitations or
restrictions of such preferences and/or rights.
Section 4. Lost, Stolen or Destroyed Certificates. The Board of
Directors, the Secretary and the Treasurer each may direct a new certificate or
certificates to be issued in place of any certificate or certificates
theretofore issued by the Corporation alleged to have been lost, stolen or
destroyed, upon the making of an affidavit of that fact by the owner of such
certificate, or his legal representative. When authorizing such issue of a new
certificate or certificates, the Board of Directors may, in its discretion and
as a condition precedent to the issuance thereof, require the owner of such
lost, stolen or destroyed certificate or certificates, or his legal
representative, to advertise the same in such manner as it shall require and/or
to furnish the Corporation a bond in such form and substance and with such
surety as it may direct as indemnity against any claim that may be made against
the Corporation with respect to the certificate alleged to have been lost,
stolen or destroyed.
- 15 -
<PAGE>
Section 5. Transfers of Stock. Upon surrender to the Corporation, or
the transfer agent of the Corporation, of a certificate for shares duly endorsed
or accompanied by proper evidence of succession, assignation or authority to
transfer, it shall be the duty of the Corporation to issue a new certificate or
other evidence of such new shares to the person entitled thereto, cancel the old
certificate and record the transaction upon its books. Uncertificated shares
shall be transferred in the share register of the Corporation upon the written
instruction originated by the appropriate person to transfer the shares.
Section 6. Fixing Record Date. In order that the Corporation may
determine the stockholders entitled to notice of or to vote at any meeting of
the stockholders, or any adjournment thereof, or entitled to receive payment of
any dividend or other distribution or allotment of any rights, or entitled to
exercise any rights in respect of any change, conversion or exchange of stock or
for the purpose of any other lawful action, the Board of Directors may fix a
record date which shall not be more than 60 nor less than 10 days before the
date of such meeting, nor more than 60 days prior to any other action. A
determination of stockholders of record entitled to notice of or to vote at a
meeting of stockholders shall apply to any adjournment of the meeting; provided,
however, that the Board of Directors may fix a new record date for the adjourned
meeting.
Section 7. Registered Stockholders. The Corporation shall be entitled
to treat the holder of record of any share or shares of stock as the holder in
fact thereof and, accordingly, shall not be bound to recognize any equitable or
other claim or interest in such share on the part of any other person, whether
or not it shall have express or other notice thereof, save as expressly provided
by the laws of the State of Delaware.
ARTICLE VI
GENERAL PROVISIONS
Section 1. Dividends. Dividends upon the capital stock of the
Corporation, subject to the provisions of the Certificate of Incorporation, if
any, may be declared by the Board of Directors at any regular or special
meeting, pursuant to law. Dividends may be paid in cash, in property or in
shares of the Corporation's capital stock, subject to the provisions of the
Certificate of Incorporation.
Section 2. Payment of Dividends. Before declaration of any dividend,
there may be set aside out of any funds of the Corporation available for
dividends such sum or sums as the Board of Directors from time to time, in its
absolute discretion, thinks proper as a reserve fund to meet contingencies, or
for equalizing dividends, or for repairing or maintaining any property of the
Corporation, or for such other purpose as the Board of Directors shall think
conducive to the interests of the Corporation, and the Board of Directors may
thereafter abolish any such reserve in its absolute discretion.
Section 3. Checks. All checks, drafts or other orders for payment of
money, notes or other evidences of indebtedness, issued in the name of or
payable to the Corporation
- 16 -
<PAGE>
shall be signed by such officer or officers as the Board of Directors or the
President or any Vice President, acting jointly, may from time to time
designate.
Section 4. Corporate Contracts and Instruments. The President, any Vice
President, the Secretary or the Treasurer may enter into contracts and execute
instruments on behalf of the Corporation. The Board of Directors, the President
or any Vice President may authorize any officer or officers, and any employee or
employees or agent or agents of the Corporation or any of its subsidiaries, to
enter into any contract or execute any instrument in the name of and on behalf
of the Corporation, and such authority may be general or confined to specific
instances.
Section 5. Fiscal Year. The fiscal year of the Corporation shall be
January 1 through December 31, unless otherwise fixed by resolution of the Board
of Directors.
Section 6. Manner of Giving Notice. Whenever, under the provisions of
the statutes, the Certificate of Incorporation or these Bylaws, notice is
required to be given to any director, it shall not be construed to require
personal notice, but such notice may be given in writing, by mail, addressed to
such director, at his address as it appears on the records of the Corporation
(unless prior to mailing of such notice he shall have filed with the Secretary a
written request that notices intended for him be mailed to some other address,
in which case such notice shall be mailed to the address designated in the
request) with postage thereon prepaid, and such notice shall be deemed to be
given at the time when the same shall be deposited in the United States mail;
provided, however, that, in the case of notice of a special meeting of the Board
of Directors, if such meeting is to be held within seven calendar days after the
date of such notice, notice shall be deemed given as of the date such notice
shall be accepted for delivery by a courier service that provides "opening of
business next day" delivery, so long as at least one attempt shall have been
made, on or before the date such notice is accepted for delivery by such courier
service, to provide notice by telephone to each director at his principal place
of business and at his principal residence. Notice to directors may also be
given by telegram, by personal delivery, by telephone, by facsimile or by other
electronic transmission.
Section 7. Waiver of Notice. Whenever any notice is required to be
given under the provisions of the statutes, the Certificate of Incorporation or
these Bylaws, a waiver thereof in writing, signed by the person or persons
entitled to said notice, or waiver by electronic transmission by such person,
whether before or after the time stated therein, shall be deemed equivalent
thereto.
ARTICLE VII
AMENDMENTS
Section 1. Amendment by Directors. Except any amendment to this Article
VII and to Article II, Section 6, Article II, Section 10, Article III, Section 1
(as it relates to increases in the number of directors), Article III, Section 2,
the last sentence of Article III, Section 3 (as it relates to removal of
directors), Article III, Section 4, Article III, Section 16 and Article VI,
- 17 -
<PAGE>
Section 6 of these Bylaws, or any of such provisions, which shall require
approval by the affirmative vote of directors representing at least 75% of the
number of directors provided for in accordance with Article III, Section 1, the
directors, by the affirmative vote of a majority of the whole Board and without
the assent or vote of the stockholders, may at any meeting, make, repeal, alter,
amend or rescind any of these Bylaws, provided the substance of the proposed
amendment or other action shall have been stated in a notice of the meeting.
Section 2. Amendment by Stockholders. These Bylaws may not be altered,
amended or rescinded, and new Bylaws may not be adopted, by the stockholders of
the Corporation except by the vote of the holders of not less than 75% of the
total voting power of all shares of stock of the Corporation entitled to vote in
the election of directors, considered for such purpose as one class.
- 18 -
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.26
<SEQUENCE>4
<FILENAME>h94456ex10-26.txt
<DESCRIPTION>FORM OF NONQUALIFIED STOCK OPTION AGMT - DIRECTORS
<TEXT>
<PAGE>
EXHIBIT 10.26
BAKER HUGHES INCORPORATED
NONQUALIFIED STOCK OPTION AGREEMENT
((NAME)) ((SHARES))
GRANTEE SHARES GRANTED
Pursuant to action by the Compensation Committee for administration of the Baker
Hughes Incorporated ("Company") 1993 Stock Option Plan ("Plan"), the above
Grantee is hereby granted a nonqualified stock option to purchase the above
number of shares of the Company's $1 par value common stock at the exercise
price of (Price) for each share subject to this option, payable at the time of
exercise. Subject to the terms of the Plan regarding exercise, this option will
be exercisable during the period beginning one year from the date of grant set
forth below and ending seven years from such date, provided that the Grantee
remains a member of the Board of Directors of the Company. This option may not
be exercised after (Date).
Cashless exercise, in accordance with the terms of the Plan, shall be available
to Grantee for the shares subject to this option.
To the extent the exercise of this option results in taxable income to Grantee,
the Company is authorized to withhold from any remuneration payable to Grantee
any tax required to be withheld by reason of such taxable income.
This option is granted under and is subject to all of the provisions of the
Plan. This option is not transferable by the Grantee otherwise than by will or
by the laws of descent and distribution, and is exercisable during the Grantee's
lifetime only by the Grantee.
Date of Grant: (Date)
BAKER HUGHES INCORPORATED
By
(Name)
(Title)
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.27
<SEQUENCE>5
<FILENAME>h94456ex10-27.txt
<DESCRIPTION>FORM OF NONQUALIFIED STOCK OPTION AGMT - EMPLOYEES
<TEXT>
<PAGE>
EXHIBIT 10.27
BAKER HUGHES INCORPORATED
NONQUALIFIED STOCK OPTION AGREEMENT
((NAME)) ((SHARES))
GRANTEE SHARES GRANTED
Pursuant to action taken by the Compensation Committee of the Board of Directors
of Baker Hughes Incorporated, a Delaware corporation (the "Company"), for the
purposes of administration of the Baker Hughes Incorporated 1993 Stock Option
Plan (the "Plan"), the above-named Grantee is hereby granted a nonqualified
stock option to purchase the above number of shares of the Company's $1 par
value per share common stock at the exercise price of (Price) for each share
subject to this option, payable at the time of exercise. Subject to the terms of
the Plan regarding exercise, (i) twenty percent (20%) of the shares subject to
this option are immediately vested and this option is exercisable with respect
thereto on the date of grant, and this option will be exercisable with respect
to subsequent increments of twenty percent (20%) of the shares subject to this
option on each of the next four (4) anniversaries of the grant date, and (ii) if
the closing price of the Company Common Stock on the New York Stock Exchange
increases to at least $50.00 per share and thereafter the closing price of the
Company Common Stock on the New York Stock Exchange averages $50.00 per share or
above for a period of ten consecutive trading days, any unvested portion of this
option shall immediately vest in its entirety; in each case, provided the
Grantee remains in the employment of the Company. This option may not be
exercised after (Date).
The following provisions will apply in the event of Grantee's termination of
employment:
1. If Grantee's employment is terminated for any reason (other than death,
retirement or disability pursuant to paragraphs 4 and 5 below), this option will
wholly and completely terminate on the date of termination of employment, to the
extent it is not then exercisable.
2. If Grantee's employment is terminated because of fraud, theft or embezzlement
committed against the Company or one of its subsidiaries, or for conflict of
interest as provided in the Plan, this option will wholly and completely
terminate on the date of termination of employment.
3. If Grantee's employment is terminated for any reason other than death,
retirement, disability, fraud, theft, embezzlement or conflict of interest as
provided in the Plan, Grantee shall have three months from the date of
termination of employment to exercise this option, to the extent then
exercisable (but in no event later than (Date)).
4. In the event of the retirement (such that the Grantee's age plus years of
service with the Company equals or exceeds 65) or disability of the Grantee, all
granted but unvested options shall immediately vest upon the Grantee's
retirement or disability. The Grantee shall have three years from the date of
termination of employment due to retirement or disability to exercise this
option (but in no event later than (Date)).
5. Upon the death of the Grantee in active service, all granted but unvested
options shall immediately vest upon the Grantee's death and otherwise shall be
exercisable for a period of one year following Grantee's death (but in no event
later than (Date)).
<PAGE>
Cashless exercise, in accordance with the terms of the Plan, shall be available
to Grantee for the shares subject to this option.
To the extent the exercise of this option results in taxable income to Grantee,
the Company is authorized to withhold from any remuneration payable to Grantee
any tax required to be withheld by reason of such taxable income.
This option is granted under and is subject to all of the provisions of the
Plan. This option is not transferable by the Grantee otherwise than by will or
by the laws of descent and distribution, and is exercisable during the Grantee's
lifetime only by the Grantee.
Date of Grant: (Date)
BAKER HUGHES INCORPORATED
(NAME)
(TITLE)
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.28
<SEQUENCE>6
<FILENAME>h94456ex10-28.txt
<DESCRIPTION>FORM OF INCENTIVE STOCK OPTION AGMT FOR EMPLOYEES
<TEXT>
<PAGE>
EXHIBIT 10.28
BAKER HUGHES INCORPORATED
INCENTIVE STOCK OPTION AGREEMENT
((NAME)) ((SHARES))
GRANTEE SHARES GRANTED
Pursuant to action taken by the Compensation Committee of the Board of Directors
of BAKER HUGHES Incorporated, a Delaware corporation (the "Company"), for the
purposes of administration of the BAKER HUGHES Incorporated 1993 STOCK OPTION
Plan (the "Plan"), the above-named Grantee is hereby granted an incentive STOCK
OPTION (within the meaning of Section 422(b) of the Internal Revenue Code) to
purchase the above number of shares of the Company's $1 par value per share
common stock at the exercise price of (Price) for each share subject to this
option, payable at the time of exercise. Subject to the terms of the Plan
regarding exercise, (i) twenty percent (20%) of the shares subject to this
option are immediately vested and this option is exercisable with respect
thereto on the date of grant, and this option will be exercisable with respect
to subsequent increments of twenty percent (20%) of the shares subject to this
option on each of the next four (4) anniversaries of the grant date, and (ii) if
the closing price of the Company Common Stock on the New York Stock Exchange
increases to at least $50.00 per share and thereafter the closing price of the
Company Common Stock on the New York Stock Exchange averages $50.00 per share or
above for a period of ten consecutive trading days, any unvested portion of this
option shall immediately vest in its entirety; in each case, provided the
Grantee remains in the employment of the Company. This option may not be
exercised after (Date).
The following provisions will apply in the event of Grantee's termination of
employment:
1. If Grantee's employment is terminated for any reason (other than death,
retirement or disability pursuant to paragraphs 4 and 5 below), this option will
wholly and completely terminate on the date of termination of employment, to the
extent it is not then exercisable.
2. If Grantee's employment is terminated because of fraud, theft or embezzlement
committed against the Company or one of its subsidiaries, or for conflict of
interest as provided in the Plan, this option will wholly and completely
terminate on the date of termination of employment.
3. If Grantee's employment is terminated for any reason other than death,
retirement, disability, fraud, theft, embezzlement or conflict of interest as
provided in the Plan, Grantee shall have three months from the date of
termination of employment to exercise this option, to the extent then
exercisable (but in no event later than (Date)).
4. In the event of the retirement (such that the Grantee's age plus years of
service with the Company equals or exceeds 65) or disability of the Grantee, all
granted but unvested options shall immediately vest upon the Grantee's
retirement or disability. The Grantee shall have three years from the date of
termination of employment due to retirement or disability to exercise this
option (but in no event later than (Date)).
5. Upon the death of the Grantee in active service, all granted but unvested
options shall immediately vest upon the Grantee's death and otherwise shall be
exercisable for a period of one year following Grantee's death (but in no event
later than (Date)).
Cashless exercise, in accordance with the terms of the Plan, shall be available
to Grantee for the shares subject to this option.
<PAGE>
To the extent the exercise of this option results in taxable income to Grantee,
the Company is authorized to withhold from any remuneration payable to Grantee
any tax required to be withheld by reason of such taxable income.
This option is granted under and is subject to all of the provisions of the
Plan. This option is not transferable by the Grantee otherwise than by will or
by the laws of descent and distribution, and is exercisable during the Grantee's
lifetime only by the Grantee.
Date of Grant: (Date)
BAKER HUGHES INCORPORATED
(NAME)
(TITLE)
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.38
<SEQUENCE>7
<FILENAME>h94456ex10-38.txt
<DESCRIPTION>AMEND.NO.1 TO EMPLOYMENT AGMT - MICHAEL E WILEY
<TEXT>
<PAGE>
EXHIBIT 10.38
AMENDMENT 1 TO EMPLOYMENT AGREEMENT
This Amendment 1 to Employment Agreement ("Amendment 1") is made and
entered into effective April 25, 2001, by and between BAKER HUGHES INCORPORATED,
a Delaware corporation (the "Company") and MICHAEL E. WILEY (the "Executive").
WHEREAS, the Board of Directors of the Company and the Executive desire
to make certain changes to that certain Employment Agreement dated as of July
17, 2000, by and between the Company and the Executive (the "Employment
Agreement"), providing the Executive with additional time to purchase the
Company's Common Stock;
NOW, THEREFORE, in consideration of the premises and the mutual
agreements contained herein, the Company and the Executive hereby agree as
follows:
Section 2(f) of the Employment Agreement is hereby amended in its
entirety to read as follows:
"As Chief Executive Officer of the Company, the Executive is required
to own common stock in the Company equal to three times Base Salary
within five years from Effective Date. Subject to approval of the
Compensation Committee of the Board, effective December 31, 2001, the
Executive will receive a one-time grant of restricted common stock of
the Company equal to the number of shares of common stock of the
Company owned by the Executive on December 31, 2001, not to exceed
50,000 shares. Vesting of these restricted shares will occur upon
retirement from the Company, involuntary termination (unless due to
cause), permanent disability or death and is subject to the other terms
and conditions of the grant. Retirement for this purchase means
attaining age 55 with at least 10 years of service with the Company. On
the first day of employment under this Agreement, the Executive will be
credited with seven years of service for purposes of this program."
All capitalized terms in this Amendment 1 shall have the definition
ascribed to those terms in the Employment Agreement. The Employment Agreement
continues in full foe and effect, except as amended hereby. This Amendment 1 may
be executed in counterparts, each of which shall be deemed to be an original but
all of which together will constitute one and the same instrument.
EXECUTED effective as of the day and year first written above.
Company: Executive:
BAKER HUGHES INCORPORATED
By:
------------------------------------- ------------------------------
Richard D. Kinder, Chairman, MICHAEL E. WILEY
Compensation Committee of the
Board of Directors
<PAGE>
AMENDMENT 2 TO EMPLOYMENT AGREEMENT
This Amendment 2 to Employment Agreement ("Amendment 2") is made and
entered into effective December 5, 2001, by and between BAKER HUGHES
INCORPORATED, a Delaware corporation (the "Company") and MICHAEL E. WILEY (the
"Executive").
WHEREAS, the Board of Directors of the Company and the Executive desire
to make certain changes to that certain Employment Agreement dated as of July
17, 2000, by and between the Company and the Executive (the "Employment
Agreement"), providing the Executive with additional time to purchase the
Company's Common Stock;
NOW, THEREFORE, in consideration of the premises and the mutual
agreements contained herein, the Company and the Executive hereby agree as
follows:
Section 2(f) of the Employment Agreement is hereby amended in its
entirety to read as follows:
"As Chief Executive Officer of the Company, the Executive is required
to own common stock in the Company equal to three times Base Salary
within five years from Effective Date. Subject to approval of the
Compensation Committee of the Board, effective June 30, 2002, the
Executive will receive a one-time grant of restricted common stock of
the Company equal to the number of shares of common stock of the
Company owned by the Executive on June 30, 2002, not to exceed 50,000
shares. Vesting of these restricted shares will occur upon retirement
from the Company, involuntary termination (unless due to cause),
permanent disability or death and is subject to the other terms and
conditions of the grant. Retirement for this purchase means attaining
age 55 with at least 10 years of service with the Company. On the first
day of employment under this Agreement, the Executive will be credited
with seven years of service for purposes of this program."
All capitalized terms in this Amendment 2 shall have the definition
ascribed to those terms in the Employment Agreement. The Employment Agreement
continues in full foe and effect, except as amended hereby. This Amendment 2 may
be executed in counterparts, each of which shall be deemed to be an original but
all of which together will constitute one and the same instrument.
EXECUTED effective as of the day and year first written above.
Company: Executive:
BAKER HUGHES INCORPORATED
By:
------------------------------------- ------------------------------
Richard D. Kinder, Chairman, MICHAEL E. WILEY
Compensation Committee of the
Board of Directors
<PAGE>
AMENDMENT 3 TO EMPLOYMENT AGREEMENT
This Amendment 3 to Employment Agreement ("Amendment 2") is made and
entered into effective December 5, 2001, by and between BAKER HUGHES
INCORPORATED, a Delaware corporation (the "Company") and MICHAEL E. WILEY (the
"Executive").
WHEREAS, the Board of Directors of the Company and the Executive desire
to make certain changes to that certain Employment Agreement dated as of July
17, 2000, by and between the Company and the Executive (the "Employment
Agreement"), providing the Executive with additional time to purchase the
Company's Common Stock;
NOW, THEREFORE, in consideration of the premises and the mutual
agreements contained herein, the Company and the Executive hereby agree as
follows:
Section 1 of the Employment Agreement is hereby amended in its entirety
to read as follows:
"Employment; Term. The Company hereby agrees to employ the Executive,
and the Executive hereby accepts such employment, on the terms and
conditions hereinafter set forth. The period of employment of the
Executive by the Company hereunder (the "Employment Period") shall
commence the date the Executive begins full-time employment with the
Company (which is expected to be on August 14, 2000, the "Effective
Date") and shall end on the Executive's Date of Termination (as defined
in Section 7(b) hereof). The term of this Agreement (the "Term") shall
begin on the Effective Date and shall end on December 31, 2003 thereof;
provided, that, on January 1, 2002, and each January 1 thereafter, the
Term shall be extended for one additional year unless, prior to
December 1, 2001 with respect to the extension on January 1, 2002, and
each December 1 thereafter with respect to each subsequent annual
extension, the Company or the Executive shall have given notice not to
extend the Term."
All capitalized terms in this Amendment 3 shall have the definition
ascribed to those terms in the Employment Agreement. The Employment Agreement
continues in full foe and effect, except as amended hereby. This Amendment 3 may
be executed in counterparts, each of which shall be deemed to be an original but
all of which together will constitute one and the same instrument.
EXECUTED effective as of the day and year first written above.
Company: Executive:
BAKER HUGHES INCORPORATED
By:
------------------------------------- ------------------------------
Richard D. Kinder, Chairman, MICHAEL E. WILEY
Compensation Committee of the
Board of Directors
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.39
<SEQUENCE>8
<FILENAME>h94456ex10-39.txt
<DESCRIPTION>SEVERANCE AGREEMENT - EDWIN C HOWELL
<TEXT>
<PAGE>
EXHIBIT 10.39
SEVERANCE AGREEMENT
THIS AGREEMENT, dated as of July 23, 1997, is made by and between
BAKER HUGHES INCORPORATED, a Delaware corporation (the "Company"), and EDWIN C.
HOWELL (the "Executive").
WHEREAS, the Company considers it essential to the best interests
of its stockholders to foster the continued employment of key management
personnel; and
WHEREAS, the Board recognizes that, as is the case with many
publicly held corporations, the possibility of a Change in Control exists and
that such possibility, and the uncertainty and questions which it may raise
among management, may result in the departure or distraction of management
personnel to the detriment of the Company and its stockholders; and
WHEREAS, the Board has determined that appropriate steps should
be taken to reinforce and encourage the continued attention and dedication of
members of the Company's management, including the Executive, to their assigned
duties without distraction in the face of potentially disturbing circumstances
arising from the possibility of a Change in Control;
NOW, THEREFORE, in consideration of the premises and the mutual
covenants herein contained, the Company and the Executive hereby agree as
follows:
1. Defined Terms. The definitions of capitalized terms used in
this Agreement are provided in the last Section hereof.
2. Term of Agreement. Subject to the provisions of Section 12.2
hereof, the Term of this Agreement shall commence on the date hereof and shall
continue in effect through December 31, 1999; provided, however, that commencing
on January 1, 1998 and each January 1 thereafter (an "Extension Date"), the Term
shall automatically be extended for one additional year (i.e., resulting in a
two-year Term on the Extension Date) unless, not later than September 30 of the
year preceding the Extension Date, the Company or the Executive shall have given
notice not to extend the Term; and further provided, however, that if a Change
in Control shall have occurred during the Term, the Term shall expire no earlier
than twenty-four (24) months beyond the month in which such Change in Control
occurred.
3. Company's Covenants Summarized. In order to induce the
Executive to remain in the employ of the Company and in consideration of the
Executive's covenants set forth in Section 4 hereof, the Company agrees, under
the conditions described herein, to pay the Executive the Severance Payments and
the other payments and benefits described herein. Except as provided in Section
9.1 hereof, no Severance Payments shall be payable under this Agreement unless
there shall have been (or, under the terms of the second sentence of Section 6.1
hereof, there shall be deemed to have been) a termination of the Executive's
employment with the Company following a Change in Control and during the Term.
This Agreement shall not be construed as creating an express or implied contract
of employment and, except as otherwise agreed in writing between the Executive
and the Company, the Executive shall not have any right to be retained in the
employ of the Company.
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4. The Executive's Covenants. The Executive agrees that, subject
to the terms and conditions of this Agreement, in the event of a Potential
Change in Control during the Term, the Executive will remain in the employ of
the Company until the earliest of (i) a date which is six (6) months from the
date of such Potential Change of Control, (ii) the date of a Change in Control,
(iii) the date of termination by the Executive of the Executive's employment for
Good Reason or by reason of death, Disability or Retirement, or (iv) the
termination by the Company of the Executive's employment for any reason.
5. Compensation Other Than Severance Payments.
5.1 Following a Change in Control and during the Term, during any
period that the Executive fails to perform the Executive's full-time duties with
the Company as a result of incapacity due to physical or mental illness, the
Company shall pay the Executive's full salary to the Executive at the rate in
effect at the commencement of any such period, together with all compensation
and benefits payable to the Executive under the terms of any compensation or
benefit plan, program or arrangement maintained by the Company during such
period, until the Executive's employment is terminated by the Company for
Disability.
5.2 If the Executive's employment shall be terminated for any
reason following a Change in Control and during the Term, the Company shall pay
the Executive's full salary to the Executive through the Date of Termination at
the rate in effect immediately prior to the Date of Termination or, if higher,
the rate in effect immediately prior to the first occurrence of an event or
circumstance constituting Good Reason, together with all compensation and
benefits payable to the Executive through the Date of Termination under the
terms of the Company's compensation and benefit plans, programs or arrangements
as in effect immediately prior to the Date of Termination or, if more favorable
to the Executive, as in effect immediately prior to the first occurrence of an
event or circumstance constituting Good Reason.
5.3 If the Executive's employment shall be terminated for any
reason following a Change in Control and during the Term, the Company shall pay
to the Executive the Executive's normal post-termination compensation and
benefits as such payments become due. Such post-termination compensation and
benefits shall be determined under, and paid in accordance with, the Company's
retirement, insurance and other compensation or benefit plans, programs and
arrangements as in effect immediately prior to the Date of Termination or, if
more favorable to the Executive, as in effect immediately prior to the
occurrence of the first event or circumstance constituting Good Reason.
5.4 Upon the occurrence of a Change in Control all options to
acquire shares of Company stock, all shares of restricted Company stock and all
other equity or phantom equity incentives held by the Executive under any plan
of the Company (including, but not limited to, the Company's 1995 Stock Award
Plan (and the Stock Matching Programs thereunder), 1993 Stock Option Plan, 1993
Stock Bonus Plan and 1991 Stock Bonus Plan) shall become immediately vested,
exercisable and nonforfeitable and all conditions thereof (including, but not
limited to, any required holding periods) shall be deemed to have been
satisfied.
6. Severance Payments.
6.1 If the Executive's employment is terminated following a
Change in Control and during the Term, other than (A) by the Company for Cause,
(B) by reason of death or Disability, or (C) by the Executive without Good
Reason, then, the Company shall pay the Executive the amounts, and provide the
Executive the benefits, described in this Section 6.1 ("Severance Payments") and
Section 6.2, in addition to any payments and benefits to which the Executive is
entitled under Section 5 hereof. For purposes of this
2
<PAGE>
Agreement, the Executive's employment shall be deemed to have been terminated
following a Change in Control by the Company without Cause or by the Executive
with Good Reason, if (i) the Executive's employment is terminated by the Company
without Cause prior to a Change in Control (whether or not a Change in Control
ever occurs) and such termination was at the request or direction of a Person
who has entered into an agreement with the Company the consummation of which
would constitute a Change in Control, (ii) the Executive terminates his
employment for Good Reason prior to a Change in Control (whether or not a Change
in Control ever occurs) and the circumstance or event which constitutes Good
Reason occurs at the request or direction of such Person described in clause
(i), or (iii) the Executive's employment is terminated by the Company without
Cause or by the Executive for Good Reason and such termination or the
circumstance or event which constitutes Good Reason is otherwise in connection
with or in anticipation of a Change in Control (whether or not a Change in
Control ever occurs). For purposes of any determination regarding the
applicability of the immediately preceding sentence, any position taken by the
Executive shall be presumed to be correct unless the Company establishes to the
Committee by clear and convincing evidence that such position is not correct.
(A) In lieu of any further salary payments to the
Executive for periods subsequent to the Date of Termination and
in lieu of any severance benefit otherwise payable to the
Executive, the Company shall pay to the Executive a lump sum
severance payment, in cash, equal to three times the sum of (i)
the Executive's base salary as in effect immediately prior to the
Date of Termination or, if higher, in effect immediately prior to
the first occurrence of an event or circumstance constituting
Good Reason, and (ii) the average annual bonus earned by the
Executive pursuant to any annual bonus or incentive plan
maintained by the Company in respect of the three fiscal years
ending immediately prior to the fiscal year in which occurs the
Date of Termination or, if higher, immediately prior to the
fiscal year in which occurs the first event or circumstance
constituting Good Reason; provided, that if the Executive has not
participated in an annual bonus or incentive plan maintained by
the Company for the entirety of such three-year period, the
amount referred to in this clause (ii) shall be calculated using
such lesser number of bonuses as have been actually earned by the
Executive in respect of such lesser period.
(B) For the thirty-six (36) month period
immediately following the Date of Termination, the Company shall
arrange to provide the Executive and his dependents life,
disability, accident and health insurance benefits and
perquisites (including, but not limited to, executive life
insurance, club memberships, financial planning and tax
preparation, annual physical examination and charitable
contributions), in each case, substantially similar to those
provided to the Executive and his dependents immediately prior to
the Date of Termination or, if more favorable to the Executive,
those provided to the Executive and his dependents immediately
prior to the first occurrence of an event or circumstance
constituting Good Reason, at no greater cost to the Executive
than the cost to the Executive immediately prior to such date or
occurrence; provided, however, that, unless the Executive
consents to a different method (after taking into account the
effect of such method on the calculation of "parachute payments"
pursuant to Section 6.2 hereof), such health insurance benefits
shall be provided through a third-party insurer. Benefits
otherwise receivable by the Executive pursuant to this Section
6.1(B) shall be reduced to the extent benefits of the same type
are received by or made available to the Executive during the
thirty-six (36) month period following the Executive's
termination of employment (and any such benefits received by or
made available to the Executive shall be reported to the Company
by the Executive); provided, however, that the Company shall
reimburse the Executive for the excess, if any, of the cost of
such benefits to the Executive over such cost immediately prior
to the Date of Termination or, if more favorable to the
Executive, the first occurrence of an event or circumstance
constituting Good Reason.
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<PAGE>
(C) Notwithstanding any provision of the Baker
Hughes Incorporated 1995 Employee Annual Incentive Compensation
Plan (the "Annual Incentive Plan"), the Company shall pay to the
Executive a lump sum amount, in cash, equal to the sum of (i) any
unpaid incentive compensation which has been allocated or awarded
to the Executive for a completed fiscal year or other measuring
period preceding the Date of Termination under the Annual
Incentive Plan and which, as of the Date of Termination, is
contingent only upon the continued employment of the Executive to
a subsequent date, and (ii) a pro rata portion to the Date of
Termination of the aggregate value of all contingent incentive
compensation awards to the Executive for all then uncompleted
periods under the Annual Incentive Plan, calculated as to each
such award by multiplying the award that the Executive would have
earned on the last day of the performance award period, assuming
the achievement, at the expected value target level, of the
individual and corporate performance goals established with
respect to such award, by the fraction obtained by dividing the
number of full months and any fractional portion of a month
during such performance award period through the Date of
Termination by the total number of months contained in such
performance award period; provided, however, that if such
termination of employment occurs during the same year in which
the Change in control occurs, the pro-rata bonus payment referred
to in clause (ii) above shall be offset by any payments received
under the Annual Incentive Plan in connection with such Change in
Control.
(D) In addition to the retirement benefits to
which the Executive is entitled under the Company's Thrift Plan
(the "Thrift Plan") and the Company's Supplemental Retirement
Plan (the "SRP"), the Company shall pay the Executive a lump sum
amount, in cash, equal to the present value of the
employer-provided contributions, deferrals and allocations the
Executive would have received had he continued to participate,
after the Date of Termination, in the Thrift Plan and the SRP for
three (3) additional years, assuming for this purpose that (i)
the Executive earned compensation for purposes of the Thrift Plan
and SRP during such three-year period the amount used to
calculate the Executive's severance payment under subparagraph
(A) of this Section 6.1, and (ii) the percentages of
contributions, deferrals and allocations made under the Thrift
Plan and the SRP by or on behalf of the Executive during such
three-year period are the same percentages of contributions,
deferrals and allocations in effect on the date of the Change in
Control or the Date of Termination, whichever is more favorable
to the Executive.
(E) If the Executive would have become entitled to
benefits under the Company's post-retirement health care or life
insurance plans, as in effect immediately prior to the Date of
Termination or, if more favorable to the Executive, as in effect
immediately prior to the first occurrence of an event or
circumstance constituting Good Reason, had the Executive's
employment terminated at any time during the period of thirty-six
(36) months after the Date of Termination, the Company shall
provide such post-retirement health care or life insurance
benefits to the Executive and the Executive's dependents
commencing on the later of (i) the date on which such coverage
would have first become available and (ii) the date on which
benefits described in subsection (B) of this Section 6.1
terminate.
(F) The Company shall provide the Executive with
outplacement services suitable to the Executive's position for a
period of three years or, if earlier, until the first acceptance
by the Executive of an offer of employment.
6.2 (A) Whether or not the Executive becomes entitled to the
Severance Payments, if any of the payments or benefits received or to be
received by the Executive in connection with a Change in Control or the
Executive's termination of employment (whether pursuant to the terms of this
Agreement or any other plan, arrangement or agreement with the Company, any
Person whose actions result in a
4
<PAGE>
Change in Control or any Person affiliated with the Company or such Person)
(such payments or benefits, excluding the Gross-Up Payment, being hereinafter
referred to as the "Total Payments") will be subject to the Excise Tax, the
Company shall pay to the Executive an additional amount (the "Gross-Up Payment")
such that the net amount retained by the Executive, after deduction of any
Excise Tax on the Total Payments and any federal, state and local income and
employment taxes and Excise Tax upon the Gross-Up Payment, shall be equal to the
Total Payments.
(B) For purposes of determining whether any of the Total Payments
will be subject to the Excise Tax and the amount of such Excise Tax, (i) all of
the Total Payments shall be treated as "parachute payments" (within the meaning
of section 280G(b)(2) of the Code) unless, in the opinion of tax counsel ("Tax
Counsel") reasonably acceptable to the Executive and selected by the accounting
firm which was, immediately prior to the Change in Control, the Company's
independent auditor (the "Auditor"), such payments or benefits (in whole or in
part) do not constitute parachute payments, including by reason of section
280G(b)(4)(A) of the Code, (ii) all "excess parachute payments" within the
meaning of section 280G(b)(l) of the Code shall be treated as subject to the
Excise Tax unless, in the opinion of Tax Counsel, such excess parachute payments
(in whole or in part) represent reasonable compensation for services actually
rendered (within the meaning of section 280G(b)(4)(B) of the Code) in excess of
the Base Amount allocable to such reasonable compensation, or are otherwise not
subject to the Excise Tax, and (iii) the value of any noncash benefits or any
deferred payment or benefit shall be determined by the Auditor in accordance
with the principles of sections 280G(d)(3) and (4) of the Code. For purposes of
determining the amount of the Gross-Up Payment, the Executive shall be deemed to
pay federal income tax at the highest marginal rate of federal income taxation
in the calendar year in which the Gross-Up Payment is to be made and state and
local income taxes at the highest marginal rate of taxation in the state and
locality of the Executive's residence on the Date of Termination (or if there is
no Date of Termination, then the date on which the Gross-Up Payment is
calculated for purposes of this Section 6.2), net of the maximum reduction in
federal income taxes which could be obtained from deduction of such state and
local taxes.
(C) In the event that the Excise Tax is finally determined to be
less than the amount taken into account hereunder in calculating the Gross-Up
Payment, the Executive shall repay to the Company, within five (5) business days
following the time that the amount of such reduction in the Excise Tax is
finally determined, the portion of the Gross-Up Payment attributable to such
reduction (plus that portion of the Gross-Up Payment attributable to the Excise
Tax and federal, state and local income and employment taxes imposed on the
Gross-Up Payment being repaid by the Executive, to the extent that such
repayment results in a reduction in the Excise Tax and a dollar-for-dollar
reduction in the Executive's taxable income and wages for purposes of federal,
state and local income and employment taxes, plus interest on the amount of such
repayment at 120% of the rate provided in section 1274(b)(2)(B) of the Code. In
the event that the Excise Tax is determined to exceed the amount taken into
account hereunder in calculating the Gross-Up Payment (including by reason of
any payment the existence or amount of which cannot be determined at the time of
the Gross-Up Payment), the Company shall make an additional Gross-Up Payment in
respect of such excess (plus any interest, penalties or additions payable by the
Executive with respect to such excess) within five (5) business days following
the time that the amount of such excess is finally determined. The Executive and
the Company shall each reasonably cooperate with the other in connection with
any administrative or judicial proceedings concerning the existence or amount of
liability for Excise Tax with respect to the Total Payments.
6.3 The payments provided in subsections (A), (C) and (D) of
Section 6.1 hereof and in Section 6.2 hereof shall be made not later than the
fifth day following the Date of Termination; provided, however, that if the
amounts of such payments cannot be finally determined on or before such day, the
Company shall pay to the Executive on such day an estimate, as determined in
good faith by the Executive or, in the case of payments under Section 6.2
hereof, in accordance with Section 6.2 hereof, of the minimum
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<PAGE>
amount of such payments to which the Executive is clearly entitled and shall pay
the remainder of such payments (together with interest on the unpaid remainder
(or on all such payments to the extent the Company fails to make such payments
when due) at 120% of the rate provided in section 1274(b)(2)(B) of the Code) as
soon as the amount thereof can be determined but in no event later than the
thirtieth (30th) day after the Date of Termination. In the event that the amount
of the estimated payments exceeds the amount subsequently determined to have
been due, such excess shall constitute a loan by the Company to the Executive,
payable on the fifth (5th) business day after demand by the Company (together
with interest at 120% of the rate provided in section 1274(b)(2)(B) of the
Code), but only to the extent such amount has not been paid by the Executive
pursuant to Section 6.2(C) above. At the time that payments are made under this
Agreement, the Company shall provide the Executive with a written statement
setting forth the manner in which such payments were calculated and the basis
for such calculations including, without limitation, any opinions or other
advice the Company has received from Tax Counsel, the Auditor or other advisors
or consultants (and any such opinions or advice which are in writing shall be
attached to the statement).
6.4 The Company also shall pay to the Executive all legal fees
and expenses incurred by the Executive in disputing in good faith any issue
hereunder relating to the termination of the Executive's employment, in seeking
in good faith to obtain or enforce any benefit or right provided by this
Agreement or in connection with any tax audit or proceeding to the extent
attributable to the application of section 4999 of the Code to any payment or
benefit provided hereunder. Such payments shall be made within five (5) business
days after delivery of the Executive's written requests for payment accompanied
with such evidence of fees and expenses incurred as the Company reasonably may
require.
7. Termination Procedures and Compensation During Dispute.
7.1 Notice of Termination. After a Change in Control and during
the Term, any purported termination of the Executive's employment (other than by
reason of death) shall be communicated by written Notice of Termination from one
party hereto to the other party hereto in accordance with Section 10 hereof. For
purposes of this Agreement, a "Notice of Termination" shall mean a notice which
shall indicate the specific termination provision in this Agreement relied upon
and shall set forth in reasonable detail the facts and circumstances claimed to
provide a basis for termination of the Executive's employment under the
provision so indicated. Further, a Notice of Termination for Cause is required
to include a copy of a resolution duly adopted by the affirmative vote of not
less than three-quarters (3/4) of the entire membership of the Board at a
meeting of the Board which was called and held for the purpose of considering
such termination (after reasonable notice to the Executive and an opportunity
for the Executive, together with the Executive's counsel, to be heard before the
Board) finding that, in the good faith opinion of the Board, the Executive was
guilty of conduct set forth in clause (i) or (ii) of the definition of Cause
herein, and specifying the particulars thereof in detail.
7.2 Date of Termination. "Date of Termination," with respect to
any purported termination of the Executive's employment after a Change in
Control and during the Term, shall mean (i) if the Executive's employment is
terminated for Disability, thirty (30) days after Notice of Termination is given
(provided that the Executive shall not have returned to the full-time
performance of the Executive's duties during such thirty (30) day period), and
(ii) if the Executive's employment is terminated for any other reason, the date
specified in the Notice of Termination (which, in the case of a termination by
the Company, shall not be less than thirty (30) days (except in the case of a
termination for Cause) and, in the case of a termination by the Executive, shall
not be less than fifteen (15) days nor more than sixty (60) days, respectively,
from the date such Notice of Termination is given).
7.3 Dispute Concerning Termination. If within fifteen (15) days
after any Notice of Termination is given, or, if later, prior to the Date of
Termination (as determined without regard to this
6
<PAGE>
Section 7.3), the party receiving such Notice of Termination notifies the other
party that a dispute exists concerning the termination, the Date of Termination
shall be extended until the earlier of (i) the date on which the Term ends or
(ii) the date on which the dispute is finally resolved, either by mutual written
agreement of the parties or by a final judgment, order or decree of an
arbitrator or a court of competent jurisdiction (which is not appealable or with
respect to which the time for appeal therefrom has expired and no appeal has
been perfected); provided, however, that the Date of Termination shall be
extended by a notice of dispute given by the Executive only if such notice is
given in good faith and the Executive pursues the resolution of such dispute
with reasonable diligence.
7.4 Compensation During Dispute. If a purported termination
occurs following a Change in Control and during the Term and the Date of
Termination is extended in accordance with Section 7.3 hereof, the Company shall
continue to pay the Executive the full compensation in effect when the notice
giving rise to the dispute was given (including, but not limited to, salary) and
continue the Executive as a participant in all compensation, benefit and
insurance plans in which the Executive was participating when the notice giving
rise to the dispute was given or those plans in which the Executive was
participating immediately prior to the first occurrence of an event or
circumstance giving rise to the Notice of Termination, if more favorable to the
Executive, until the Date of Termination, as determined in accordance with
Section 7.3 hereof. Amounts paid under this Section 7.4 are in addition to all
other amounts due under this Agreement (other than those due under Section 5.2
hereof) and shall not be offset against or reduce any other amounts due under
this Agreement.
8. No Mitigation. The Company agrees that, if the Executive's
employment with the Company terminates during the Term, the Executive is not
required to seek other employment or to attempt in any way to reduce any amounts
payable to the Executive by the Company pursuant to Sections 5, 6 or 7.4 hereof.
Further, the amount of any payment or benefit provided for in this Agreement
(other than Section 6.1(B) hereof but including (but not limited to) Section 7.4
hereof) shall not be reduced by any compensation earned by the Executive as the
result of employment by another employer, by retirement benefits, by offset
against any amount claimed to be owed by the Executive to the Company, or
otherwise.
9. Successors; Binding Agreement.
9.1 In addition to any obligations imposed by law upon any
successor to the Company, the Company will require any successor (whether direct
or indirect, by purchase, merger, consolidation or otherwise) to all or
substantially all of the business and/or assets of the Company to expressly
assume and agree to perform this Agreement in the same manner and to the same
extent that the Company would be required to perform it if no such succession
had taken place. Failure of the Company to obtain such assumption and agreement
prior to the effectiveness of any such succession shall be a breach of this
Agreement and shall entitle the Executive to compensation from the Company in
the same amount and on the same terms as the Executive would be entitled to
hereunder if the Executive were to terminate the Executive's employment for Good
Reason after a Change in Control, except that, for purposes of implementing the
foregoing, the date on which any such succession becomes effective shall be
deemed the Date of Termination.
9.2 This Agreement shall inure to the benefit of and be
enforceable by the Executive's personal or legal representatives, executors,
administrators, successors, heirs, distributees, devisees and legatees. If the
Executive shall die while any amount would still be payable to the Executive
hereunder (other than amounts which, by their terms, terminate upon the death of
the Executive) if the Executive had continued to live, all such amounts, unless
otherwise provided herein, shall be paid in accordance with the terms of this
Agreement to the executors, personal representatives or administrators of the
Executive's estate.
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10. Notices. For the purpose of this Agreement, notices and all
other communications provided for in the Agreement shall be in writing and shall
be deemed to have been duly given when delivered or mailed by United States
registered mail, return receipt requested, postage prepaid, addressed, if to the
Executive, to the address inserted below the Executive's signature on the final
page hereof and, if to the Company, to the address set forth below, or to such
other address as either party may have furnished to the other in writing in
accordance herewith, except that notice of change of address shall be effective
only upon actual receipt:
To the Company:
3900 Essex Lane
Suite 210
Houston, Texas 77027
Attention: General Counsel
11. Miscellaneous. Except as otherwise specifically provided in
Section 12.2 below, no provision of this Agreement may be modified, waived or
discharged unless such waiver, modification or discharge is agreed to in writing
and signed by the Executive and such officer as may be specifically designated
by the Board. No waiver by either party hereto at any time of any breach by the
other party hereto of, or of any lack of compliance with, any condition or
provision of this Agreement to be performed by such other party shall be deemed
a waiver of similar or dissimilar provisions or conditions at the same or at any
prior or subsequent time. This Agreement supersedes any other agreements or
representations, oral or otherwise, express or implied, with respect to the
subject matter hereof which have been made by either party; provided, however,
that this Agreement shall supersede any agreement setting forth the terms and
conditions of the Executive's employment with the Company only in the event that
the Executive's employment with the Company is terminated on or following a
Change in Control, by the Company other than for Cause or by the Executive other
than for Good Reason; and provided further that all agreements otherwise
superseded by this Agreement will be automatically reinstated with full force
and effect to the extent this Agreement is terminated or otherwise rendered
inapplicable or amended in accordance with Section 12.2 hereof. The validity,
interpretation, construction and performance of this Agreement shall be governed
by the laws of the State of Texas. All references to sections of the Exchange
Act or the Code shall be deemed also to refer to any successor provisions to
such sections. Any payments provided for hereunder shall be paid net of any
applicable withholding required under federal, state or local law and any
additional withholding to which the Executive has agreed. The obligations of the
Company and the Executive under this Agreement which by their nature may require
either partial or total performance after the expiration of the Term (including,
without limitation, those under Sections 6 and 7 hereof) shall survive such
expiration.
12. Validity; Pooling.
12.1 Validity. The invalidity or unenforceability of any
provision of this Agreement shall not affect the validity or enforceability of
any other provision of this Agreement, which shall remain in full force and
effect.
12.2 Pooling. In the event that (A) the Company is party to a
transaction which is otherwise intended to qualify for "pooling of interests"
accounting treatment, (B) such transaction constitutes a Change in Control
within the meaning of Section 15(G)(III) and (C) individuals who satisfy the
requirements in clauses (i) and (ii) below constitute more than two-thirds (2/3)
of the number of directors of the entity surviving such transaction or any
parent thereof, if any: individuals who (i) immediately prior to such
transaction constitute the Board and (ii) on the date hereof constitute the
Board and any new director (other than a director whose initial assumption of
office is in connection with an actual or threatened
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<PAGE>
election contest relating to the election of directors of the Company) whose
appointment or election by the Board or nomination for election by the Company's
stockholders was approved or recommended, by a vote of at least two-thirds (2/3)
of the directors then still in office who either were directors on the date
hereof or whose appointment, election or nomination for election was previously
so approved or recommended then (a) this Agreement shall, to the extent
practicable, be interpreted so as to permit such accounting treatment, and (b)
to the extent that the application of clause (a) of this Section 12.2 does not
preserve the availability of such accounting treatment, then, to the extent that
any provision or combination of provisions of the Agreement disqualifies the
transaction as a "pooling" transaction (including, if applicable, the entire
Agreement), the Board shall have the right, by sending written notice to the
Executive prior to the Change in Control, to unilaterally amend (without the
consent of the Executive) such provision or provisions if and to the extent
necessary (including declaring such provision or provisions to be null and void
as of the date hereof) so that such transaction may be accounted for as a
"pooling of interests." All determinations under this Section 12.2 shall be made
by the Board prior to the Change in Control, based upon the advice of the
accounting firm whose opinion with respect to "pooling of interests" is required
as a condition to the consummation of such transaction.
13. Counterparts. This Agreement may be executed in several
counterparts, each of which shall be deemed to be an original but all of which
together will constitute one and the same instrument.
14. Settlement of Disputes; Arbitration.
14.1 All claims by the Executive for benefits under this
Agreement shall be directed to and determined by the Committee and shall be in
writing. Any denial by the Committee of a claim for benefits under this
Agreement shall be delivered to the Executive in writing within thirty (30) days
after written notice of the claim is provided to the Company in accordance with
Section 10 and shall set forth the specific reasons for the denial and the
specific provisions of this Agreement relied upon. The Committee shall afford a
reasonable opportunity to the Executive for a review of the decision denying a
claim and shall further allow the Executive to appeal to the Committee a
decision of the Committee within sixty (60) days after notification by the
Committee that the Executive's claim has been denied.
14.2 Any further dispute or controversy arising under or in
connection with this Agreement shall be settled exclusively by arbitration in
Houston, Texas in accordance with the rules of the American Arbitration
Association then in effect; provided, however, that the evidentiary standards
set forth in this Agreement shall apply. Judgment may be entered on the
arbitrator's award in any court having jurisdiction. Notwithstanding any
provision of this Agreement to the contrary, the Executive shall be entitled to
seek specific performance of the Executive's right to be paid until the Date of
Termination during the pendency of any dispute or controversy arising under or
in connection with this Agreement.
1. Definitions. For purposes of this Agreement, the following
terms shall have the meanings indicated below:
(A) "Affiliate" shall have the meaning set forth in Rule 12b-2
promulgated under Section 12 of the Exchange Act.
(B) "Auditor" shall have the meaning set forth in Section 6.2
hereof.
(C) "Base Amount" shall have the meaning set forth in section
280G(b)(3) of the Code.
(D) "Beneficial Owner" shall have the meaning set forth in Rule
13d-3 under the Exchange Act.
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<PAGE>
(E) "Board" shall mean the Board of Directors of the Company.
(F) "Cause" for termination by the Company of the Executive's
employment shall mean (i) the willful and continued failure by the Executive to
substantially perform the Executive's duties with the Company (other than any
such failure resulting from the Executive's incapacity due to physical or mental
illness or any such actual or anticipated failure after the issuance of a Notice
of Termination for Good Reason by the Executive pursuant to Section 7.1 hereof)
after a written demand for substantial performance is delivered to the Executive
by the Board, which demand specifically identifies the manner in which the Board
believes that the Executive has not substantially performed the Executive's
duties, or (ii) the willful engaging by the Executive in conduct which is
demonstrably and materially injurious to the Company or its subsidiaries,
monetarily or otherwise. For purposes of clauses (i) and (ii) of this
definition, (x) no act, or failure to act, on the Executive's part shall be
deemed "willful" unless done, or omitted to be done, by the Executive not in
good faith and without reasonable belief that the Executive's act, or failure to
act, was in the best interest of the Company and (y) in the event of a dispute
concerning the application of this provision, no claim by the Company that Cause
exists shall be given effect unless the Company establishes to the Committee by
clear and convincing evidence that Cause exists.
(G) A "Change in Control" shall be deemed to have occurred if the
event set forth in any one of the following paragraphs shall have occurred:
(I) any Person is or becomes the Beneficial Owner,
directly or indirectly, of securities of the Company (not
including in the securities beneficially owned by such Person any
securities acquired directly from the Company or its affiliates)
representing 20% or more of the combined voting power of the
Company's then outstanding securities, excluding any Person who
becomes such a Beneficial Owner in connection with a transaction
described in clause (i) of paragraph (III) below; or
(II) the following individuals cease for any
reason to constitute a majority of the number of directors then
serving: individuals who, on the date hereof, constitute the
Board and any new director (other than a director whose initial
assumption of office is in connection with an actual or
threatened election contest relating to the election of directors
of the Company) whose appointment or election by the Board or
nomination for election by the Company's stockholders was
approved or recommended by a vote of at least two-thirds (2/3) of
the directors then still in office who either were directors on
the date hereof or whose appointment, election or nomination for
election was previously so approved or recommended; or
(III) there is consummated a merger or
consolidation of the Company or any direct or indirect subsidiary
of the Company with any other corporation, other than (i) a
merger or consolidation which would result in the voting
securities of the Company outstanding immediately prior to such
merger or consolidation continuing to represent (either by
remaining outstanding or by being converted into voting
securities of the surviving entity or any parent thereof), in
combination with the ownership of any trustee or other fiduciary
holding securities under an employee benefit plan of the Company
or any subsidiary of the Company, at least 65% of the combined
voting power of the securities of the Company or such surviving
entity or any parent thereof outstanding immediately after such
merger or consolidation, or (ii) a merger or consolidation
effected to implement a recapitalization of the Company (or
similar transaction) in which no Person is or becomes the
Beneficial Owner, directly or indirectly, of securities of the
Company (not including in the securities Beneficially Owned by
such Person any securities acquired directly from the
10
<PAGE>
Company or its Affiliates other than in connection with the
acquisition by the Company or its Affiliates of a business)
representing 20% or more of the combined voting power of the
Company's then outstanding securities; or
(IV) the stockholders of the Company approve a
plan of complete liquidation or dissolution of the Company or
there is consummated an agreement for the sale or disposition by
the Company of all or substantially all of the Company's assets,
other than a sale or disposition by the Company of all or
substantially all of the Company's assets to an entity, at least
65% of the combined voting power of the voting securities of
which are owned by stockholders of the Company in substantially
the same proportions as their ownership of the Company
immediately prior to such sale.
Notwithstanding the foregoing, a "Change in Control" shall not be deemed to have
occurred by virtue of the consummation of any transaction or series of
integrated transactions immediately following which the record holders of the
common stock of the Company immediately prior to such transaction or series of
transactions continue to have substantially the same proportionate ownership in
an entity which owns all or substantially all of the assets of the Company
immediately following such transaction or series of transactions.
(H) "Code" shall mean the Internal Revenue Code of 1986, as
amended from time to time.
(I) "Committee" shall mean (i) the individuals (not fewer than
three in number) who, on the date six months before a Change in Control,
constitute the Compensation Committee of the Board, plus (ii) in the event that
fewer than three individuals are available from the group specified in clause
(i) above for any reason, such individuals as may be appointed by the individual
or individuals so available (including for this purpose any individual or
individuals previously so appointed under this clause (ii)); provided, however,
that the maximum number of individuals constituting the Committee shall not
exceed six (6).
(J) "Company" shall mean Baker Hughes Incorporated and, except in
determining under Section 15(G) hereof whether or not any Change in Control of
the Company has occurred, shall include any successor to its business and/or
assets which assumes and agrees to perform this Agreement by operation of law,
or otherwise.
(K) "Date of Termination" shall have the meaning set forth in
Section 7.2 hereof.
(L) "Disability" shall be deemed the reason for the termination
by the Company of the Executive's employment, if, as a result of the Executive's
incapacity due to physical or mental illness, the Executive shall have been
absent from the full-time performance of the Executive's duties with the Company
for a period of six (6) consecutive months, the Company shall have given the
Executive a Notice of Termination for Disability, and, within thirty (30) days
after such Notice of Termination is given, the Executive shall not have returned
to the full-time performance of the Executive's duties.
(M) "Exchange Act" shall mean the Securities Exchange Act of
1934, as amended from time to time.
(N) "Excise Tax" shall mean any excise tax imposed under section
4999 of the Code.
(O) "Executive" shall mean the individual named in the first
paragraph of this Agreement.
(P) "Extension Date" shall have the meaning set forth in Section
2 hereof.
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<PAGE>
(Q) "Good Reason" for termination by the Executive of the
Executive's employment shall mean the occurrence (without the Executive's
express written consent) after any Change in Control, or prior to a Change in
Control under the circumstances described in clauses (ii) and (iii) of the
second sentence of Section 6.1 hereof (treating all references in paragraphs (I)
through (VII) below to a "Change in Control" as references to a "Potential
Change in Control"), of any one of the following acts by the Company, or
failures by the Company to act, unless, in the case of any act or failure to act
described in paragraph (I), (V), (VI) or (VII) below, such act or failure to act
is corrected prior to the Date of Termination specified in the Notice of
Termination given in respect thereof:
(I) the assignment to the Executive of any duties
inconsistent with the Executive's status as a senior executive
officer of the Company or a substantial adverse alteration in the
nature or status of the Executive's responsibilities from those
in effect immediately prior to the Change in Control;
(II) a reduction by the Company in the Executive's
annual base salary as in effect on the date hereof or as the same
may be increased from time to time except for across-the-board
salary reductions similarly affecting all senior executives of
the Company and all senior executives of any Person in control of
the Company;
(III) the relocation of the Executive's principal
place of employment to a location more than 50 miles from the
Executive's principal place of employment immediately prior to
the Change in Control or the Company's requiring the Executive to
be based anywhere other than such principal place of employment
(or permitted relocation thereof) except for required travel on
the Company's business to an extent substantially consistent with
the Executive's present business travel obligations;
(IV) the failure by the Company to pay to the
Executive any portion of the Executive's current compensation
except pursuant to an across-the-board compensation deferral
similarly affecting all senior executives of the Company and all
senior executives of any Person in control of the Company, or to
pay to the Executive any portion of an installment of deferred
compensation under any deferred compensation program of the
Company, within seven (7) days of the date such compensation is
due;
(V) the failure by the Company to continue in
effect any compensation plan in which the Executive participates
immediately prior to the Change in Control which is material to
the Executive's total compensation, including but not limited to
the Company's 1993 Stock Option Plan, 1993 Employee Stock Bonus
Plan, 1991 Employee Stock Bonus Plan, 1995 Stock Award Plan (and
the 1995, 1996 and 1997 Stock Matching Programs thereunder and
any subsequent Stock Matching Programs in which the Executive
participates), 1987 Convertible Debenture Plan and 1995 Employee
Annual Incentive Compensation Plan or any substitute plans
adopted prior to the Change in Control, unless an equitable
arrangement (embodied in an ongoing substitute or alternative
plan) has been made with respect to such plan, or the failure by
the Company to continue the Executive's participation therein (or
in such substitute or alternative plan) on a basis not materially
less favorable, both in terms of the amount or timing of payment
of benefits provided and the level of the Executive's
participation relative to other participants, as existed
immediately prior to the Change in Control;
(VI) the failure by the Company to continue to
provide the Executive with
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<PAGE>
benefits substantially similar to those enjoyed by the Executive
under any of the Company's pension, savings, life insurance,
medical, health and accident, or disability plans in which the
Executive was participating immediately prior to the Change in
Control (except for across the board changes similarly affecting
all senior executives of the Company and all senior executives of
any Person in control of the Company), the taking of any other
action by the Company which would directly or indirectly
materially reduce any of such benefits or deprive the Executive
of any material fringe benefit or perquisite enjoyed by the
Executive at the time of the Change in Control, or the failure by
the Company to provide the Executive with the number of paid
vacation days to which the Executive is entitled on the basis of
years of service with the Company in accordance with the
Company's normal vacation policy in effect at the time of the
Change in Control; or
(VII) any purported termination of the Executive's
employment which is not effected pursuant to a Notice of
Termination satisfying the requirements of Section 7.1 hereof;
for purposes of this Agreement, no such purported termination
shall be effective.
The Executive's right to terminate the Executive's employment for
Good Reason shall not be affected by the Executive's incapacity due to physical
or mental illness. The Executive's continued employment shall not constitute
consent to, or a waiver of rights with respect to, any act or failure to act
constituting Good Reason hereunder.
For purposes of any determination regarding the existence of Good
Reason, any claim by the Executive that Good Reason exists shall be presumed to
be correct unless the Company establishes to the Committee by clear and
convincing evidence that Good Reason does not exist.
(R) "Gross-Up Payment" shall have the meaning set forth in
Section 6.2 hereof.
(S) "Notice of Termination" shall have the meaning set forth in
Section 7.1 hereof.
(T) "Person" shall have the meaning given in Section 3(a)(9) of
the Exchange Act, as modified and used in Sections 13(d) and 14(d) thereof,
except that such term shall not include (i) the Company or any of its
subsidiaries, (ii) a trustee or other fiduciary holding securities under an
employee benefit plan of the Company or any of its Affiliates, (iii) an
underwriter temporarily holding securities pursuant to an offering of such
securities, or (iv) a corporation owned, directly or indirectly, by the
stockholders of the Company in substantially the same proportions as their
ownership of stock of the Company.
(U) "Potential Change in Control" shall be deemed to have
occurred if the event set forth in any one of the following paragraphs shall
have occurred:
(I) the Company enters into an agreement, the
consummation of which would result in the occurrence of a Change
in Control;
(II) the Company or any Person publicly announces
an intention to take or to consider taking actions which, if
consummated, would constitute a Change in Control;
(III) any Person becomes the Beneficial Owner,
directly or indirectly, of securities of the Company representing
15% or more of either the then outstanding shares of common stock
of the Company or the combined voting power of the Company's then
outstanding securities (not including in the securities
beneficially owned by such Person
13
<PAGE>
any securities acquired directly from the Company or its
affiliates); or
(IV) the Board adopts a resolution to the effect that, for
purposes of this Agreement, a Potential Change in Control has occurred.
(V) "Retirement" shall, for purposes of Section 4 hereof, be
deemed the reason for the termination by the Executive of the Executive's
employment if such employment is terminated after completion of ten (10) years
of service with the Company and attainment of age fifty-five (55).
(W) "Severance Payments" shall have the meaning set forth in
Section 6.1 hereof.
(X) "SRP" shall have the meaning set forth in Section 6.1 hereof.
(Y) "Tax Counsel" shall have the meaning set forth in Section 6.2
hereof.
(Z) "Term" shall mean the period of time described in Section 2
hereof (including any extension, continuation or termination described therein).
(AA) "Thrift Plan" shall have the meaning set forth in Section
6.1 hereof.
(BB) "Total Payments" shall mean those payments so described in
Section 6.2 hereof.
IN WITNESS WHEREOF, the parties hereto have executed this
Agreement as of the date above first written.
BAKER HUGHES INCORPORATED
By: /s/ John F. Maher
--------------------------------------
Name: John F. Maher
Title: Chairman - Compensation Committee
of the Board of Directors
EXECUTIVE
/s/ Edwin C. Howell
-----------------------------------------
Edwin C. Howell
Address:
-----------------------------------------
-----------------------------------------
(Please print carefully)
14
<PAGE>
AMENDMENT 1 TO SEVERANCE AGREEMENT
This Amendment 1 to Severance Agreement ("Amendment 1") is made and
entered into effective November 11, 1998, by and between BAKER HUGHES
INCORPORATED, A Delaware corporation (the "Company") and EDWIN C. HOWELL (the
"Executive").
WHEREAS, the Company and the Executive desire to make certain changes
to that certain Severance Agreement dated as of July 23, 1997, by and between
the Company and the Executive (the "Severance Agreement"), to take into account
the recent Change in Control (as defined in the Severance Agreement) involving
Western Atlas Inc.;
NOW, THEREFORE, in consideration of the premises and the mutual
agreements contained herein, the Company and the Executive hereby agree as
follows:
Term. The following shall be added to the end of Paragraph 2 of the
Severance Agreement:
"; and further provided however, that solely with respect to any rights
or claims of the Executive in connection with the Change in Control
brought about by the merger with Western Atlas, Inc. which occurred on
August 10, 1998, the Term shall be deemed to expire on September 1,
2000, but for all other purposes and other events of Change in Control
which may occur subsequent to August 10, 1998, this proviso shall have
no force or effect."
All capitalized terms in this Amendment 1 shall have the definition
ascribed to those terms in the Severance Agreement. The Severance Agreement
continues in full force and effect, except as amended hereby. This Amendment 1
may be executed in several counterparts, each of which shall be deemed to be an
original but all of which together will constitute one and the same instrument.
EXECUTED effective the day and year first written above.
Company:
Baker Hughes Incorporated
By: /s/ John F. Maher
------------------------------
John F. Maher
Chairman-Compensation Committee
Of the Board of Directors
Executive:
/s/ Edwin C. Howell
---------------------------------
Edwin C. Howell
15
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.40
<SEQUENCE>9
<FILENAME>h94456ex10-40.txt
<DESCRIPTION>SEVERANCE AGREEMENT - DOUGLAS J WALL
<TEXT>
<PAGE>
EXHIBIT 10.40
SEVERANCE AGREEMENT
THIS AGREEMENT, dated as of December 3, 1997, is made by and
between BAKER HUGHES INCORPORATED, a Delaware corporation (the "Company"), and
DOUGLAS J. WALL (the "Executive").
WHEREAS, the Company considers it essential to the best
interests of its stockholders to foster the continued employment of key
management personnel; and
WHEREAS, the Board recognizes that, as is the case with many
publicly held corporations, the possibility of a Change in Control exists and
that such possibility, and the uncertainty and questions which it may raise
among management, may result in the departure or distraction of management
personnel to the detriment of the Company and its stockholders; and
WHEREAS, the Board has determined that appropriate steps
should be taken to reinforce and encourage the continued attention and
dedication of members of the Company's management, including the Executive, to
their assigned duties without distraction in the face of potentially disturbing
circumstances arising from the possibility of a Change in Control;
NOW, THEREFORE, in consideration of the premises and the
mutual covenants herein contained, the Company and the Executive hereby agree as
follows:
1. Defined Terms. The definitions of capitalized terms used in
this Agreement are provided in the last Section hereof.
2. Term of Agreement. Subject to the provisions of Section
12.2 hereof, the Term of this Agreement shall commence on the date hereof and
shall continue in effect through December 31, 1999; provided, however, that
commencing on January 1, 1998 and each January 1 thereafter (an "Extension
Date"), the Term shall automatically be extended for one additional year (i.e.,
resulting in a two-year Term on the Extension Date) unless, not later than
September 30 of the year preceding the Extension Date, the Company or the
Executive shall have given notice not to extend the Term; and further provided,
however, that if a Change in Control shall have occurred during the Term, the
Term shall expire no earlier than twenty-four (24) months beyond the month in
which such Change in Control occurred.
3. Company's Covenants Summarized. In order to induce the
Executive to remain in the employ of the Company and in consideration of the
Executive's covenants set forth in Section 4 hereof, the Company agrees, under
the conditions described herein, to pay the Executive the Severance Payments and
the other payments and benefits described herein. Except as provided in Section
9.1 hereof, no Severance Payments shall be payable under this Agreement unless
there shall have been (or, under the terms of the second sentence of Section 6.1
hereof, there shall be deemed to have been) a termination of the Executive's
employment with the Company following a Change in Control and during the Term.
This Agreement shall not be construed as creating an express or implied contract
of employment and, except as otherwise agreed in writing between the Executive
and the Company, the Executive shall not have any right to be retained in the
employ of the Company.
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<PAGE>
4. The Executive's Covenants. The Executive agrees that,
subject to the terms and conditions of this Agreement, in the event of a
Potential Change in Control during the Term, the Executive will remain in the
employ of the Company until the earliest of (i) a date which is six (6) months
from the date of such Potential Change of Control, (ii) the date of a Change in
Control, (iii) the date of termination by the Executive of the Executive's
employment for Good Reason or by reason of death, Disability or Retirement, or
(iv) the termination by the Company of the Executive's employment for any
reason.
5. Compensation Other Than Severance Payments.
5.1 Following a Change in Control and during the Term, during
any period that the Executive fails to perform the Executive's full-time duties
with the Company as a result of incapacity due to physical or mental illness,
the Company shall pay the Executive's full salary to the Executive at the rate
in effect at the commencement of any such period, together with all compensation
and benefits payable to the Executive under the terms of any compensation or
benefit plan, program or arrangement maintained by the Company during such
period, until the Executive's employment is terminated by the Company for
Disability.
5.2 If the Executive's employment shall be terminated for any
reason following a Change in Control and during the Term, the Company shall pay
the Executive's full salary to the Executive through the Date of Termination at
the rate in effect immediately prior to the Date of Termination or, if higher,
the rate in effect immediately prior to the first occurrence of an event or
circumstance constituting Good Reason, together with all compensation and
benefits payable to the Executive through the Date of Termination under the
terms of the Company's compensation and benefit plans, programs or arrangements
as in effect immediately prior to the Date of Termination or, if more favorable
to the Executive, as in effect immediately prior to the first occurrence of an
event or circumstance constituting Good Reason.
5.3 If the Executive's employment shall be terminated for any
reason following a Change in Control and during the Term, the Company shall pay
to the Executive the Executive's normal post-termination compensation and
benefits as such payments become due. Such post-termination compensation and
benefits shall be determined under, and paid in accordance with, the Company's
retirement, insurance and other compensation or benefit plans, programs and
arrangements as in effect immediately prior to the Date of Termination or, if
more favorable to the Executive, as in effect immediately prior to the
occurrence of the first event or circumstance constituting Good Reason.
5.4 Upon the occurrence of a Change in Control all options to
acquire shares of Company stock, all shares of restricted Company stock and all
other equity or phantom equity incentives held by the Executive under any plan
of the Company (including, but not limited to, the Company's 1995 Stock Award
Plan (and the Stock Matching Programs thereunder), 1993 Stock Option Plan, 1993
Stock Bonus Plan and 1991 Stock Bonus Plan) shall become immediately vested,
exercisable and nonforfeitable and all conditions thereof (including, but not
limited to, any required holding periods) shall be deemed to have been
satisfied.
6. Severance Payments.
6.1 If the Executive's employment is terminated following a
Change in Control and during the Term, other than (A) by the Company for Cause,
(B) by reason of death or Disability, or (C) by the Executive without Good
Reason, then, the Company shall pay the Executive the amounts, and provide the
Executive the benefits, described in this Section 6.1 ("Severance Payments") and
Section 6.2, in addition to any payments and benefits to which the Executive is
entitled under Section 5 hereof. For purposes of this
2
<PAGE>
Agreement, the Executive's employment shall be deemed to have been terminated
following a Change in Control by the Company without Cause or by the Executive
with Good Reason, if (i) the Executive's employment is terminated by the Company
without Cause prior to a Change in Control (whether or not a Change in Control
ever occurs) and such termination was at the request or direction of a Person
who has entered into an agreement with the Company the consummation of which
would constitute a Change in Control, (ii) the Executive terminates his
employment for Good Reason prior to a Change in Control (whether or not a Change
in Control ever occurs) and the circumstance or event which constitutes Good
Reason occurs at the request or direction of such Person described in clause
(i), or (iii) the Executive's employment is terminated by the Company without
Cause or by the Executive for Good Reason and such termination or the
circumstance or event which constitutes Good Reason is otherwise in connection
with or in anticipation of a Change in Control (whether or not a Change in
Control ever occurs). For purposes of any determination regarding the
applicability of the immediately preceding sentence, any position taken by the
Executive shall be presumed to be correct unless the Company establishes to the
Committee by clear and convincing evidence that such position is not correct.
(A) In lieu of any further salary payments
to the Executive for periods subsequent to the Date of Termination and
in lieu of any severance benefit otherwise payable to the Executive,
the Company shall pay to the Executive a lump sum severance payment, in
cash, equal to three times the sum of (i) the Executive's base salary
as in effect immediately prior to the Date of Termination or, if
higher, in effect immediately prior to the first occurrence of an event
or circumstance constituting Good Reason, and (ii) the average annual
bonus earned by the Executive pursuant to any annual bonus or incentive
plan maintained by the Company in respect of the three fiscal years
ending immediately prior to the fiscal year in which occurs the Date of
Termination or, if higher, immediately prior to the fiscal year in
which occurs the first event or circumstance constituting Good Reason;
provided, that if the Executive has not participated in an annual bonus
or incentive plan maintained by the Company for the entirety of such
three-year period, the amount referred to in this clause (ii) shall be
calculated using such lesser number of bonuses as have been actually
earned by the Executive in respect of such lesser period.
(B) For the thirty-six (36) month period
immediately following the Date of Termination, the Company shall
arrange to provide the Executive and his dependents life, disability,
accident and health insurance benefits and perquisites (including, but
not limited to, executive life insurance, club memberships, financial
planning and tax preparation, annual physical examination and
charitable contributions), in each case, substantially similar to those
provided to the Executive and his dependents immediately prior to the
Date of Termination or, if more favorable to the Executive, those
provided to the Executive and his dependents immediately prior to the
first occurrence of an event or circumstance constituting Good Reason,
at no greater cost to the Executive than the cost to the Executive
immediately prior to such date or occurrence; provided, however, that,
unless the Executive consents to a different method (after taking into
account the effect of such method on the calculation of "parachute
payments" pursuant to Section 6.2 hereof), such health insurance
benefits shall be provided through a third-party insurer. Benefits
otherwise receivable by the Executive pursuant to this Section 6.1(B)
shall be reduced to the extent benefits of the same type are received
by or made available to the Executive during the thirty-six (36) month
period following the Executive's termination of employment (and any
such benefits received by or made available to the Executive shall be
reported to the Company by the Executive); provided, however, that the
Company shall reimburse the Executive for the excess, if any, of the
cost of such benefits to the Executive over such cost immediately prior
to the Date of Termination or, if more favorable to the Executive, the
first occurrence of an event or circumstance constituting Good Reason.
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(C) Notwithstanding any provision of the
Baker Hughes Incorporated 1995 Employee Annual Incentive Compensation
Plan (the "Annual Incentive Plan"), the Company shall pay to the
Executive a lump sum amount, in cash, equal to the sum of (i) any
unpaid incentive compensation which has been allocated or awarded to
the Executive for a completed fiscal year or other measuring period
preceding the Date of Termination under the Annual Incentive Plan and
which, as of the Date of Termination, is contingent only upon the
continued employment of the Executive to a subsequent date, and (ii) a
pro rata portion to the Date of Termination of the aggregate value of
all contingent incentive compensation awards to the Executive for all
then uncompleted periods under the Annual Incentive Plan, calculated as
to each such award by multiplying the award that the Executive would
have earned on the last day of the performance award period, assuming
the achievement, at the expected value target level, of the individual
and corporate performance goals established with respect to such award,
by the fraction obtained by dividing the number of full months and any
fractional portion of a month during such performance award period
through the Date of Termination by the total number of months contained
in such performance award period; provided, however, that if such
termination of employment occurs during the same year in which the
Change in control occurs, the pro-rata bonus payment referred to in
clause (ii) above shall be offset by any payments received under the
Annual Incentive Plan in connection with such Change in Control.
(D) In addition to the retirement benefits
to which the Executive is entitled under the Company's Thrift Plan (the
"Thrift Plan") and the Company's Supplemental Retirement Plan (the
"SRP"), the Company shall pay the Executive a lump sum amount, in cash,
equal to the present value of the employer-provided contributions,
deferrals and allocations the Executive would have received had he
continued to participate, after the Date of Termination, in the Thrift
Plan and the SRP for three (3) additional years, assuming for this
purpose that (i) the Executive earned compensation for purposes of the
Thrift Plan and SRP during such three-year period the amount used to
calculate the Executive's severance payment under subparagraph (A) of
this Section 6.1, and (ii) the percentages of contributions, deferrals
and allocations made under the Thrift Plan and the SRP by or on behalf
of the Executive during such three-year period are the same percentages
of contributions, deferrals and allocations in effect on the date of
the Change in Control or the Date of Termination, whichever is more
favorable to the Executive.
(E) If the Executive would have become
entitled to benefits under the Company's post-retirement health care or
life insurance plans, as in effect immediately prior to the Date of
Termination or, if more favorable to the Executive, as in effect
immediately prior to the first occurrence of an event or circumstance
constituting Good Reason, had the Executive's employment terminated at
any time during the period of thirty-six (36) months after the Date of
Termination, the Company shall provide such post-retirement health care
or life insurance benefits to the Executive and the Executive's
dependents commencing on the later of (i) the date on which such
coverage would have first become available and (ii) the date on which
benefits described in subsection (B) of this Section 6.1 terminate.
(F) The Company shall provide the Executive
with outplacement services suitable to the Executive's position for a
period of three years or, if earlier, until the first acceptance by the
Executive of an offer of employment.
6.2 (A) Whether or not the Executive becomes entitled to the
Severance Payments, if any of the payments or benefits received or to be
received by the Executive in connection with a Change in Control or the
Executive's termination of employment (whether pursuant to the terms of this
Agreement or any other plan, arrangement or agreement with the Company, any
Person whose actions result in a
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Change in Control or any Person affiliated with the Company or such Person)
(such payments or benefits, excluding the Gross-Up Payment, being hereinafter
referred to as the "Total Payments") will be subject to the Excise Tax, the
Company shall pay to the Executive an additional amount (the "Gross-Up Payment")
such that the net amount retained by the Executive, after deduction of any
Excise Tax on the Total Payments and any federal, state and local income and
employment taxes and Excise Tax upon the Gross-Up Payment, shall be equal to the
Total Payments.
(B) For purposes of determining whether any of the
Total Payments will be subject to the Excise Tax and the amount of such Excise
Tax, (i) all of the Total Payments shall be treated as "parachute payments"
(within the meaning of section 280G(b)(2) of the Code) unless, in the opinion of
tax counsel ("Tax Counsel") reasonably acceptable to the Executive and selected
by the accounting firm which was, immediately prior to the Change in Control,
the Company's independent auditor (the "Auditor"), such payments or benefits (in
whole or in part) do not constitute parachute payments, including by reason of
section 280G(b)(4)(A) of the Code, (ii) all "excess parachute payments" within
the meaning of section 280G(b)(l) of the Code shall be treated as subject to the
Excise Tax unless, in the opinion of Tax Counsel, such excess parachute payments
(in whole or in part) represent reasonable compensation for services actually
rendered (within the meaning of section 280G(b)(4)(B) of the Code) in excess of
the Base Amount allocable to such reasonable compensation, or are otherwise not
subject to the Excise Tax, and (iii) the value of any noncash benefits or any
deferred payment or benefit shall be determined by the Auditor in accordance
with the principles of sections 280G(d)(3) and (4) of the Code. For purposes of
determining the amount of the Gross-Up Payment, the Executive shall be deemed to
pay federal income tax at the highest marginal rate of federal income taxation
in the calendar year in which the Gross-Up Payment is to be made and state and
local income taxes at the highest marginal rate of taxation in the state and
locality of the Executive's residence on the Date of Termination (or if there is
no Date of Termination, then the date on which the Gross-Up Payment is
calculated for purposes of this Section 6.2), net of the maximum reduction in
federal income taxes which could be obtained from deduction of such state and
local taxes.
(C) In the event that the Excise Tax is finally
determined to be less than the amount taken into account hereunder in
calculating the Gross-Up Payment, the Executive shall repay to the Company,
within five (5) business days following the time that the amount of such
reduction in the Excise Tax is finally determined, the portion of the Gross-Up
Payment attributable to such reduction (plus that portion of the Gross-Up
Payment attributable to the Excise Tax and federal, state and local income and
employment taxes imposed on the Gross-Up Payment being repaid by the Executive,
to the extent that such repayment results in a reduction in the Excise Tax and a
dollar-for-dollar reduction in the Executive's taxable income and wages for
purposes of federal, state and local income and employment taxes, plus interest
on the amount of such repayment at 120% of the rate provided in section
1274(b)(2)(B) of the Code. In the event that the Excise Tax is determined to
exceed the amount taken into account hereunder in calculating the Gross-Up
Payment (including by reason of any payment the existence or amount of which
cannot be determined at the time of the Gross-Up Payment), the Company shall
make an additional Gross-Up Payment in respect of such excess (plus any
interest, penalties or additions payable by the Executive with respect to such
excess) within five (5) business days following the time that the amount of such
excess is finally determined. The Executive and the Company shall each
reasonably cooperate with the other in connection with any administrative or
judicial proceedings concerning the existence or amount of liability for Excise
Tax with respect to the Total Payments.
6.3 The payments provided in subsections (A), (C) and (D) of
Section 6.1 hereof and in Section 6.2 hereof shall be made not later than the
fifth day following the Date of Termination; provided, however, that if the
amounts of such payments cannot be finally determined on or before such day, the
Company shall pay to the Executive on such day an estimate, as determined in
good faith by the Executive or, in the case of payments under Section 6.2
hereof, in accordance with Section 6.2 hereof, of the minimum
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amount of such payments to which the Executive is clearly entitled and shall pay
the remainder of such payments (together with interest on the unpaid remainder
(or on all such payments to the extent the Company fails to make such payments
when due) at 120% of the rate provided in section 1274(b)(2)(B) of the Code) as
soon as the amount thereof can be determined but in no event later than the
thirtieth (30th) day after the Date of Termination. In the event that the amount
of the estimated payments exceeds the amount subsequently determined to have
been due, such excess shall constitute a loan by the Company to the Executive,
payable on the fifth (5th) business day after demand by the Company (together
with interest at 120% of the rate provided in section 1274(b)(2)(B) of the
Code), but only to the extent such amount has not been paid by the Executive
pursuant to Section 6.2(C) above. At the time that payments are made under this
Agreement, the Company shall provide the Executive with a written statement
setting forth the manner in which such payments were calculated and the basis
for such calculations including, without limitation, any opinions or other
advice the Company has received from Tax Counsel, the Auditor or other advisors
or consultants (and any such opinions or advice which are in writing shall be
attached to the statement).
6.4 The Company also shall pay to the Executive all legal fees
and expenses incurred by the Executive in disputing in good faith any issue
hereunder relating to the termination of the Executive's employment, in seeking
in good faith to obtain or enforce any benefit or right provided by this
Agreement or in connection with any tax audit or proceeding to the extent
attributable to the application of section 4999 of the Code to any payment or
benefit provided hereunder. Such payments shall be made within five (5) business
days after delivery of the Executive's written requests for payment accompanied
with such evidence of fees and expenses incurred as the Company reasonably may
require.
7. Termination Procedures and Compensation During Dispute.
7.1 Notice of Termination. After a Change in Control and
during the Term, any purported termination of the Executive's employment (other
than by reason of death) shall be communicated by written Notice of Termination
from one party hereto to the other party hereto in accordance with Section 10
hereof. For purposes of this Agreement, a "Notice of Termination" shall mean a
notice which shall indicate the specific termination provision in this Agreement
relied upon and shall set forth in reasonable detail the facts and circumstances
claimed to provide a basis for termination of the Executive's employment under
the provision so indicated. Further, a Notice of Termination for Cause is
required to include a copy of a resolution duly adopted by the affirmative vote
of not less than three-quarters (3/4) of the entire membership of the Board at a
meeting of the Board which was called and held for the purpose of considering
such termination (after reasonable notice to the Executive and an opportunity
for the Executive, together with the Executive's counsel, to be heard before the
Board) finding that, in the good faith opinion of the Board, the Executive was
guilty of conduct set forth in clause (i) or (ii) of the definition of Cause
herein, and specifying the particulars thereof in detail.
7.2 Date of Termination. "Date of Termination," with respect
to any purported termination of the Executive's employment after a Change in
Control and during the Term, shall mean (i) if the Executive's employment is
terminated for Disability, thirty (30) days after Notice of Termination is given
(provided that the Executive shall not have returned to the full-time
performance of the Executive's duties during such thirty (30) day period), and
(ii) if the Executive's employment is terminated for any other reason, the date
specified in the Notice of Termination (which, in the case of a termination by
the Company, shall not be less than thirty (30) days (except in the case of a
termination for Cause) and, in the case of a termination by the Executive, shall
not be less than fifteen (15) days nor more than sixty (60) days, respectively,
from the date such Notice of Termination is given).
7.3 Dispute Concerning Termination. If within fifteen (15)
days after any Notice of Termination is given, or, if later, prior to the Date
of Termination (as determined without regard to this
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Section 7.3), the party receiving such Notice of Termination notifies the other
party that a dispute exists concerning the termination, the Date of Termination
shall be extended until the earlier of (i) the date on which the Term ends or
(ii) the date on which the dispute is finally resolved, either by mutual written
agreement of the parties or by a final judgment, order or decree of an
arbitrator or a court of competent jurisdiction (which is not appealable or with
respect to which the time for appeal therefrom has expired and no appeal has
been perfected); provided, however, that the Date of Termination shall be
extended by a notice of dispute given by the Executive only if such notice is
given in good faith and the Executive pursues the resolution of such dispute
with reasonable diligence.
7.4 Compensation During Dispute. If a purported termination
occurs following a Change in Control and during the Term and the Date of
Termination is extended in accordance with Section 7.3 hereof, the Company shall
continue to pay the Executive the full compensation in effect when the notice
giving rise to the dispute was given (including, but not limited to, salary) and
continue the Executive as a participant in all compensation, benefit and
insurance plans in which the Executive was participating when the notice giving
rise to the dispute was given or those plans in which the Executive was
participating immediately prior to the first occurrence of an event or
circumstance giving rise to the Notice of Termination, if more favorable to the
Executive, until the Date of Termination, as determined in accordance with
Section 7.3 hereof. Amounts paid under this Section 7.4 are in addition to all
other amounts due under this Agreement (other than those due under Section 5.2
hereof) and shall not be offset against or reduce any other amounts due under
this Agreement.
8. No Mitigation. The Company agrees that, if the Executive's
employment with the Company terminates during the Term, the Executive is not
required to seek other employment or to attempt in any way to reduce any amounts
payable to the Executive by the Company pursuant to Sections 5, 6 or 7.4 hereof.
Further, the amount of any payment or benefit provided for in this Agreement
(other than Section 6.1(B) hereof but including (but not limited to) Section 7.4
hereof) shall not be reduced by any compensation earned by the Executive as the
result of employment by another employer, by retirement benefits, by offset
against any amount claimed to be owed by the Executive to the Company, or
otherwise.
9. Successors; Binding Agreement.
9.1 In addition to any obligations imposed by law upon any
successor to the Company, the Company will require any successor (whether direct
or indirect, by purchase, merger, consolidation or otherwise) to all or
substantially all of the business and/or assets of the Company to expressly
assume and agree to perform this Agreement in the same manner and to the same
extent that the Company would be required to perform it if no such succession
had taken place. Failure of the Company to obtain such assumption and agreement
prior to the effectiveness of any such succession shall be a breach of this
Agreement and shall entitle the Executive to compensation from the Company in
the same amount and on the same terms as the Executive would be entitled to
hereunder if the Executive were to terminate the Executive's employment for Good
Reason after a Change in Control, except that, for purposes of implementing the
foregoing, the date on which any such succession becomes effective shall be
deemed the Date of Termination.
9.2 This Agreement shall inure to the benefit of and be
enforceable by the Executive's personal or legal representatives, executors,
administrators, successors, heirs, distributees, devisees and legatees. If the
Executive shall die while any amount would still be payable to the Executive
hereunder (other than amounts which, by their terms, terminate upon the death of
the Executive) if the Executive had continued to live, all such amounts, unless
otherwise provided herein, shall be paid in accordance with the terms of this
Agreement to the executors, personal representatives or administrators of the
Executive's estate.
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10. Notices. For the purpose of this Agreement, notices and
all other communications provided for in the Agreement shall be in writing and
shall be deemed to have been duly given when delivered or mailed by United
States registered mail, return receipt requested, postage prepaid, addressed, if
to the Executive, to the address inserted below the Executive's signature on the
final page hereof and, if to the Company, to the address set forth below, or to
such other address as either party may have furnished to the other in writing in
accordance herewith, except that notice of change of address shall be effective
only upon actual receipt:
To the Company:
3900 Essex Lane
Suite 210
Houston, Texas 77027
Attention: General Counsel
11. Miscellaneous. Except as otherwise specifically provided
in Section 12.2 below, no provision of this Agreement may be modified, waived or
discharged unless such waiver, modification or discharge is agreed to in writing
and signed by the Executive and such officer as may be specifically designated
by the Board. No waiver by either party hereto at any time of any breach by the
other party hereto of, or of any lack of compliance with, any condition or
provision of this Agreement to be performed by such other party shall be deemed
a waiver of similar or dissimilar provisions or conditions at the same or at any
prior or subsequent time. This Agreement supersedes any other agreements or
representations, oral or otherwise, express or implied, with respect to the
subject matter hereof which have been made by either party; provided, however,
that this Agreement shall supersede any agreement setting forth the terms and
conditions of the Executive's employment with the Company only in the event that
the Executive's employment with the Company is terminated on or following a
Change in Control, by the Company other than for Cause or by the Executive other
than for Good Reason; and provided further that all agreements otherwise
superseded by this Agreement will be automatically reinstated with full force
and effect to the extent this Agreement is terminated or otherwise rendered
inapplicable or amended in accordance with Section 12.2 hereof. The validity,
interpretation, construction and performance of this Agreement shall be governed
by the laws of the State of Texas. All references to sections of the Exchange
Act or the Code shall be deemed also to refer to any successor provisions to
such sections. Any payments provided for hereunder shall be paid net of any
applicable withholding required under federal, state or local law and any
additional withholding to which the Executive has agreed. The obligations of the
Company and the Executive under this Agreement which by their nature may require
either partial or total performance after the expiration of the Term (including,
without limitation, those under Sections 6 and 7 hereof) shall survive such
expiration.
12. Validity; Pooling.
12.1 Validity. The invalidity or unenforceability of any
provision of this Agreement shall not affect the validity or enforceability of
any other provision of this Agreement, which shall remain in full force and
effect.
12.2 Pooling. In the event that (A) the Company is party to a
transaction which is otherwise intended to qualify for "pooling of interests"
accounting treatment, (B) such transaction constitutes a Change in Control
within the meaning of Section 15(G)(III) and (C) individuals who satisfy the
requirements in clauses (i) and (ii) below constitute more than two-thirds (2/3)
of the number of directors of the entity surviving such transaction or any
parent thereof, if any: individuals who (i) immediately prior to such
transaction constitute the Board and (ii) on the date hereof constitute the
Board and any new director (other than a director whose initial assumption of
office is in connection with an actual or threatened
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election contest relating to the election of directors of the Company) whose
appointment or election by the Board or nomination for election by the Company's
stockholders was approved or recommended, by a vote of at least two-thirds (2/3)
of the directors then still in office who either were directors on the date
hereof or whose appointment, election or nomination for election was previously
so approved or recommended then (a) this Agreement shall, to the extent
practicable, be interpreted so as to permit such accounting treatment, and (b)
to the extent that the application of clause (a) of this Section 12.2 does not
preserve the availability of such accounting treatment, then, to the extent that
any provision or combination of provisions of the Agreement disqualifies the
transaction as a "pooling" transaction (including, if applicable, the entire
Agreement), the Board shall have the right, by sending written notice to the
Executive prior to the Change in Control, to unilaterally amend (without the
consent of the Executive) such provision or provisions if and to the extent
necessary (including declaring such provision or provisions to be null and void
as of the date hereof) so that such transaction may be accounted for as a
"pooling of interests." All determinations under this Section 12.2 shall be made
by the Board prior to the Change in Control, based upon the advice of the
accounting firm whose opinion with respect to "pooling of interests" is required
as a condition to the consummation of such transaction.
13. Counterparts. This Agreement may be executed in several
counterparts, each of which shall be deemed to be an original but all of which
together will constitute one and the same instrument.
14. Settlement of Disputes; Arbitration.
14.1 All claims by the Executive for benefits under this
Agreement shall be directed to and determined by the Committee and shall be in
writing. Any denial by the Committee of a claim for benefits under this
Agreement shall be delivered to the Executive in writing within thirty (30) days
after written notice of the claim is provided to the Company in accordance with
Section 10 and shall set forth the specific reasons for the denial and the
specific provisions of this Agreement relied upon. The Committee shall afford a
reasonable opportunity to the Executive for a review of the decision denying a
claim and shall further allow the Executive to appeal to the Committee a
decision of the Committee within sixty (60) days after notification by the
Committee that the Executive's claim has been denied.
14.2 Any further dispute or controversy arising under or in
connection with this Agreement shall be settled exclusively by arbitration in
Houston, Texas in accordance with the rules of the American Arbitration
Association then in effect; provided, however, that the evidentiary standards
set forth in this Agreement shall apply. Judgment may be entered on the
arbitrator's award in any court having jurisdiction. Notwithstanding any
provision of this Agreement to the contrary, the Executive shall be entitled to
seek specific performance of the Executive's right to be paid until the Date of
Termination during the pendency of any dispute or controversy arising under or
in connection with this Agreement.
1. Definitions. For purposes of this Agreement, the following
terms shall have the meanings indicated below:
(A) "Affiliate" shall have the meaning set forth in Rule 12b-2
promulgated under Section 12 of the Exchange Act.
(B) "Auditor" shall have the meaning set forth in Section 6.2
hereof.
(C) "Base Amount" shall have the meaning set forth in section
280G(b)(3) of the Code.
(D) "Beneficial Owner" shall have the meaning set forth in
Rule 13d-3 under the Exchange Act.
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(E) "Board" shall mean the Board of Directors of the Company.
(F) "Cause" for termination by the Company of the Executive's
employment shall mean (i) the willful and continued failure by the Executive to
substantially perform the Executive's duties with the Company (other than any
such failure resulting from the Executive's incapacity due to physical or mental
illness or any such actual or anticipated failure after the issuance of a Notice
of Termination for Good Reason by the Executive pursuant to Section 7.1 hereof)
after a written demand for substantial performance is delivered to the Executive
by the Board, which demand specifically identifies the manner in which the Board
believes that the Executive has not substantially performed the Executive's
duties, or (ii) the willful engaging by the Executive in conduct which is
demonstrably and materially injurious to the Company or its subsidiaries,
monetarily or otherwise. For purposes of clauses (i) and (ii) of this
definition, (x) no act, or failure to act, on the Executive's part shall be
deemed "willful" unless done, or omitted to be done, by the Executive not in
good faith and without reasonable belief that the Executive's act, or failure to
act, was in the best interest of the Company and (y) in the event of a dispute
concerning the application of this provision, no claim by the Company that Cause
exists shall be given effect unless the Company establishes to the Committee by
clear and convincing evidence that Cause exists.
(G) A "Change in Control" shall be deemed to have occurred if
the event set forth in any one of the following paragraphs shall have occurred:
(I) any Person is or becomes the Beneficial
Owner, directly or indirectly, of securities of the Company
(not including in the securities beneficially owned by such
Person any securities acquired directly from the Company or
its affiliates) representing 20% or more of the combined
voting power of the Company's then outstanding securities,
excluding any Person who becomes such a Beneficial Owner in
connection with a transaction described in clause (i) of
paragraph (III) below; or
(II) the following individuals cease for any
reason to constitute a majority of the number of directors
then serving: individuals who, on the date hereof, constitute
the Board and any new director (other than a director whose
initial assumption of office is in connection with an actual
or threatened election contest relating to the election of
directors of the Company) whose appointment or election by the
Board or nomination for election by the Company's stockholders
was approved or recommended by a vote of at least two-thirds
(2/3) of the directors then still in office who either were
directors on the date hereof or whose appointment, election or
nomination for election was previously so approved or
recommended; or
(III) there is consummated a merger or
consolidation of the Company or any direct or indirect
subsidiary of the Company with any other corporation, other
than (i) a merger or consolidation which would result in the
voting securities of the Company outstanding immediately prior
to such merger or consolidation continuing to represent
(either by remaining outstanding or by being converted into
voting securities of the surviving entity or any parent
thereof), in combination with the ownership of any trustee or
other fiduciary holding securities under an employee benefit
plan of the Company or any subsidiary of the Company, at least
65% of the combined voting power of the securities of the
Company or such surviving entity or any parent thereof
outstanding immediately after such merger or consolidation, or
(ii) a merger or consolidation effected to implement a
recapitalization of the Company (or similar transaction) in
which no Person is or becomes the Beneficial Owner, directly
or indirectly, of securities of the Company (not including in
the securities Beneficially Owned by such Person any
securiti