-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, ICC1ovL38x9cP477vInTGgi8h4wLl7o9Czi5e9HuNCoZ7sClNsMVQAcZu/4UP0fV KZd26Pekt4VHQFUsgPz0fg== 0000950129-99-001008.txt : 19990318 0000950129-99-001008.hdr.sgml : 19990318 ACCESSION NUMBER: 0000950129-99-001008 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 31 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990317 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: SEC FILE NUMBER: 001-09397 FILM NUMBER: 99566867 BUSINESS ADDRESS: STREET 1: 3900 ESSEX LANE CITY: HOUSTON STATE: TX ZIP: 77027 BUSINESS PHONE: 7134398600 MAIL ADDRESS: STREET 1: P O BOX 4740 CITY: HOUSTON STATE: TX ZIP: 77210-4740 10-K 1 BAKER HUGHES INCORPORATED - DATED 12/31/98 1 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- FORM 10-K SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 --------------------- [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998 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 (I.R.S. Employer Identification No.) of Incorporation or Organization) 3900 ESSEX LANE, 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:
NAME OF EACH EXCHANGE TITLE OF EACH CLASS ON WHICH REGISTERED ------------------- --------------------- Common Stock, $1 Par Value New York Stock Exchange Pacific Exchange Swiss Exchange
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 3, 1999, the registrant had outstanding 327,204,472 shares of Common Stock, $1 par value. The aggregate market value of the Common Stock on such date (based on the closing price on the New York Stock Exchange) held by nonaffiliates was approximately $5,917,274,025. --------------------- DOCUMENTS INCORPORATED BY REFERENCE Portions of Registrant's Annual Report to Stockholders for 1998 are incorporated by reference into Parts I and II. Portions of Registrant's 1998 Proxy Statement for the Annual Meeting of Stockholders to be held April 28, 1999 are incorporated by reference into Part III. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 2 PART I ITEM 1. BUSINESS The Company is engaged in the oilfield and process industry segments. 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 joint ventures, partnerships or alliances. The Company is a Delaware corporation that was formed in connection with the combination of Baker International Corporation ("Baker") and Hughes Tool Company ("Hughes") consummated on April 3, 1987 (the "Combination"). The Company acquired Western Atlas Inc. ("Western Atlas") in a merger completed on August 10, 1998. As used herein, the "Company" refers to Baker Hughes Incorporated and its subsidiaries, unless the context clearly indicates otherwise. For additional industry segment information for the year ended December 31, 1998, the three month period ended December 31, 1997 and for each of the two years in the period ended September 30, 1997, see Note 13 of Notes to Consolidated Financial Statements which Notes are incorporated herein by Reference in Part II, Item 8 ("Notes to Consolidated Financial Statements"). OILFIELD The Company is a leading supplier of reservoir-centered products, services and systems to the worldwide oil and gas industry. Through its eight oilfield service companies, the Company provides products and services for oil and gas exploration, drilling, completion and production. The Company provides seismic data acquisition and processing services to assist oil and gas companies in evaluating the producing potential of sedimentary basins and in locating productive zones. The Company conducts seismic surveys on land, in deep waters and across shallow-water transition zones worldwide. 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. The Company's major competitors in providing these services are Geco-Prakla, a division of Schlumberger, Ltd. ("Schlumberger"), Compagnie Generale de Geophysique and Petroleum Geo-Services ASA. The Company manufactures and markets a broad range of roller cutter bits and fixed cutter diamond bits, ranging upward from 3-3/4 inches in diameter, which are designed for drilling in specific types of rock formations, and slimhole bits for the worldwide oil, gas and geothermal industries. The Company believes that it is a leading worldwide manufacturer of bits and that its principal competitors in this area are Smith International, Inc. ("Smith"), the Security DBS operating unit of Halliburton Company ("Halliburton") and Reed Tool Company and Hycalog, each operating units of Schlumberger. The Company also produces and markets drilling fluids (muds) for oil and gas well drilling, 3 as well as chemical additives and specialty chemicals, and provides technical services in connection with their respective formulation and use. Drilling fluids, that are usually comprised of barite and bentonite combined with other chemicals in a water, chemical or oil base, are used to clean the bottom of a hole by removing cuttings and transporting them to the surface, to cool the bit and drill string, to control formation pressures and to seal porous well formations. 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 with regard to these products and services are M-I Drilling Fluids, an operating unit of Smith, and Baroid Corporation, a subsidiary of Halliburton. The Company believes that it is a leading supplier of directional and horizontal drilling services, downhole motors, drilling fluid systems, coring services, subsurface surveying and measurement-while-drilling services to the oil and gas industry. The Company's specialized positive displacement downhole motors help operators to steer wells into subsurface geologic strata where oil and gas may be found (often referred to as pay zones) for conventional directional drilling and short, medium and long-radius horizontal drilling. A full range of measurement-while-drilling systems that the Company provides use mud-pulse telemetry to deliver real-time downhole information on the drilling process and the reservoir. The systems are available for every application, from directional-only service through real-time logging-while-drilling. With regard to these products and services, the Company competes principally with Halliburton Energy Services, an operating unit of Halliburton, Sperry-Sun Drilling Services, a subsidiary of Halliburton, and Anadrill, a subsidiary of Schlumberger. The Company provides a broad range of well logging and data analysis services for various phases of drilling and production. These services are designed to measure rock and fluid properties of subsurface geologic formations. New-generation high-resolution logging instruments, together with faster data transmission techniques, have often provided for the transfer of larger amounts of data from the borehole to the surface in less time than older techniques. These new-generation tools, used in combination with other logging instruments and sensors to obtain simultaneous multiple measurements, have often resulted in more accurate reservoir evaluation while reducing logging turnaround time than the older techniques, and consequently can lower drilling costs and risks. The Company's largest competitors in this market include Schlumberger and Halliburton. After oil and gas wells are drilled, the operator must complete and equip the well using production tools, serviced to achieve safety and long-term productivity, protect the well against pressure and corrosion damage and stimulate or repair the well during its productive life. The Company provides a broad range of production tools and oilfield services to meet many of these needs. Packers are a major product of the Company. The Company's customers use packers to seal the space between the production tubing and the casing to protect the casing from reservoir pressures and corrosive formation fluids and also to maintain the separation of productive zones. The Company believes that it is a leading worldwide producer of packers and that its principal -2- 4 competitors for sale of packers are Dresser Oil Tools and Halliburton Energy Services, operating units of Halliburton, and Camco, an operating division of Schlumberger. The Company manufactures and sells liner hanger tools and equipment. The Company's customers use these tools and equipment to suspend and set strings of casing pipe in oil and gas wells. The Company believes that it is a leading worldwide producer of liner hangers and its primary competitor in this area is the Nodeco division of Weatherford International Inc. ("Weatherford"). -3- 5 The Company provides fishing tool services using specialized tools to locate, dislodge and retrieve twisted off, dropped or damaged pipe, tools or other objects from the well bore. The Company's major fishing tool competitors are Weatherford and Smith. The Company also provides inflatable and mechanical packers that its customers use in testing the potential of a well during the drilling phase prior to installation of casing, and under-reamers, which enlarge the well bore at any point below the surface to form a production cavity. The Company offers gravel packing, a specialized service that prevents sand from entering the well bore and reducing productivity, as well as other sand control services. It also provides tubing conveyed perforating services to provide paths through the casing and cement sheath in wells so that oil and gas can enter the well bore from the formation. Major gravel packing competitors include Dowell, a division of Schlumberger, and Halliburton Energy Services. Tubing conveyed perforating competitors include the Well Testing division of Schlumberger and Halliburton Energy Services and Dresser Oil Tools, both operating units of Halliburton. The Company's gravel packing products and services also compete with frac-pack services that pressure pumping companies, such as BJ Services Company, Dowell and Halliburton Energy Services, provide. 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 for these products and services are Halliburton Energy Services and Camco. The Company is a leader in proprietary technology for oilfield electric submersible pumping ("ESP") systems, which help raise oil to the surface. It also provides variable speed motor controllers and specialty armored power cables. Its major competition in ESPs is Reda, a division of Schlumberger. The Company plays a leading role in project management and the integration of products and services from the Company and other service producers. The Company seeks clients and partners for oil and gas exploration and production opportunities who value the subsurface information technologies that the Company possesses to exploit the full potential of hydrocarbon-bearing properties. The Company has multidisciplinary project teams of geophysicists, geologists and reservoir engineers that offer a wide range of experience in exploration and production techniques, including integrated geoscience subsurface analysis, reservoir characterization economic and risk analysis, drilling recommendations and project management and implementation. Halliburton and Schlumberger are the principal competitors with this capability. Recent new technology that the Company has offered its customers includes downhole hydrocyclone oil/water separation systems, multi-lateral drilling and completion systems, coiled tubing drilling systems, remote actuated, downhole completion tools and rotary closed loop drilling systems. The Company manufactures oilfield specialty chemicals and integrated chemical technology solutions for petroleum production, transportation and refining. These chemicals include specialty chemicals that production segments of the petroleum industry use, as well as industrial chemicals that customers use in refining, waste water treatment, mineral handling and cooling and boiler water processes. The Company also provides chemical technology solutions to -4- 6 other industrial markets throughout the world including petrochemicals, fuel additives, plastics, imaging, adhesives, steel and crop protection. The Company believes it is a leader in worldwide specialty oilfield chemicals and that its primary competitor is the Nalco-Exxon joint venture. The Company designs and manufactures systems for the treatment of produced water and its reinjection. PROCESS The Company provides a broad range of solid/liquid separation equipment and systems to concentrate its customers' product or separate and remove waste material in the mineral, industrial, pulp and paper and municipal industries. The Company's product lines include vacuum filters (drum, disc and horizontal belt), filter presses, belt presses, granular media filters, thickeners, clarifiers, flotation cells and aeration equipment. The Company's principal competitors for sales for mineral and industrial applications are Krauss Maffei, Outokumpu and Svedala; the Company's principal competitors for sales for municipal applications are Envirex and General Filter, both business units of United States Filter Corporation ("U.S. Filter"), and Walker Process; and the Company's principal competitor for sales for pulp and paper applications is Ahlstrom. The Company designs and manufactures process solutions for the oilfield and refinery markets. These solutions include equipment for the processing and conditioning of seawater for injection, desalting oil streams and separating oil from water in oil production streams, with products consisting of fine filters, coarse filters, nutshell filters, flotation units, hydrocyclones, coalescers, deaeration towers, electrochlorinators and electrostatic desalters. The primary competitors in this area are Kvaerner, Serck Baker and U.S. Filter. The Company manufactures a broad range of continuous and batch centrifuges and specialty filters that are each widely used in the environmental, chemical, minerals and pharmaceutical markets to dewater or classify process and waste streams. The Company's principal competitors in its continuous centrifuge product line are Alfa-Lavel/Sharples, Tomoe and Flottweg. There are numerous small and large companies that compete in the batch centrifuge and filter product lines. The Company provides parts and service 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 facilities operation services for processes that utilize many of the Company's process equipment product and service lines. 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 customer's 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. Stockpoints and service centers for process products and services are located near the Company's -5- 7 customers' operations, and the Company markets process products and services throughout the world. In certain areas outside the United States where direct product sales efforts are not practicable, the Company utilizes licensees, sales representatives and distributors. The products of each of the Company's principal industry segments 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 effectively 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 and availability, technical proficiency and price. Further information concerning Marketing, Competition and Economic Conditions is contained under the caption "Business Environment" in "Management's Discussion and Analysis of Financial Condition and Results of Operations" in the 1998 Annual Report to Stockholders and is incorporated herein by reference. INTERNATIONAL OPERATIONS The Company's operations are subject to the risks inherent in doing business in multiple countries with various legal and political policies. These risks include war, boycotts, political changes, expropriation, 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 of these events would not have a material adverse effect on its operations. RESEARCH AND DEVELOPMENT; PATENTS At December 31, 1998, the equivalent of approximately 800 full-time employees were engaged in research and development activities directed primarily toward improvement of existing products and services, design of specialized products to meet specific customer needs and development of new products and processes. For information regarding the amounts of research and development expense for the year ended December 31, 1998, the three month period ended December 31, 1997 and for each of the two years in the period ended September 30, 1997, see Note 17 of Notes to Consolidated Financial Statements. The Company has followed a policy of seeking patent 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 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. -6- 8 BUSINESS DEVELOPMENTS OILFIELD Oilfield Operations consists of eight operating divisions: Baker Atlas, Baker Hughes INTEQ, Baker Oil Tools, Baker Petrolite, Centrilift, E&P Solutions, Hughes Christensen and Western Geophysical. Business developments during fiscal 1998 have positioned these divisions among the market leaders in providing products, services and technologies in the drilling, completion and production processes. In August 1998, the Company completed its acquisition of Western Atlas, which specializes in land, marine and transition-zone seismic data acquisitions and processing services, well-logging and completion services and reservoir characterization and project management services. With the combination of the Company and Western Atlas, the Company has enhanced its strategic position in providing integrated "life of field" and "reservoir management" related products and services. These products and services span the planning, exploration, development and production phases of an oil and gas reservoir, integrating the Company's drilling, completion and production technologies with Western Atlas' reservoir information technologies. This acquisition also gave the Company the ability to provide integrated product and service offerings and project management on an outsourced basis by combining the Company's drilling solutions with Western Atlas' seismic and reservoir information technologies. During the year ended December 31, 1998, the Company acquired and disposed of several additional oilfield businesses, none of which had a material effect on the Company's results of operations. PROCESS Baker Process provides separation technologies, continuous process solutions and centrifuges and filters for the mineral, industrial, pulp and paper, municipal and petroleum industries. During the year ended December 31, 1998, the Company acquired several additional process businesses, none of which had a material effect on the Company's results of operations. EMPLOYEES At December 31, 1998, the Company had a total of approximately 32,300 employees, as compared to approximately 33,400 employees at December 31, 1997 and a 1998 peak of approximately 36,500 employees in May 1998. Approximately 3,000 employees at December 31, 1998 were represented under collective bargaining agreements that terminate at various times through July 2002. The Company believes that its relations with its employees are satisfactory. -7- 9 EXECUTIVE OFFICERS The following table shows as of March 3, 1999, the name of each executive officer of the Company, together with his age and all offices presently held with the Company.
NAME OF INDIVIDUAL AGE - ------------------ --- Max L. Lukens 50 Chief Executive Officer of the Company since October 1996; President of the Company since October 1998 and from October 1995 to August 1998; and Chairman of the Board since January 1997. Employed 1981. Vice President and Chief Financial Officer of Baker, 1984-1987; Senior Vice President and Chief Financial Officer of the Company, 1987-1989; President, Baker Hughes Production Tools, 1989-1993; Senior Vice President of the Company, 1987-1994; Executive Vice President, 1994-1995; President, Baker Hughes Oilfield Operations, 1993-1995; and Chief Operating Officer of the Company, 1995-1996. Thomas R. Bates, Jr. 49 Senior Vice President of the Company since June 1998. Employed 1998. President and Chief Executive Officer of Weatherford Enterra 1997-1998; and President of Anadrill Division of Schlumberger 1992-1997. George S. Finley 47 Senior Vice President and Chief Administrative Officer of the Company since 1995. Employed 1982. Controller of the Company, 1987-1993; Vice President of the Company, 1990-1995; and Chief Financial Officer of Baker Hughes Oilfield Operations, 1993-1995. James W. Harris 40 Controller of the Company since December 1998; and Vice President-Tax of the Company since December 1997. Director of Tax from 1994-1997. Employed 1994. Eric L. Mattson 47 Senior Vice President of the Company since 1994; and Chief Financial Officer of the Company since 1993. Employed 1980. Treasurer of the Company, 1983-1994; and Vice President of the Company, 1988 to 1994. Lawrence O'Donnell, III 41 Vice President and General Counsel of the Company since 1995. Employed 1991. Deputy General Counsel of the Company, 1991-1995; Vice President and General Counsel, Baker Hughes Oilfield Operations, 1994-1995; and Corporate Secretary of the Company, 1992-1996.
-8- 10 Andrew J. Szescila 51 Senior Vice President of the Company since July 1997; Vice President of the Company from 1995-1997; and President of Hughes Christensen Company from 1989-1997. Employed 1973. President, BJ Services International, 1987-1988; and President, Baker Service Tools, 1988-1989.
There are no family relationships among the executive officers of the Company. The Company follows the practice of electing its officers annually in October. ENVIRONMENTAL MATTERS The Company is 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 is in the process of development, and changes in standards of enforcement of existing regulations as well as the enactment and enforcement of new legislation may require the Company, as well as its customers, to modify, supplement or replace equipment or facilities or to change or discontinue present methods of operation. While making projections of future costs in the environmental area can be difficult and uncertain, based upon current information, the Company estimates that during the fiscal year ending December 31, 1999, the Company will spend approximately $24,683,000 to enable the Company to comply with U.S. federal, state and local provisions that have been enacted or adopted regulating the discharge of materials into the environment or otherwise relating to the protection of the environment (collectively, "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 adequate reserves for such compliance expenditures or the cost to the Company for such compliance will be small when compared to the Company's overall net worth. In addition to the amounts described in the preceding paragraph, based upon current information, the Company estimates that it will incur capital expenditures of approximately $6,500,000 for environmental control equipment during the fiscal year ending December 31, 1999. Based upon current information, the Company believes that capital expenditures for environmental control equipment for the 1999 and 2000 fiscal years, as well as such future periods as the Company deems relevant, will not have a material adverse effect upon the financial condition of the Company because the aggregate amount of these expenditures for those periods is or will be small when compared to the Company's overall net worth. The Company and certain of its subsidiaries and divisions have been identified as a potentially responsible party ("PRP") as a result of substances which may have been released in the -9- 11 past at various sites more fully discussed below. The United States Environmental Protection Agency (the "EPA") and appropriate state agencies are supervising investigative and clean-up activities at these sites. (a) Baker Petrolite Corporation ("BPC"), a subsidiary of the Company, Hughes Christensen Company ("HC"), Milpark Drilling Fluids ("Milpark") (now known as INTEQ), and Baker Oil Tools ("BOT"), a division of Baker Hughes Oilfield Operations, Inc. ("BHOO"), have been named as PRPs in the Sheridan Superfund Site, located in Hempstead, Texas. The remedial work at this site is being overseen by the Texas Natural Resource Conservation Commission ("TNRCC"). A trust (the "Sheridan Site Trust") was formed to manage the site remediation and administrative details of the project. The Company participates as a member of the Sheridan Site Trust. Total remedial and administrative costs are estimated by Sheridan Site Trust officials to total approximately $30,000,000. Contribution of the Company's subsidiaries and divisions (including Baker Hughes Tubular Services, Inc. ("BHTS"), which was sold to ICO on September 30, 1992), is estimated to be 1.81% of those costs. (b) Spectrace Instruments, Inc. ("Spectrace"), the assets of which were sold to Thermo-Electron Corporation on March 15, 1994, is a named respondent to an EPA Administrative Order associated with the MEW Study Area, an eight square mile soil and groundwater contamination site located in Mountain View, California. A group of PRPs estimates that the total cost of remediation will be approximately $80,000,000. The Company's environmental consultants have conducted extensive investigations of Spectrace's operating facility located within the MEW Study Area and have concluded that Spectrace's activities could not have been the source of any contamination in the soil or groundwater at and around the MEW Study Area. The EPA has informed the Company that no further work needs to be performed on Spectrace's site and indicated that the EPA does not believe there is a contaminant source on the property. However, the Company continues to be named in the EPA's Administrative Order. The Company continues to believe the EPA's Administrative Order for Remedial Design and Remedial Action is not valid with respect to the Company's subsidiary and is seeking the withdrawal of the Administrative Order with respect to the Company's subsidiary. (c) In June 1998, Magna Corporation (now known as BPC) was named as a de minimis PRP at the Operating Industries Superfund Site located in Monterrey Park, California. The EPA has alleged that the company has transported, disposed, or arranged for disposal of, 12,600 gallons of waste material to the site and has demanded a contribution of $43,200 to assist with the remedial response. The Company is presently considering the demand. (d) In May 1987, Baker Performance Chemicals Incorporated (now known as BPC) entered into an Agreed Administrative Order with the then Texas -10- 12 Water Commission, now known as the TNRCC, with respect to soil and groundwater contamination at the Odessa - Hillmont site located in Odessa, Texas. This site was previously used by BPC as a chemical blending plant. The contaminated soil has been removed, and the site continues in the groundwater recovery/treatment phase at an annual cost to the Company of approximately $20,000. (e) Oil Base, Inc. and Hughes Drilling Fluids (now known as INTEQ) have been identified by the EPA as PRPs in the PAB Oil and Chemical Superfund Site located in Abbeville, Louisiana. The remediation of the site was completed in 1998. Operating and maintenance costs of the environmental monitoring system at the site is estimated to total $1,000,000. The Company's allocated share of this cost, based on allocated volume (4.5%) is $45,000. (f) PA Inc., a former subsidiary of the Company, was identified as a PRP in the Sonics International Site, a former hazardous waste disposal facility located near Ranger, Texas. This site is currently being administered by the TNRCC under the Texas Superfund Statute. The Company allegedly contributed 1.64% of the waste volume at the site. It is not possible at this time to quantify the Company's ultimate liability. The remediation proposed by the TNRCC is estimated to cost $700,000. (g) Milpark (now known as INTEQ) has been identified as a PRP at the Toups Farm Superfund Site (eligible for cleanup under the Texas State Cleanup Fund) located north of South Lake near Hallettsville, Texas. The site consists of approximately 21 acres and was operated over the years as a municipal landfill, fence post treating company and a hog farm. Based on available information, the Company does not believe that it has any liability for contamination at the site. (h) Milpark (now known as INTEQ) and Baker Sand Control (now known as BOT) have been named as PRPs at the DL Mud Superfund Site located in Abbeville, Louisiana. This site was used for the disposal of used drilling fluids and drilling muds. However, another named PRP is responsible for a majority of the waste volume disposed at this site, and such PRP is presently engaged in the remediation of the site. To date neither the other PRP nor the EPA have produced any substantive waste disposal or transportation documentation linking the Company or its subsidiaries or divisions to the environmental conditions at the site. The Company does not anticipate that it will have any liability for this site. (i) Milpark (now known as INTEQ) has been named as a PRP at the Mar Services Superfund site located in Crankton, Louisiana. It has been estimated that the contribution to this site by the Company's subsidiary is approximately 0.08% of the total volume of solids at the site (based upon a volumetric calculation). The site is now undergoing investigative studies to determine the remedial action plan as well as a total estimated cost for remediation. -11- 13 (j) Teleco Oilfield Services, Inc. ("Teleco") (now known as INTEQ) has been named as a PRP at the Solvent Recycling Service of New England Superfund Site located in Southington, Connecticut. Approximately 1,000 companies have been named as PRPs at this site. Calculations from the PRP group verified by the Company, indicate that Teleco contributed 0.00006% of the volume at the site. The total cost of cleanup at the site is currently estimated to be $3,500,000. A de minimis buyout offer from either the EPA or the PRP group is anticipated in the future. (k) In January 1996, Petrolite Corporation (now known as BPC) was named as a PRP by the TNRCC at the McBay Oil and Gas State Superfund Site in Grapevine, Texas. The Company has disputed its involvement in the site based on the fact that it has no knowledge of transporting waste to the site. However, the Company has transacted product sales to McBay Oil and Gas Company. Documentation of product sales has been sent to the TNRCC. Based on available information, the Company does not believe that it has any liability for contamination at this site. (l) In July 1997, Petrolite Corporation (now known as BPC), was named by the EPA as a PRP at the Shore Refinery Site, Kilgore, Gregg County, Texas. The Company has completed a thorough search of its documents and records. The Company has concluded that it has not arranged for the disposal, treatment, or transportation of hazardous substances or used oil at the site. To date, the EPA has not produced any substantive, hazardous substance treatment, disposal or transportation 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 the site. While PRPs in Superfund actions have joint and several liability for all costs of remediation in many of the sites described above, it is not possible at this time to quantify the Company's ultimate exposure because the project is either in its early investigative or remediation stage. Based upon current information, the Company does not believe that probable and reasonably possible expenditures in connection with any of the sites described above are likely to have a material adverse effect on the Company's financial condition because: (i) the Company has established adequate reserves to cover what the Company presently believes will be its ultimate liability with respect to the matter, (ii) the Company and its subsidiaries have only limited involvement in the sites based upon a volumetric calculation, as described above, (iii) there are other PRPs that have greater involvement on a volumetric calculation basis who have substantial assets and who may reasonably be expected to pay their share of the cost of remediation, (iv) where discussed above, the Company has insurance coverage or contractual indemnities from third parties to cover the ultimate liability, and (v) the Company's ultimate liability, based upon current information, is small compared to the Company's overall net worth. -12- 14 The Company is subject to various other governmental proceedings 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. ITEM 2. PROPERTIES The Company operates 80 manufacturing plants, almost all of which are owned, ranging in size from approximately 750 square feet to approximately 306,700 square feet of manufacturing space and totaling more than 3,860,000 square feet. Of such total, approximately 2,570,000 square feet (67%) are located in the United States, 270,000 square feet (7%) are located in the Western Hemisphere exclusive of the United States, 875,000 square feet (23%) are located in Europe, and 145,000 square feet (3%) 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.
Other Other United Western Eastern States Hemisphere Europe Hemisphere Total ------ ---------- ------ ---------- ----- Oilfield 39 8 10 10 67 Process 6 2 4 1 13
The Company believes that its manufacturing facilities are well maintained. The Company also has a significant investment in service vehicles, rental tools and equipment. During 1998 and 1997, the Company recognized permanent impairments and wrote down to net realizable value -13- 15 certain inventory, property, plant and equipment. For further information regarding these write-downs, see Note 8 of Notes to Consolidated Financial Statements. Property additions increased in 1998 as the Company added capacity to meet the increased market demand. ITEM 3. LEGAL PROCEEDINGS The Company is sometimes named as a defendant in litigation relating to the products and services it provides. 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 in every case fully indemnify the Company against liabilities arising out of pending and future legal proceedings relating to its business activities. See also "Item 1. Business - Environmental Matters." ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. -14- 16 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 3, 1999, there were approximately 98,741 stockholders and 29,180 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, 1998 and information regarding dividends declared on the Common Stock during the two years ended December 31, 1998, see Note 19 of Notes to Consolidated Financial Statements. ITEM 6. SELECTED FINANCIAL DATA The information set forth under the caption "Selected Financial Data" in the 1998 Annual Report to Stockholders is incorporated herein by reference. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The information set forth under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations" in the 1998 Annual Report to Stockholders ("MD&A") is incorporated herein by reference. ITEM 7.a QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The information set forth under the sub-caption "Quantitative and Qualitative Market Risk Disclosures" under MD&A is incorporated herein by reference. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The following consolidated financial statements of the Company and the independent auditors' report set forth in the 1998 Annual Report to Stockholders are incorporated herein by reference: -15- 17 Independent Auditors' Report. Consolidated Statements of Operations for the year ended December 31, 1998, the three month period ended December 31, 1997 and for each of the two years in the period ended September 30, 1997. Consolidated Statements of Financial Position as of December 31, 1998 and 1997. Consolidated Statements of Stockholders' Equity for the year ended December 31, 1998, the three month period ended December 31, 1997 and for each of the two years in the period ended September 30, 1997. Consolidated Statements of Cash Flows for the year ended December 31, 1998, the three month period ended December 31, 1997 and for each of the two years in the period ended September 30, 1997. Notes to Consolidated Financial Statements. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. -16- 18 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 28, 1999, 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 28, 1999, 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 28, 1999, 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 28, 1999, which sections are incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS None. -17- 19 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: Financial statement schedules are omitted because of the absence of conditions under which they are required or because all material information required to be reported is included in the consolidated financial statements and notes thereto. (3) Exhibits: 3.1 Restated Certificate of Incorporation. 3.2 By-Laws. 3.3 Certificate of Designation of Series L Preferred Stock of Baker Hughes Incorporated (filed as Exhibit 3.3 to Annual Report of Baker Hughes Incorporated on Form 10-K for the year ended September 30, 1996 and incorporated herein by reference). 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 hereto). 4.3 By-Laws (filed as Exhibit 3.2 hereto). 4.4 Certificate of Designation of Series L Preferred Stock of Baker Hughes Incorporated (filed as Exhibit 4.4 to Annual Report of Baker Hughes Incorporated on Form 10-K for the year ended September 30, 1996 and incorporated herein by reference). -18- 20 10.1 Employment Agreement between Baker Hughes Incorporated and Max L. Lukens dated as of January 1, 1998. 10.2 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 and incorporated herein by reference). 10.3 Severance Agreement between Baker Hughes Incorporated and Max L. Lukens dated as of July 23, 1997 (filed as Exhibit 10.9 to Annual Report of Baker Hughes Incorporated on Form 10-K for the year ended September 30, 1997 and incorporated herein by reference). 10.4 Severance Agreement between Baker Hughes Incorporated and Eric L. Mattson dated as of July 23, 1997 (filed as Exhibit 10.10 to Annual Report of Baker Hughes Incorporated on Form 10-K for the year ended September 30, 1997 and incorporated herein by reference). 10.5 Severance Agreement between Baker Hughes Incorporated and Lawrence O'Donnell, III dated as of July 23, 1997 (filed as Exhibit 10.11 to Annual Report of Baker Hughes Incorporated on Form 10-K for the year ended September 30, 1997 and incorporated herein by reference). 10.6 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 and incorporated herein by reference). 10.7 Form of Amendment 1 to Severance Agreement between Baker Hughes Incorporated and each of G. Stephen Finley, Max L. Lukens, Eric L. Mattson, Lawrence O'Donnell, III and Andrew J. Szescila effective November 11, 1998. 10.8 Severance Agreement between Baker Hughes Incorporated and Thomas R. Bates, Jr. dated as of January 27, 1999. 10.9 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 and incorporated herein by reference). 10.10 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 -19- 21 Incorporated on Form 10-K for the year ended September 30, 1997 and incorporated herein by reference). 10.11 Amendment No. 1999-1 to the Amended and Restated 1991 Employee Stock Bonus Plan. 10.12 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 and incorporated herein by reference). 10.13 1987 Convertible Debenture Plan of Baker Hughes Incorporated (amended as of October 24, 1990) (filed as Exhibit 10.18 to Annual Report of Baker Hughes Incorporated on Form 10-K for the year ended September 30, 1997 and incorporated herein by reference). 10.14 Baker Hughes Incorporated Supplemental Retirement Plan. 10.15 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 incorporated herein by reference). 10.16 Amendment No. 1999-1 to the Baker Hughes Incorporated Supplemental Retirement Plan. 10.17 Executive Severance Policy. 10.18 1993 Stock Option Plan. 10.19 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 incorporated herein by reference). 10.20 Amendment No. 1999-1 to the 1993 Stock Option Plan. 10.21 1993 Employee Stock Bonus Plan. 10.22 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 incorporated herein by reference). 10.23 Amendment No. 1999-1 to the 1993 Employee Stock Bonus Plan. 10.24 Amended and Restated Director Compensation Deferral Plan. 10.25 1995 Employee Annual Incentive Compensation Plan (filed as Exhibit 10.16 to Annual Report of Baker Hughes Incorporated on Form 10-K for the year ended September 30, 1994 and incorporated herein by reference). 10.26 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 incorporated herein by reference). -20- 22 10.27 Amendment No. 1999-1 to the 1995 Employee Annual Incentive Compensation Plan. 10.28 1995 Stock Award Plan (filed as Exhibit 10.17 to Annual Report of Baker Hughes Incorporated on Form 10-K for the year ended September 30, 1994 and incorporated herein by reference). 10.29 Amendment No. 1997-1 to the 1995 Stock Award Plan (filed as Exhibit 10.27 to Annual Report of Baker Hughes Incorporated on Form 10-K for the year ended September 30, 1997 and incorporated herein by reference). 10.30 Amendment No. 1999-1 to the 1995 Stock Award Plan. 10.31 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). 10.32 Amendment No. 1999-1 to Long Term Incentive Plan. 10.33 1998 Employee Stock Option Plan. 10.34 Amendment No. 1999-1 to 1998 Employee Stock Option Plan. 10.35 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. 10.36 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. 10.37 Form of Nonqualified Stock Option Agreement for executive officers effective October 1, 1998. 10.38 Form of Nonqualified Stock Option Agreement for employees effective October 1, 1998. 10.39 Form of Nonqualified Stock Option Agreement for executive officers effective October 1, 1998. 10.40 Form of Incentive Stock Option Agreement for executive officers effective October 1, 1998. 10.41 Form of Nonqualified Stock Option Agreement for directors effective October 25, 1995 (filed as Exhibit 10.16 to Annual Report of Baker Hughes Incorporated on Form 10-K for the year ended September 30, 1996 and incorporated herein by reference). -21- 23 10.42 Form of Nonqualified Stock Option Agreement for employees effective October 25, 1995 (filed as Exhibit 10.16 to Annual Report of Baker Hughes Incorporated on Form 10-K for the year ended September 30, 1996 and incorporated herein by reference). 10.43 Form of Incentive Stock Option Agreement for employees effective October 25, 1995 (filed as Exhibit 10.16 to Annual Report of Baker Hughes Incorporated on Form 10-K for the year ended September 30, 1996 and incorporated herein by reference). 10.44 Agreement and Plan of Merger among Baker Hughes Incorporated, Baker Hughes Missouri, Inc., Baker Hughes Delaware, Inc., Petrolite Corporation and Wm. S. Barnickel & Company, dated as of February 25, 1997 (filed as Exhibit 2.1 to Form 8-K dated March 5, 1997 and incorporated herein by reference). 10.45 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 and incorporated herein by reference). 10.46 Distribution and Indemnity Agreement dated October 31, 1997, between Western Atlas Inc. and UNOVA, Inc. (filed as Exhibit 10.18 to Western Atlas Inc.'s Form 10-Q for the quarter ended September 30, 1997 and incorporated herein by reference). 10.47 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 and incorporated herein by reference). 10.48 Intellectual Property Agreement dated October 31, 1997, between Western Atlas Inc. and UNOVA, Inc. (filed as Exhibit 10.20 to Western Atlas Inc.'s Form 10-Q for the quarter ended September 30, 1997 and incorporated herein by reference). 10.49 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 and incorporated herein by reference). 10.50 Corporate Executive Loan Program. -22- 24 13.1 Portions of 1998 Annual Report to Stockholders. 21.1 Subsidiaries of Registrant. 23.1 Consent of Deloitte & Touche LLP. 27.1 Financial Data Schedule (for SEC purposes only). (b) REPORTS ON FORM 8-K: A report on Form 8-K dated December 18, 1998 was filed with the Commission on December 21, 1998 reporting that the Company has restated its financial statements to account for using the pooling of interests method of business combinations and reflecting the audited transition period related to the Company's change in fiscal year. -23- 25 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 17th day of March, 1999. BAKER HUGHES INCORPORATED By /s/ MAX L. LUKENS ----------------------------------------- (Max L. Lukens, 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.
Signature Title Date --------- ----- ---- /s/ MAX L. LUKENS - ----------------------------------------- Chairman of the Board, President March 17, 1999 (Max L. Lukens) and Chief Executive Officer (principal executive officer) /s/ E.L. MATTSON - ----------------------------------------- Senior Vice President and March 17, 1999 (E. L. Mattson) Chief Financial Officer (principal financial officer) /s/ JAMES W. HARRIS - ----------------------------------------- Vice President and Controller March 17, 1999 (James W. Harris) (principal accounting officer) /s/ LESTER M. ALBERTHAL, JR. - ----------------------------------------- Director March 17, 1999 (Lester M. Alberthal, Jr.) /s/ VICTOR G. BEGHINI - ----------------------------------------- Director March 17, 1999 (Victor G. Beghini) - ----------------------------------------- Director March , 1999 (Alton J. Brann)
-24- 26 /s/ JOSEPH T. CASEY - ----------------------------------------- Director March 17, 1999 (Joseph T. Casey) /s/ EUNICE M. FILTER - ----------------------------------------- Director March 17, 1999 (Eunice M. Filter) /s/ JOE B. FOSTER - ----------------------------------------- Director March 17, 1999 (Joe B. Foster) /s/ CLAIRE W. GARGALLI - ----------------------------------------- Director March 17, 1999 (Claire W. Gargalli) /s/ RICHARD D. KINDER - ----------------------------------------- Director March 17, 1999 (Richard D. Kinder) - ----------------------------------------- Director March , 1999 (John F. Maher) /s/ JAMES F. McCALL - ----------------------------------------- Director March 17, 1999 (James F. McCall) /s/ H. JOHN RILEY, JR. - ----------------------------------------- Director March 17, 1999 (H. John Riley, Jr.) /s/ JOHN R. RUSSELL - ----------------------------------------- Director March 17, 1999 (John R. Russell) /s/ CHARLES L. WATSON - ----------------------------------------- Director March 17, 1999 (Charles L. Watson) /s/ MAX P. WATSON, JR. - ----------------------------------------- Director March 17, 1999 (Max P. Watson, Jr.)
-25- 27 INDEX TO EXHIBITS
EXHIBIT NUMBERS DESCRIPTION - ------- ----------- 3.1 Restated Certificate of Incorporation. 3.2 By-Laws. 3.3 Certificate of Designation of Series L Preferred Stock of Baker Hughes Incorporated (filed as Exhibit 3.3 to Annual Report of Baker Hughes Incorporated on Form 10-K for the year ended September 30, 1996 and incorporated herein by reference). 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 hereto). 4.3 By-Laws (filed as Exhibit 3.2 hereto). 4.4 Certificate of Designation of Series L Preferred Stock of Baker Hughes Incorporated (filed as Exhibit 4.4 to Annual Report of Baker Hughes Incorporated on Form 10-K for the year ended September 30, 1996 and incorporated herein by reference).
28 10.1 Employment Agreement between Baker Hughes Incorporated and Max L. Lukens dated as of January 1, 1998. 10.2 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 and incorporated herein by reference). 10.3 Severance Agreement between Baker Hughes Incorporated and Max L. Lukens dated as of July 23, 1997 (filed as Exhibit 10.9 to Annual Report of Baker Hughes Incorporated on Form 10-K for the year ended September 30, 1997 and incorporated herein by reference). 10.4 Severance Agreement between Baker Hughes Incorporated and Eric L. Mattson dated as of July 23, 1997 (filed as Exhibit 10.10 to Annual Report of Baker Hughes Incorporated on Form 10-K for the year ended September 30, 1997 and incorporated herein by reference). 10.5 Severance Agreement between Baker Hughes Incorporated and Lawrence O'Donnell, III dated as of July 23, 1997 (filed as Exhibit 10.11 to Annual Report of Baker Hughes Incorporated on Form 10-K for the year ended September 30, 1997 and incorporated herein by reference). 10.6 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 and incorporated herein by reference). 10.7 Form of Amendment 1 to Severance Agreement between Baker Hughes Incorporated and each of G. Stephen Finley, Max L. Lukens, Eric L. Mattson, Lawrence O'Donnell, III and Andrew J. Szescila effective November 11, 1998. 10.8 Severance Agreement between Baker Hughes Incorporated and Thomas R. Bates, Jr. dated as of January 27, 1999. 10.9 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 and incorporated herein by reference). 10.10 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
29 Incorporated on Form 10-K for the year ended September 30, 1997 and incorporated herein by reference). 10.11 Amendment No. 1999-1 to the Amended and Restated 1991 Employee Stock Bonus Plan. 10.12 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 and incorporated herein by reference). 10.13 1987 Convertible Debenture Plan of Baker Hughes Incorporated (amended as of October 24, 1990) (filed as Exhibit 10.18 to Annual Report of Baker Hughes Incorporated on Form 10-K for the year ended September 30, 1997 and incorporated herein by reference). 10.14 Baker Hughes Incorporated Supplemental Retirement Plan. 10.15 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 incorporated herein by reference). 10.16 Amendment No. 1999-1 to the Baker Hughes Incorporated Supplemental Retirement Plan. 10.17 Executive Severance Policy. 10.18 1993 Stock Option Plan. 10.19 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 incorporated herein by reference). 10.20 Amendment No. 1999-1 to the 1993 Stock Option Plan. 10.21 1993 Employee Stock Bonus Plan. 10.22 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 incorporated herein by reference). 10.23 Amendment No. 1999-1 to the 1993 Employee Stock Bonus Plan. 10.24 Amended and Restated Director Compensation Deferral Plan. 10.25 1995 Employee Annual Incentive Compensation Plan (filed as Exhibit 10.16 to Annual Report of Baker Hughes Incorporated on Form 10-K for the year ended September 30, 1994 and incorporated herein by reference). 10.26 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 incorporated herein by reference).
30 10.27 Amendment No. 1999-1 to the 1995 Employee Annual Incentive Compensation Plan. 10.28 1995 Stock Award Plan (filed as Exhibit 10.17 to Annual Report of Baker Hughes Incorporated on Form 10-K for the year ended September 30, 1994 and incorporated herein by reference). 10.29 Amendment No. 1997-1 to the 1995 Stock Award Plan (filed as Exhibit 10.27 to Annual Report of Baker Hughes Incorporated on Form 10-K for the year ended September 30, 1997 and incorporated herein by reference). 10.30 Amendment No. 1999-1 to the 1995 Stock Award Plan. 10.31 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). 10.32 Amendment No. 1999-1 to Long Term Incentive Plan. 10.33 1998 Employee Stock Option Plan. 10.34 Amendment No. 1999-1 to 1998 Employee Stock Option Plan. 10.35 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. 10.36 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. 10.37 Form of Nonqualified Stock Option Agreement for executive officers effective October 1, 1998. 10.38 Form of Nonqualified Stock Option Agreement for employees effective October 1, 1998. 10.39 Form of Nonqualified Stock Option Agreement for executive officers effective October 1, 1998. 10.40 Form of Incentive Stock Option Agreement for executive officers effective October 1, 1998. 10.41 Form of Nonqualified Stock Option Agreement for directors effective October 25, 1995 (filed as Exhibit 10.16 to Annual Report of Baker Hughes Incorporated on Form 10-K for the year ended September 30, 1996 and incorporated herein by reference).
31 10.42 Form of Nonqualified Stock Option Agreement for employees effective October 25, 1995 (filed as Exhibit 10.16 to Annual Report of Baker Hughes Incorporated on Form 10-K for the year ended September 30, 1996 and incorporated herein by reference). 10.43 Form of Incentive Stock Option Agreement for employees effective October 25, 1995 (filed as Exhibit 10.16 to Annual Report of Baker Hughes Incorporated on Form 10-K for the year ended September 30, 1996 and incorporated herein by reference). 10.44 Agreement and Plan of Merger among Baker Hughes Incorporated, Baker Hughes Missouri, Inc., Baker Hughes Delaware, Inc., Petrolite Corporation and Wm. S. Barnickel & Company, dated as of February 25, 1997 (filed as Exhibit 2.1 to Form 8-K dated March 5, 1997 and incorporated herein by reference). 10.45 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 and incorporated herein by reference). 10.46 Distribution and Indemnity Agreement dated October 31, 1997, between Western Atlas Inc. and UNOVA, Inc. (filed as Exhibit 10.18 to Western Atlas Inc.'s Form 10-Q for the quarter ended September 30, 1997 and incorporated herein by reference). 10.47 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 and incorporated herein by reference). 10.48 Intellectual Property Agreement dated October 31, 1997, between Western Atlas Inc. and UNOVA, Inc. (filed as Exhibit 10.20 to Western Atlas Inc.'s Form 10-Q for the quarter ended September 30, 1997 and incorporated herein by reference). 10.49 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 and incorporated herein by reference). 10.50 Corporate Executive Loan Program. 13.1 Portions of 1998 Annual Report to Stockholders. 21.1 Subsidiaries of Registrant. 23.1 Consent of Deloitte & Touche LLP. 27.1 Financial Data Schedule (for SEC purposes only).
EX-3.1 2 RESTATED CERTIFICATE OF INCORPORATION 1 Exhibit 3.1 RESTATED CERTIFICATE OF INCORPORATION OF BAKER HUGHES INCORPORATED - ------------------------------------------------------------------------------- PURSUANT TO SECTIONS 245 AND 242 OF THE GENERAL CORPORATION LAW OF THE STATE OF DELAWARE - ------------------------------------------------------------------------------- BAKER HUGHES INCORPORATED (the "Corporation"), a corporation organized and existing under and by virtue of the General Corporation Law of the State of Delaware, hereby adopts the following Restated Certificate of Incorporation pursuant to Sections 245 and 242 of said General Corporation Law and certifies as follows: 1. The name of this corporation is: BAKER HUGHES INCORPORATED. 2. The Certificate of Incorporation of the Corporation was originally filed with the Secretary of State of the State of Delaware on November 3, 1986. 3. The Restated Certificate of Incorporation was duly adopted by unanimous written consent of the Board of Directors of the Corporation dated December 17, 1986, and by unanimous vote of all the stockholders on December 18, 1986 in accordance with the provisions of Sections 242 and 245 of the General Corporation Law of the State of Delaware. 4. The Restated Certificate of Incorporation supersedes the original Certificate of Incorporation. 5. The Certificate of Incorporation is hereby amended and restated in its entirety to read as follows: FIRST: The name of this Corporation is: BAKER HUGHES INCORPORATED SECOND: The address of its registered office in the State of Delaware is The Corporation Trust Center, 1209 Orange Street in the City of Wilmington, County of New Castle. The name of its registered agent at such address is The Corporation Trust Company. THIRD: The nature of the business or purposes to be conducted or promoted is to engage in any lawful act or activity for which corporations may be organized under the General Corporation Law of Delaware. 1 2 FOURTH: The total number of shares of stock which the Corporation shall have the authority to issue is 415,000,000 shares of capital stock consisting of 15,000,000 shares of preferred stock, par value $1.00 per share (the "Preferred Stock") and 400,000,000 shares of common stock, par value $l.00 per share (the "Common Stock"). The designations, powers, preferences and relative, participating, optional or other special rights and qualifications, limitations or restrictions of the Preferred Stock shall be established by resolution of the Board of Directors pursuant to Section 151 of the General Corporation Law of the State of Delaware. FIFTH: In furtherance and not in limitation of the powers conferred by statute, the Board of Directors is expressly authorized to make, alter or repeal the by-laws of the Corporation. SIXTH: Election of directors need not be by written ballot unless the by-laws of the Corporation shall so provide. SEVENTH: The by-laws of the Corporation shall not be made, repealed, altered, amended or rescinded 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 purposes of this Article SEVENTH as one class. EIGHTH: No action shall be taken by the stockholders except at an annual or special meeting of stockholders and stockholders may not act by written consent. NINTH: Special meetings of the stockholders of the Corporation for any purpose or purposes 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 the by-laws of the Corporation, include the power to call such meetings. Special meetings of stockholders of the Corporation may not be called by any other person or persons. TENTH: No director of this Corporation shall be personally liable to the Corporation or its stockholders for monetary damages for breach of fiduciary duty as a director, except for liability (i) for any breach of the director's duty of loyalty to the Corporation or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of the law, (iii) under Section 174 of the General Corporation Law of Delaware, or (iv) for any transaction from which the director derived an improper personal benefit. 2 3 If the General Corporation Law of the State of Delaware is hereafter amended to authorize corporate action further limiting or eliminating the personal liability of directors, then the liability of the director to the Corporation shall be limited or eliminated to the full extent permitted by the General Corporation Law of the State of Delaware, as so amended from time to time. Any repeal or modification of this Article shall be prospective only, and shall not adversely affect any limitation on the personal liability of a director of the Corporation existing at the time of such repeal or modification. ELEVENTH: The initial directors of the Corporation shall serve for a term ending on the date of the first annual meeting of stockholders next following September 30, 1987. Thereafter, 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 one-third (1/3) the extra director shall be a member of Class III and if the fraction is two-thirds (2/3) one of the extra directors shall be a member of Class III and the other shall be a member of Class II. After division of the Board of Directors into classes, 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; provided, however, that the initial directors appointed to Class I shall serve for a term ending on the date of the first annual meeting next following September 30, 1988, the initial directors appointed to Class II shall serve for a term ending on the date of the second annual meeting next following September 30, 1988, and the initial directors appointed to Class III shall serve for a term ending on the date of the third annual meeting next following September 30, 1988. The number of directors shall be fixed from time to time by the by-laws of the Corporation or an amendment thereof duly adopted by the Board of Directors or by the stockholders acting in accordance with Article SEVENTH herein. In the event of any increase or 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, retirement, resignation or removal, and (b) the newly created or eliminated directorships resulting from such increase or 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 this Article, as applied to the new authorized number of directors. Notwithstanding any of the foregoing provisions of this Article, each director shall serve until his successor is elected and qualified or until his death, retirement, resignation or removal. No director may be removed during his term except for cause. 3 4 TWELFTH: The affirmative vote of the holders of not less than 75% of the outstanding shares of "Voting Stock" (as hereinafter defined) of the Corporation, including the affirmative vote of the holders of not less than 66 2/3% of the outstanding shares of Voting Stock not owned, directly or indirectly, by any "Related Person" (as hereinafter defined), shall be required for the approval or authorization of any "Business Combination" (as hereinafter defined) of the Corporation with any Related Person; provided, however, that the 66 2/3% voting requirement referred to above shall not be applicable if the Business Combination is approved by the affirmative vote of the holders of not less than 90% of the outstanding shares of Voting Stock; and further provided that the 75% voting requirement shall not be applicable if: (1) The Board of Directors of the Corporation by a vote of not less than 75% of the directors then holding office (a) have expressly approved in advance the acquisition of outstanding shares of Voting Stock of the Corporation that caused the Related Person to become a Related Person or (b) have approved the Business Combination prior to the Related Person involved in the Business Combination having become a Related Person; (2) The Business Combination is solely between the Corporation and another corporation, 100% of the Voting Stock of which is owned directly or indirectly by the Corporation; or (3) All of the following conditions have been met: (a) the Business Combination is a merger or consolidation, the consummation of which is proposed to take place within one year of the date of the transaction pursuant to which such person became a Related Person and the cash or fair market value of the property, securities or other consideration to be received per share by holders of Common Stock of the Corporation in the Business Combination is not less than the highest per share price (with appropriate adjustments for recapitalizations and for stock splits, reverse stock splits and stock dividends) paid by the Related Person in acquiring any of its holdings of the Corporation's Common Stock; (b) the consideration to be received by such holders is either cash or, if the Related Person shall have acquired the majority of its holdings of the Corporation's Common Stock for a form of consideration other than cash, in the same form of consideration as the Related Person acquired such majority; (c) after such Related Person has become a Related Person and prior to the consummation of such Business Combination: (i) except as approved by a majority of the "Continuing Directors" (as hereinafter defined), there shall have been no failure to declare and pay at the regular date therefor any full quarterly dividends (whether or not cumulative) on any outstanding Shares of Preferred Stock of the Corporation, (ii) there shall have been no reduction in the annual rate of dividends paid per share on the Corporation's Common Stock (adjusted as appropriate for recapitalizations and for stock splits, reverse stock splits and stock dividends) except as approved by a majority of the Continuing 4 5 Directors, (iii) such Related Person shall not have become the "Beneficial Owner" (as hereinafter defined) of any additional shares of Voting Stock of the Corporation except as part of the transaction which resulted in such Related Person becoming a Related Person, and (iv) such Related Person shall not have received the benefit, directly or indirectly (except proportionately as a stockholder), of any loans, advances, guarantees, pledges or other financial assistance or any tax credits or other tax advantages provided by the Corporation, whether in anticipation of or in connection with such Business Combination or otherwise; and (d) a proxy statement, responsive to the requirements of the Securities Exchange Act of 1934, as amended ("Exchange Act") and the rules and regulations thereunder (or any subsequent provisions replacing the Exchange Act, rules or regulations), shall be mailed to all stockholders of record at least 30 days prior to the consummation of the Business Combination for the purpose of soliciting stockholder approval of the Business Combination and shall contain at the front thereof, in a prominent place, any recommendations as to the advisability (or inadvisability) of the Business Combination which the Continuing Directors, or any of them, may choose to state and, if deemed advisable by a majority of the Continuing Directors, an opinion of a reputable investment banking firm as to the fairness (or unfairness) of the terms of such Business Combination from the point of view of the remaining stockholders of the Corporation (such investment banking firm to be selected by a majority of the Continuing Directors and to be paid a reasonable fee for its services by the Corporation upon receipt of such opinion). For the purposes of this Article: (i) The term "Business Combination" shall mean (a) any merger or consolidation of the Corporation or a subsidiary with or into a Related Person, (b) any sale, lease, exchange, transfer or other disposition, including without limitation a mortgage or any other security device, of all or any "Substantial Part" (as hereinafter defined) of the assets either of the Corporation (including, without limitation, any voting securities of a subsidiary) or of a subsidiary to a Related Person (other than a distribution by the Corporation or a subsidiary to the Related Person of assets in connection with a pro rata distribution by the Corporation to all stockholders), (c) any merger or consolidation of a Related Person with or into the Corporation or a subsidiary of the Corporation, (d) any sale, lease, exchange, transfer or other disposition of all or any Substantial Part of the assets of a Related Person to the Corporation or a subsidiary of the Corporation, (e) the issuance of any securities (other than by way of pro rata distribution to all stockholders) of the Corporation or a subsidiary of the Corporation to a Related Person, (f) the acquisition by the Corporation or a subsidiary of the Corporation of any securities of a Related Person, (g) any recapitalization that would have the effect of increasing the voting power of a Related Person, (h) any series or combination of transactions having the 5 6 same effect, directly or indirectly, as any of the foregoing and (i) any agreement, contract or arrangement providing for any of the transactions described in this definition of Business Combination. (ii) The term "Continuing Director" shall mean any member of the Board of Directors of the Corporation who is not affiliated with a Related Person and who was a member of the Board of Directors immediately prior to the time that the Related Person became a Related Person, and any successor to a Continuing Director who is not affiliated with the Related Person and is recommended to succeed a Continuing Director by a majority of Continuing Directors then serving as members of the Board of Directors of the Corporation. (iii) The term "Related Person" shall mean and include any individual, corporation, partnership or other person or entity which, together with its "Affiliates" and "Associates" (as defined on October 1, 1986 in Rule 12b-2 under the Exchange Act), is the "Beneficial Owner" (as defined on October 1, 1986 in Rule 13d-3 under the Exchange Act) in the aggregate of 10% or more of the outstanding Voting Stock of the Corporation, and any Affiliate or Associate of any such individual, corporation, partnership or other person or entity. (iv) The term "Substantial Part" shall mean more than 10% of the book value of the total assets of the Corporation in question as of the end of its most recent fiscal year ending prior to the time the determination is being made. (v) Without limitation, any shares of Common Stock of the Corporation that any person has the right to acquire pursuant to any agreement, or upon exercise of conversion rights, warrants or options, or otherwise, shall be deemed beneficially owned by such person. (vi) For the purposes of subparagraph (3) of this Article, the term "other consideration to be received" shall include, without limitation, Common Stock of the Corporation retained by its existing public shareholders in the event of a Business Combination in which the Corporation is the surviving corporation. (vii) The term "Voting Stock" shall mean all outstanding shares of capital stock of the Corporation or another corporation entitled to vote generally in the election of directors and each reference to a proportion of shares of Voting Stock shall refer to such proportion of the votes entitled to be cast by such shares. THIRTEENTH: The provisions set forth in this Article THIRTEENTH and in Articles SEVENTH (dealing with the alteration of Bylaws by stockholders), EIGHTH (dealing with the prohibition against stockholder action without meetings), TENTH (dealing with 6 7 liability of directors), ELEVENTH (dealing with the classification and number of directors) and TWELFTH (dealing with the 75% vote of stockholders required for certain Business Combinations) herein may not be repealed or amended in any respect, and no Article imposing cumulative voting in the election of directors may be added, unless such action is approved by the affirmative vote 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 purposes of this Article THIRTEENTH as one class. Amendment to the provisions set forth in this Article THIRTEENTH and in Article TWELFTH shall also require the affirmative vote of 66 2/3% of such total voting power excluding the vote of shares owned by a "Related Person" (as defined in Article THIRTEENTH). The voting requirements contained in Article SEVENTH, Article TWELFTH and this Article THIRTEENTH herein shall be in addition to the voting requirements imposed by law, other provisions of this Certificate of Incorporation or any Certificate of Designation of Preferences in favor of certain classes or series of classes of shares of the Corporation. FOURTEENTH: The Corporation reserves the right to amend, alter, change or repeal any provisions contained in this Restated Certificate of Incorporation, in the manner now or hereafter prescribed by statute, and all rights conferred upon stockholders herein are granted subject to this reservation. Notwithstanding the foregoing, the provision set forth in Articles SEVENTH, EIGHTH, TENTH, ELEVENTH, TWELFTH and THIRTEENTH may not be repealed or amended in any respect unless such repeal or amendment is approved as specified in Article THIRTEENTH herein. IN WITNESS WHEREOF, BAKER HUGHES INCORPORATED has caused this Restated Certificate of Incorporation to be executed, signed and acknowledged by Patrick T. Doyle, its Vice President, who states under penalty of perjury that the facts stated herein are true, and to be attested by Sandra E. Alford, its Assistant Secretary this 3rd day of April, 1987. /s/ Patrick T. Doyle ---------------------------- Patrick T. Doyle Vice President Attest: /s/ Sandra E. Alford - ----------------------------- Sandra E. Alford Assistant Secretary 7 EX-3.2 3 BY-LAWS 1 EXHIBIT 3.2 BYLAWS OF BAKER HUGHES INCORPORATED As Amended December 2, 1998 2 Table of Contents
Page No. -------- 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 ...............................................................2 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 ........................................................................5 Section 1. Number and Qualification of Directors ..........................................5 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 ...................................................7 Section 7. Regular Meetings ...............................................................7 Section 8. Special Meetings ...............................................................7 Section 9. Quorum .........................................................................8 Section 10. Action Without Meeting .........................................................8 Section 11. Telephonic Meetings ............................................................8 Section 12. Meetings and Action of Committees ..............................................8 Section 13. Special Meetings of Committees .................................................9 Section 14. Minutes of Committee Meetings ..................................................9 Section 15. Compensation of Directors ......................................................9 Section 16. Indemnification ................................................................9
ii 3 ARTICLE IV - Officers .........................................................................11 Section 1. Officers ......................................................................11 Section 2. Election of Officers ..........................................................11 Section 3. Subordinate Officers ..........................................................11 Section 4. Removal and Resignation of Officers ...........................................12 Section 5. Vacancies in Offices ..........................................................12 Section 6. Chairman of the Board .........................................................12 Section 7. Vice Chairman of the Board ....................................................12 Section 8. President .....................................................................12 Section 9. Vice Presidents ...............................................................12 Section 10. Secretary ......................................................................12 Section 11. Chief Financial Officer ........................................................13 Section 12. Treasurer and Controller ......................................................13 ARTICLE V - Certificate of Stock ..............................................................13 Section 1. Certificates ...................................................................13 Section 2. Signatures on Certificates .....................................................13 Section 3. Statement of Stock Rights, Preferences, Privileges..............................14 Section 4. Lost Certificates ..............................................................14 Section 5. Transfers of Stock .............................................................14 Section 6. Fixing Record Date .............................................................14 Section 7. Registered Stockholders ........................................................15 ARTICLE VI - General Provisions - Dividends ...................................................15 Section 1. Dividends ......................................................................15 Section 2. Payment of Dividends; Directors' Duties.........................................15 Section 3. Checks .........................................................................15 Section 4. Corporate Contracts and Instruments ............................................15 Section 5. Fiscal Year ....................................................................15 Section 6. Manner of Giving Notice ........................................................16 Section 7. Waiver of Notice ...............................................................16 Section 8. Annual Statement ...............................................................16 ARTICLE VII - Amendments ......................................................................16 Section 1. Amendment by Directors .........................................................16 Section 2. Amendment by Stockholders ......................................................17
iii 4 BYLAWS OF BAKER HUGHES INCORPORATED ARTICLE I Offices Section 1. The registered office shall be in the City of Wilmington, County of New Castle, State of Delaware. Section 2. 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. All meetings of the stockholders shall be held at such place 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. An annual meeting of stockholders shall be held on the fourth Wednesday in January in each year, if not a legal holiday, and if a legal holiday, then on the next business day following, at 2:00 p.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 17 hereof, one class of the directors of the Corporation, and transacting such other business as may properly be brought before the meeting. Section 3. 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. 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 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 thirty (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. 1 5 Section 4. When a quorum is present at any meeting, the 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, 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. 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 appointed by an instrument in writing subscribed by such stockholder and bearing a date not more than three years prior to said meeting, unless said instrument provides for a longer period. All proxies must be filed with the Secretary of the Corporation at the beginning of each meeting in order to be counted in any vote at the meeting. A proxy shall be deemed signed if the stockholder's name is placed on the proxy (whether by manual signature, telegraphic transmission or otherwise) by the stockholder or the stockholder's attorney in fact. 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 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. Any notice requested to be given to stockholders by statute, the Certificate of Incorporation or these Bylaws, including notice of any meeting of stockholders, shall be given personally, by first-class mail or by telegraphic communication, charges prepaid, addressed to the stockholder at the address of such stockholder appearing on the books of the Corporation or given by the stockholder to the Corporation for the purpose of notice. If no such address appears on the Corporation's books or has been so given, notice shall be deemed to have been given if sent by first-class mail or telegraphic communication to the Corporation's principal executive office, or if published at least once in a newspaper of general circulation in the county where such principal executive office is located. Notice shall be deemed to have been given at the time when delivered personally or deposited in the mail or sent by telegram. If any notice addressed to a stockholder at the address of such stockholder appearing on the books of a Corporation is returned to the Corporation by the United States Postal Service marked to indicate that the United States Postal Service is unable to deliver the notice to the stockholder at such address, all further notices shall be deemed to have been duly given without further mailing if the same shall be available to the stockholder upon written demand of the stockholder at the principal executive office of the Corporation for a period of one year from the date of the giving of such notice. Section 8. 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, or objects to the consideration of matters not included in the notice of the meeting. 2 6 Section 9. The officer or agent who has charge of the stock ledger of the Corporation shall prepare and make, at least ten 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, either at a place within the city where their meeting is to be held, which place shall be specified in the notice of the meeting, or, if not so specified, at the place where the meeting is to be held. 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. 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. 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) Determine the number of shares outstanding and the voting power of each, the shares represented at the meeting, the existence of a quorum, and the authenticity, validity and effect of proxies; (b) Receive votes or ballots; (c) Hear and determine all challenges and questions in any way arising in connection with the right to vote; (d) Count and tabulate all votes; (e) Determine when the polls shall close; (f) Determine the results; and (g) Do any other acts that may be proper to conduct the election or vote with fairness to all stockholders. 3 7 Section 12. 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. The order of business at all meetings of stockholders shall be as determined by the chairman of the meeting. Section 14. 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 hereinafter 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 said 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 one hundred twenty (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 thirty (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 (10th) 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 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 reconvened 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 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. 4 8 Section 15. 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 reconvene within thirty (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 reconvened 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 which pertains to the nominee. 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. The Board of Directors shall consist of a minimum of twelve (12) and a maximum of sixteen (16) 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 fifteen (15). The maximum number of directors may not be increased by the Board of Directors 5 9 to exceed sixteen 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 ten (10), eleven (11) or twelve (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. 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 one-third (1/3), the extra director shall be a member of Class III, and if the fraction is two-thirds (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; provided, however, that the directors initially appointed to Class I shall serve for a term ending on the date of the first annual meeting next following September 30, 1988, the directors initially appointed to Class II shall serve for a term ending on the date of the second annual meeting next following September 30, 1988, and the directors initially appointed to Class III shall serve for a term ending on the date of the third annual meeting next following September 30, 1988. 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. Directors who are employees of the Corporation must resign from the Board of Directors at the time of any diminution in their duties or responsibilities as an officer, at the time they leave the employ of the Corporation for any reason or on their 70th birthday. A director's term of office shall automatically terminate on the date of the annual meeting of stockholders following: (i) his seventieth (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 ten (10) complete years; (iv) any fiscal year in which he has failed to attend at least sixty-six percent (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). The above requirements of Section 3 of Article III may be waived 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 seventy-five percent (75%) of the members of the whole Board; provided that 6 10 the Board may remove any director who fails to resign as required by the provisions of these Bylaws. Section 4. 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 one-third (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 in such class or classes, voting separately by class. 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 remaining in the class in which the vacancy occurs or, if only one such director remains, by such 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 this 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. 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 Certificate of Incorporation or by these Bylaws directed or required to be exercised or done by the stockholders. Meetings of the Board of Directors Section 6. 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 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 of the Board of Directors may be called by the Chairman of the Board, the Vice Chairman or the President on at least twenty-four 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 any two directors unless the Board consists of only one director, in which case special meetings shall be called by the President or Secretary in like manner and on like notice on the written request of the sole director. 7 11 Section 9. 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. 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, and the writing or writings are filed with the minutes of proceedings of the Board or committee. Section 11. 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. Committees of Directors Section 12. The Board of Directors may, by resolution passed by a majority of the whole Board, designate one or more committees, each such committee to consist of one or more of the directors of the Corporation. The Board may designate one or more directors as alternate members of any committee, who may replace any absent or disqualified member at any meeting of the committee. If no alternate members have been appointed, the committee member or members thereof present at any meeting and not disqualified from voting, whether or not he or they constitute a quorum, may unanimously appoint another member of the Board of Directors to act at the meeting in the place of any 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, but no such committee shall have the power or authority to authorize an amendment to the Certificate of Incorporation (except that a committee may, to the extent authorized in the resolution or resolutions providing for the issuance of shares of stock adopted by the Board of Directors, fix the designations and any of the preferences or rights of such shares relating to dividends, redemption, dissolution, any distribution of assets of the Corporation or the conversion into, or the exchange of such shares for, shares of any other class or classes or any other series of the same or any other class or classes of stock of the Corporation, or fix the number or shares of any series of stock or authorize the increase or decrease of the shares of any series), adopt an agreement of 8 12 merger or consolidation, recommend to the stockholders the sale, lease or exchange of all or substantially all of the Corporation's property and assets, recommend to the stockholders a dissolution of the Corporation or a revocation of a dissolution, or amend the Bylaws of the Corporation; and, unless the resolution or the Certificate of Incorporation expressly so provide, no such committee shall have the power or authority to declare a dividend, to authorize the issuance of stock or to adopt a certificate of ownership and merger. Section 13. Special meetings of committees may be called by the Chairman of such committee, the Chairman of the Board or the President, on at least forty-eight (48) hours notice to each member and alternate 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 one-half (1/2) of that number. If a committee is comprised of two members, a quorum shall consist of both members. Section 14. Each Committee shall keep regular minutes of its meetings and report the same to the Board of Directors when requested. Compensation of Directors Section 15. 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 therefor. Members of special or standing committees may be allowed like compensation for attending committee meetings. Indemnification Section 16. (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 9 13 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 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 10 14 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 the Board of Directors by a majority vote of a quorum consisting of Directors who were not parties to such action, suit or proceeding, or (2) if such a quorum is not obtainable, or, even if obtainable a quorum of disinterested directors so directs, by independent legal counsel in a written opinion, or (3) by the stockholders. (f) Expenses (including attorneys' fees) incurred by an 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. 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. 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 Board, subject to the rights, if any, of any officer under any contract of employment. Section 3. 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. 11 15 Section 4. 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. 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. 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. 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. 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. 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 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. 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. 12 16 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. 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. 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. ARTICLE V Certificate of Stock Section 1. 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. 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. 13 17 Section 3. 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. Lost, Stolen or Destroyed Certificates Section 4. 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. Transfers of Stock Section 5. 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. Fixing Record Date Section 6. 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. 14 18 Registered Stockholder Section 7. 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 Dividends Section 1. 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. 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. Checks Section 3. 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 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. 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. Fiscal Year Section 5. The fiscal year of the Corporation shall be January 1 through December 31, unless otherwise fixed by resolution of the Board of Directors. 15 19 Notices Section 6. 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 or by facsimile. Section 7. 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, or by telegraph, cable or other written form of recorded communication, signed by the person or persons entitled to said notice, whether before or after the time stated therein, shall be deemed equivalent thereto. Annual Statement Section 8. The Board of Directors shall present at each annual meeting, and at any special meeting of the stockholders when called for by vote of the stockholders, a full and clear statement of the business and condition of the Corporation. ARTICLE VII Amendments Section 1. 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, Section 6 of these Bylaws, or any of such provisions, which shall require approval by the affirmative vote of directors representing at least seventy-five percent (75%) of the number of directors provided for in accordance with Article III, Section 1, and except as otherwise expressly provided in a bylaw adopted by the stockholders as hereinafter provided, 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. 16 20 Section 2. 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 seventy-five percent (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. 17 EX-10.1 4 EMPLOYMENT AGREEMENT - MAX L. LUKENS 1 EXHIBIT 10.1 EMPLOYMENT AGREEMENT by and between BAKER HUGHES INCORPORATED and M. L. LUKENS January 1, 1998 2 EMPLOYMENT AGREEMENT AGREEMENT, dated as of January 1, 1998, by and between M. L. Lukens (the "Executive") and Baker Hughes Incorporated, a Delaware corporation (the "Company"). WHEREAS, the Executive is currently employed by the Company as its Chief Executive Officer and is a party to an employment agreement with the Company(the "Prior Agreement"), effective as of December 7, 1994, and a Severance Agreement, dated as of July 23, 1997 (the "Severance Agreement"); WHEREAS, the Board of Directors of the Company (the "Board") desires to provide for the continued employment of the Executive and to encourage the attention and dedication to the Company of the Executive as a member of the Company's management, in the best interests of the Company and its shareholders; WHEREAS, the Executive is willing to commit himself to serve the Company, on the terms and conditions herein provided; and WHEREAS, the Company and the Executive desire to terminate and supersede the Prior Agreement (but not the Severance Agreement) and to set forth in this Agreement the terms and conditions of the Executive's employment; NOW, THEREFORE, in consideration of the premises and the respective covenants and agreements of the parties herein contained, and intending to be legally bound hereby, the parties hereto agree as follows: 1. 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 on the date first written above (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 the third anniversary thereof; provided, that, beginning on January 1, 1999 and on each January 1 thereafter, the Term shall automatically be extended for one additional year unless, prior to the September 30 of the preceding year, the Company or the Executive shall have given notice to not extend the Term. 2. Position and Duties. As of the Effective Date, the Executive shall serve as Chairman of the Board, President and Chief Executive Officer of the Company, in which capacity the Executive shall perform the usual and customary duties of such office, which shall be those normally inherent in such capacity in U.S. publicly held corporations of similar size and character. 3 The Executive agrees and acknowledges that, in connection with his employment relationship with the Company, the Executive owes fiduciary duties to the Company and will act accordingly. During the Employment Period, the Executive agrees to devote substantially his full time, attention and energies to the Company's business and agrees to faithfully and diligently endeavor to the best of his ability to further the best interests of the Company. The Executive shall not engage in any other business activity, whether or not such business activity is pursued for gain, profit or other pecuniary advantage. Subject to the covenants of Section 9 herein, this shall not be construed as preventing the Executive from investing his own assets in such form or manner as will not require his services in the daily operations of the affairs of the companies in which such investments are made. Further, subject to Section 9 herein, the Executive may serve as a director of other companies so long as such service is not injurious to the Company and so long as such service does not present the Executive with a conflict of interest. In keeping with the Executive's fiduciary duties to the Company, the Executive agrees that he shall not, directly or indirectly, become involved in any conflict of interest, or upon discovery thereof, allow such a conflict to continue. Moreover, the Executive agrees that he shall promptly disclose to the Board any facts which might involve any reasonable possibility of a conflict of interest. Circumstances in which a conflict of interest on the part of the Executive would or might arise, and which should be reported immediately by the Executive to the Board, include the following: (a) ownership of a material interest in, acting in any capacity for, or accepting directly or indirectly any payments, services or loans from a supplier, contractor, subcontractor, customer or other entity with which the Company does business; (b) misuse of information or facilities to which the Executive has access in a manner which will be detrimental to the Company's interest; (c) disclosure or other misuse of Confidential Information (as defined in Section 9); (d) acquiring or trading in, directly or indirectly, other properties or interests connected with the design, manufacture or marketing of products designed, manufactured or marketed by the Company; (e) the appropriation to the Executive or the diversion to others, directly or indirectly, of any opportunity in which it is known or could reasonably be anticipated that the Company would be interested; and (f) the ownership, directly or indirectly, of a material interest in an enterprise in competition with the Company or its dealers and distributors or acting as a director, officer, partner, consultant, employee or agent of any enterprise which is in competition with the Company or its dealers or distributors. Further, the Executive covenants, warrants and represents that he shall: (i) Devote his full and best efforts to the fulfillment of his employment obligations; (ii) Exercise the highest degree of fiduciary loyalty and care and the highest standards and conduct in the performance of his duties; and 4 (iii) Endeavor to prevent any harm, in any way, to the business or reputation of the Company. 3. Place of Performance. In connection with the Executive's employment by the Company, the Executive's principal business address shall be at the Company's current principal executive offices in Houston, Texas (the "Principal Place of Employment") or in such other place as the Executive and the Company may agree. 4. Compensation and Related Matters. (a) Base Salary. During the Employment Period, the Company shall pay the Executive an annual base salary ("Base Salary") in an amount that shall be established from time to time by the Board or the Compensation Committee of the Board (the "Compensation Committee"), payable in approximately equal installments in accordance with the Company's customary payroll practices; provided, however, that the Base Salary shall be not less than the Executive's annual base salary on the day immediately prior to the date hereof. The Base Salary shall be reviewed at least annually during the Employment Period and may be increased but not decreased during the Employment Period. (b) Bonuses. During the Employment Period, the Executive shall be eligible to participate in the Company's 1995 Employee Annual Incentive Compensation Plan, as amended (the "Annual Incentive Plan"), or any successor plan thereto. The bonus opportunity afforded the Executive pursuant to this Section 4(b) may vary from year to year and any bonus earned thereunder (the "Annual Bonus") shall be paid at a time and in a manner consistent with the Company's customary practice. (c) Equity-Based Compensation. During the Employment Period, the Executive shall be entitled to receive equity-based compensation awards on substantially similar terms and conditions no less favorable than awards made to the other senior executive officers of the Company. Such awards shall be commensurate with the awards normally granted to the chief executive officer of other public companies similar in size and character to the Company. Such awards may be granted pursuant to the terms of an equity-based compensation plan of the Company or otherwise, provided that any grant made other than pursuant to any such Company plan shall be approved by either the Board or the Compensation Committee. (d) Expenses. The Company shall promptly reimburse the Executive for all reasonable business expenses incurred during the Employment Period by the Executive in performing services hereunder, including all expenses of travel and living expenses while away from home on business or at the request of and in the service of the Company, provided that such expenses are incurred and accounted for in accordance with the policies and procedures established by the Company. 5 (e) Other Benefits. During the Employment Period, the Executive shall be entitled to participate in all of the employee benefit plans and arrangements made available by the Company to its other senior executive officers, subject to and on a basis consistent with the terms, conditions and overall administration of such plans and arrangements, and shall be entitled to all perquisites and special benefits suitable to the character of the Chief Executive Officer, including, but not limited to, executive life insurance, club memberships, financial planning (including tax return preparation) and an annual physical examination. Notwithstanding the foregoing, the Company shall have the right to change, amend or discontinue any benefit plan, program, or perquisite, so long as such changes are similarly applicable to senior executive officers of the Company generally. (f) Vacation. During the Employment Period, the Executive shall be entitled to vacation in accordance with the standard written policy of the Company with regard to vacations of employees. (g) Services Furnished. During the Employment Period, the Executive shall at all times be provided with office space, stenographic assistance and such other facilities and services as are suitable to his position and no less favorable than those being provided to the Executive by the Company as of the date hereof. 5. Offices. Subject to Sections 2, 3 and 4 hereof, the Executive agrees to serve without additional compensation, if elected or appointed thereto, as a director of any of the Company's subsidiaries and as a member of any committees of the board of directors of any such corporations, and in one or more executive positions of any of the Company's subsidiaries, provided that the Executive is indemnified for serving in any and all such capacities on a basis no less favorable than is currently or may be provided to any other director of the Company, any of its subsidiaries, or in connection with any such executive position, as the case may be. 6. Termination. The Employment Period shall end in the event of a termination of the Executive's employment in accordance with any of the provisions of Section 6 or 7, and the Term shall expire in the event of a termination of Executive's employment by the Company for Cause or by the Executive without Good Reason, in each case, on the Executive's Date of Termination. (a) Death. The Executive's employment hereunder shall terminate upon his death. (b) Disability. 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 his duties hereunder for the entire period of ninety (90) days in the aggregate during any period of twelve (12) consecutive months or it is reasonably expected that such disability will exist for more than such period of time, and within thirty (30) days after written Notice of Termination (as defined in Section 7) is given (which notice may be given during such 6 ninety (90) day period) shall not have returned to the performance of his duties hereunder on a full-time basis, the Company may terminate the Executive's employment hereunder for "Disability." During any period that the Executive fails to perform his duties hereunder as a result of incapacity due to physical or mental illness ("Disability Period"), the Executive shall continue to receive his Base Salary at the rate in effect at the beginning of such period as well as all other payments and benefits set forth in Section 4 hereof, reduced by any payments made to the Executive during the Disability Period under the disability benefit plans of the Company then in effect or under the Social Security disability insurance program. (c) Cause. The Company may terminate the Executive's employment hereunder for Cause. For purposes of this Agreement, the Company shall have "Cause" to terminate the Executive's employment hereunder upon the occurrence of any of the following events: (i) the commission by the Executive of an act of fraud, embezzlement, theft or other criminal act constituting a felony; (ii) a material breach by the Executive of any provision of this Agreement; (iii) the failure by the Executive to perform any and all material covenants under this Agreement for any reason other than the Executive's death, Disability or following the Executive's delivery of a Notice of Termination for Good Reason; or (iv) a material breach by the Executive of the Company's Standards of Ethical Conduct. provided, that, the Executive shall have thirty (30) business days from the date on which the Executive receives the Company's Notice of Termination for Cause under clause (ii), (iii) or (iv) above to remedy any such occurrence otherwise constituting Cause under such clause (ii), (iii) or (iv). Cause shall not exist unless and until the Company has delivered to the Executive a copy of a resolution duly adopted by the affirmative vote of not less than two-thirds (2/3) of the entire membership of the Board at a meeting of the Board called and held for such purpose (after reasonable notice to the Executive and an opportunity for the Executive, together with his counsel, to be heard before the Board), finding that in the good faith opinion of the Board, the Executive was guilty of the conduct set forth in this Section 6(c) and specifying the particulars thereof in detail. 7 (d) Good Reason. The Executive may terminate his employment hereunder for "Good Reason." Good Reason for the Executive's termination of employment shall mean the occurrence, without the Executive's prior written consent, of any one or more of the following; (i) the assignment to the Executive of any duties inconsistent with the Executive's position (including status, office, title and reporting requirements), authorities, duties or other responsibilities as contemplated by Section 2 of this Agreement; (ii) the relocation of the Principal Place of Employment to a location more than fifty (50) miles from the Principal Place of Employment; (iii) a material reduction in any element of the Executive's compensation as set forth in Section 4 hereof, other than in connection with a Company-wide reduction of such benefits; (iv) a material breach by the Company of any provision of this Agreement; provided, in any case, that the Company shall have thirty (30) business days from the date on which the Company receives the Executive's Notice of Termination for Good Reason to remedy any such occurrence otherwise constituting Good Reason. (e) Either party hereto may terminate this Agreement at any time by giving the Board no more than thirty (30) days' prior written notice, in accordance with Section 7 hereof, of such party's intent to so terminate this Agreement. 7. Termination Procedure. (a) Notice of Termination. Any termination of the Executive's employment by the Company or by the Executive (other than termination pursuant to Section 6(a) hereof) shall be communicated by written Notice of Termination to the other party hereto in accordance with Section 12 hereof. For purposes of this Agreement, a "Notice of Termination" shall mean a notice that 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. (b) Date of Termination. "Date of Termination" shall mean (i) if the Executive's employment is terminated pursuant to Section 6(a) above, the date of the Executive's death, (ii) if the Executive's employment is terminated pursuant to Section 6(b) above, thirty (30) days after Notice of Termination is given (provided that the Executive shall not have returned to the performance of his duties on a full-time basis during such thirty (30) day period), (iii) if the Executive's employment is terminated pursuant to Section 6(c) above, the date specified 8 in the Notice of Termination, (iv) if the Executive's employment is terminated pursuant to Section 6(d) above, the date on which a Notice of Termination is given or any later date (within thirty (30) days of the date of such Notice of Termination) set forth in such Notice of Termination and (v) if the Executive's employment is terminated for any other reason, the date specified in the Notice of Termination, which date shall be not later than thirty (30) days following the date on which Notice of Termination is given; provided, however, that, if within ten (10) days after any Notice of Termination is given the party receiving such Notice of Termination notifies the other party that a dispute exists concerning such termination, the Date of Termination shall be the date on which the dispute is finally determined, either by mutual written agreement of the parties, by a binding and final arbitration award or by a final judgment, order or decree of a court of competent jurisdiction (the time for appeal therefrom having expired and no appeal having been perfected). (c) Compensation During Dispute. If a purported termination occurs during the Term, and such termination is disputed in accordance with subsection (b) of this Section 7, 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, Base 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, until the Date of Termination, determined in accordance with subsection (b) of this Section 7. Amounts paid under this Section 7(c) are in addition to all other amounts due under this Agreement and shall not be offset against or reduce any other amounts due under this Agreement. 8. Compensation upon Termination or During Disability. (a) Accrued Obligation Defined. For purposes of this Agreement, payment of the "Accrued Obligation" shall mean payment by the Company to the Executive (or his designated beneficiary or legal representative, as applicable), when due, of all vested benefits to which the Executive is entitled under the terms of the employee benefit plans in which the Executive is a participant as of the Date of Termination and a lump sum amount in cash equal to the sum of (i) the Executive's Base Salary through the Date of Termination, (ii) any compensation previously deferred by the Executive (together with any accrued interest or earnings thereon) and any accrued vacation pay and (iii) any other amounts due the Executive as of the Date of Termination, in each case to the extent not theretofore paid. (b) Disability; Death. Following the termination of the Executive's employment pursuant to Sections 6(a) or (b) hereof, the Company shall pay to the Executive (or his designated beneficiary or legal representative, if applicable)): (i) the Accrued Obligation, (ii) an amount in cash equal to one-half of the Executive's Base Salary as in effect on the Date of Termination (for each year and prorated for any partial years) for the remainder of the Term (as such Term may have been extended), and (iii) a lump sum in cash equal to the Executive's Expected Value (as defined in the Annual Incentive Plan, and assuming for this purpose that any performance goals under such Plan for such Plan year have been achieved), or similar award opportunity under a successor plan thereto, for the year in which the Date of 9 Termination occurs. The amount payable pursuant to clause (ii) above shall be paid in accordance with the Company's ordinary payroll practices. (c) By the Company for Cause. If during the Term the Executive's employment is terminated by the Company pursuant to Section 6(c) hereof, the Company shall pay to the Executive the Accrued Obligation within thirty (30) days following the Date of Termination. Following such payment, the Company shall have no further obligations to the Executive other than as may be required by law or the terms of an employee benefit plan of the Company. (d) By the Executive Without Good Reason. If during the Term the Executive terminates his employment for any reason other than Good Reason, the Company shall pay to the Executive the Accrued Obligation within thirty (30) days following the Date of Termination. Following such payment, the Company shall have no further obligations to the Executive other than as may be required by law or the terms of an employee benefit plan of the Company. (e) By the Company Without Cause or by the Executive for Good Reason. If during the Term the Executive's employment is terminated by the Company other than for Cause, death or Disability or if the Executive terminates his employment for Good Reason, then (i) the Company shall pay the Executive the Accrued Obligation; (ii) the Company shall continue to pay to the Executive his Base Salary (at the rate in effect as of the Date of Termination) for the remainder of the Term (as such Term may have been extended), payable consistent with the Company's normal payroll practices; provided, however, that for purposes of this clause (ii), Base Salary shall be deemed to increase or decrease on each January 1 following the Date of Termination by the GNP price deflator adjustment as published by the Federal government for the previous 12 months, determined by the then public accounting firm of record of the Company (that performs the annual audit); (iii) the Company shall, once a year for the remainder of the Term (as such Term may have been extended), consistent with the Company's normal payroll practices, pay to the Executive an amount equal to the Executive's Expected Value (as defined in the Annual Incentive Plan, and assuming for this purpose that any performance goals under such Plan for such Plan year have been achieved), or similar award opportunity under a successor plan thereto, for the year in which the Date of Termination occurs, provided, however, that for purposes of this clause (iii), Expected Value shall be deemed to increase or decrease on each January 1 following the Date of Termination by the GNP price deflator adjustment as published by the Federal government 10 for the previous 12 months, determined by the then public accounting firm of record of the Company (that performs the annual audit); (iv) all equity-based awards then held by Executive shall become fully vested; and (v) the Company shall continue to provide to the Executive the benefits described in Section 4(e) and (g) hereof for the remainder of the Term (as such Term may have been extended), provided, that such benefits shall be reduced to the extent benefits of the same type are received by or made available to the Executive during such period, and provided, further, that the Executive shall have the obligation to notify the Company that he is entitled to or receiving such benefits. 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 this Section 8. Further, except with respect to the benefits provided pursuant to clause (vi) above, the amount of any payment or benefit provided for in this Agreement 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. Confidential Information; Non-Competition; Non-Solicitation. (a) Confidential Information. The Executive shall hold in a fiduciary capacity for the benefit of the Company all trade secrets, confidential information, and knowledge or data relating to the Company and its businesses, which shall have been obtained by the Executive during the Executive's employment by the Company and which shall not have been or hereafter become public knowledge (other than by acts by the Executive or representatives of the Executive in violation of this Agreement) (hereinafter being collectively referred to as "Confidential Information"). The Executive shall not, without the prior written consent of the Company or as may otherwise be required by law or legal process, communicate or divulge any such trade secrets, information, knowledge or data to anyone other than the Company and those designated by the Company. Any termination of the Executive's employment or of this Agreement shall have no effect on the continuing operation of this Section 9(a). The Executive agrees to return all Confidential Information, including all photocopies, extracts and summaries thereof, and any such information stored electronically on tapes, computer disks or in any other manner to the Company at any time upon request by the Company and upon the termination of his employment hereunder for any reason. (b) Non-Competition. During the Employment Period and for a period of two (2) years following the Date of Termination (such period following the Employment Period, the "Restricted Period"), the Executive shall not engage in Competition, as 11 defined below, with the Company; provided, that it shall not be a violation of this Section 9(b) for the Executive to become the registered or beneficial owner of up to two percent (2%) of any class of the capital stock of a corporation registered under the Securities Exchange Act of 1934, as amended, provided that the Executive does not actively participate in the business of such corporation until such time as this covenant expires. For purposes of this Agreement, Competition by the Executive shall mean the Executive's engaging in, or otherwise directly or indirectly being employed by or acting as a consultant or lender to, or being a director, officer, employee, principal, agent, stockholder, member, owner or partner of, or permitting his name to be used in connection with the activities of any other business or organization which competes, directly or indirectly, with the business of the Company as the same shall be constituted at any time during the Term. (c) Non-Solicitation. During the Restricted Period, Executive agrees that he will not, directly or indirectly, for his benefit or for the benefit of any other person, firm or entity, do any of the following: (i) solicit from any customer doing business with the Company as of the Date of Termination, business of the same or of a similar nature to the business of the Company with such customer; (ii) solicit from any known potential customer of the Company business of the same or of a similar nature to that which has been the subject of a known written or oral bid, offer or proposal by the Company, or of substantial preparation with a view to making such a bid, proposal or offer, within six (6) months prior to such Date of Termination; (iii) solicit the employment or services of, or hire, any person who was known to be employed by or was a known consultant to the Company upon the Date of Termination, or within six (6) months prior thereto; or (iv) otherwise knowingly interfere with the business or accounts of the Company. The Executive and the Company agree and acknowledge that the Company has a substantial and legitimate interest in protecting the Company's Confidential Information and goodwill. The Executive and the Company further agree and acknowledge that the provisions of this Section 9 are reasonably necessary to protect the Company's legitimate business interests and are designed to protect the Company's Confidential Information and goodwill. The Executive agrees that the scope of the restrictions as to time, geographic area, and scope of activity in this Section 9 are reasonably necessary for the protection of the Company's legitimate business interests and are not oppressive or injurious to the public interest. 12 The Executive agrees that in the event of a breach or threatened breach of any of the provisions of this Section 9 the Company shall be entitled to injunctive relief against the Executive's activities to the extent allowed by law, and the Executive waives any requirement for the posting of any bond by the Company in connection with such action. The Executive further agrees that any breach or threatened breach of any of the provisions of Section 9(a) would cause irreparable injury to the Company for which it would have no adequate remedy at law. (d) Publicity. The Executive agrees that the Company may use, and hereby grants the Company the nonexclusive and worldwide right to use, the Executive's name, picture, likeness, photograph, signature or any other attribute of the Executive's persona (all of such attributes are hereafter collectively referred to as "Persona") in any media for any advertising, publicity or other purpose at any time, either during or subsequent to his employment by the Company. The Executive agrees that such use of his Persona will not result in any invasion or violation of any privacy or property rights the Executive may have; and the Executive agrees that he will receive no additional compensation for the use of his Persona. The Executive further agrees that any negatives, prints or other material for printing or reproduction purposes prepared in connection with the use of his Persona by the Company shall be and are the sole property of the Company. 10. Indemnification; Legal Fees. The Company shall indemnify the Executive to the fullest extent permitted by the laws of the Company's state of incorporation in effect at that time, or certificate of incorporation and by-laws of the Company, whichever affords the greater protection to the Executive. The Executive will be entitled to any insurance policies the Company may elect to maintain generally for the benefit of its officers and directors against all costs, charges and expenses incurred in connection with any action, suit or proceeding to which he may be made a party by reason of being a director or officer of the Company. 11. Successors; Binding Agreement. (a) Company's Successors. 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 he would be entitled to hereunder if he terminated his employment for Good Reason, except that for purposes of implementing the foregoing, the date on which any such succession becomes effective shall be deemed the Date of Termination. As used in this Agreement, "Company" shall mean the Company as hereinbefore defined and any successor to its business and/or assets as aforesaid which executes and delivers the agreement provided for in this Section 11 or which otherwise becomes bound by all the terms and provisions of this Agreement by operation of law. 13 (b) Executive's Successors. This Agreement and all rights of the Executive hereunder 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 should die while any amounts would still be payable to him hereunder if he had continued to live, all such amounts unless otherwise provided herein shall be paid in accordance with the terms of this Agreement to the Executive's devisee, legatee or other designee or, if there is no such designee, to the Executive's estate. 12. Notice. For the purposes of this Agreement, notices, demands and all other communications provided for in this Agreement shall be in writing and shall be deemed to have been duly given when delivered or (unless otherwise specified) mailed by United States certified or registered mail, return receipt requested, postage prepaid, addressed as follows: If to the Executive: Mr. Max L. Lukens 3415 Albans Houston, Texas 77005 If to the Company: Baker Hughes Incorporated 3900 Essex Lane, Suite 1200 Houston, Texas 70027 Attention: General Counsel or to such other address as either party may have furnished to the other in writing in accordance herewith, except that notices of change of address shall be effective only upon receipt. 13. Amendment or Modification; Waiver. No provisions of this Agreement may be modified, waived or discharged unless such waiver, modification or discharge is agreed to in writing signed by the Executive and such officer of the Company as may be specifically designated by the Board or its compensation committee. No waiver by either party hereto at any time of any breach by the other party hereto of, or 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. No agreements or representations, oral or otherwise, express or implied, with respect to the subject matter hereof have been made by either party which are not set forth expressly in Agreement. 14. Arbitration. Any dispute or controversy arising under or in connection with this Agreement shall be settled exclusively by arbitration, conducted before a panel of three arbitrators in Houston, Harris County, Texas, in accordance with the Commercial 14 Arbitration Rules of the American Arbitration Association then in effect or of such similar organization as the parties hereto may mutually agree. Judgment may be entered on the arbitrator's award in any court having jurisdiction. The arbitrators shall award the prevailing party in the arbitration its costs and expenses, including reasonable attorney's fees, incurred in enforcing the provisions of this Agreement in arbitration. 15. Governing Law. The validity, interpretation, construction and performance of this Agreement shall be governed by the laws of the State of Texas without regard to its conflicts of law principles. 16. Miscellaneous. All references to sections of any statute shall be deemed also to refer to any successor provisions to such sections. The obligations of the parties under Sections 8, 9, 10 and 14 hereof shall survive the expiration of the Term. The compensation and benefits payable to the Executive or his beneficiary under Section 8 of this Agreement shall be in lieu of any other severance benefits to which the Executive may otherwise be entitled upon his termination of employment under any severance plan, program, policy or arrangement of the Company other than the Severance Agreement, and the Executive shall not be entitled to receive any benefits under Section 8 hereof if he has become eligible to receive benefits under the Severance Agreement. 17. Severability. The invalidity or unenforceability of any provision or provisions 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 throughout the Term. Should any one or more of the provisions of this Agreement be held to be excessive or unreasonable as to duration, geographical scope or activity, then that provision shall be construed by limiting and reducing it so as to be reasonable and enforceable to the extent compatible with the applicable law. 18. Counterparts. This Agreement may be executed in one or more counterparts, each of which shall be deemed to be an original but all of which together will constitute one and the same instrument. 19. Release. In consideration of the benefits and compensation which may be awarded to the Executive pursuant to Section 8 of this Agreement, the Executive hereby agrees to execute and be bound by, as a condition precedent to receiving said benefits and compensation, the Release attached hereto as Exhibit A, such Release being incorporated herein by reference. 20. Entire Agreement. This Agreement sets forth the entire agreement of the parties hereto in respect of the subject matter contained herein and, as of the Effective Date, supersedes all prior agreements, promises, covenants, arrangements, communications, 15 representations or warranties, whether oral or written, by any officer, employee or representative of any party hereto; provided, however, that the Severance Agreement shall not be superseded hereby. IN WITNESS WHEREOF, the parties have executed this Agreement on the date first above written. ATTEST: BAKER HUGHES INCORPORATED By: By: ---------------------- ---------------------------- Name: Name: John F. Maher Title: Title: Chairman, Compensation Committee M. L. LUKENS ------------------------------- 16 EXHIBIT A RELEASE As a material inducement for the Company to enter into this Agreement, the Executive hereby irrevocably and unconditionally releases, acquits and forever discharges the Company and its affiliated companies and their directors, officers, employees and representatives, (collectively "Releasees"), from any and all claims, liabilities, obligations, damages, causes of action, demands, costs, losses and/or expenses (including attorneys' fees) of any nature whatsoever, whether known or unknown, including, but not limited to, rights arising out of alleged violations of any contracts, express or implied, any covenant of good faith and fair dealing, express or implied, or any tort, or any legal restrictions on the Company's right to terminate employees, or any federal, state or other governmental statute, regulation, or ordinance, including, without limitation, Title VII of the Civil Rights Act of 1964, and the Federal Age Discrimination in Employment Act, which the Executive claims to have against any of the Releasees. In addition, the Executive waives all rights and benefits afforded by any state laws which provide in substance that a general release does not extend to claims which a person does not know or suspect to exist in his favor at the time of executing the release which, if known by him, must have materially affected the Executive's settlement with the other person. The only exception to the foregoing are claims and rights that may arise after the date of execution of this Release. The Executive represents and acknowledges that in executing this Release he does not rely and has not relied upon any representation or statement, oral or written, not set forth herein or in the Agreement made by any of the Releasees or by any of the Releasees' agents, representatives or attorneys with regard to the subject matter, basis or effect of this Release, the Agreement or otherwise. The Executive represents and agrees that he fully understands his right to discuss all aspects of this Release with his private attorney, that to the extent, if any, that he desires, he has availed himself of this right, that he has carefully read and fully understands all of the provisions of this Release and that he is voluntarily entering into this Release. AGREED AND ACCEPTED, on this day of , 19 . ----- --------- -- MAX L. LUKENS -------------------------- EX-10.7 5 FORM OF AMENDMENT NO.1 TO SERVERANCE AGREEMENT 1 EXHIBIT 10.7 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 __________________ (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 conform the Severance Agreement with the form executed by other executives of the Company and 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: 1. 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." 2. 13th Month Good Reason Waiver. The following language which appears in lines 3, 4, and 5 of Section 6.1(ii) of the Severance Agreement is hereby deleted: "or (ii) the Executive voluntarily terminates his employment for any reason during the one-month period commencing on the first anniversary of the Change in Control," 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: ---------------------------------- John F. Maher Chairman-Compensation Committee of the Board of Directors Executive: ------------------------------------- EX-10.8 6 SEVERANCE AGREEMENT - THOMAS R. BATES, JR. 1 EXHIBIT 10.8 SEVERANCE AGREEMENT THIS AGREEMENT, dated as of January 27, 1999, is made by and between BAKER HUGHES INCORPORATED, a Delaware corporation (the "Company"), and THOMAS R. BATES, JR. (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, 2000; provided, however, that commencing on January 1, 2000 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. -1- 2 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. 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. -2- 3 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 1997 Long Term Incentive Plan, 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, subject however, to the provisions of the applicable plan or stock option agreement on vesting and the period of exercisability following a Change in Control. -3- 4 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 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 -4- 5 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 -5- 6 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. (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 -6- 7 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. -7- 8 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 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 -8- 9 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 -9- 10 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 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. -10- 11 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 -11- 12 determined without regard to this 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 -12- 13 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. 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 -13- 14 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 1200 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 shall 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 -14- 15 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 and the 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 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 -15- 16 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. -16- 17 15. 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. (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: -17- 18 (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 -18- 19 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 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. -19- 20 (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. (Q) "Good Reason" for termination by the Executive of the Executive's employment shall mean the occurrence (without the Executive's express written -20- 21 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 -21- 22 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 1997 Long Term Incentive Plan, 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 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 -22- 23 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 -23- 24 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 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). -24- 25 (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: ------------------------------------ Max L. Lukens Chairman of the Board of Directors, President & CEO EXECUTIVE: --------------------------------------- THOMAS R. BATES Address: 58 Greenwards Lane Sugar Land, Texas 77479 EX-10.11 7 AMEND.NO.1999-1 TO AMENDED 1991 EMP. STOCK BONUS 1 EXHIBIT 10.11 AMENDMENT NO. 1999-1 TO THE AMENDED AND RESTATED 1991 EMPLOYEE STOCK BONUS PLAN This Amendment No. 1999-1 is made to the Baker Hughes Incorporated Amended and Restated 1991 Employee Stock Bonus Plan ("the Plan"). Capitalized terms used but not defined herein shall have the meanings ascribed to them in the Plan. WHEREAS, Baker Hughes Incorporated (the "Company") has determined that it is in its best interest and that of its stockholders to amend the Plan as set forth herein; NOW, THEREFORE, the Plan is amended as follows: 1. Clauses (ii) and (iii) of the first sentence of Paragraph 5 of the Plan are amended in their entirety to read as follows: "(ii) the occurrence of a Change in Control other than an event described only in clause (iii) of the definition of Change in Control set forth in Paragraph 5 of the Plan, and (iii) the termination of the eligible employee's employment if (a) such eligible employee'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, (b) such eligible employee terminates his or her 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 the Person described in clause (a), (c) such eligible employee's employment is terminated by the Company without Cause or by the eligible employee for Good Reason and such termination or 1 2 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) or (d) such eligible employee's employment is terminated by the Company without Cause or by the eligible employee for Good Reason, in either case within 2 years following the occurrence of a Change in Control described in clause (iii) of the definition of Change in Control set forth in Paragraph 5 of the Plan." . 2 The definition of Change in Control set forth in Paragraph 5 of the Plan is amended in its entirety to read as follows: "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 (a) 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 of Directors of the Company 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 of Directors of the Company or nomination for 2 3 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 (a) 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 (b) 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 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) 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 a merger or consolidation immediately following which the individuals who comprise the Board immediately prior thereto constitute at least a majority of 3 4 the board of directors of the Company, the entity surviving such merger or consolidation or any parent thereof (or a majority plus one member where such board comprises an odd number of members); or (v) 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." 3 The second sentence of Paragraph 6 of the Plan is amended by inserting immediately prior to the "." at the end thereof the following: "other than an event described only in clause (iii) of the definition of Change in Control set forth in Section 5 of the Plan; and provided further, that the provisions of this sentence shall be inapplicable to any sale of Option Shares or Conversion Shares by an employee holding a Stock Award if such sale occurs at any time following a Qualifying Termination." 4 5 4 Clause (ii) of Paragraph 7 of the Plan is amended in its entirety to read as follows: "(ii) the occurrence of a Change in Control other than an event described only in clause (iii) of the definition of Change in Control set forth in Section 5 of the Plan." The effective date of this Amendment No. 1999-1 shall be January 27, 1999; provided, however, that, 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 the Plan and (C) individuals who satisfy the requirements in clauses (i) and (ii) below constitute at least two-thirds (2/3) of the number of directors of the entity surviving such transaction or any parent thereof: individuals who (i) immediately prior to such transaction constitute the Board of Directors of the Company and (ii) on the date hereof constitute the Board of Directors of the Company 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 of Directors of the Company 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 Amendment No. 1999-1 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 sentence does not preserve the availability of such accounting treatment, then, to the extent that any provision or combination of provisions of this Amendment No. 1999-1 disqualifies the transaction as a "pooling" transaction (including, if applicable, this entire Amendment No. 1999-1), the Board of Directors of the Company shall amend 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 with respect to this paragraph shall be made by 5 6 the Company, 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. Except as herein modified, the Plan shall remain in full force and effect. BAKER HUGHES INCORPORATED By: ----------------------------------- Name: G.S. Finley Title: Senior Vice President and Chief Administrative Officer 6 EX-10.14 8 SUPPLEMENTAL RETIREMENT PLAN 1 Exhibit 10.14 BAKER HUGHES INCORPORATED SUPPLEMENTAL RETIREMENT PLAN Effective Date: January 1, 1989 TABLE OF CONTENTS
ARTICLE PAGE - ------- ---- I - DEFINITIONS AND CONSTRUCTION. . . . . . . . . . . . . . . . . I-1 II - PARTICIPATION . . . . . . . . . . . . . . . . . . . . . . . . II-1 III - CONTRIBUTIONS AND ALLOCATIONS OF INCOME OR LOSS . . . . . . . . . . . . . . . . . . . . . . III-1 IV - INVESTMENT OF FUNDS . . . . . . . . . . . . . . . . . . . . . IV-1 V - BENEFITS. . . . . . . . . . . . . . . . . . . . . . . . . . . V-1 VI - ADMINISTRATION OF THE PLAN. . . . . . . . . . . . . . . . . . VI-1 VII - ADMINISTRATION OF FUNDS . . . . . . . . . . . . . . . . . . . VII-1 VIII - ADOPTING EMPLOYERS. . . . . . . . . . . . . . . . . . . . . . VIII-1 IX - DISCONTINUANCE OF CONTRIBUTIONS OR TERMINATION. . . . . . . . . . . . . . . . . . . . . . . . . IX-1 X - NATURE OF THE PLAN. . . . . . . . . . . . . . . . . . . . . . X-1 XI - MISCELLANEOUS . . . . . . . . . . . . . . . . . . . . . . . . XI-1
(i) 2 BAKER HUGHES INCORPORATED SUPPLEMENTAL RETIREMENT PLAN W I T N E S S E T H : WHEREAS, BAKER HUGHES INCORPORATED (the "Company") and other employing companies have heretofore adopted the BAKER HUGHES INCORPORATED SUPPLEMENTAL RETIREMENT PLAN, hereinafter referred to as the "Plan," for the benefit of their eligible employees; and WHEREAS, the Company desires to restate the Plan and to amend the Plan in several respects, intending thereby to provide an uninterrupted and continuing program of benefits; NOW THEREFORE, the Plan is hereby restated in its entirety as follows with no interruption in time, effective as of January 1, 1989, except as otherwise indicated herein: I. DEFINITIONS AND CONSTRUCTION 1.1 Definitions. The capitalized words or terms used in the Plan and which are not otherwise defined herein shall have the same meanings as such words or terms have in the Baker Hughes Incorporated Thrift Plan, as the same may be amended from time to time. Where the following words and phrases appear in the Plan, they shall have the respective meanings set forth below, unless their context clearly indicates to the contrary. (1) Account: An individual account for each Member to which is credited his contributions and the contributions made by the Employer on his behalf and which is credited (or debited) for such account's allocation of net income (or net loss) of the Trust Fund. (2) Basic Compensation: An amount equal to a Member's "Compensation," as such term is defined under the Thrift Plan. I-1 3 (3) Benefit Commencement Date: With respect to each Member or beneficiary, the first day of the first period for which such Member's or beneficiary's benefit is payable to him from the Trust Fund. (4) Code: The Internal Revenue Code of 1986, as amended. (5) Company: Baker Hughes Incorporated. (6) Compensation: The term "Compensation" shall have the same meaning as is assigned to such term under the Thrift Plan except that a Member's Compensation (A) shall include amounts which he could have received in cash in lieu of contributions made on his behalf by the Employer to this Plan pursuant to Section 3.1 and Section 3.3(a) and (B) shall not be limited to the maximum amount of compensation that can be considered by the Thrift Plan pursuant to section 401(a)(17) of the Code. A Member's Compensation for a Plan Year shall be determined as of the same date his compensation for such year is determined pursuant to the Thrift Plan and, once determined, shall be considered to remain unchanged for such year regardless of job transfers or wage rate changes during such year. (7) Directors: The Board of Directors of the Company. (8) Effective Date: January 1, 1989, as to this restatement of the Plan. (9) Eligible Employee: Any individual who is employed by an Employer and who is a participant in the Thrift Plan. (10) Employer: The Company and any other entity which adopts the Plan pursuant to the provisions of Article VIII. (11) Excess Compensation: A Member's Excess Compensation for a Plan Year shall be equal to the amount by which his Compensation for such year exceeds the maximum amount of compensation that can be considered by the Thrift Plan for such year pursuant to section 401(a)(17) of the Code. (12) Fund: A portion of the Trust Fund which is invested in a specified manner. (13) Limitation: For each Plan Year, the greater of $30,000 or one-fourth of the dollar limitation in effect under section 415(b)(1)(A) of the Code for such year. (14) Member: Any individual who has met the eligibility requirements for participation in the Plan. (15) Monthly Excess Compensation: A Member's Monthly Excess Compensation for a Plan Year shall be equal to one-twelfth of his Excess Compensation for such year. I-2 4 (16) Plan: The Baker Hughes Incorporated Supplemental Retirement Plan, as amended from time to time. (17) Plan Administrator: The Company, acting through its delegate. (18) Plan Year: The twelve-consecutive month period commencing January 1 of each year. (19) Thrift Plan: The Baker Hughes Incorporated Thrift Plan, as amended from time to time. (20) Trust: The trust established under the Trust Agreement to hold and invest contributions made under the Plan and from which the Plan benefits will be distributed (to the extent permitted under the Trust Agreement). (21) Trust Agreement: The agreement entered into between the Company and the Trustee establishing the Trust. (22) Trust Fund: The funds and properties held pursuant to the provisions of the Trust Agreement, together with all income, profits and increments thereto. (23) Trustee: The trustee or trustees qualified and acting under the Trust Agreement at any time. (24) Valuation Dates: The last business day of each calendar month and any other interim Valuation Date determined by the Plan Administrator on a nondiscriminatory basis. 1.2 Number and Gender. Wherever appropriate herein, words used in the singular shall be considered to include the plural and the plural to include the singular. The masculine gender, where appearing in this Plan, shall be deemed to include the female gender. 1.3 Headings. The headings of Articles and Sections herein are included solely for convenience and if there is any conflict between such headings and the text of the Plan, the text shall control. I-3 5 II. PARTICIPATION 2.1 Eligibility. (a) Any Eligible Employee shall become a Member upon the first day of the Plan Year for which the Employer determines that he will have Excess Compensation. (b) Any Eligible Employee who does not become a Member pursuant to Paragraph (a) above shall become a Member upon the first day of the calendar month for which the Employer determines that his Annual Additions under the Thrift Plan will equal the Limitation in effect for the Plan Year in which such month occurs. (c) Paragraphs (a) and (b) above notwithstanding, an Eligible Employee who was a participant in the Plan on the day prior to the Effective Date shall remain a Member of this restatement thereof as of the Effective Date. 2.2 Cessation of Active Participation. Notwithstanding any provision herein to the contrary, an Eligible Employee who has become a Member of the Plan shall cease to be an active participant in the Plan immediately upon a change in his employment status which results in him no longer being eligible to receive an allocation of contributions under the Thrift Plan. Such an Eligible Employee shall again become an active participant in the Plan immediately upon becoming eligible to receive an allocation of contributions under the Thrift Plan as a result of a subsequent change in his employment status. III CONTRIBUTIONS AND ALLOCATIONS OF INCOME OR LOSS 3.1 Member Contributions Attributable to Excess Compensation. (a) A Member may elect to defer an integral percentage of from 2% to 10% of his Excess Compensation for a Plan Year by having the Employer contribute the amount so deferred to the Plan. Excess Compensation for a Plan Year not so deferred by such election shall be received by such Member in cash. A Member's election to defer an amount of his Excess Compensation pursuant to this Section shall be made by executing a compensation reduction agreement pursuant to which the Member authorizes the Employer to reduce his Excess Compensation in the elected amount and the Employer, in consideration thereof, agrees to contribute an equal amount to the Plan. The reduction in a Member's Excess Compensation for a Plan Year pursuant to his election under a compensation reduction agreement shall be effected by Excess Compensation reductions within such Plan Year following the effective date of such agreement. (b) A Member's compensation reduction agreement shall become effective as of the January 1 which is on or after the election is executed by the Member and filed with the Employer. A Member's compensation reduction II-1 6 agreement shall remain in force and effect for all periods following the date of its execution until modified or terminated or until such Member terminates his employment. A Member who has elected to defer a portion of his Excess Compensation may change his deferral election percentage (within the percentage limits set forth in Paragraph (a) above), effective as of the first day of any subsequent Plan Year, by executing and delivering to the Employer a new compensation reduction agreement within the time period prescribed by the Plan Administrator. (c) A Member may cancel his compensation reduction agreement at any time by executing and delivering to the Employer the form prescribed by the Plan Administrator. Excess Compensation deferrals by a Member who so cancels his compensation reduction agreement shall cease as soon as administratively practicable after the Employer receives such form. A Member who so cancels his compensation reduction agreement may again elect to defer a portion of his Excess Compensation, effective as of the first day of any subsequent Plan Year, by executing and delivering to the Employer a new compensation reduction agreement within the time period prescribed by the Plan Administrator. 3.2 Employer Contributions Attributable to Excess Compensation. (a) For each calendar month, the Employer shall contribute on a Member's behalf an amount which equals 50% of the contributions made pursuant to Section 3.1 on behalf of such Member during such month not in excess of 6% of such Member's Excess Compensation for the payroll periods in such month with respect to which contributions pursuant to Section 3.1 were made. (b) For each calendar month, the Employer shall also contribute an additional amount on behalf of each Member who is entitled to an allocation of Employer Base Contributions under the Thrift Plan for such month. The amount of each such monthly contribution shall be a percentage of such Member's Monthly Excess Compensation, if any, with such percentage being equal to the percentage utilized under the Thrift Plan to determine the Member's Employer Base Contribution for such month under such plan. (c) For each calendar month, the Employer shall also contribute an additional amount on behalf of each Member who is entitled to an allocation of Employer Supplemental Base Contributions under the Thrift Plan for such month. The amount of each such monthly contribution shall be a percentage of such Member's Monthly Excess Compensation, if any, with such percentage being equal to the percentage utilized under the Thrift Plan to determine the Member's Employer Supplemental Base Contribution for such month under such plan. 3.3 Contributions for Members Whose Annual Additions under the Thrift Plan Equal the Limitation. III-1 7 (a) For each calendar month in which the Employer determines that a Member's Annual Additions under the Thrift Plan equal the Limitation in effect for the Plan Year in which such month occurs, the Employer shall withhold from such Member's Basic Compensation the amount by which such Member's Cash or Deferred Contributions and/or Voluntary Contributions to the Thrift Plan are reduced solely because such member's Annual Additions under the Thrift Plan equal such Limitation. The amount withheld from a Member's Basic Compensation pursuant to this Paragraph shall be (1) determined based upon the Member's elections in effect at the relevant times under the Thrift Plan with respect to Cash or Deferred Contributions and/or Voluntary Contributions and (2) contributed by the Employer to the Plan on behalf of such Member. (b) For each calendar month in which the Employer determines that a Member's Annual Additions under the Thrift Plan equal the Limitation in effect for the Plan Year in which such month occurs, the Employer shall also contribute on such Member's behalf an amount equal to the excess of: (1) the amount of Employer contributions which would have been allocated to the accounts of such Member under the Thrift Plan (other than to his Deferred Income Account) for such month if the provisions of the Thrift Plan were administered without regard to the limitations imposed by section 415(c) of the Code on the amount of Annual Additions, OVER (2) the amount of Employer contributions which were in fact allocated to the accounts of such Member under the Thrift Plan (other than to his Deferred Income Account) for such month. For purposes of determining the amount of Employer Matching Contributions which would have been allocated to the account of a Member under the Thrift Plan, the contributions to the Plan on a Member's behalf pursuant to Paragraph (a) above shall be deemed to have been made to the Thrift Plan. 3.4 Payments to Trustee. Contributions under the Plan shall be paid by the Employer directly to the Trustee as soon as practicable. On or about the date of any such payment, the Plan Administrator shall be informed as to the amount of such payment. Contributions made by a Member or on the Member's behalf shall be credited to the Member's Account as received. 3.5 Allocation of Net Income or Loss. (a) As of each Valuation Date, the Trustee shall determine the fair market value of the Trust Fund assets and the net income (or net loss) of the Trust Fund. The net income (or net loss) of each Fund within the Trust Fund since the next preceding Valuation Date shall be ascertained by the Trustee and shall be determined on the accrual basis of accounting; provided, however, that such net income (or net loss) shall include any net increase or net decrease in III-2 8 the value of the assets of each such Fund since the next preceding Valuation Date to the extent not otherwise accrued. As soon as is practicable after each Valuation Date, the Trustee shall deliver to the Plan Administrator a written statement of such determination. (b) For purposes of allocations of net income (or net loss) of the Trust Fund, each Member's Account shall be divided into subaccounts to reflect such Member's investment designation in a particular Fund or Funds pursuant to Article IV. As of each Valuation Date, the Plan Administrator shall adjust the Account of each Member as follows: (1) The net income (or net loss) of each Fund, separately and respectively, shall be allocated among the corresponding subaccounts of the Members who had such corresponding subaccounts on the next preceding Valuation Date, and each such corresponding subaccount shall be credited (or debited) with that portion of such net income (or net loss) which the value of each such corresponding subaccount on such next preceding Valuation Date was of the value of all such corresponding subaccounts on such date; provided, however, that the value of such subaccounts as of the next preceding Valuation Date shall be reduced by the amount of any payments made therefrom since the next preceding Valuation Date. (2) With respect to each Member whose employment is terminated for any reason, so long as there is any balance in his Account, such Account shall continue to receive allocations pursuant to this Section; provided, however, that the value of such Account as of the next preceding Valuation Date shall be reduced by the amount of any payments made therefrom since the next preceding Valuation Date. IV. INVESTMENT OF FUNDS On the form prescribed by the Plan Administrator, each Member shall designate the manner in which the amounts allocated to his Account shall be invested from among the following options: OPTION 1 In fixed income or cash investments. Amounts invested under this Option 1 shall be invested and reinvested by the Trustee primarily with a view towards steady and dependable income through investment in savings certificates, savings accounts, certificates of deposit, short-term money market funds or other similar investments, corporate bonds and, or other debt obligations and, or other fixed income securities or assets. Amounts invested under this Option 1 shall be invested as one Fund referred to as the Fixed Fund. III-3 9 OPTION 2 In equity investments. Amounts invested under this Option 2 shall be invested and reinvested by the Trustee primarily with a view towards maximum growth and long-term capital appreciation through investment in common stocks and, or related equity securities or other assets. Amounts invested under this Option 2 shall be invested as one Fund referred to as the Investment Fund. A Member may designate one of such options for all of the contributions to his Account or he may split the investment of the contributions to his Account between such options in 25% increments. No other type of designation will be permitted. If a Member fails to make a designation, then contributions to his Account shall be invested among the Funds in accordance with the Member's investment designation in effect at the time of such failure under the Thrift Plan with respect to contributions being allocated to his accounts maintained under such Plan; provided, however, that if such failure occurs at a time when there is either a greater or lesser number of investment funds maintained under the Thrift Plan than are maintained under the Plan or at a time when the investment funds maintained under the Thrift Plan are not of similar character to the Funds maintained under the Plan, then contributions to his Account shall be invested in the Fixed Fund until such time as the Member designates different investment options as hereinafter provided. A Member may change his designated investment option for future contributions as of any January 1 or July 1 in the manner and on the form prescribed by the Plan Administrator. Any such change shall be implemented as soon as administratively practicable. A Member may elect, as of any January 1 or July 1 and in the manner and on the form prescribed by the Plan Administrator, to convert his investment designation with respect to the amounts allocated to his Account prior to the effective date of such conversion. Any such conversion shall be implemented as soon as administratively practicable and shall be permitted only while the Member is an active participant in the Thrift Plan. V. BENEFITS 5.1 Amount of Benefit. Upon termination of employment of a Member with the Employer and all Controlled Entities for any reason, the Member, or, in the IV-1 10 event of the death of the Member prior to the Member's Benefit Commencement Date, the Member's designated beneficiary, shall be entitled to a benefit equal in value to the balance in the Member's Account as of the Valuation Date next preceding his Benefit Commencement Date. A Member's employment shall not be considered to have terminated at any time when the Employer is making contributions under the Plan on behalf of such Member pursuant to Paragraph (b) of either Section 3.2 or Section 3.3. 5.2 Time of Payment. Payment of a Member's benefit hereunder shall commence as soon as administratively feasible after the Valuation Date coincident with or next succeeding the date the Member or his beneficiary becomes entitled to a benefit pursuant to Section 5.1. 5.3 Alternative Forms of Benefit Payments. A Member may elect to receive his benefit payments in any one of the following forms by executing and properly filing an irrevocable written election with the Employer (the form of such written election shall be prescribed by the Plan Administrator) on or before the date he becomes a Member of the Plan: (a) A lump sum, cash payment; (b) Annual installment payments for a term certain of either 5, 10 or 15 years payable to the Member or, in the event of such Member's death prior to the end of such term certain, to his designated beneficiary as provided in Section 5.4; (c) Subject to the approval of the Plan Administrator, such other form of benefit payment as a Member may elect. In the event a Member fails to timely elect the form in which his benefit payments are to be made, such benefit payments shall be in the form of annual installment payments for a term certain of 15 years payable to such Member or, in the event of such Member's death prior to the end of such term certain, to his designated beneficiary as provided in Section 5.4; provided, however, that the Plan Administrator may, in its sole discretion, elect to make such benefit payments in any other form. If a Member dies prior to his Benefit Commencement Date and if the Member failed to timely elect the form in which his benefit payments are to be made, then benefit payments shall be made to the Member's designated beneficiary in the form described in the preceding sentence. If a Member dies prior to his Benefit Commencement Date and if the Member did timely elect the form in which his benefit payments are to be made, then benefit payments shall be made to the Member's designated beneficiary in the form elected by the Member. V-1 11 5.4 Designation of Beneficiaries. (a) Each Member shall have the right to designate the beneficiary or beneficiaries to receive payment of his benefit in the event of his death. Each such designation shall be made by executing the beneficiary designation form prescribed by the Plan Administrator and filing same with the Plan Administrator. Any such designation may be changed at any time by execution of a new designation in accordance with this Section. (b) If no such designation is on file with the Plan Administrator at the time of the death of the Member or such designation is not effective for any reason as determined by the Plan Administrator, then the designated beneficiary or beneficiaries to receive such benefit shall be as follows: (1) If a Member leaves a surviving spouse, his benefit shall be paid to such surviving spouse; (2) If a Member leaves no surviving spouse, his benefit shall be paid to such Member's executor or administrator, or to his heirs at law if there is no administration of such Member's estate. 5.5 Payment of Benefits. To the extent the Trust Fund has sufficient assets, the Trustee shall pay benefits to Members or their beneficiaries, except to the extent the Employer pays the benefits directly and provides adequate evidence of such payment to the Trustee. To the extent the Trustee does not or cannot pay benefits out of the Trust Fund, the benefits shall be paid by the Employer. Any benefit payments made to a Member or for his benefit shall be debited to such Member's Account. All benefit payments shall be made in cash to the fullest extent practicable. 5.6 No Withdrawals or Loans. Members shall not be permitted to make withdrawals from the Plan prior to termination of employment with the Employer and all Controlled Entities. Subsequent to such termination, Members shall be permitted to receive benefits under the Plan only as provided in this Article V. Members shall not at any time be permitted to borrow from the Trust Fund. 5.7 Unclaimed Benefits. In the case of a benefit payable on behalf of a Member, if the Plan Administrator is unable to locate the Member or beneficiary to whom such benefit is payable, upon the Plan Administrator's determination thereof, such benefit shall be forfeited, held in a suspense account and applied to reduce Employer contributions next coming due. For all Valuation Dates prior to such application, forfeited amounts held in the suspense account shall not participate in allocations of the net income (or net loss) of the Trust Fund. Notwithstanding the foregoing, if subsequent to any such forfeiture the Member or beneficiary to whom such benefit is payable makes a valid claim for such benefit, such forfeited benefit shall be restored to the Plan by means of an additional Employer contribution. V-2 12 VI. ADMINISTRATION OF THE PLAN 6.1 Appointment of Plan Administrator. The general administration of the Plan shall be vested in the Plan Administrator which shall be appointed by the Directors. 6.2 Resignation and Removal. At any time during its term of office, the Plan Administrator may resign by giving written notice to the Directors, such resignation to become effective upon the appointment of a substitute Plan Administrator or, if earlier, the lapse of thirty days after such notice is given as herein provided. At any time during its term of office, and for any reason, the Plan Administrator may be removed by the Directors. 6.3 Records and Procedures. The Plan Administrator shall keep appropriate records of its proceedings and the administration of the Plan and shall make available for examination during business hours to any Member or beneficiary such records as pertain to that individual's interest in the Plan. The Plan Administrator shall designate the person or persons who shall be authorized to sign for the Plan Administrator and, upon such designation, the signature of such person or persons shall bind the Plan Administrator. 6.4 Indemnity. To the extent permitted by applicable law, the Company shall indemnify and save harmless the Directors, the Plan Administrator and any individual serving as Trustee against any and all expenses, liabilities and claims (including legal fees incurred to defend against such liabilities and claims) arising out of their discharge in good faith of responsibilities under or incident to the Plan. Expenses and liabilities arising out of willful misconduct shall not be covered under this indemnity. This indemnity shall not preclude such further indemnities as may be available under insurance purchased by the Company or provided by the Company under any bylaw, agreement, vote of stockholders or disinterested directors or otherwise, as such indemnities are permitted under applicable law. 6.5 Self-Interest of Plan Administrator. No delegate of the Plan Administrator shall have any right to vote or decide upon any matter relating solely to himself under the Plan or to vote in any case in which his individual right to claim any benefit under the Plan is particularly involved. In any case in which a delegate of the Plan Administrator is so disqualified to act, the Directors shall decide the matter in which he is disqualified. 6.6 Compensation and Bonding. The Plan Administrator shall not receive compensation with respect to its services as Plan Administrator. To the extent required by applicable law, or required by the Company, the Plan Administrator shall furnish bond or security for the performance of their duties hereunder. VI-1 13 6.7 Plan Administrator Powers and Duties. The Plan Administrator shall supervise the administration and enforcement of the Plan according to the terms and provisions hereof and shall have all powers necessary to accomplish these purposes, including, but not by way of limitation, the right, power, authority and duty: (a) to make rules, regulations and bylaws for the administration of the Plan which are not inconsistent with the terms and provisions hereof, provided such rules, regulations and bylaws are evidenced in writing and copies thereof are delivered to the Trustee and to the Company; (b) to construe all terms, provisions, conditions and limitations of the Plan; (c) to correct any defect or supply any omission or reconcile any inconsistency that may appear in the Plan, in such manner and to such extent as it shall deem expedient to carry the Plan into effect for the greatest benefit of all interested parties; (d) to employ and compensate such accountants, attorneys, investment advisors and other agents and employees as the Plan Administrator may deem necessary or advisable in the proper and efficient administration of the Plan; (e) to determine all questions relating to eligibility; (f) to determine the amount, manner and time of payment of any benefits and to prescribe procedures to be followed by distributees in obtaining benefits; (g) to make a determination as to the right of any person to a benefit under the Plan; and (h) to receive and review reports from the Trustee as to the financial condition of the Trust Fund, including its receipts and disbursements. 6.8 Employer to Supply Information. The Employer shall supply full and timely information to the Plan Administrator relating to the Compensation of all Members, their ages, their retirement, death or other cause for termination of employment and such other pertinent facts as the Plan Administrator may require. The Employer shall advise the Trustee of such of the foregoing facts as are deemed necessary for the Trustee to carry out the Trustee's duties under the Plan. When making a determination in connection with the Plan, the Plan Administrator shall be entitled to rely upon the aforesaid information furnished by the Employer. VI-2 14 VII. ADMINISTRATION OF FUNDS 7.1 Payment of Expenses. All expenses incident to the administration of the Plan and Trust, including but not limited to, legaL accounting, Trustee fees, expenses of the Plan Administrator and the cost of furnishing any bond or security required of the Plan Administrator, may be paid by the Employer and, if not paid by the Employer, shall be paid by the Trustee from the Trust Fund. 7.2 Trust Fund Property. All income, profits, recoveries, contributions, forfeitures and any and all moneys, securities and properties of any kind at any time received or held by the Trustee shall be held for investment purposes as a commingled Trust Fund pursuant to the terms of the Trust Agreement. The Plan Administrator shall maintain an Account in the name of each Member, but the maintenance of an Account designated as the Account of a Member shall not mean that such Member shall have a greater or lesser interest than that due him by operation of the Plan and shall not be considered as segregating any funds or property from any other funds or property contained in the commingled fund. No Member shall have any title to any specific asset in the Trust Fund. VIII. ADOPTING EMPLOYERS It is contemplated that other corporations, associations, partnerships or proprietorships may adopt this Plan and thereby become Employers. Any such entity, whether or not presently existing, may become a party hereto by appropriate action of its officers without the need for approval of its board of directors or noncorporate counterpart or of the Company; provided, however, that such entity must be a Controlled Entity. The provisions of the Plan shall apply separately and equally to each Employer and its employees in the same manner as is expressly provided for the Company and its employees, except that the power to appoint or otherwise affect the Plan Administrator or the Trustee and the power to amend or terminate the Plan and Trust Agreement shall be exercised by the Company alone. Transfer of employment among Employers shall not be considered a termination of employment hereunder. Any Employer may, by appropriate action of its officers without the need for approval of its board of directors or noncorporate counterpart or the Company, terminate its participation in the Plan. Moreover, the Company may, in its discretion, terminate an Employer's Plan participation at any time. VII-1 15 IX. DISCONTINUANCE OF CONTRIBUTIONS OR TERMINATION 9.1 Declaration of Intent. The Employer has established the Plan with the bona fide intention and expectation that from year to year it will be able to, and will deem it advisable to, make its contributions as herein provided. However, the Directors realize that circumstances not now foreseen, or circumstances beyond their control, may make it either impossible or inadvisable for the Employer to continue to make its contributions to the Trustee. Therefore, the Directors shall have the power to discontinue contributions to the Plan, terminate the Plan or partially terminate the Plan at any time hereafter. The Plan Administrator and the Trustee shall be notified of such discontinuance, termination or partial termination. 9.2 Administration of Plan in Case of Discontinuance of Contributions or Termination. (a) Upon discontinuance or termination, any previously unallocated contributions and net income (or net loss) shall be allocated among the Accounts of the Members on such date of discontinuance or termination according to the provisions of Article III, as if such date of discontinuance or termination were a Valuation Date. Thereafter, the net income (or net loss) shall continue to be allocated to the Accounts of the Members until the balances are distributed. In the event of termination, the date of the final distribution shall be treated as a Valuation Date. (b) In the case of a total or partial termination of the Plan, and in the absence of a Plan amendment to the contrary, the balance of the Account of a Member for whom the Plan is terminated shall be paid to such Member or his designated beneficiary in the manner specified by the Plan Administrator, which may include the payment of a single, lump sum cash payment in full satisfaction of all such Member's or beneficiary's benefits hereunder. X. NATURE OF THE PLAN The Employer intends and desires by the adoption of the Plan to recognize the value to the Employer of the past and present services of employees covered by the Plan and to encourage and assure their continued service with the Employer by making more adequate provision for their future retirement security. The establishment of the Plan is made necessary by certain benefit limitations which are imposed on the Thrift Plan by the Employee Retirement Income Security Act of 1974 and by the Code. The Plan is intended to constitute an unfunded, IX-1 16 unsecured promise of the Employer to pay benefits to each Member (or his beneficiary) as herein provided out of the Employer's general assets. Nevertheless, subject to the terms hereof and of the Trust Agreement, the Employer shall transfer money or other property to the Trustee and the Trustee shall pay Plan benefits to Members and their beneficiaries out of the Trust Fund. As a means of administering the assets of the Plan, the Employer has adopted the Baker Hughes Incorporated Supplemental Retirement Plan Trust Agreement pursuant to which Mellon Bank, N.A. serves as Trustee as of the Effective Date. The Employer shall remain the owner of all assets in the Trust Fund and the assets shall only be subject to the claims of Employer creditors if the Employer ever goes into bankruptcy, or becomes insolvent. The term "insolvent," as used herein shall mean the Employer's inability to pay, within a reasonable time, its liabilities as they become due. The Director, Employee Benefits of the Employer, the chief executive officer of the Employer and the Board of Directors of the Employer shall have the duty to inform the Trustee, within a reasonable time, if the Employer becomes insolvent or goes into bankruptcy. Such notice given under the preceding sentence by any party shall satisfy all of the parties' duty to give notice. When so informed, the Trustee shall suspend payments to the Members and hold the assets for the benefit of the Employer's general creditors. If the Trustee receives a written allegation that the Employer is bankrupt or insolvent, the Trustee shall suspend payments to the Members and hold the Trust Fund for the benefit of the Employer's general creditors, and shall determine within thirty days of receipt of such notice whether the Employer is bankrupt or insolvent. If the Trustee determines that the Employer is not bankrupt or insolvent, the Trustee shall resume payments to the Members. No Member or beneficiary shall have any preferred claim to, or any beneficial ownership interest in, any assets of the Trust Fund prior to the time such assets are paid to such Member or beneficiary as benefits. XI. MISCELLANEOUS 11.1 Not Contract of Employment. The adoption and maintenance of this Plan shall not be deemed to be a contract between the Employer and any person or to be consideration for the employment of any person. Nothing herein contained shall be deemed to give any person the right to be retained in the employ of the Employer or to restrict the right of the Employer to discharge any person at any time nor shall the Plan be deemed to give the Employer the right to require any person to remain in the employ of the Employer or to restrict any person's right to terminate his employment at any time. 11.2 Alienation of Interest Forbidden. The interest of a Member or his beneficiary or beneficiaries hereunder may not be sold, transferred, assigned, or encumbered in any manner, either voluntarily or involuntarily, and any X-1 17 attempt so to anticipate, alienate, sell, transfer, assign, pledge, encumber, or charge the same shall be null and void; neither shall the benefits hereunder be liable for or subject to the debts, contracts, liabilities, engagements or torts of any person to whom such benefits or funds are payable, nor shall they be an asset in bankruptcy or subject to garnishment, attachment or other legal or equitable proceedings. 11.3 Amendment. The Company may from time to time, in its discretion, amend, in whole or in part, any or all of the provisions of the Plan on behalf of the Company and all Employers; provided, however, that no amendment may be made that would impair the rights of a Member with respect to amounts already allocated to his Account. 11.4 Severability. If any provision of this Plan shall be held illegal or invalid for any reason, said illegality or invalidity shall not affect the remaining provisions hereof; instead, each provision shall be fully severable and the Plan shall be construed and enforced as if said illegal or invalid provision had never been included herein. 11.5 Governing Laws. All provisions of the Plan shall be construed in accordance with the laws of Texas except to the extent preempted by federal law. EXECUTED effective as of January 1, 1989. BAKER HUGHES INCORPORATED By: ---------------------------------- Name: ---------------------------------- Title: ---------------------------------- XI-1 18 FIRST AMENDMENT TO BAKER HUGHES INCORPORATED SUPPLEMENTAL RETIREMENT PLAN WHEREAS, BAKER HUGHES INCORPORATED (the "Company") and other Employers have heretofore adopted the BAKER HUGHES INCORPORATED SUPPLEMENTAL RETIREMENT PLAN (the "Plan") for the benefit of their eligible employees; and WHEREAS, the Company amended and restated the Plan on behalf of itself and the other Employers, effective as of January 1, 1989; and WHEREAS, the Company desires to further amend the Plan on behalf of itself and other Employers; NOW, THEREFORE, the Plan shall be amended as follows, effective as of April 1, 1993: 1. The second and third paragraphs of Article IV of the Plan shall be deleted and the following shall be substituted therefor: "A Member may change his designated investment option for future contributions as of the first day of any calendar quarter in the manner and on the form prescribed by the Plan Administrator. Any such change shall be implemented as soon as administratively feasible. A Member may elect, as of the first day of any calendar quarter and in the manner and on the form prescribed by the Plan Administrator, to convert his investment designation with respect to the amounts allocated to his Account prior to the effective date of such conversion. Any such conversion shall be implemented as soon as administratively feasible and shall be permitted only while the Member is an active participant in the Thrift Plan." 2. As amended hereby, the Plan is specifically ratified and reaffirmed. IN WITNESS WHEREOF, the undersigned has caused these presents to be executed this 18th day of March, 1993. BAKER HUGHES INCORPORATED By: /s/ Thomas Scott Smith ------------------------------------- Name: Thomas Scott Smith Title: Director, Compensation and Benefits 19 RESOLUTIONS FOR THE BAKER HUGHES INCORPORATED ADMINISTRATIVE COMMITTEE RESOLVED, that the First Amendment to Baker Hughes Incorporated Supplemental Retirement Plan, a copy of which is attached and is directed to be marked for identification and filed with the records of Baker Hughes Incorporated (the "Company"), be and the same hereby is approved and adopted; and RESOLVED, that the appropriate officers of the Company be and they hereby are authorized and directed to do and perform all such acts and things, to sign such documents or instruments, and to take all other steps as they or any of them may deem necessary, advisable, convenient or proper to effectuate the same and accomplish the purpose of the foregoing. DATED this 18th day of March, 1993. /s/ T. Scott Smith T. Scott Smith ------------------------------------------ Director, Compensation and Benefits /s/ E. L. Mattson E. L. Mattson ------------------------------------------ Treasurer /s/ Phil Rice Phil Rice ------------------------------------------ Vice President-Human Resources /s/ G. S. Finley G. S. Finley ------------------------------------------ Controller 20 SEPTEMBER 2, 1992 INFORMATION STATEMENT PURSUANT TO REGULATION SECTION 2520.104-23 1. Name Address of Employer: Baker Hughes Incorporated 3900 Essex Lane, Suite 1200 Houston, TX 77027 2. Employer Identification No.: 76-0207995 3. The Employer and certain of its subsidiaries and affiliates maintain one plan, the Baker Hughes Incorporated Supplemental Retirement Plan, primarily for the purpose of providing deferred compensation for a select group of management or highly-compensated employees. As of the date hereof, there are 12 employees participating in the Plan. /s/ T. Scott Smith - -------------------------------- T. Scott Smith Plan Administrator RESOLUTIONS FOR T. SCOTT SMITH AS DELEGATE OF THE BOARD OF DIRECTORS OF BAKER HUGHES INCORPORATED RESOLVED, that the restatement of the Baker Hughes Incorporated Supplemental Retirement Plan, a copy of which is attached and is directed to be marked for identification and filed with the records of Baker Hughes Incorporated (the "Company"), be and the same hereby is approved and adopted on behalf of the Company and all other adopting employers, effective as of January 1, 1989; and RESOLVED, that the appropriate officers of the Company be and they hereby are authorized and directed to do and perform all such acts and things, to sign such documents or instruments, and to take all other steps as they or any of them may deem necessary, advisable, convenient or proper to effectuate the same and accomplish the purpose of the foregoing, and to acquire and maintain a qualified and exempt status for the Plan under the applicable provisions of the Employee Retirement Income Security Act of 1974, as amended. DATED EFFECTIVE AS OF JANUARY 1, 1989. /s/ T. Scott Smith ----------------------------- T. Scott Smith EX-10.16 9 AMEND. NO. 1999-1 TO SUPPLEMENTAL RETIREMENT PLAN 1 EXHIBIT 10.16 AMENDMENT NO. 1999-1 TO THE SUPPLEMENTAL RETIREMENT PLAN This Amendment No. 1999-1 is made to the Baker Hughes Incorporated Supplemental Retirement Plan ("the Plan"). Capitalized terms used but not defined herein shall have the meanings ascribed to them in the Plan. WHEREAS, Baker Hughes Incorporated (the "Company") has determined that it is in its best interest and that of its stockholders to amend the Plan as set forth herein; NOW, THEREFORE, the Plan is amended as follows: 1. Article I, Section 1.1(6) of the Plan is amended in its entirety to read as follows: "(6) Change in Control: 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: (A) 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 (C) below; or (B) 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 Directors and any new director (other than a 1 2 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 Directors 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 (C) 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 securi- 2 3 ties Beneficially Owned by such Person any securities acquired directly from the 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 (D) 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 a merger or consolidation immediately following which the individuals who comprise the Board immediately prior thereto constitute at least a majority of the board of directors of the Company, the entity surviving such merger or consolidation or any parent thereof (or a majority plus one member where such board comprises an odd number of members); or (E) 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 3 4 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. For purposes of this Article I, Section 1.1(6) only, the term "affiliate" shall have the meaning set forth in Rule 12b-2 promulgated under Section 12 of the Exchange Act." 2 The last paragraph Article V, Section 5.2 of the Plan is amended in its entirety to read as follows: "Notwithstanding the foregoing, in the event of a Change in Control other than an event described only in clause (C) of Article I, Section 1.1(6) of the Plan, each Member's Accounts created pursuant to this Plan, including each Member's General Account and Base Contribution Account, shall become fully vested in each such Member. A Member's Accounts shall also become fully vested in such Member if (1) such Member'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, (2) such Member terminates his or her 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 the Person described in clause (1), 4 5 (3) such Member's employment is terminated by the Company without Cause or by the Member 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) or (4) such Member's employment is terminated by the Company without Cause or by the Member employee for Good Reason, in either case within 2 years following the occurrence of a Change in Control described in clause (C) of the definition of Change in Control set forth in Article I, Section 1.1(6) of the Plan." The effective date of this Amendment No. 1999-1 shall be January 27, 1999; provided, however, that, 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 the Plan and (C) individuals who satisfy the requirements in clauses (i) and (ii) below constitute at least two-thirds (2/3) of the number of directors of the entity surviving such transaction or any parent thereof: individuals who (i) immediately prior to such transaction constitute the Directors and (ii) on the date hereof constitute the Directors 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 Directors 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 Amendment No. 1999-1 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 sentence does not preserve the availability of such accounting treatment, then, to the extent that any provision or combination of provisions of this Amendment No. 1999-1 disqualifies the transaction as a "pooling" transaction (including, if 5 6 applicable, this entire Amendment No. 1999-1), the Directors shall amend 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 with respect to this paragraph shall be made by the Company, 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. Except as herein modified, the Plan shall remain in full force and effect. BAKER HUGHES INCORPORATED By: -------------------------------- Name: G.S. Finley Title: Senior Vice President and Chief Administrative Officer 6 EX-10.17 10 EXECUTIVE SEVERANCE POLICY 1 Exhibit 10.17 POLICY: Baker Hughes Incorporated EFFECTIVE: October 1, 1988 (LOGO) Executive Severance Policy REVISED: September 1, 1992 APPROVED BY: J. D. Woods PAGE: 1 of 2 - -------------------------------------------------------------------------------- POLICY: Baker Hughes Incorporated ("BHI") Executive Severance Policy (the "Policy") SCOPE: This Policy covers all U.S.-based Executive Salary Grade System employees (the "Executives") of Baker Hughes Incorporated, its divisions, subsidiaries and BHI-controlled affiliates (the "Company"). PURPOSE: To have a uniform Policy regarding severance benefits for all U.S.-based Company Executives on the Executive Salary Grade System. This Policy is intended to afford the specified Executives whose employment is terminated for reasons specified below an income stream for a fixed time period while such Executives actively seek and obtain gainful employment or become self-employed. ELIGIBILITY: Executives shall be eligible for the benefits under this Policy if (i) their employment is terminated because their position is eliminated, or (ii) their employment is terminated in conjunction with an acquisition, merger, spinoff, reorganization (either business or personnel), facility closing or a discontinuance of operations of the division in which such Executives are employed. Executives shall not be eligible for the benefits under this policy if they are terminated for any other reason, or if they resign or retire. Executives shall not be eligible for the benefits under this Policy if, in the event of an acquisition or merger, they are offered a position by BHI or the successor company at the same base salary at a work location within fifty (50) miles of their current work location. BENEFITS: Eligible Executives shall be eligible for the severance payments described in the chart below and the attached sample Letter of Explanation (the "Letter"). REQUIREMENTS: In order to receive the benefits under this Policy, such Executives must agree in writing to a Settlement Agreement and General Release (the "Agreement") in advance of receiving any benefits (sample attached). Such Executives will not receive any of the described severance benefits or any other severance benefits in the absence of executing and agreeing to a Letter and Agreement. 2 POLICY: Baker Hughes Incorporated Executive Severance Policy PAGE: 2 of 2 - -------------------------------------------------------------------------------- MISCELLANEOUS: The Company is an "employment at will" employer. Employees have the right to resign their positions "at will" and the Company has the right to terminate an employee "at will", with or without notice of cause. No employee's "at will" status may be modified except in a written contract executed by BHI's President. The benefits described in this Policy and in the Letter shall be interpreted and administered by BHI's Vice President of Human Resources in accordance with the terms and conditions of the various benefit plans described in the Letter. Eligible Executives under this Policy may request outplacement services but eligibility for such services will be determined at the sole discretion of BHI's Vice President of Human Resources. The benefits outlined in this Policy and the Letter supersede, negate and replace all other benefits the Company has offered or may offer to other Company employees, including those offered by the division where such Executives are employed. The benefits under this Policy and the Letter may be amended, expanded or discontinued at any time at the sole discretion of BHI, with or without notice. The number of months of severance pay for such Executives is indicated below by salary grade. All other benefits are described in the Letter. Salary Grade No. of Months 10-12 3 13-14 6 15-16 9 17-18 12 19-22 15 23 and above 18 [Form of Letter of Explanation] SAMPLE ONLY Date 3 Name Address City, State Zip RE: Letter of Explanation (the "Letter") Baker Hughes Incorporated ("BHI") Executive Severance Policy (the "Policy") Dear : ---------------- It has been determined you are eligible for certain benefits under the above referenced Policy upon termination of your employment with (the "Company"). The Effective Date of your termination is . Leave of Absence 1. You will be granted a ( ) month leave of absence beginning on the Effective Date. During the leave of absence, the Company or BHI will pay your salary of $ per month until you secure gainful employment or become self-employed as an owner, partner, shareholder, officer or director of a business for profit, whichever occurs first. In the event you secure gainful employment or become self-employed and earn less than your present salary, the Company or BHI will pay you the difference from the date your new employment or self-employment commences until the expiration of your leave of absence. Earnings include all compensation, including but not limited to, wages, salaries, bonuses, severance pay or net earnings from self-employment, as determined for Internal Revenue purposes, which you earn during your leave of absence. 2. During the period of your leave of absence, the group insurance programs for medical, dental and life in which you are currently enrolled will be continued in the normal course. All short-term disability insurance and long-term disability insurance coverage shall cease as of the Effective Date. All benefits for medical, dental and life shall cease on the expiration of the term of your leave of absence or when other medical, dental and life insurance coverage becomes available to you when you secure gainful employment or become self-employed as an owner, partner, shareholder, officer, or director of a business for profit, whichever occurs first. Upon termination of your coverage, you may be eligible to buy continuation coverage under the terms and for the period mandated by federal law. 4 Name Date Page 2 For purposes of paragraphs 1 and 2 of this letter, the terms "self-employed" and "self-employment" shall mean activities in which your personal services are a material income-producing factor of a business for profit and shall exclude investments, other passive activities or any other activity in which capital is a material income-producing factor, irrespective of your degree of ownership as an owner, partner, shareholder or degree of control as an officer or director of such activity or investment. 3. You will be allowed, at your option, to continue to participate in the BHI Employee Thrift Plan in accordance with the terms of the plan throughout the term of your leave of absence as long as you are receiving sufficient income from BHI or the Company to meet the minimum payroll deduction participation requirement. No contributions will be accepted during your leave of absence from any source other than income from BHI or the Company. All benefits, contributions or disbursements, if any, which accrued under that plan during your employment will be awarded, vested or paid in accordance with the provisions of that plan as of the expiration of the term of your leave of absence. 4. You will be allowed, at your option, to continue to participate in the BHI Employee Stock Purchase Plan in accordance with the terms of the plan throughout the term of your leave of absence as long as you are receiving sufficient income from BHI or the Company to meet the minimum payroll deduction participation requirement. No contributions will be accepted during your leave of absence from any source other than income from BHI or the Company. The expiration of the term of your leave of absence will also terminate Employee Stock Purchase Plan eligibility, with vesting and distribution, if any, being determined in accordance with the provisions of that plan. 5. During your leave of absence, your rights, if any, under the BHI Employee Stock Option Plan, and/or the BHI Convertible Debenture Plan, will continue pursuant to the terms of those plans. No new options or debenture grants will be awarded to you after the Effective Date. You will be permitted to exercise or convert any option rights or convertible debenture rights awarded to you prior to the Effective Date for a period of up to three (3) months from the expiration of your leave of absence or the normal expiration date of these rights, whichever occurs first, but only to the extent these rights are vested or convertible at the end of the above referenced time periods. If any of your convertible debentures remain unconverted at the end of the period in which they can be exercised, BHI will have the right to repurchase the debentures for their face value. 5 Name Date Page 3 6. Upon expiration of your leave of absence, you will be paid for vacation earned but not taken as of the Effective Date. This payment will be limited to a maximum of six (6) weeks earned but unused vacation and specifically excludes payment for any vacation which was awarded under the BHI Executive Perquisite Plan. You will not be eligible to receive payment for vacation accrued but not earned as of the Effective Date. You will not accrue or earn vacation time, or remuneration in lieu thereof, during your leave of absence. 7. Any bonuses determined with reference to formal written objectives shall be paid pro-rata as of the Effective Date based on your number of months of active employment (i.e., bonuses will not accrue during your leave of absence) completed during the fiscal year in which the Effective Date falls. The bonus, if any, will be determined at the Company's sole discretion based on interim results to the Effective Date considering the following: . Progress of the Company towards completion of its bonus goals for the fiscal Year. . Satisfactory performance related to the bonus plan for the most recently completed quarter. . Subject to the successful completion of the year-end audit of the financial statements of the Company by its outside auditor and the BHI Internal Audit Department. 8. During the term of your leave of absence, you will be permitted the continued use of any Company vehicle assigned to you in accordance with the Company's existing policy. Within thirty (30) days of the termination of your leave of absence, or upon acceptance of other employment or self-employment, you will be permitted to purchase any vehicle assigned to you at the then fair market value of the vehicle as determined by the Company. No new vehicle will be provided during your leave of absence. Reasonable gasoline and maintenance expenses will be reimbursed as submitted and approved on monthly expense reports in accordance with the Company's existing policy. 9. All payments for monthly club memberships or other perquisites will cease as of the Effective Date and said memberships or other Company property, including Company credit cards, will be immediately returned to the Company; provided, however, you will have the option of purchasing said memberships at their fair market value as determined by the Company. 6 Name Date Page 4 10. The benefits described above supersede, negate and replace any other benefits offered by the Company to you or other Company employees. Issues regarding the interpretation, implementation or administration of the benefits described above will be resolved by BHI's Vice President of Human Resources, the appropriate BHI Group President and BHI's President and Chief Executive Officer. The benefits awarded above will be administered by BHI's Vice President of Human Resources. 11. BHI, at its sole discretion, may offer outplacement services to you if such services are requested by you and it is determined by BHI's Vice President of Human Resources that you would benefit from this kind of service. The outplacement counselor will be chosen by BHI and costs associated with this service will be for BHI's account. 12. By executing this letter you agree and accept the fact that the Company is an "employment at will" employer and that as such an employee has the right to resign his position "at will" and the Company has the right to terminate an employee "at will". 13. Payment of the above severance benefits is contingent upon your executing and returning the attached Settlement Agreement and General Release (the "Agreement"). You are encouraged to consult an attorney before executing this Letter and the attached Agreement if that is your desire. Conclusion If the above reflects your understanding of the severance arrangement, please indicate your approval and acceptance by affixing your signature in the space provided below and returning the original to me retaining a copy for your files. Sincerely, - ----------------------------- Accepted, Approved and Agreed to this day of , 19 . - ------------------------------ Signature - ------------------------------ Typed or Printed Name 7 SETTLEMENT AGREEMENT AND GENERAL RELEASE THIS SETTLEMENT AGREEMENT AND GENERAL RELEASE (the "Agreement") is made and entered into by and between (hereinafter referred to as "Employee") and BAKER HUGHES INCORPORATED and its subsidiaries and affiliates (hereinafter referred to as the "Company"). W I T N E S S E T H: WHEREAS, the Employee's active service with the Company has or will soon terminate; and WHEREAS, the Company has offered certain benefits to the Employee under the provisions of the Company's Executive Severance Policy (the "Policy") and the attendant Letter of Explanation (the "Letter") as consideration to the Employee to enter into this Agreement; and WHEREAS, the Employee and the Company desire to settle fully and finally all difference between them including, but in no way limited to, any differences that might arise out of Employee's employment with the Company and the termination thereof; NOW, THEREFORE, in consideration of the premises and mutual promises herein contained, and in conjunction with the Policy and the Letter, it is agreed as follows: FIRST: This Agreement shall not in any way be construed as an admission by the Company that it has acted wrongfully with respect to the Employee or any other person, or that the Employee has any rights whatsoever against the Company, and the Company specifically disclaims any liability to or wrongful acts against the Employee or any other person, on the part of itself, its employees or its agents. SECOND: The Employee represents, understands and agrees that his/her active employment with the Company has or will soon terminate, and that he/she will not apply for or otherwise seek employment with the Company at any time. THIRD: The Employee further agrees that during any period in which he/she is receiving benefits under the Policy or the Letter, he/she will not solicit or participate in or assist in any way in the solicitation or recruitment, directly or indirectly, of any Company employees or customers. Additionally, the Employee agrees that during any period the Employee is receiving benefits under the Policy or the Letter, the Employee shall not engage in any business or venture or become employed by any person or entity which engages in a business activity which competes, directly or indirectly, with the business activities of the Company. In view of the nature of the Employees's employment and the information and trade secrets which the Employee has received during the course of his/her employment, the Employee likewise agrees that the Company would be irreparably harmed by any violation or threatened violation of this Agreement, and that the Company shall be entitled to injunctive relief prohibiting the Employee from any violation or threatened violation of this Agreement. 8 FOURTH: The Employee represents and agrees that he/she fully understands his/her right to discuss all aspects of this Agreement with his/her private attorney, that to the extent, if any, that he/she desires, he/she has availed himself/herself of this right, that he/she has carefully read and fully understands all of the provisions of this Agreement and that he/she is voluntarily entering into this Agreement. FIFTH: As a material inducement to the Company to enter into this Agreement, the Employee hereby irrevocably and unconditionally releases, acquits and forever discharges the Company and each of the Company's owners, stockholders, predecessors, successors, assigns, agents, directors, officers, employee's representatives and attorneys of such divisions, subsidiaries, affiliates (and agents, directors, officers, employees and attorneys of such divisions, subsidiaries and affiliates), and all persons acting by, through, under or in concert with any of them (collectively "Releasees"), or any of them, from any and all charges, complaints, claims, liabilities, obligations, promises, agreements, controversies, damages, actions, causes of action, suits, rights, demands, costs, losses, debts and expenses (including attorneys' fees and costs actually incurred) of any nature whatsoever, known or unknown, suspected or unsuspected, including, but not limited to, rights arising out of alleged violations of any contracts, express or implied, any covenant of good faith and fair dealing, express or implied, or any tort, or any legal restrictions on the Company's right to terminate employees, or any federal, state or other governmental statute, regulation, or ordinance, including, without limitation, Title VII of the Civil Rights Act of 1964 and the Federal Age Discrimination in Employment Act, which the Employee now has, owns or holds, or claims to have, own or hold, or which the Employee at any time heretofore had, owned or held, or claimed to have, own or hold, or which the Employee at any time hereinafter may have, own or hold, or claim to have, own or hold against each or any of the Releasees. In addition, the Employee waives all rights and benefits afforded by any state laws which provide in substance that a general release does not extend to claims which a person does not know or suspect to exist in his/her favor at the time of executing the release which, if known by him/her, must have materially affected his/her settlement with the other person. The only exception to the foregoing shall be claims for wages and benefits specifically promised under the Policy and the Letter. SIXTH: The Employee represents and acknowledges that in executing the Agreement he/she does not rely and has not relied upon any representation or statement, oral or written, not set forth herein made by any of the Releasees or by any of the Releasees' agents, representatives or attorneys with regard to the subject matter, basis or effect of this Agreement or otherwise. -2- 9 This Agreement, the Policy and the Letter sets forth the entire agreement between the parties hereto, and fully supersedes any and all prior agreements or understandings, oral or written, between the parties hereto pertaining to the subject matter hereof. This Agreement, the Policy and the Letter shall be construed and interpreted in accordance with the laws of the State of Texas with venue for litigation being in Houston, Texas. PLEASE READ CAREFULLY. THIS AGREEMENT INCLUDES A RELEASE OF ALL KNOWN AND UNKNOWN CLAIMS. EXECUTED at (city), (state), this day of ,19 . ----------------------------- ----------------------------- Name Printed EXECUTED at (city), (state), this day of ,19 . BAKER HUGHES INCORPORATED BY: ------------------------- ----------------------------- Name Printed -3- EX-10.18 11 1993 STOCK OPTION PLAN 1 EXHIBIT 10.18 BAKER HUGHES INCORPORATED 1993 STOCK OPTION PLAN ARTICLE I INTRODUCTION 1. PURPOSE. This 1993 Stock Option Plan, which shall be known as the "1993 STOCK OPTION PLAN" and which is hereinafter referred to as the "PLAN," is intended to promote the interests of Baker Hughes Incorporated ("COMPANY") and its stockholders by encouraging employees of the Company and its subsidiaries and non-employee directors of the Company to acquire or increase their equity interest in the Company, thereby giving them an added incentive to work toward the continued growth and success of the Company. The Board of Directors also contemplates that through the adoption of the Plan, the Company, its subsidiaries and affiliated entities will be better able to compete for the services of personnel needed for the continued growth and success of the Company. 2. SHARES SUBJECT TO THE PLAN. Subject to adjustment as provided in Article I, Section 4, Article II, Paragraph 3(e), Article III, Paragraph 3(e), and Article IV, Paragraph 5(e), the aggregate number of shares of Common Stock, $1 par value per share, of the Company ("COMMON STOCK") to be delivered upon exercise of all options granted under the Plan shall not exceed 6,500,000 shares. In the event the number of shares to be delivered upon the exercise in full of any option granted under the Plan is reduced for any reason whatsoever or in the event any option granted under the Plan can no longer under any circumstances be exercised, the number of shares no longer subject to such option shall thereupon be released from such option and shall thereafter be available to be re-optioned under the Plan. Shares issued pursuant to the exercise of options granted under the Plan shall be fully paid and nonassessable. 3. ADMINISTRATION OF THE PLAN. Subject to the provisions of the Plan, the Compensation Committee of the Board of Directors of the Company (the "COMMITTEE") shall interpret the Plan and all options granted under the Plan, shall make such rules as it deems necessary for the proper administration of the Plan, shall make all other determinations necessary or advisable for the administration of the Plan and shall correct any defect or supply any omission or reconcile any inconsistency in the Plan or in any option granted under the Plan in the manner and to the extent that the Committee deems desirable to carry the Plan or any option into effect. Any action taken or determination made by the Committee pursuant to this and the other paragraphs of the Plan shall be conclusive on all parties. The act or determination of a majority of the Committee shall be deemed to be the act or determination of the Committee. The Committee shall consist of at least three members of the Board of Directors of the Company appointed by and holding office during the pleasure of the Board of Directors of the Company. Other than options granted to Non- Employee Directors (as hereinafter defined) pursuant to Article IV, no options may be granted under the Plan to any member of the Committee during the term of 1 2 his membership on the Committee. No person shall be eligible to serve on the Committee unless he is then a "disinterested person" within the meaning of Paragraph (d)(3) of Rule 16b-3 ("RULE 16B-3") promulgated under the Securities Exchange Act of 1934, as amended (the "ACT"), if and as the Rule is then in effect. The members of the Committee shall be solely "outside directors," within the meaning of section 162(m) of the Internal Revenue Code of 1986, as amended (the "CODE") and applicable interpretive authority thereunder. 4. AMENDMENT AND DISCONTINUANCE OF THE PLAN. The Board of Directors of the Company may amend, suspend or terminate the Plan; provided, however, that each such amendment of the Plan (a) extending the period within which options may be granted under the Plan, (b) increasing the aggregate number of shares of Common Stock to be optioned under the Plan except as provided in Article II, Paragraph 3(e), Article III, Paragraph 3(e), Article IV, Paragraph 5(e) and the next succeeding sentence, (c) changing the class of employees to whom options may be granted under Article II or III, (d) materially increasing the benefits to optionees under the Plan, (e) modifying the provisions of Article IV, or (f) granting options to Non-Employee Directors other than pursuant to Article IV, shall, in each case, be subject to approval by the stockholders of the Company; provided, further, however, that no amendment, suspension or termination of the Plan may cause the Plan to fail to meet the requirements of Rule 16b-3 or may, without the consent of the holder of an option granted under Article II, III, or IV, terminate such option or adversely affect such person's rights in any material respect (unless such change is required in order to cause the benefits under the Plan to qualify as "performance based compensation" within the meaning of section 162(m) of the Code and applicable interpretive authority thereunder). The Board of Directors of the Company may increase the aggregate number of shares of Common Stock that may be issued under the Plan provided that the full amount of such increase shall be reserved solely for issuance as provided in Article I, Paragraph 5(a), and provided that the number of shares issuable to persons subject to Section 16(a) of the Act in connection with such increases shall not, in the aggregate, exceed 650,000 shares. 5. GRANTING OF OPTIONS TO EMPLOYEES. The Committee shall have authority to grant, prior to the expiration date of the Plan, to employees of the Company and its subsidiaries (as defined in section 424 of the Code) ("EMPLOYEE OPTIONEES"), options to purchase, on the terms and conditions hereinafter set forth in Articles II and III, authorized but unissued, or reacquired, shares of Common Stock as follows: (a) to a broad-based group of Employee Optionees, including those described in Paragraph 5(b) below, options granted pursuant to Article II, provided such grants under this Paragraph 5(a) shall, unless increased by the Board of Directors, be limited to options to purchase 1,500,000 shares of Common Stock and shall be made only to those Employee Optionees, in such amounts and at such times as determined in the discretion of the Committee; and 2 3 (b) to Employee Optionees who are key employees (including officers and directors who are also key employees), options granted pursuant to Article II and/or Article III, provided such grants shall be made only to those Employee Optionees, in such amounts and at such times as determined in the discretion of the Committee, and, for this purpose, the Committee may consider the Employee Optionee's office or position, degree of responsibility for and contribution to the growth and success of the Company, length of service, age, promotions, potential and any other factors which it may deem relevant. Options granted to Employee Optionees under Article III shall be "incentive stock options," within the meaning of section 422(b) of the Code, and are hereinafter referred to as "incentive stock options." All other options granted to Employee Optionees under the Plan shall be granted pursuant to Article II, and are hereinafter referred to as "nonqualified options." Notwithstanding the foregoing, grants of options to any one Employee Optionee under the Plan shall be limited to options to purchase no more than 400,000 shares of Common Stock per calendar year. 6. GRANTING OF OPTIONS TO NON-EMPLOYEE DIRECTORS. All options granted to Non- Employee Directors shall be options to purchase, on the terms and conditions hereinafter set forth in Article IV, authorized but unissued, or reacquired, shares of Common Stock and shall be nonqualified options. 7. OPTION AGREEMENTS. Each option under the Plan shall be evidenced by a written agreement between the Company and the Eligible Optionee which shall contain such terms and conditions, and may be exercisable for such periods, as may be approved by the Committee, which terms and conditions need not be identical. 8. EFFECTIVE DATE. The Plan shall become effective as of October 27, 1993, provided the Plan is approved by the Board of Directors of the Company and approved by the shareholders of the Company within twelve months thereafter. Notwithstanding any other provisions of the Plan, no option under the Plan shall be exercisable prior to such shareholder approval. Except with respect to options then outstanding, if not sooner terminated under the provisions of Article I, Paragraph 4, the Plan shall terminate upon and no further options shall be granted after the expiration of ten years from October 27, 1993. 9. MISCELLANEOUS. All references in the Plan to "Articles," "Paragraphs," and other subdivisions refer to the corresponding Articles, Paragraphs, and subdivisions of the Plan. 10. RULE 16B-3 COMPLIANCE. The Company intends: (a) that the Plan meet the requirements of Rule 16b-3; 3 4 (b) that participation by Non-Employee Directors under Article IV of the Plan will not prohibit them from being "disinterested persons" within the meaning of Rule 16b-3(d)(3) with respect to administration of the Plan or with respect to administration of any other plan of the Company; (c) that transactions of the type specified in the first paragraph of Rule 16b-3 by Non-Employee Directors pursuant to Article IV of the Plan will be exempt from the operation of section 16(b) of the Act; and (d) that transactions of the type specified in the first paragraph of Rule 16b-3 by officers of the Company (whether or not they are directors) pursuant to the Plan will be exempt from the operation of section 16(b) of the Act. In all cases, the terms, provisions, conditions and limitations of the Plan shall be construed and interpreted consistent with the Company's intent as stated in this Article I, Paragraph 10. 11. RECAPITALIZATION OR REORGANIZATION. If (i) the Company shall not be the surviving entity in any merger, consolidation or other reorganization (or survives only as a subsidiary of an entity other than a previously wholly-owned subsidiary of the Company), (ii) the Company sells, leases or exchanges all or substantially all of its assets to any other person or entity (other than a wholly-owned subsidiary of the Company), (iii) the Company is to be dissolved and liquidated, (iv) any person or entity, including a "group" as contemplated by section 13(d)(3) of the Act, acquires or gains ownership or control (including, without limitation, power to vote) of more than 50% of the outstanding shares of the Company's voting stock (based upon voting power), or (v) as a result of or in connection with a contested election of directors, the persons who were directors of the Company before such election shall cease to constitute a majority of the Board of Directors of the Company (each such event is referred to herein as a "CORPORATE CHANGE"), no later than (a) ten days after the approval by the shareholders of the Company of such merger, consolidation, reorganization, sale, lease or exchange of assets or dissolution or such election of directors or (b) thirty days after a change of control of the type described in Clause (iv), the Committee, acting in its sole discretion without the consent or approval of any optionee, shall act to effect one or more of the following alternatives, which may vary among individual optionees and which may vary among options held by any individual optionee: (1) accelerate the time at which options then outstanding may be exercised so that such options may be exercised in full for a limited period of time on or before a specified date (before or after such Corporate Change) fixed by the Committee, after which specified date all unexercised options and all rights of optionees thereunder shall terminate, (2) require the mandatory surrender to the Company by selected optionees of some or all of the outstanding options held by such optionees (irrespective of whether such options are then exercisable under the provisions of the Plan) as of a date, before or after such Corporate Change, specified by the Committee, in which event the Committee shall thereupon cancel such options and the Company shall pay to each optionee 4 5 an amount of cash per share equal to the excess, if any, of the amount calculated below (the "CHANGE OF CONTROL VALUE") of the shares subject to such option over the exercise price(s) under such options for such shares, (3) make such equitable adjustments to options then outstanding as the Committee deems appropriate to reflect such Corporate Change (provided, however, that the Committee may determine in its sole discretion that no adjustment is necessary to options then outstanding) or (4) provide that thereafter upon any exercise of an option theretofore granted the optionee shall be entitled to purchase under such option, in lieu of the number of shares of Common Stock then covered by such option the number and class of shares of stock or other securities or property (including, without limitation, cash) to which the optionee would have been entitled pursuant to the terms of the agreement of merger, consolidation or sale of assets and dissolution if, immediately prior to such merger, consolidation or sale of assets and dissolution the optionee had been the holder of record of the number of shares of Common Stock then covered by such option. For the purposes of clause (2) above, the "CHANGE OF CONTROL VALUE" shall equal the amount determined in clause (i), (ii) or (iii), whichever is applicable, as follows: (i) the per share price offered to shareholders of the Company in any such merger, consolidation, reorganization, sale of assets or dissolution transaction, (ii) the price per share offered to shareholders of the Company in any tender offer or exchange offer whereby a Corporate Change takes place, or (iii) if such Corporate Change occurs other than pursuant to a tender or exchange offer, the fair market value per share of the shares into which such options being surrendered are exercisable, as determined by the Committee as of the date determined by the Committee to be the date of cancellation and surrender of such options. In the event that the consideration offered to shareholders of the Company in any transaction described herein consists of anything other than cash, the Committee shall determine the fair cash equivalent of the portion of the consideration offered which is other than cash. Any adjustment provided for herein shall be subject to any required shareholder action. ARTICLE II NONQUALIFIED STOCK OPTIONS 1. ELIGIBLE EMPLOYEES. All Employee Optionees shall be eligible to receive nonqualified options under this Article II. 2. CALCULATION OF EXERCISE PRICE. The exercise price to be paid for each share of Common Stock deliverable upon exercise of each nonqualified option granted under Article II shall be equal to the fair market value per share of Common Stock at the time of grant as determined by the Committee, based on the composite transactions in the Common Stock as reported by The Wall Street Journal, and shall be equal to the per share price of the last sale of Common Stock on the trading day prior to the grant of such option. The exercise price for each nonqualified option granted under Article II shall be subject to adjustment as provided in Article II, Paragraph 3(e). 5 6 3. TERMS AND CONDITIONS OF OPTIONS. Nonqualified options granted under Article II shall be in such form as the Committee may from time to time approve. Options granted under Article II shall be subject to the following terms and conditions and may contain such additional terms and conditions, not inconsistent with Article II, as the Committee shall deem desirable: (a) OPTION PERIOD AND CONDITIONS AND LIMITATIONS ON EXERCISE. Subject to Article II, Paragraph 4, no nonqualified option granted under Article II shall be exercisable with respect to any of the shares subject to the option later than the date which is ten years after the date of grant (the "NONQUALIFIED OPTION EXPIRATION DATE"). To the extent not prohibited by other provisions of the Plan, each nonqualified option granted under Article II shall be exercisable at such time or times as the Committee in its discretion may determine at or prior to the time such option is granted (unless otherwise extended by the Committee pursuant to Article II, Paragraph 3 (b)(2)(iii)); provided, however, that unless the Committee determines otherwise, each nonqualified option granted under Article II shall be exercisable from time to time, in whole or in part, at any time prior to the Nonqualified Option Expiration Date. (b) TERMINATION OF EMPLOYMENT AND DEATH. For purposes of Article II and each nonqualified option granted under Article II, an Employee Optionee's employment shall be deemed to have terminated at the close of business on the day preceding the first date on which he is no longer for any reason whatsoever (including his death) employed by the Company or a subsidiary of the Company. An Employee Optionee shall be considered to be in the employment of the Company or a subsidiary of the Company as long as he remains an employee of the Company or a subsidiary of the Company, whether active or on an authorized leave of absence. Any question as to whether and when there has been a termination of such employment, and the cause of such termination, shall be determined by the Committee and its determination shall be final. If an Employee Optionee's employment is terminated for any reason whatsoever (including his death), each nonqualified option granted to him under Article II and all of his rights thereunder shall wholly and completely terminate: (1) With respect to options not then exercisable, at the time the Employee Optionee's employment is terminated; and (2) With respect to options then exercisable: (i) At the time the Employee Optionee's employment is terminated if his employment is terminated because he is discharged for fraud, theft or embezzlement committed against the 6 7 Company or a subsidiary, affiliated entity or customer of the Company, or for conflict of interest (other than legitimate competition); or (ii) At the expiration of a period of one year after the Employee Optionee's death (but in no event later than the Nonqualified Option Expiration Date) if the Employee Optionee's employment is terminated by reason of his death. A nonqualified option granted under Article II may be exercised by the Employee Optionee's estate or by the person or persons who acquire the right to exercise his option by bequest or inheritance with respect to any or all of the shares remaining subject to his option at the time of his death; or (iii) Unless it is otherwise provided in the option agreement or otherwise extended in the discretion of the Committee in the event of the Employee Optionee's retirement, at the expiration of a period of three years after the Employee Optionee's employment is terminated because of retirement (such that the Employee Optionee's age plus years of service with the Company and its subsidiaries equals or exceeds sixty-five) or disability (but in no event later than the Nonqualified Option Expiration Date); or (iv) At the expiration of a period of three months after the Employee Optionee's employment is terminated (but in no event later than the Nonqualified Option Expiration Date) if the Employee Optionee's employment is terminated for any reason other than his death, retirement, disability or the reasons specified in Article II, Paragraph 3 (b)(2)(i). (c) MANNER OF EXERCISE. In order to exercise a nonqualified option granted under Article II, the person or persons entitled to exercise it shall deliver to the Company payment in full for the shares being purchased, together with any required withholding tax. The payment of the exercise price for each option granted under Article II and any required withholding tax shall either be in cash or through delivery to the Company of shares of Common Stock, or by any combination of cash or shares; the value of each share of Common Stock delivered shall be deemed to be equal to the per share price of the last sale of Common Stock on the trading day prior to the date the option is exercised, based on the composite transactions in the Common Stock as reported in The Wall Street Journal. If the Committee so requires, such person or persons shall also deliver a written representation that all shares being purchased are being acquired for investment and not with a view to, or for resale in connection with, any distribution of such shares. An option agreement may, in the discretion of the Committee, provide for a "cashless exercise" of a nonqualified option by establishing procedures whereby the Employee Optionee, by a properly executed written notice, directs (1) an immediate market sale or margin loan respecting all or a part of the shares of Common Stock to which he is entitled upon exercise pursuant to an extension of credit by the 7 8 Company to the Employee Optionee of the option price, (2) the delivery of the shares of Common Stock from the Company directly to a brokerage firm and (3) the delivery of the option price from sale or margin loan proceeds from the brokerage firm directly to the Company. An option agreement may also, in the discretion of the Committee, provide for the withholding of Federal, state or local income tax upon exercise of a nonqualified option from any cash or stock remuneration (from the Plan or otherwise) then or thereafter payable by the Company to the Employee Optionee. (d) OPTIONS NOT TRANSFERABLE. No nonqualified option granted under Article II shall be transferable otherwise than by will or by the laws of descent and distribution and, during the lifetime of the Employee Optionee to whom any such option is granted, it shall be exercisable only by the Employee Optionee. Any attempt to transfer, assign, pledge, hypothecate or otherwise dispose of, or to subject to execution, attachment or similar process, any nonqualified option granted under Article II, or any right thereunder, contrary to the provisions hereof, shall be void and ineffective, shall give no right to the purported transferee, and shall, at the sole discretion of the Committee, result in forfeiture of the option with respect to the shares involved in such attempt. (e) ADJUSTMENT OF SHARES. In the event that at any time after the effective date of the Plan the outstanding shares of Common Stock are changed into or exchanged for a different number or kind of shares of the Company or other securities of the Company by reason of merger, consolidation, recapitalization, reclassification, stock split, stock dividend, or combination of shares, the Committee shall make an appropriate and equitable adjustment in the number and kind of shares subject to Article II (including shares as to which all outstanding nonqualified options granted under Article II, or portions thereof then unexercised, shall be exercisable), to the end that after such event the shares subject to Article II of the Plan and each Employee Optionee's proportionate interest shall be maintained as before the occurrence of such event. Such adjustment in an outstanding nonqualified option granted under Article II shall be made without change in the total price applicable to the option or the unexercised portion of the option (except for any change in the aggregate price resulting from rounding-off of share quantities or prices) and with any necessary corresponding adjustment in exercise price per share. Any such adjustment made by the Committee shall be final and binding upon all Employee Optionees, the Company, and all other interested persons. (f) LISTING AND REGISTRATION OF SHARES. Each nonqualified option granted under Article II shall be subject to the requirement that if at any time the Committee determines, in its discretion, that the listing, registration, or qualification of the shares subject to such option under 8 9 any securities exchange or under any state or Federal law, or the consent or approval of any governmental regulatory body, is necessary or desirable as a condition of, or in connection with, the issue or purchase of shares thereunder, such option may not be exercised in whole or in part unless such listing, registration, qualification, consent or approval shall have been effected or obtained and the same shall have been free of any conditions not acceptable to the Committee. 4. AMENDMENT. The Committee may, with the consent of the person or persons entitled to exercise any outstanding nonqualified option granted under Article II, amend such nonqualified option; provided, however, that any such amendment shall be subject to shareholder approval when required in Article I, Paragraph 4. The Committee may at any time or from time to time, in its discretion, in the case of any nonqualified option previously granted under Article II which is not then immediately exercisable in full, accelerate the time or times at which such option may be exercised to any earlier time or times. The Committee, in its absolute discretion, may grant to holders of outstanding nonqualified options granted under Article II, in exchange for the surrender and cancellation of such options, new options having exercise prices lower (or higher) than the exercise price provided in the options so surrendered and cancelled and containing such other terms and conditions, in accordance with the terms of the Plan, as the Committee may deem appropriate. 5. OTHER PROVISIONS. (a) The person or persons entitled to exercise, or who have exercised, a nonqualified option granted under Article II shall not be entitled to any rights as a stockholder of the Company with respect to any shares subject to such option until he shall have become the holder of record of such shares. (b) No nonqualified option granted under Article II shall be construed as limiting any right which the Company or any subsidiary of the Company may have to terminate at any time, with or without cause, the employment of any person to whom such option has been granted. (c) Notwithstanding any provision of the Plan or the terms of any nonqualified option granted under Article II, the Company shall not be required to issue any shares hereunder if such issuance would, in the judgment of the Committee, constitute a violation of any state or Federal law or of the rules or regulations of any governmental regulatory body. ARTICLE III INCENTIVE STOCK OPTIONS 1. ELIGIBLE EMPLOYEES. Key employees (including officers and directors who are also key employees) of the Company and its subsidiaries (as defined in 9 10 section 424 of the Code) shall be eligible to receive incentive stock options, within the meaning of section 422(b) of the Code, under this Article III. 2. CALCULATION OF EXERCISE PRICE. The exercise price to be paid for each share of Common Stock deliverable upon exercise of each incentive stock option granted under Article III shall be equal to the fair market value per share of Common Stock at the time of grant as determined by the Committee, based on the composite transactions in the Common Stock as reported by The Wall Street Journal, and shall be equal to the per share price of the last sale of Common Stock on the trading day prior to the grant of such option; provided, however, that in the case of an Employee Optionee who, at the time such option is granted, owns more than 10% of the total combined voting power of all classes of stock of the Company or any subsidiary corporation, within the meaning of section 422(b)(6) of the Code, then the exercise price per share shall be at least 110% of the fair market value per share of Common Stock at the time of grant. The exercise price for each incentive stock option shall be subject to adjustment as provided in Article III, Paragraph 3(e). 3. TERMS AND CONDITIONS OF OPTIONS. Incentive stock options granted under Article III shall be in such form as the Committee may from time to time approve. Options granted under Article III shall be subject to the following terms and conditions and may contain such additional terms and conditions, not inconsistent with Article III, as the Committee shall deem desirable: (a) OPTION PERIOD AND CONDITIONS AND LIMITATIONS ON EXERCISE. Subject to Article III, Paragraph 4, no incentive stock option granted under Article III shall be exercisable with respect to any of the shares subject to such option later than the date which is ten years after the date of grant; provided, however, that in the case of an Employee Optionee who, at the time such option is granted, owns more than 10% of the total combined voting power of all classes of stock of the Company or any subsidiary corporation, within the meaning of section 422(b)(6) of the Code, then such option shall not be exercisable with respect to any of the shares subject to such option later than five years after the date of grant. The date on which an incentive stock option ultimately becomes unexercisable under the previous sentence is hereinafter referred to as the "ISO EXPIRATION DATE." To the extent not prohibited by other provisions of the Plan, each incentive stock option granted under Article III shall be exercisable at such time or times as the Committee in its discretion may determine at or prior to the time such option is granted (unless otherwise extended by the Committee pursuant to Article III, Paragraph 3 (b)(2)(iii)); provided, however, that unless the Committee determines otherwise, each incentive stock option granted under Article III shall be exercisable from time to time, in whole or in part, subject to the dollar limitations set forth in Article III, Paragraph 3(g), at any time prior to the ISO Expiration Date. (b) TERMINATION OF EMPLOYMENT AND DEATH. For purposes of Article III and each incentive stock option granted under Article III, an Employee Optionee's employment shall be deemed to have terminated at the close of business on the day preceding the first date on which he is no longer for 10 11 any reason whatsoever (including his death) employed by the Company or a subsidiary of the Company. An Employee Optionee shall be considered to be in the employment of the Company or a subsidiary of the Company as long as he remains an employee of the Company or a subsidiary of the Company, whether active or on an authorized leave of absence. Any question as to whether and when there has been a termination of such employment, and the cause of such termination, shall be determined by the Committee and its determination shall be final. If an Employee Optionee's employment is terminated by any reason whatsoever (including his death), each incentive stock option granted to him and all of his rights thereunder shall wholly and completely terminate: (1) With respect to options not then exercisable, at the time the Employee Optionee's employment is terminated; and (2) With respect to options then exercisable: (i) At the time the Employee Optionee's employment is terminated if his employment is terminated because he is discharged for fraud, theft or embezzlement committed against the Company or a subsidiary, affiliated entity or customer of the Company, or for conflict of interest (other than legitimate competition); or (ii) At the expiration of a period of one year after the Employee Optionee's death (but in no event later than the ISO Expiration Date) if the Employee Optionee's employment is terminated by reason of his death. An incentive stock option granted under Article III of the Plan may be exercised by the Employee Optionee's estate or by the person or persons who acquire the right to exercise his option by bequest or inheritance with respect to any or all of the shares remaining subject to his option at the time of his death; or (iii) Unless it is otherwise provided in the option agreement or otherwise extended in the discretion of the Committee after the date which is three months after the Employee Optionee's retirement, at the expiration of a period of three years after the Employee Optionee's employment is terminated because of retirement (such that the Employee Optionee's age plus years of service with the Company and its subsidiaries equals or exceeds sixty-five) or disability (but in no event later than the ISO Expiration Date); or (iv) At the expiration of a period of three months after the Employee Optionee's employment is terminated (but in no event later than the ISO Expiration Date) if the Employee Optionee's employment is terminated for any other reason than his death, retirement, disability or the reasons specified in Article III, Paragraph 3 (b)(2)(i). 11 12 In the event and to the extent that an incentive stock option granted under Article III is not exercised (i) within three months after the Employee Optionee's employment is terminated because of retirement or disability not within the meaning of section 22(e)(3) of the Code or (ii) within one year after the Employee Optionee's employment is terminated because of disability within the meaning of section 22(e)(3) of the Code, such option shall be taxed as a nonqualified option and shall be subject to the manner of exercise provisions described in Article II, Paragraph 3(c). (c) MANNER OF EXERCISE. In order to exercise an incentive stock option granted under Article III, the person or persons entitled to exercise it shall deliver to the Company payment in full for the shares being purchased. The payment of the exercise price for each option granted under Article III shall either be in cash or through delivery to the Company of shares of Common Stock, or by any combination of cash or shares; the value of each share of Common Stock delivered shall be deemed to be equal to the per share price of the last sale of Common Stock on the trading day prior to the date the option is exercised, based on the composite transactions in the Common Stock as reported in The Wall Street Journal. If the Committee so requires, such person or persons shall also deliver a written representation that all shares being purchased are being acquired for investment and not with a view to, or for resale in connection with, any distribution of such shares. An option agreement may, in the discretion of the Committee, provide for a "cashless exercise" of an incentive stock option by establishing procedures whereby the Employee Optionee, by a properly executed written notice, directs (1) an immediate market sale or margin loan respecting all or a part of the shares of Common Stock to which he is entitled upon exercise pursuant to an extension of credit by the Company to the Employee Optionee of the option price, (2) the delivery of the shares of Common Stock from the Company directly to a brokerage firm and (3) the delivery of the option price from sale or margin loan proceeds from the brokerage firm directly to the Company. An option agreement may also, in the discretion of the Committee, provide for the withholding of Federal, state or local income tax upon exercise of an incentive stock option from any cash or stock remuneration (from the Plan or otherwise) then or thereafter payable by the Company to the Employee Optionee. (d) OPTIONS NOT TRANSFERABLE. No incentive stock option granted under Article III shall be transferable otherwise than by will or by the laws of descent and distribution and, during the lifetime of the Employee Optionee to whom any option is granted, it shall be exercisable only by such Employee Optionee. Any attempt to transfer, assign, pledge, hypothecate or otherwise dispose of, or to subject to execution, attachment or similar process, any incentive stock option granted under Article III, or any right thereunder, contrary to the provisions hereof, shall be void and 12 13 ineffective, shall give no right to the purported transferee, and shall, at the sole discretion of the Committee, result in forfeiture of the option with respect to the shares involved in such attempt. (e) ADJUSTMENT OF SHARES. In the event that at any time after the effective date of the Plan the outstanding shares of Common Stock are changed into or exchanged for a different number or kind of shares of the Company or other securities of the Company by reason of merger, consolidation, recapitalization, reclassification, stock split, stock dividend, or combination of shares, the Committee shall make an appropriate and equitable adjustment in the number and kind of shares subject to Article III (including shares as to which all outstanding incentive stock options granted under Article III, or portions thereof then unexercised, shall be exercisable), to the end that after such event the shares subject to Article III of the Plan and each Employee Optionee's proportionate interest shall be maintained as before the occurrence of such event. Such adjustment in an outstanding incentive stock option shall be made without change in the total price applicable to the option or the unexercised portion of the option (except for any change in the aggregate price resulting from rounding-off of share quantities or prices) and with any necessary corresponding adjustment in exercise price per share. Any such adjustment made by the Committee shall be final and binding upon all Employee Optionees, the Company, and all other interested persons. Any adjustment of an incentive stock option under this paragraph shall be made in such manner as not to constitute a "modification" within the meaning of section 424(h)(3) of the Code. (f) LISTING AND REGISTRATION OF SHARES. Each incentive stock option granted under Article III shall be subject to the requirement that if at any time the Committee determines, in its discretion, that the listing, registration, or qualification of the shares subject to such option upon any securities exchange or under any state or Federal law, or the consent or approval of any governmental regulatory body, is necessary or desirable as a condition of, or in connection with, the issue or purchase of shares thereunder, such option may not be exercised in whole or in part unless such listing, registration qualification, consent or approval shall have been effected or obtained and the same shall have been free of any conditions not acceptable to the Committee. (g) LIMITATION ON AMOUNT. Notwithstanding any other provision of the Plan, the aggregate fair market value (determined as of the time the incentive stock option is granted) of the Common Stock with respect to which incentive stock options are exercisable for the first time by an Employee Optionee, under all incentive stock option plans of the Company and its subsidiaries, during any calendar year cannot exceed $100,000 as provided under section 422(d) of the Code. 4. AMENDMENT. The Committee may, with the consent of the person or persons entitled to exercise any outstanding incentive stock option granted under Article III, amend such incentive stock option; provided, however, that any 13 14 such amendment shall be subject to shareholder approval when required in Article I, Paragraph 4. Subject to Article III, Paragraph 3(g), the Committee may at any time or from time to time, in its discretion, in the case of any incentive stock option previously granted under Article III which is not then immediately exercisable in full, accelerate the time or times at which such option may be exercised to any earlier time or times. 5. OTHER PROVISIONS. (a) The person or persons entitled to exercise, or who have exercised, an incentive stock option granted under Article III shall not be entitled to any rights as a stockholder of the Company with respect to any shares subject to such option until he shall have become the holder of record of such shares. (b) No incentive stock option granted under Article III shall be construed as limiting any right which the Company or any subsidiary of the Company may have to terminate at any time, with or without cause, the employment of any person to whom such option has been granted. (c) Notwithstanding any provision of the Plan or the terms of any incentive stock option granted under Article III, the Company shall not be required to issue any shares hereunder if such issuance would, in the judgment of the Committee, constitute a violation of any state or Federal law or of the rules or regulations of any governmental regulatory body. (d) The Committee may require any person who exercises an incentive stock option to give prompt notice to the Company of any disposition of shares of Common Stock acquired upon exercise of an incentive stock option within one year after the transfer of shares to such person. ARTICLE IV NON-EMPLOYEE DIRECTOR STOCK OPTIONS 1. ELIGIBLE PERSONS. Persons who are members of the Board of Directors of the Company but are not employees of the Company or of its subsidiaries ("NON- EMPLOYEE DIRECTORS") shall be eligible to receive options under, and solely under, this Article IV. 2. INITIAL AND ANNUAL GRANTING OF OPTIONS TO NON-EMPLOYEE DIRECTORS. Subject to the limitation of the number of shares of Common Stock set forth in Article I, Paragraph 2, (a) a nonqualified option to purchase 2,000 shares of Common Stock is hereby granted to each Non-Employee Director who is elected or appointed to the Board of Directors of the Company after the effective date of the Plan and prior to the expiration of the Plan, effective on the date of his initial election or appointment, if applicable (which date shall be the date of 14 15 grant for purposes hereof), and (b) a nonqualified option to purchase 1,000 shares of Common Stock is hereby granted, effective the fourth Wednesday of October of each year from and after the effective date of the Plan until the expiration of the Plan, to each person who is a Non-Employee Director on each such date (which date shall be the date of grant for purposes hereof). The Non- Employee Director grants set forth in this Article IV, Paragraph 2 are provided to replace and supersede, and not to supplement, the Non-Employee Director grants provided in Article IV, Paragraph 2 and Paragraph 3 of the Company's 1987 Stock Option Plan. 3. ADDITIONAL GRANTING OF OPTIONS TO NON-EMPLOYEE DIRECTORS. Subject to the limitation of the number of shares of Common Stock set forth in Article I, Paragraph 2, Non-Employee Directors shall, in the discretion of the Committee, be eligible to receive additional nonqualified options under this Article IV in lieu of directors fees and/or retainers, in accordance with such terms as may be approved by the Committee. 4. CALCULATION OF EXERCISE PRICE. The exercise price to be paid for each share of Common Stock deliverable upon exercise of each option granted under Article IV shall be equal to the fair market value per share of Common Stock at the time of grant as determined by the Committee, based on the composite transactions in the Common Stock as reported by The Wall Street Journal, and shall be equal to the per share price of the last sale of Common Stock on the trading day prior to the grant of such option, provided, that the exercise price of each option granted under Article IV, Paragraph 3 may, in the discretion of the Committee, be discounted from fair market value. The exercise price for each option granted under Article IV shall be subject to adjustment as provided in Article IV, Paragraph 5(e). 5. TERMS AND CONDITIONS OF OPTIONS. Subject to the provisions of this Article IV, Paragraph 5, options granted under Article IV shall be in such form as the Committee may from time to time approve. Options granted under Article IV shall be subject to the following terms and conditions: (a) OPTION PERIOD AND CONDITIONS AND LIMITATIONS ON EXERCISE. Each option granted under Article IV shall be exercisable from time to time, in whole or in part, at any time after one year from the date of grant and prior to the date which is seven years after the date of grant (the "OPTION EXPIRATION DATE"). (b) TERMINATION OF DIRECTORSHIP AND DEATH. For purposes of Article IV and each option granted under Article IV, a Non-Employee Director's directorship shall be deemed to have terminated at the close of business on the day preceding the first date on which he ceases to be a member of the Board of Directors of the Company for any reason whatsoever (including his death). If a Non-Employee Director's directorship is terminated for any reason whatsoever (including his death), each option granted to him under Article IV and all of his rights thereunder shall wholly and completely terminate: 15 16 (1) With respect to each option granted within the one-year period preceding such termination, at the time the Non-Employee Director's directorship is terminated; and (2) With respect to each option granted prior to the one-year period preceding such termination: (i) At the time the Non-Employee Director's directorship is terminated if his directorship is terminated as a result of his removal from the Board of Directors for cause (other than disability or in accordance with the provision of the Company's Bylaws regarding automatic termination of directors' terms of office); or (ii) At the expiration of a period of one year after the Non- Employee Director's death (but in no event later than the Option Expiration Date) if the Non-Employee Director's directorship is terminated by reason of his death. An option granted under Article IV may be exercised by the Non-Employee Director's estate or by the person or persons who acquire the right to exercise his option by bequest or inheritance with respect to any or all of the shares remaining subject to his option at the time of his death; or (iii) At the expiration of a period of three years after the Non- Employee Director's directorship is terminated as a result of such person's resignation or removal from the Board of Directors of the Company because of disability or in accordance with the provisions of the Company's Bylaws regarding automatic termination of directors' terms of office (but in no event later than the Option Expiration Date); or (iv) At the expiration of a period of three months after the Non- Employee Director's directorship is terminated (but in no event later than the Option Expiration Date) if the Non-Employee Director's directorship is terminated for any reason other than the reasons specified in Article IV, Paragraphs 5 (b)(2)(i) through 5 (b)(2)(iii). (c) MANNER OF EXERCISE. In order to exercise an option granted under Article IV, the person or persons entitled to exercise it shall deliver to the Company payment in full for the shares being purchased, together with any required withholding tax. The payment of the exercise price for each option granted under Article IV and any required withholding tax shall either be in cash or through delivery to the Company of shares of Common Stock, or by any combination of cash or shares; the value of each share of Common Stock delivered shall be deemed to be equal to the per share price of the last sale of Common Stock on the trading day prior to the date the option is exercised, based on the composite transactions in the Common 16 17 Stock as reported in The Wall Street Journal. If the Committee so requires, such person or persons shall also deliver a written representation that all shares being purchased are being acquired for investment and not with a view to, or for resale in connection with, any distribution of such shares. An option agreement may, in the discretion of the Committee, provide for a "cashless exercise" of a nonqualified option by establishing procedures whereby the Non-Employee Director, by a properly executed written notice, directs (1) an immediate market sale or margin loan respecting all or a part of the shares of Common Stock to which he is entitled upon exercise pursuant to an extension of credit by the Company to the Non-Employee Director of the option price, (2) the delivery of the shares of Common Stock from the Company directly to a brokerage firm and (3) the delivery of the option price from sale or margin loan proceeds from the brokerage firm directly to the Company. An option agreement may also, in the discretion of the Committee, provide for the withholding of Federal, state or local income tax upon exercise of a nonqualified option from any cash or stock remuneration (from the Plan or otherwise) then or thereafter payable by the Company to the Non-Employee Director. (d) OPTIONS NOT TRANSFERABLE. No option granted under Article IV shall be transferable otherwise than by will or by the laws of descent and distribution and, during the lifetime of the Non-Employee Director to whom any such option is granted, it shall be exercisable only by such Non- Employee Director. Any attempt to transfer, assign, pledge, hypothecate or otherwise dispose of, or to subject to execution, attachment or similar process, any option granted under Article IV, or any right thereunder, contrary to the provisions hereof, shall be void and ineffective, shall give no right to the purported transferee, and shall, at the sole discretion of the Committee, result in forfeiture of the option with respect to the shares involved in such attempt. (e) ADJUSTMENT OF SHARES. In the event that at any time after the effective date of the Plan the outstanding shares of Common Stock are changed into or exchanged for a different number or kind of shares of the Company or other securities of the Company by reason of merger, consolidation, recapitalization, reclassification, stock split, stock dividend, or combination of shares, the Committee shall make an appropriate and equitable adjustment in the number and kind of shares subject to Article IV (including shares as to which all outstanding options granted under Article IV, or portions thereof then unexercised, shall be exercisable), to the end that after such event the shares subject to Article IV of the Plan and each Non-Employee Director's proportionate interest shall be maintained as before the occurrence of such event. Such adjustment in an outstanding option granted under Article IV shall be made without change in the total price applicable to the option or the unexercised portion of the option (except for any change in the aggregate price resulting from rounding-off of share quantities or prices) and with 17 18 any necessary corresponding adjustment in exercise price per share. Any such adjustment made by the Committee shall be final and binding upon all Non-Employee Directors, the Company, and all other interested persons. (f) LISTING AND REGISTRATION OF SHARES. Each option granted under Article IV shall be subject to the requirement that if at any time the Committee determines, in its discretion, that the listing, registration, or qualification of the shares subject to such option under any securities exchange or under any state or Federal law, or the consent or approval of any governmental regulatory body, is necessary or desirable as a condition of, or in connection with, the issue or purchase of shares thereunder, such option may not be exercised in whole or in part unless such listing, registration, qualification, consent or approval shall have been effected or obtained and the same shall have been free of any conditions not acceptable to the Committee. 6. AMENDMENT. The Committee may, with the consent of the person or persons entitled to exercise any outstanding nonqualified option granted under Article IV, amend such nonqualified option; provided, however, that any such amendment shall be subject to shareholder approval when required in Article I, Paragraph 4. 7. OTHER PROVISIONS. (a) The person or persons entitled to exercise, or who have exercised, an option granted under Article IV shall not be entitled to any rights as a stockholder of the Company with respect to any shares subject to such option until he shall have become the holder of record of such shares. (b) No option granted under Article IV shall be construed as limiting any right which either the stockholders of the Company or the Board of Directors of the Company may have to remove at any time, with or without cause, any person to whom such option has been granted from the Board of Directors of the Company. (c) Notwithstanding any provision of the Plan or the terms of any option granted under Article IV, the Company shall not be required to issue any shares hereunder if such issuance would, in the judgment of the Committee, constitute a violation of any state or Federal law or of the rules or regulations of any governmental regulatory body. (d) Notwithstanding any provision of the Plan, the Committee may not exercise any discretion with respect to this Article IV which would be inconsistent with the intent that (i) the Plan meet the requirements of Rule 16b-3 promulgated by the Securities Exchange Commission under the Act and (ii) any Non-Employee Director who is eligible to receive a grant or to whom a grant is made pursuant this Article IV will not for such reason 18 19 cease to be a "disinterested person" within the meaning of such Rule 16b-3 with respect to the Plan and other stock related plans of the Company or any of its affiliates. Specifically, in the event of a Corporate Change, as defined in Article I, Paragraph 11, the Committee may, with respect to options under this Article IV, only exercise the alternative in clause (2) of Article I, Paragraph 11, or such other alternatives specified in Article I, Paragraph 11 as would not, in the opinion of legal counsel of the Company, violate the limitations contained in the immediately preceding sentence. 19 EX-10.20 12 AMENDMENT NO. 1999-1 TO 1993 STOCK OPTION PLAN 1 EXHIBIT 10.20 AMENDMENT NO. 1999-1 TO THE 1993 STOCK OPTION PLAN This Amendment No. 1999-1 is made to the Baker Hughes Incorporated 1993 Stock Option Plan ("the Plan"). Capitalized terms used but not defined herein shall have the meanings ascribed to them in the Plan. WHEREAS, Baker Hughes Incorporated (the "Company") has determined that it is in its best interest and that of its stockholders to amend the Plan as set forth herein; NOW, THEREFORE, the Plan is amended as follows: 1. Article I, Paragraphs 11(a), (b) and (f) of the Plan are amended in their entirety to read as follows: "11. Change in Control. (a) Notwithstanding any provision of the Plan to the contrary, in the event of an occurrence of a Change in Control other than an event described only in clause (3) of Paragraph 11(f) of the Plan, all options granted pursuant to this Plan shall become fully vested and exercisable. (b) Notwithstanding any provision of the Plan to the contrary, all outstanding options held by an Employee Optionee shall become fully vested and exercisable as of the effective date of termination of such Employee Optionee's employment if (i) such Employee Optionee'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) such Employee Optionee terminates his or her employment for Good Reason prior to a Change in Control (whether or not a Change in Control ever occurs) and the circumstance 1 2 or event which constitutes Good Reason occurs at the request or direction of the Person described in clause (i), (iii) such Employee Optionee's employment is terminated by the Company without Cause or by the Employee Optionee 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) or (iv) such Employee Optionee's employment is terminated by the Company without Cause or by the Employee Optionee for Good Reason, in either case within 2 years following the occurrence of a Change in Control described in clause (3) of Paragraph 11(f) of the Plan. (f) 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: (1) 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 (3) below; or (2) 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 of Directors of the Company 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 of Directors of the Company or nomination for election by the Company's stockholders was approved 2 3 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 (3) 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 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 (4) 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 a merger or consolidation immediately following which the individuals who comprise the Board immediately prior thereto constitute at least a majority of the board of directors of the Company, 3 4 the entity surviving such merger or any parent thereof (or a majority plus one member where such board comprises an odd number of members); or (5) 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." 2 Article II, Paragraph 3(b)(2)(i) of the Plan is amended by inserting the phrase "(but in no event later than the Nonqualified Option Expiration Date)" after the second appearance of the phrase "termination of employment" therein. 3 Article II, Paragraph 3(b)(2)(iv) of the Plan is amended in its entirety to read as follows: "At the expiration of a period of three months after the Employee Optionee's employment is terminated (but in no event later than the Nonqualified Option Expiration Date) if the 4 5 Employee Optionee's employment is terminated for any reason other than his death, retirement, disability or the reasons specified in this Article II, Paragraph 3(b)(2)(i), if such termination of employment occurs prior to a Change in Control or after the second anniversary of a Change in Control, and two years following such termination of employment (but in no event later than the Nonqualified Option Expiration Date) if such termination is either by the Company without Cause or by the Employee Optionee for Good Reason and, in either case, occurs within two years following a Change in Control (in each case, as such term is defined in Article I, Paragraph 11(f) hereof)." 4 Article III, Paragraph 3(b)(2)(i) of the Plan is amended by inserting the phrase "(but in no event later than the ISO Expiration Date)" after the second appearance of the phrase "termination of employment" therein". 5 Article III, Paragraph 3(b)(2)(iv) of the Plan is amended in its entirety to read as follows: "At the expiration of a period of three months after the Employee Optionee's employment is terminated (but in no event later than the ISO Expiration Date) if the Employee Optionee's employment is terminated for any reason other than his death, retirement, disability or the reasons specified in this Article III, Paragraph 3(b)(2)(i), if such termination of employment occurs prior to a Change in Control or after the second anniversary of a Change in Control, and two years following such termination of employment (but in no event later than the ISO Expiration Date) if such termination is either by the Company without Cause or by the Employee Optionee for Good Reason and, in either case, occurs within two years following a Change in Control (in each case, as such term is defined in Article I, Paragraph 11(f) hereof)." 6 Article IV, Paragraph 5(b)(2)(i) of the Plan is amended by inserting the phrase "(but in no event 5 6 later than the Option Expiration Date)" after the second appearance of the phrase "termination of service" therein. 7 Article IV, Paragraph 5(b)(2)(iv) of the Plan is amended in its entirety to read as follows: "At the expiration of a period of three months after the Non-Employee Director's directorship is terminated (but in no event later than the Option Expiration Date) if the Non-Employee Director's directorship is terminated for any reason other than the reasons specified in Article IV, Paragraphs 5(b)(2)(i) through 5(b)(2)(iii), if such termination of directorship occurs prior to a Change in Control or after the second anniversary of a Change in Control, and two years following such termination of directorship (but in no event later than the Option Expiration Date) if such termination occurs within two years following a Change in Control (in each case, as such term is defined in Article I, Paragraph 11(f) hereof)." The effective date of this Amendment No. 1999-1 shall be January 27, 1999; provided, however, that, 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 the Plan and (C) individuals who satisfy the requirements in clauses (i) and (ii) below constitute at least two-thirds (2/3) of the number of directors of the entity surviving such transaction or any parent thereof: individuals who (i) immediately prior to such transaction constitute the Board of Directors of the Company and (ii) on the date hereof constitute the Board of Directors of the Company 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 of Directors of the Company 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, 6 7 election or nomination for election was previously so approved or recommended then (a) this Amendment No. 1999-1 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 sentence does not preserve the availability of such accounting treatment, then, to the extent that any provision or combination of provisions of this Amendment No. 1999-1 disqualifies the transaction as a "pooling" transaction (including, if applicable, this entire Amendment No. 1999-1), the Board of Directors of the Company shall amend 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 with respect to this paragraph shall be made by the Company, 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. Except as herein modified, the Plan shall remain in full force and effect. BAKER HUGHES INCORPORATED By: -------------------------------------- Name: G.S. Finley Title: Senior Vice President and Chief Administrative Officer 7 EX-10.21 13 1993 EMPLOYEE STOCK BONUS PLAN 1 EXHIBIT 10.21 BAKER HUGHES INCORPORATED 1993 EMPLOYEE STOCK BONUS PLAN 1. PURPOSE OF THE PLAN. The Baker Hughes Incorporated 1993 Employee Stock Bonus Plan (the "PLAN") is intended to promote the interests of Baker Hughes Incorporated (the "COMPANY") and its subsidiaries and its stockholders by encouraging employees of the Company and its subsidiaries to increase their equity interests in the Company, thereby giving them an added incentive to work toward the continued growth and success of the Company. The Plan provides an incentive to such employees who have been granted options under the Baker Hughes Incorporated 1993 Stock Option Plan (the "STOCK OPTION PLAN") to encourage such employees to remain in the employ of the Company and its subsidiaries and to retain the shares acquired by the exercise of such options ("OPTION SHARES") for a minimum of three years from the issuance of such Option Shares. Accordingly, the Company may grant to such employees awards representing rights to receive shares of common stock of the Company, $1 par value ("STOCK"), subject to certain restrictions in accordance with the terms and conditions herein established ("STOCK AWARDS"). 2. ADMINISTRATION OF THE PLAN. The Plan shall be administered by the Compensation Committee ("COMMITTEE") of the Board of Directors of the Company. Subject to the provisions of the Plan, the Committee shall interpret the Plan, shall make such rules as it deems necessary for the proper administration of the Plan, shall make all other determinations necessary or advisable for the administration of the Plan and shall correct any defect or supply any omission or reconcile any inconsistency in the Plan or in any Stock Award granted under the Plan in the manner and to the extent that the Committee deems desirable to carry the Plan into effect. Any action taken or determination made by the Committee pursuant to this and the other paragraphs of the Plan shall be conclusive on all parties. The act or determination of a majority of the Committee at a meeting where a quorum is present shall be deemed to be the act or determination of the Committee. 1 2 The Committee shall consist of at least three members of the Board of Directors of the Company appointed by and holding office for a term determined by and in the discretion of the Board of Directors of the Company. No Stock Awards may be granted under the Plan to any member of the Committee during the term of his membership on the Committee. No person shall be eligible to serve on the Committee unless he is then a "disinterested person" within the meaning of Paragraph (d)(3) of Rule 16b-3 ("RULE 16B-3") promulgated under the Securities Exchange Act of 1934, as amended (the "ACT"), if and as such Rule is then in effect. 3. ELIGIBILITY TO RECEIVE STOCK AWARDS. Stock Awards shall be granted under the Plan to those employees of the Company and its subsidiaries (excluding non- employee directors) who are issued Option Shares under the Stock Option Plan during the Company's 1993 fiscal year and thereafter. A Stock Award may be granted to the same employee on more than one occasion. 4. SHARES SUBJECT TO THE PLAN. The aggregate number of shares of Stock which may be issued to employees under Paragraph 5 of the Plan shall not exceed 1,300,000 shares of Stock; however, such amount may be increased by the Board of Directors of the Company up to an amount not to exceed one-fifth of the number of Option Shares which may be issued, from time to time, under the terms of the Stock Option Plan, without additional approval from the stockholders of the Company; provided, that (i) the full amount of such increase shall be reserved solely for issuance to a broad-based group of employees and (ii) the number of shares issuable to persons subject to Section 16(a) of the Act in connection with such increases shall not, in the aggregate, exceed 130,000 shares. Such shares of Stock may consist of authorized but unissued shares or previously issued shares reacquired by the Company. Any of such shares of Stock which remain unissued at the termination of the Plan shall cease to be subject to the Plan, but until termination of the Plan, the Company shall at all times make available a sufficient number of shares of Stock to meet the requirements of the Plan. The aggregate number of shares of Stock which may be issued under the Plan may be adjusted to reflect a change in capitalization of the Company, such as a stock dividend or stock split. 5. ISSUANCE OF STOCK AWARDS. Stock Awards shall be issued to eligible employees in the form of shares of Stock ("STOCK AWARD SHARES") in an amount equal to one Stock Award Share for every five Option Shares acquired by exercise pursuant to options (whether nonqualified or incentive) granted under the Stock Option Plan on the third anniversary of the issuance of Option Shares issued pursuant to the exercise of an option granted under the Stock Option Plan, to the extent such eligible employee has not violated the Forfeiture Restrictions defined in Paragraph 6 below. Upon the issuance of Option Shares, the Committee or the Company shall notify in writing each employee entitled to receive a Stock Award hereunder of the number of Stock Award Shares to be issued in accordance with the Plan. In addition to a Stock Award, at the time 2 3 of the issuance of the Stock Award Shares, the Company will pay to the employee the dividends attributable to the Stock Award Shares as though such shares had been issued and outstanding for the three years, without interest. 6. FORFEITURE RESTRICTIONS. The obligation of the Company to issue Stock Award Shares is subject to the restrictions as described in this Paragraph 6 and shall hereinafter be referred to as the "FORFEITURE RESTRICTIONS." If an employee, who is granted a Stock Award based upon underlying Option Shares issued pursuant to the exercise of an option granted under the Stock Option Plan, sells or otherwise transfers (other than by gift, devise or descent) such underlying Option Shares within three years of the date of issuance of such Option Shares, the right to receive the Stock Award Shares attributable to such Option Shares shall be forfeited on a prorated basis of one such Stock Award Share per five such Option Shares sold or otherwise transferred; provided that, in the event such employee sells or otherwise transfers more than fifty percent of such underlying Option Shares within three years of the date of issuance of such Option Shares, the right to receive all such Stock Award Shares attributable to such Option Shares shall be forfeited. Moreover, in the event of termination of the employee's employment with the Company and its subsidiaries for any reason other than retirement (such that the employee's age plus years of service with the Company and its subsidiaries equals or exceeds sixty-five), death or total and permanent disability within three years of the date of issuance of underlying Option Shares, upon which the issuance of Stock Award Shares are based, the right to receive all such Stock Award Shares shall be forfeited. An employee shall be considered to be in the employment of an employer as long as he remains an employee of the employer, whether active or on an authorized leave of absence. Any question as to whether and when there has been a termination of such employment, and the cause of such termination, shall be determined by the Committee and its determination shall be final. 7. LAPSE OF FORFEITURE RESTRICTIONS. The Forfeiture Restrictions with respect to the right to receive Stock Award Shares not otherwise forfeited pursuant to the provisions of Paragraph 6 and issued to an employee based upon underlying Option Shares issued pursuant to the exercise of an option granted under the Stock Option Plan shall lapse and be of no further force and effect upon the expiration of three years following the date of issuance of such Option Shares or, if earlier, upon the termination of the employee's employment with the Company and its subsidiaries by reason of retirement (such that the employee's age plus years of service with the Company and its subsidiaries equals or exceeds sixty-five), death or total and permanent disability. 8. SHARES RECEIVED IN REORGANIZATION OR STOCK SPLIT. The right to receive stock or securities in exchange for the right to receive Stock Award Shares pursuant to a plan of reorganization of the Company and the right to receive any Stock Award Shares as a result of a stock split with respect to Stock Award Shares shall also become subject to the Forfeiture Restrictions for all purposes of the Plan. Notwithstanding the foregoing, if the Company is to be merged into or consolidated with one or more corporations and the Company is not to be the surviving corporation, if the Company is to be dissolved and liquidated, or if substantially all of the assets and business of the Company 3 4 are to be sold, the Committee may fix a date, prior to the effective time of such merger, consolidation, dissolution and liquidation, or sale, on which date all Forfeiture Restrictions with respect to the right to receive all Stock Awards Shares shall lapse. 9. TERM OF PLAN. The Plan shall be effective as of October 27, 1993, provided the Plan is approved by the stockholders of the Company. Unless sooner terminated under the provisions of Paragraph 12, no further Stock Awards shall be granted under Paragraph 5 after the issuance of the last underlying Option Shares pursuant to the exercise of an option granted under the Stock Option Plan, and the Plan shall terminate when the right to receive all Stock Award Shares attributable to Option Shares issued or to be issued under the Stock Option Plan (and dividends thereon) either have been forfeited to the Company or the Forfeiture Restrictions thereon have lapsed and the Stock Award Shares have been issued. 10. RIGHTS OF STOCKHOLDER. Upon the issuance of Stock Award Shares to an employee, such employee shall have all of the rights of a stockholder of the Company with respect to such Stock Award Shares, including the right to vote such Stock Award Shares and the right to receive all dividends or other distributions paid with respect to such Stock Award Shares. 11. WITHHOLDING OF TAX. To the extent the issuance of Stock Award Shares or the lapse of Forfeiture Restrictions results in the receipt of compensation by an employee, the employer is authorized to withhold from any other cash compensation then or thereafter payable to such employee any tax required to be withheld by reason of the receipt of compensation resulting from the issuance of Stock Award Shares or the lapse of Forfeiture Restrictions. In the alternative, the employer may, in its discretion, at the request of the employee, satisfy any withholding requirements by retaining the number of shares of Stock (for which Forfeiture Restrictions have lapsed) necessary to satisfy any such withholding obligation. 12. AMENDMENT OR TERMINATION OF THE PLAN. The Board of Directors of the Company in its discretion may terminate the Plan at any time with respect to any Stock Awards which have not theretofore been granted. The Board of Directors shall have the right to alter or amend the Plan or any part thereof from time to time; provided, that no change may be made which would impair the rights of an employee to whom Stock Awards have been granted or to whom Stock Award Shares have theretofore been issued without the consent of such employee. 4 EX-10.23 14 AMENDMENT NO. 1999-1 TO 1993 EMP. STOCK BONUS PLAN 1 EXHIBIT 10.23 AMENDMENT NO. 1999-1 TO THE 1993 EMPLOYEE STOCK BONUS PLAN This Amendment No. 1999-1 is made to the Baker Hughes Incorporated 1993 Employee Stock Bonus Plan ("the Plan"). Capitalized terms used but not defined herein shall have the meanings ascribed to them in the Plan. WHEREAS, Baker Hughes Incorporated (the "Company") has determined that it is in its best interest and that of its stockholders to amend the Plan as set forth herein; NOW, THEREFORE, the Plan is amended as follows: 1. Clauses (ii) and (iii) of the first sentence of Paragraph 5 of the Plan are amended in their entirety to read as follows: "(ii) the occurrence of a Change in Control other than an event described only in clause (iii) of the definition of Change in Control set forth in Paragraph 5 of the Plan, and (iii) the termination of the eligible employee's employment if (a) such eligible employee'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, (b) such eligible employee terminates his or her 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 the Person described in clause (a), (c) such eligible employee's employment is terminated by the Company without Cause or by the eligible employee 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) or (d) such eligible 1 2 employee's employment is terminated by the Company without Cause or by the eligible employee for Good Reason, in either case within 2 years following the occurrence of a Change in Control described in clause (iii) of the definition of Change in Control set forth in Paragraph 5 of the Plan." 2 The definition of Change in Control set forth in Paragraph 5 of the Plan is amended in its entirety to read as follows: "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 (a) 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 of Directors of the Company 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 of Directors of the Company 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 (a) a merger or consolidation which would result in the voting 2 3 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 (b) 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 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) 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 a merger or consolidation immediately following which the individuals who comprise the Board immediately prior thereto constitute at least a majority of the board of directors of the Company, the entity surviving such merger or consolidation or any parent thereof (or a majority plus one member where such board comprises an odd number of members); or (v) 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 3 4 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". 3 The second sentence of Paragraph 6 of the Plan is amended by inserting immediately prior to the "." at the end thereof the following: "other than an event described only in clause (iii) of the definition of Change in Control set forth in Section 5 of the Plan; and provided further, that the provisions of this sentence shall be inapplicable to any sale of Option Shares by an employee holding a Stock Award if such sale occurs at any time following a Qualifying Termination." 4 Clause (ii) of Paragraph 7 of the Plan is amended in its entirety to read as follows: " (ii) the occurrence of a Change in Control other than an event described only in clause (iii) of the definition of Change in Control set forth in Section 5 of the Plan." The effective date of this Amendment No. 1999-1 shall be January 27, 1999; provided, however, that, 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 the Plan and (C) individuals who satisfy the requirements in clauses (i) and (ii) below constitute at least two-thirds (2/3) of the number of directors of the entity surviving such transaction or any parent thereof: individuals who (i) immediately prior to such transaction constitute the Board of Directors of the Company and (ii) on the date hereof constitute the Board of Directors of the Company 4 5 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 of Directors of the Company 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 Amendment No. 1999-1 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 sentence does not preserve the availability of such accounting treatment, then, to the extent that any provision or combination of provisions of this Amendment No. 1999-1 disqualifies the transaction as a "pooling" transaction (including, if applicable, this entire Amendment No. 1999-1), the Board of Directors of the Company shall amend 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 with respect to this paragraph shall be made by the Company, 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. Except as herein modified, the Plan shall remain in full force and effect. BAKER HUGHES INCORPORATED By: ----------------------------------------- Name: G.S. Finley Title: Senior Vice President and Chief Administrative Officer 5 EX-10.24 15 AMENDED DIRECTOR COMPENSATION DEFERRAL PLAN 1 EXHIBIT 10.24 BAKER HUGHES INCORPORATED DIRECTOR COMPENSATION DEFERRAL PLAN (As Amended and Restated) 1. Purposes of the Plan. The Baker Hughes Incorporated Director Compensation Deferral Plan, as amended and restated (the "Plan"), is intended to provide a means whereby nonemployee directors of Baker Hughes Incorporated (the "Company") may defer compensation otherwise payable and provide flexibility respecting the Company's compensation policies. 2. Administration. The Plan shall be administered by the Compensation Committee (the "Committee") of the Board of Directors of the Company (the "Board"). The Committee is authorized to interpret the Plan and may, from time to time, adopt such rules and regulations, consistent with the provisions of the Plan, as it may deem advisable to carry out the Plan. All determinations made by the Committee shall be final. No member of the Committee shall have any right to vote or decide upon any matter relating to himself under the Plan or to vote in any case in which his individual right to claim any benefit under the Plan is particularly involved. The Vice President of Human Resources of the Company shall, as the delegatee of the Committee, be responsible for the day-to-day administration of the Plan, including accepting deferral elections, accounting for deferrals and distributions under the Plan. All expenses incurred in connection with the administration of the Plan shall be borne by the Company. 3. Participation in the Plan. (a) Eligibility. All nonemployee directors of the Company ("Directors") shall be eligible to participate in the Plan. An individual shall be considered to be a Director until the close of business on the day preceding the earlier of the first date the individual (1) becomes a common-law employee of the Company or its subsidiaries or (2) ceases to be a member of the Board for any reason whatsoever. (b) Election to Participate. An eligible Director may elect to become a participant in the Plan ("Participant") by electing to defer an integral percentage (from 1% to 100%) of his (1) annual retainer and meeting fees ("Compensation") and/or (2) retirement benefits ("Retirement Income") pursuant to the Company's Retirement Policy covering Directors. (1) Compensation Deferrals. Deferral elections as to Compensation shall be made with respect to each calendar year. Any such election shall apply to 2 the Participant's Compensation for the period commencing on January 1 of the applicable calendar year and ending upon the earlier of December 31 of such calendar year or the date during such calendar year that his directorship is terminated for any reason. Notwithstanding the foregoing, with respect to an individual who first becomes a Director on other than the first day of a calendar year, any such election shall apply to the Participant's Compensation during the calendar year in which he first becomes a Director for the period commencing on the date he first becomes a Director and ending upon the earlier of December 31 of such calendar year or the date during such calendar year that his directorship is terminated for any reason. (2) Retirement Income Deferrals. Deferral elections as to Retirement Income may be made with respect to Retirement Income attributable to all future calendar years of service as a Director. (c) Time and Manner of Making Elections. Unless otherwise determined by the Committee, any election by a Participant to defer Compensation under this Plan must be made on or before the December 1 preceding the calendar year to which the election relates; provided, however, that with respect to the first calendar year an individual becomes a Director, any such deferral election with respect to such first calendar year in which he becomes a Director must be made by the Director within thirty (30) days of the date he first becomes a Director. Unless otherwise determined by the Committee, any election by a Participant to defer Retirement Income for all future years of service as a Director under this Plan must be made by a Director prior to the January 1 of the first calendar year to which such election relates. All elections shall be made in the form and manner prescribed by the Committee. Amounts deferred by a Participant with respect to any calendar year pursuant to any election as provided in this Paragraph 3 shall be referred to herein as the Participant's "Deferred Compensation" for such calendar year. (d) Nature of Elections. Any election to defer Compensation which may be made by a Participant with respect to any calendar year shall be irrevocable once made. Any election to defer Compensation which may be made by a Participant with respect to any calendar year, unless changed by the Participant prior to the expiration of the time for making such election with respect to each subsequent calendar year, shall be deemed to have been made with respect to each subsequent calendar year, respectively. Any election to defer Retirement Income which may be made by a Participant with respect to all calendar years which are subject to such election shall be irrevocable once made. (e) Election of Deferral Vehicles. At the time of making a deferral election, a Participant shall select one or more deferral vehicles ("Deferral Vehicles") for the Participant's Deferred Compensation respecting the applicable calendar year or years as follows: (1) Stock Option-Related Deferral Vehicles. The Participant's Deferred Compensation shall be exchanged for nonemployee Director stock 3 options ("Stock Options") granted (i) pursuant to Article IV of the Baker Hughes Incorporated 1993 Stock Option Plan to the extent shares are available for options under such plan or (ii) if permitted by the Committee, pursuant to any other plan that would permit the grant of options under this Plan. A Participant who elects a Stock Option-Related Deferral Vehicle shall also elect whether to receive such Stock Options priced at (x) the fair market value on the date of grant ("Market-Priced Stock Options") or (y) a 50% discount to the fair market value on the date of grant ("Discounted Stock Options"). To the extent Market-Priced Stock Options are elected, as of the last day of each calendar quarter, the Participant's aggregate Deferred Compensation which would otherwise have been paid during such quarter shall be increased by a multiplier of 4.4 and then divided by the fair market value of the Company's common stock on the last day of such quarter to determine the number of Market-Priced Stock Options to be granted in exchange for the Deferred Compensation. To the extent Discounted Stock Options are elected, as of the last day of each calendar quarter, the Participant's aggregate Deferred Compensation which would otherwise have been paid during such quarter shall be divided by the discounted price of the Company's common stock on the last day of such quarter to determine the number of Discounted Stock Options to be granted in exchange for the Deferred Compensation. (2) Cash-Based Deferral Vehicles. The Participant's Deferred Compensation shall be credited to an account ("Account") established by the Committee as of the date or dates the Deferred Compensation would otherwise have been paid. A Participant who elects a Cash-Based Deferral Vehicle shall also elect whether to receive prime-rate interest equivalents ("Prime Rate Equivalents") or S&P 500 earnings equivalents ("S&P 500 Equivalents") for the deferral period commencing on the date or dates such Deferred Compensation is credited to the Account and ending on the designated payment date. To the extent Prime Rate Equivalents are elected, interest equivalents will be credited to the Participant's Account as of the last day of each calendar month based upon the average daily balance in the Account for the month and the prime lending rate as declared by Citibank to be in effect from time to time. To the extent S&P 500 Equivalents are elected, the earnings (or loss) equivalents will be credited (or debited) to the Participant's Account as of the last day of each calendar quarter based upon the balance in the Account as of the last day of the quarter and the returns realized by the Standard & Poors 500 common stocks for the quarter. A Participant who elects a Cash-Based Deferral Vehicle shall also elect a designated payment date ("Designated Date") for lump sum payment of the Deferred Compensation as adjusted by the Prime Rate Equivalents or S&P 500 Equivalents, whichever is applicable. Any Designated Date respecting Deferred Compensation subject to Prime Rate Equivalents shall be as of the last day of a calendar month, and any Designated Date respecting Deferred Compensation subject to S&P 500 Equivalents shall be as of the last day of a calendar quarter. Any such Designated Date so elected may be either during the Participant's active tenure as a Director or after cessation of the Participant's Director status for any 4 reason and may be elected either by specifying a particular date or by selecting a date that follows the occurrence of a specified event; provided, however, that in no event shall a Designation Date be more than 10 years from the date the Participant's status as a Director ceases. A Participant may also elect multiple Designated Dates respecting payment of Deferred Compensation with the consent of the Committee. All Deferred Compensation and interest and earnings equivalents credited to a Participant's Account shall be nonforfeitable pending payment as of the Designated Date. 4. Stock Options Subject to Option Plan. All Stock Options granted in exchange for Deferred Compensation under this Plan shall be subject to all of the applicable terms and provisions of the plan from which each such option is granted. 5. Payment of Amounts in Accounts. (a) Payment Generally. Except as otherwise provided in this Paragraph 5, the Deferred Compensation and interest and earnings equivalents credited to a Participant's Account with respect to a calendar year or years, as applicable, shall be paid in cash to the Participant in one lump sum as of the Designated Date elected by the Participant. In the absence of a valid election of a Designated Date by the Participant, the Designated Date shall be deemed to be the date of cessation of the Participant's status as a Director. (b) Payment of Simultaneous Amounts. It is recognized that a Participant may elect to defer Compensation and/or Retirement Income with respect to more than one calendar year, so that Deferred Compensation and interest and earnings equivalents are credited to the Participant's Account with respect to more than one calendar year, and the payment of such amounts with respect to more than one calendar year may, but need not, become payable to the Participant as of the same Designated Date. (c) Hardship. In the event of hardship of the Participant, as determined in the sole discretion of the Committee, all or a portion of the cash payments that would otherwise be made on a later Designation Date under the Paragraph 5 shall be accelerated by being made as soon as practicable following the Committee's determination of hardship, in one lump sum. For this purpose, hardship shall mean any emergency or necessity affecting the Participant's personal or family affairs having a significant financial effect. (d) Disability. In the event of the disability of the Participant, as determined in the sole discretion of the Committee, all cash payments that would otherwise be made on a later Designation Date under this Paragraph 5 shall be accelerated by being made as soon as practicable following the Committee's determination of such disability, in one lump sum. For this purpose, disability shall mean total and permanent disability which will prevent the Participant from engaging in meaningful business activities. 5 (e) Death. In the event of the death of the Participant, all of the cash payments that would otherwise be made on a later Designation Date under this Paragraph 5, shall be accelerated by being made as soon as practicable following the death of the Participant. A Participant, by written instrument filed with the Committee in such manner and form as it may prescribe, may designate one or more beneficiaries to receive payment of the Participant's Deferred Compensation and interest or earnings equivalents in the event of the death of the Participant. Any such beneficiary designation may be changed from time to time prior to the death of the Participant. In the absence of a beneficiary designation on file with the Committee at the time of the Participant's death, the Deferred Compensation and interest or earnings equivalents remaining to be paid to the Participant shall be paid to the executor or administrator of the Participant's estate. (f) Change in Purpose. In the event of a major tax law change or other reason, as determined in the sole discretion of the Committee, which makes the continued deferral of amounts under the Plan undesirable, cash payments under this Paragraph 5 shall be accelerated by being made as soon as practicable following the Committee's determination to discontinue deferrals, in one lump sum. (g) Debiting of Plan Accounts. Once Deferred Compensation and interest or earnings equivalents have been paid, such amounts shall be debited from the Participant's Account and shall cease to exist. 6. Prohibition Against Assignment or Encumbrance. No right, title, interest or benefit hereunder shall ever be liable for or charged with any of the torts or obligations of a Participant or any person claiming under a Participant, or be subject to seizure by any creditor of a Participant or any person claiming under a Participant. Except as to the selection of a "designated beneficiary" in the event of death, no Participant or any person claiming under a Participant shall have the power to anticipate or dispose of any right, title, interest or benefit hereunder in any manner until the same shall have been actually distributed free and clear of the terms of the Plan. 7. Nature of the Plan. The Plan constitutes an unfunded, unsecured liability of the Company to provide benefits in accordance with the provisions hereof. The Company, at its election, may fund the payment of benefits under the Plan by setting aside and investing, in an account on the Company's books, such funds as the Company may, from time to time, determine. Neither the establishment of the Plan, the crediting of amounts to Plan Accounts nor the setting aside of any funds shall be deemed to create a trust. Legal and equitable title to any funds set aside pursuant to the Plan shall remain in the Company, and neither the Participants nor any persons claiming under the Participants shall have any security or other interest in such funds. Any funds so set aside or acquired shall remain subject to the claims of the creditors of the Company, present and future. 6 8. Effective Date, Amendment and Termination of Plan. The Plan shall be amended and restated effective as of November 1, 1998. The Committee shall have the right to alter or amend the Plan or any part thereof, from time to time, except that no alteration or amendment may be made which would impair the rights of Participants with respect to periods prior to the date such alteration or amendment is effected without the consent of such Participants. The Committee may terminate the Plan at any time with respect to periods following the date such termination is effected. 9. Reorganization. The Company shall not merge or consolidate with any other entity or entities, liquidate, dissolve, reorganize, or sell substantially all of its assets and business unless and until a succeeding or continuing entity or entities agrees to assume and discharge the obligations of the Company under this Agreement. Upon the occurrence of such an event, the term "Company" as used in this Agreement shall be deemed to refer to such successor or survivor entity or entities. 10. Laws Governing. This Plan shall be construed in accordance with, and governed by, the laws of the State of Texas. EX-10.27 16 AMEND.NO.1999-1 TO 1995 EMP.ANNUAL INCENTIVE PLAN 1 EXHIBIT 10.27 AMENDMENT NO. 1999-1 TO THE 1995 EMPLOYEE ANNUAL INCENTIVE COMPENSATION PLAN This Amendment No. 1999-1 is made to the Baker Hughes Incorporated 1995 Employee Annual Incentive Compensation Plan ("the Plan"). Capitalized terms used but not defined herein shall have the meanings ascribed to them in the Plan. WHEREAS, Baker Hughes Incorporated (the "Company") has determined that it is in its best interest and that of its stockholders to amend the plan as set forth herein; NOW, THEREFORE, the Plan is amended as follows: 1. Article 2.1(e) of the Plan is amended in its entirety to read as follows: "(e) 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 (1) 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 2 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 (1) 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 (2) 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 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 3 (iv) 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 a merger or consolidation immediately following which the individuals who comprise the Board immediately prior thereto constitute at least a majority of the board of directors of the Company, the entity surviving such merger or consolidation or any parent thereof (or a majority plus one member where such board comprises an odd number of members); or (v) 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." 4 2. Article 12 of the Plan is amended in its entirety to read as follows: "Article 12. Change in Control 12.1 Change in Control. Notwithstanding any provision of the Plan to the contrary, no later than five (5) days following the occurrence of a Change in Control other than an event described only in clause (iii) of the definition of Change in Control set forth in Article 2.1(e) of the Plan, (i) Final Awards shall be computed for each Participant pursuant to Article 5.4 hereof (assuming for this purpose that the performance goals established pursuant to Article 5.2 herein have been achieved to the extent required to earn the expected value target Award Opportunity), and (ii) the Company shall pay to each participant an amount equal to the Final Award so determined multiplied by a fraction, the numerator of which is the number of the Participant's months of participation through the date of Change of Control (rounded up to the nearest whole month), and the denominator of which is twelve (12). 12.2 Termination of Employment Prior to Change in Control or Following Certain Changes in Control. Notwithstanding any provision of the Plan to the contrary, a Participant shall be entitled to receive, no later than five (5) days following the effective date of such Participant's termination of employment, the payment described in the previous Article 12.1 if (i) such Participant'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) such Participant terminates his or her 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 5 Reason occurs at the request or direction of the Person described in clause (i), (iii) such Participant's employment is terminated by the Company without Cause or by the Participant 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) or (iv) such Participant's employment is terminated by the Company without Cause or by the Participant for Good Reason, in either case within 2 years following the occurrence of a Change in Control described in clause (iii) of the definition of Change in Control set forth in Article 2.1(e) of the Plan." The effective date of this Amendment No. 1999-1 shall be January 27, 1999; provided, however, that, 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 the Plan and (C) individuals who satisfy the requirements in clauses (i) and (ii) below constitute at least two-thirds (2/3) of the number of directors of the entity surviving such transaction or any parent thereof: 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 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 Amendment No. 1999-1 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 sentence does not preserve the availability of such accounting treatment, then, to the extent that any provision or combination of provisions of this Amendment No. 1999-1 disqualifies the transaction as a "pooling" transaction (including, if applicable, this entire 6 Amendment No. 1999-1), the Board shall amend 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 with respect to this paragraph shall be made by the Company, 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. Except as herein modified, the Plan shall remain in full force and effect. BAKER HUGHES INCORPORATED By: ----------------------------------------- Name: G.S. Finley Title: Senior Vice President and Chief Administrative Officer EX-10.30 17 AMENDMENT NO. 1999-1 TO 1995 STOCK AWARD PLAN 1 EXHIBIT 10.30 AMENDMENT NO. 1999-1 TO THE 1995 STOCK AWARD PLAN This Amendment No. 1999-1 is made to the Baker Hughes Incorporated 1995 Stock Award Plan ("the Plan"). Capitalized terms used but not defined herein shall have the meanings ascribed to them in the Plan. WHEREAS, Baker Hughes Incorporated (the "Company") has determined that it is in its best interest and that of its stockholders to amend the Plan as set forth herein; NOW, THEREFORE, the Plan is amended as follows: 1. Subparagraph (g) of Paragraph II of the Plan is amended in its entirety to read as follows: "(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: (1) 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 (3) below; or (2) 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 1 2 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 (3) 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 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 (4) 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 a merger or consolidation immediately following which the individuals who comprise the Board immediately prior thereto constitute at least a majority 2 3 of the board of directors of the Company, the entity surviving such merger or consolidation or any parent thereof (or a majority plus one member where such board comprises an odd number of members); or (5) 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." 2. Paragraph XI of the Plan is amended in its entirety to read as follows: "XI. CHANGE IN CONTROL (a) Notwithstanding any provision of the Plan to the contrary, in the event of an occurrence of a Change in Control other than an event described only in clause (3) of the definition of Change in Control set forth in Subparagraph (g) of Paragraph II of the Plan, all Awards granted pursuant to this Plan (whether granted under the Stock Matching Programs or otherwise) shall become fully vested and nonforfeitable. 3 4 (b) Notwithstanding any provision of the Plan to the contrary, an Employee's Awards granted pursuant to this Plan (whether granted under the Stock Matching Programs or otherwise) shall become fully vested and nonforfeitable if (i) such Employee'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) such Employee terminates his or her 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 the Person described in clause (i), (iii) such Employee's employment is terminated by the Company without Cause or by the Participant 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) or (iv) such Employee's employment is terminated by the Company without Cause or by the Employee for Good Reason, in either case within 2 years following the occurrence of a Change in Control described in clause (3) of the definition of Change in Control set forth in Subparagraph (g) of Paragraph II of the Plan." The effective date of this Amendment No. 1999-1 shall be January 27, 1999; provided, however, that, 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 the Plan and (C) individuals who satisfy the requirements in clauses (i) and (ii) below constitute at least two-thirds (2/3) of the number of directors of the 4 5 entity surviving such transaction or any parent thereof: 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 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 Amendment No. 1999-1 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 sentence does not preserve the availability of such accounting treatment, then, to the extent that any provision or combination of provisions of this Amendment No. 1999-1 disqualifies the transaction as a "pooling" transaction (including, if applicable, this entire Amendment No. 1999-1), the Board shall amend 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 with respect to this paragraph shall be made by the Company, 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. Except as herein modified, the Plan shall remain in full force and effect. BAKER HUGHES INCORPORATED By: ----------------------------- Name: G.S. Finley Title: Senior Vice President and Chief Administrative Officer 5 EX-10.32 18 AMENDMENT NO. 1999-1 TO LONG-TERM INCENTIVE PLAN 1 EXHIBIT 10.32 AMENDMENT NO. 1999-1 TO THE LONG TERM INCENTIVE PLAN OF BAKER HUGHES INCORPORATED This Amendment No. 1999-1 is made to the Long Term Incentive Plan of Baker Hughes Incorporated ("the Plan"). Capitalized terms used but not defined herein shall have the meanings ascribed to them in the Plan. WHEREAS, Baker Hughes Incorporated (the "Company") has determined that it is in its best interest and that of its stockholders to amend the Plan as set forth herein; NOW, THEREFORE, the Plan is amended as follows: 1. Section 9(b)(iv)(B)(1) of the Plan is amended by inserting the phrase "(but in no event later than the Option Expiration Date)" after the second appearance of the phrase "termination of service" therein. 2. Section 9(b)(iv)(B)(4) of the Plan is amended in its entirety to read as follows: "At the expiration of a period of three months after the Nonemployee Director's directorship is terminated (but in no event later than the Option Expiration Date) if the Nonemployee Director's directorship is terminated for any reason other than the reasons specified above, if such termination of service occurs prior to a Change in Control or after the second anniversary of a Change in Control, and two years following such termination of service (but in no event later than the Option Expiration Date) if such termination occurs within two years following a Change in Control (in each case, as such term is defined in Section 16(f) hereof)." 3. Sections 16(a), (b) and (f) of the Plan are amended in their entirety to read as follows: "16. Change in Control. (a) Notwithstanding any provision of the Plan to the contrary, in the event of an 1 2 occurrence of a Change in Control other than an event described only in clause (3) of Section 16(f) of the Plan, all Awards granted pursuant to this Plan shall become fully vested and, if either an Option or SAR or similar Award, immediately exercisable. (b) Notwithstanding any provision of the Plan to the contrary, all outstanding Awards held by an Employee shall become fully vested and, if either an Option or SAR or similar Award, immediately exercisable as of the effective date of termination of such Employee's employment if (i) such Employee'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) such Employee terminates his or her 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 the Person described in clause (i), (iii) such Employee's employment is terminated by the Company without Cause or by the Employee 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) or (iv) such Employee's employment is terminated by the Company without Cause or by the Employee for Good Reason, in either case within 2 years following the occurrence of a Change in Control described in clause (3) of Section 16(f) of the Plan. (f) 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: 2 3 (1) 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 (3) below; or (2) 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 of Directors of the Company 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 of Directors of the Company 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 (3) 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 3 4 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 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 (4) 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 a merger or consolidation immediately following which the individuals who comprise the Board immediately prior thereto constitute at least a majority of the board of directors of the Company, the entity surviving such merger or any parent thereof (or a majority plus one member where such board comprises an odd number of members); or (5) 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 4 5 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." 4. A new Section 16(k) is added to the end of Section 16 of the Plan to read in its entirety as follows: "Unless specifically provided otherwise in an Employee Award Agreement dated after January 27, 1999 relating to an Option, if an Employee's employment is terminated by the Company without Cause or by the Employee for Good Reason, in either case within 2 years following a Change in Control, the Option shall remain exercisable until the earlier to occur of (i) 2 years following such termination of employment or (ii) the expiration date provided in the Employee Award Agreement." The effective date of this Amendment No. 1999-1 shall be January 27, 1999; provided, however, that, 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 the Plan and (C) individuals who satisfy the requirements in clauses (i) and (ii) below constitute at least two-thirds (2/3) of the number of directors of the entity surviving such transaction or any parent thereof: individuals who (i) immediately prior to such transaction constitute the Board of Directors of the Company and (ii) on the date hereof constitute the Board of Directors of the Company 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 of Directors of the Company 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 5 6 directors on the date hereof or whose appointment, election or nomination for election was previously so approved or recommended then (a) this Amendment No. 1999-1 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 sentence does not preserve the availability of such accounting treatment, then, to the extent that any provision or combination of provisions of this Amendment No. 1999-1 disqualifies the transaction as a "pooling" transaction (including, if applicable, this entire Amendment No. 1999-1), the Board of Directors of the Company shall amend 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 with respect to this paragraph shall be made by the Company, 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. Except as herein modified, the Plan shall remain in full force and effect. BAKER HUGHES INCORPORATED By: ------------------------------------------ Name: G.S. Finley Title: Senior Vice President and Chief Administrative Officer 6 EX-10.33 19 1998 EMPLOYEE STOCK OPTION PLAN 1 EXHIBIT 10.33 BAKER HUGHES INCORPORATED 1998 EMPLOYEE STOCK OPTION PLAN ARTICLE I INTRODUCTION 1. PURPOSE. This 1998 Employee Stock Option Plan, which shall be known as the "1998 EMPLOYEE STOCK OPTION PLAN" and which is hereinafter referred to as the "PLAN," is intended to promote the interests of Baker Hughes Incorporated ("COMPANY") and its stockholders by encouraging employees of the Company and its subsidiaries to increase their equity interest in the Company, thereby giving them an added incentive to work toward the continued growth and success of the Company. The Board of Directors also contemplates that through the adoption of the Plan, the Company, its subsidiaries and affiliated entities will be better able to compete for the services of personnel needed for the continued growth and success of the Company. 2. SHARES SUBJECT TO THE PLAN. Subject to adjustment as provided in Article I, Paragraph 4 and Article II, Paragraph 3(e), the aggregate number of shares of Common Stock, $1 par value per share, of the Company ("COMMON STOCK") to be delivered upon exercise of all options granted under the Plan shall not exceed 3,500,000 shares. In the event the number of shares to be delivered upon the exercise in full of any option granted under the Plan is reduced for any reason whatsoever or in the event any option granted under the Plan can no longer under any circumstances be exercised, the number of shares no longer subject to such option shall thereupon be released from such option and shall thereafter be available to be re-optioned under the Plan. Shares issued pursuant to the exercise of options granted under the Plan shall be fully paid and nonassessable. 3. ADMINISTRATION OF THE PLAN. Subject to the provisions of the Plan, for purposes other than Article I, Paragraph 9, the Compensation Committee of the Board of Directors of the Company (the "COMMITTEE") shall interpret the Plan and all options granted under the Plan, shall make such rules as it deems necessary for the proper administration of the Plan, shall make all other determinations necessary or advisable for the administration of the Plan and shall correct any defect or supply any omission or reconcile any inconsistency in the Plan or in any option granted under the Plan in the manner and to the extent that the Committee deems desirable to carry the Plan or any option into effect. Any action taken or determination made by the Committee pursuant to this and the other paragraphs of the Plan shall be conclusive on all parties. The act or determination of a majority of the Committee shall be deemed to be the act or determination of the Committee. 4. AMENDMENT AND DISCONTINUANCE OF THE PLAN. The Board of Directors of the Company may amend, suspend or terminate the Plan; provided, further, however, that no -1- 2 amendment, suspension or termination of the Plan may, without the consent of the holder of an option, terminate such option or adversely affect such person's rights in any material respect. The Board of Directors of the Company may increase the aggregate number of shares of Common Stock that may be issued under the Plan. 5. GRANTING OF OPTIONS TO EMPLOYEES. The Committee shall have authority to grant, prior to the expiration date of the Plan, to employees of the Company and its subsidiaries (as defined in section 424 of the Internal Revenue Code of 1986, as amended) ("EMPLOYEE OPTIONEES"), options to purchase, on the terms and conditions hereinafter set forth in Article II, authorized but unissued, or reacquired, shares of Common Stock, in such amounts and at such times as determined in the discretion of the Committee. 6. OPTION AGREEMENTS. Each option under the Plan shall be evidenced by a written agreement between the Company and the Eligible Optionee which shall contain such terms and conditions, and may be exercisable for such periods, as may be approved by the Committee, which terms and conditions need not be identical. 7. EFFECTIVE DATE. The Plan shall become effective as of October 1, 1998. Except with respect to options then outstanding, if not sooner terminated under the provisions of Article I, Paragraph 4, the Plan shall terminate upon and no further options shall be granted after the expiration of ten years from October 1, 1998. 8. MISCELLANEOUS. All references in the Plan to "Articles," "Paragraphs," and other subdivisions refer to the corresponding Articles, Paragraphs, and subdivisions of the Plan. 9. CHANGE IN CONTROL. The following provisions shall apply only in connection with a Change in Control or Potential Change in Control. (a) Notwithstanding any provision of the Plan to the contrary other than Article I, Paragraph 10, in the event of an occurrence of a Change in Control, all options granted pursuant to this Plan shall become fully vested and exercisable. (b) Notwithstanding any provision of the Plan to the contrary, all outstanding options held by an Employee Optionee shall become fully vested and exercisable as of the effective date of termination of such Employee Optionee's employment if (i) such Employee Optionee'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) such Employee Optionee terminates his or her 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 the Person described in clause (i), or (iii) such Employee Optionee's employment is terminated by the Company without Cause or by the Employee Optionee for Good -2- 3 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). (c) "Affiliate" shall have the meaning set forth in Rule 12b-2 promulgated under Section 12 of the Securities Act of 1934 (the "EXCHANGE ACT") (d) "Beneficial Owner" shall have the meaning set forth in Rule 13d-3 promulgated under the Exchange Act. (e) "Cause" for termination by the Company of the Employee Optionee's employment shall mean (i) the willful and continued failure by the Employee Optionee to substantially perform the Employee Optionee's duties with the Company (other than any such failure resulting from the Employee Optionee'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 Employee Optionee) after a written demand for substantial performance is delivered to the Employee Optionee by the Committee, which demand specifically identifies the manner in which the Committee believes that the Employee Optionee has not substantially performed the Employee Optionee's duties, or (ii) the willful engaging by the Employee Optionee 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 Employee Optionee's part shall be deemed "willful" unless done, or omitted to be done, by the Employee Optionee not in good faith and without reasonable belief that the Employee Optionee'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. (f) 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: (1) 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 (3) below; or (2) 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 of Directors of the Company and any new director (other than a director whose initial assumption of office is in connection with an -3- 4 actual or threatened election contest relating to the election of directors of the Company) whose appointment or election by the Board of Directors of the Company 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 (3) 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 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 (4) 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. -4- 5 (g) "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 of Directors of the Company, 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). (h) "Good Reason" for termination by the Employee Optionee of the Employee Optionee's employment shall mean the occurrence (without the Employee Optionee'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 Article I, Paragraph 9(b) hereof (treating all references in paragraphs (1) through (7) 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 (1), (5), (6) or (7) below, such act or failure to act is corrected prior to the effective date of the Employee Optionee's termination for Good Reason; (1) the assignment to the Employee Optionee of any duties inconsistent with the status of the Employee Optionee's position with the Company or a substantial adverse alteration in the nature or status of the Employee Optionee's responsibilities from those in effect immediately prior to the Change in Control; (2) a reduction by the Company in the Employee Optionee'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 individuals having a similar level of authority and responsibility with the Company and all individuals having a similar level of authority and responsibility with any Person in control of the Company; (3) the relocation of the Employee Optionee's principal place of employment to a location more than 50 miles from the Employee Optionee's principal place of employment immediately prior to the Change in Control or the Company's requiring the Employee Optionee 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 Employee Optionee's present business travel obligations; (4) the failure by the Company to pay to the Employee Optionee any portion of the Employee Optionee's current compensation except pursuant to an across-the-board compensation deferral similarly affecting all individuals having a -5- 6 similar level of authority and responsibility with the Company and all individuals having a similar level of authority and responsibility with any Person in control of the Company, or to pay to the Employee Optionee 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; (5) the failure by the Company to continue in effect any compensation plan in which the Employee Optionee participates immediately prior to the Change in Control which is material to the Employee Optionee's total compensation, 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 Employee Optionee'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 Employee Optionee's participation relative to other participants, as existed immediately prior to the Change in Control; (6) the failure by the Company to continue to provide the Employee Optionee with benefits substantially similar to those enjoyed by the Employee Optionee under any of the Company's pension, savings, life insurance, medical, health and accident, or disability plans in which the Employee Optionee was participating immediately prior to the Change in Control (except for across-the-board changes similarly affecting all individuals having a similar level of authority and responsibility with the Company and all individuals having a similar level of authority and responsibility with 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 Employee Optionee of any material fringe benefit or perquisite enjoyed by the Employee Optionee at the time of the Change in Control, or the failure by the Company to provide the Employee Optionee with the number of paid vacation days to which the Employee Optionee 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 (7) if the Employee Optionee is party to an individual employment, severance, or similar agreement with the Company, any purported termination of the Employee Optionee's employment which is not effected pursuant to the notice of termination or other procedures specified therein satisfying the requirements thereof; for purposes of this Plan, no such purported termination shall be effective. The Employee Optionee's right to terminate the Employee Optionee's employment for Good Reason shall not be affected by the Employee Optionee's incapacity due to physical or mental illness. The Employee Optionee's continued -6- 7 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 Employee Optionee 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. (i) "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. (j) A "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: (1) the Company enters into an agreement, the consummation of which would result in the occurrence of a Change in Control; (2) 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; (3) 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 any securities acquired directly from the Company or its affiliates); or (4) the Board of Directors of the Company adopts a resolution to the effect that, for purposes of this Plan, a Potential Change in Control has occurred. 10. SPECIAL ACCOUNTING PROVISION. In the event that the Company is party to a transaction which is otherwise intended to qualify for "pooling of interests" accounting treatment then (a) the provisions of the Plan 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 sentence does not preserve the availability of such accounting treatment, then, to the extent that any of the provisions of the Plan disqualifies the transaction as a "pooling" transaction, the Board of Directors of the Company may amend any provisions of the Plan, amend the provisions of any -7- 8 outstanding option and/or declare any of the provisions of the Plan or the entire Plan as well as any outstanding options null and void 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 with respect to this paragraph shall be made by the Company, 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. ARTICLE II NONQUALIFIED STOCK OPTIONS 1. ELIGIBLE EMPLOYEES. All Employee Optionees shall be eligible to receive nonqualified options under this Article II. 2. CALCULATION OF EXERCISE PRICE. The exercise price to be paid for each share of Common Stock deliverable upon exercise of each nonqualified option granted under this Article II shall be equal to the fair market value per share of Common Stock at the time of grant as determined by the Committee, based on the composite transactions in the Common Stock as reported by The Wall Street Journal, and shall be equal to the per share price of the last sale of Common Stock on the trading day prior to the grant of such option. The exercise price for each nonqualified option granted under this Article II shall be subject to adjustment as provided in this Article II, Paragraph 3(e). 3. TERMS AND CONDITIONS OF OPTIONS. Nonqualified options granted under this Article II shall be in such form as the Committee may from time to time approve. Options granted under this Article II shall be subject to the following terms and conditions and may contain such additional terms and conditions, not inconsistent with this Article II, as the Committee shall deem desirable: (a) OPTION PERIOD AND CONDITIONS AND LIMITATIONS ON EXERCISE. Subject to this Article II, Paragraph 3, no nonqualified option granted under this Article II shall be exercisable with respect to any of the shares subject to the option later than the date which is ten years after the date of grant (the "NONQUALIFIED OPTION EXPIRATION DATE"). To the extent not prohibited by other provisions of the Plan, each nonqualified option granted under this Article II shall be exercisable at such time or times as the Committee in its discretion may determine at or prior to the time such option is granted (unless otherwise extended by the Committee pursuant to this Article II, Paragraph 3(b)(2)(iii)); provided, however, that unless the Committee determines otherwise, each nonqualified option granted under this Article II shall be exercisable from time to time, in whole or in part, at any time prior to the Nonqualified Option Expiration Date. -8- 9 (b) TERMINATION OF EMPLOYMENT AND DEATH. For purposes of this Article II and each nonqualified option granted under this Article II, an Employee Optionee's employment shall be deemed to have terminated at the close of business on the day preceding the first date on which he is no longer for any reason whatsoever (including his death) employed by the Company or a subsidiary of the Company. An Employee Optionee shall be considered to be in the employment of the Company or a subsidiary of the Company as long as he remains an employee of the Company or a subsidiary of the Company, whether active or on an authorized leave of absence. Any question as to whether and when there has been a termination of such employment, and the cause of such termination, shall be determined by the Committee and its determination shall be final. Unless otherwise determined by the Committee, if an Employee Optionee's employment is terminated for any reason whatsoever (including his death), each nonqualified option granted to him under this Article II and all of his rights thereunder shall wholly and completely terminate: (1) With respect to options not then exercisable, at the time the Employee Optionee's employment is terminated; and (2) With respect to options then exercisable: (i) At the time the Employee Optionee's employment is terminated if his employment is terminated because he is discharged for fraud, theft or embezzlement committed against the Company or a subsidiary, affiliated entity or customer of the Company, or for conflict of interest (other than legitimate competition), if such termination of employment occurs prior to a Change in Control or after the second anniversary of a Change in Control, and thirty days following such termination of employment if such termination occurs within two years following a Change in Control (in each case, as such term is defined in Article I, Paragraph 9 hereof) (but in no event later than the Nonqualified Option Expiration Date); or (ii) At the expiration of a period of one year after the Employee Optionee's death (but in no event later than the Nonqualified Option Expiration Date) if the Employee Optionee's employment is terminated by reason of his death. A nonqualified option granted under this Article II may be exercised by the Employee Optionee's estate or by the person or persons who acquire the right to exercise his option by bequest or inheritance with respect to any or all of the shares remaining subject to his option at the time of his death; or (iii) Unless it is otherwise provided in the option agreement or otherwise extended in the discretion of the Committee in the event of the Employee Optionee's retirement, at the expiration of a period of three -9- 10 years after the Employee Optionee's employment is terminated because of retirement or disability (but in no event later than the Nonqualified Option Expiration Date); or (iv) At the expiration of a period of three months after the Employee Optionee's employment is terminated (but in no event later than the Nonqualified Option Expiration Date) if the Employee Optionee's employment is terminated for any reason other than his death, retirement, disability or the reasons specified in this Article II, Paragraph 3(b)(2)(i). (c) MANNER OF EXERCISE. In order to exercise a nonqualified option granted under this Article II, the person or persons entitled to exercise it shall deliver to the Company payment in full for the shares being purchased, together with any required withholding tax. The payment of the exercise price for each option granted under this Article II and any required withholding tax shall either be in cash or through delivery to the Company of shares of Common Stock, or by any combination of cash or shares; the value of each share of Common Stock delivered shall be deemed to be equal to the per share price of the last sale of Common Stock on the trading day prior to the date the option is exercised, based on the composite transactions in the Common Stock as reported in The Wall Street Journal. If the Committee so requires, such person or persons shall also deliver a written representation that all shares being purchased are being acquired for investment and not with a view to, or for resale in connection with, any distribution of such shares. An option agreement may, in the discretion of the Committee, provide for a "cashless exercise" of a nonqualified option by establishing procedures whereby the Employee Optionee, by a properly executed written notice, directs (1) an immediate market sale or margin loan respecting all or a part of the shares of Common Stock to which he is entitled upon exercise pursuant to an extension of credit by the Company to the Employee Optionee of the option price, (2) the delivery of the shares of Common Stock from the Company directly to a brokerage firm and (3) the delivery of the option price from sale or margin loan proceeds from the brokerage firm directly to the Company. An option agreement may also, in the discretion of the Committee, provide for the withholding of Federal, state or local income tax upon exercise of a nonqualified option from any cash or stock remuneration (from the Plan or otherwise) then or thereafter payable by the Company to the Employee Optionee. (d) OPTIONS NOT TRANSFERABLE. No nonqualified option granted under this Article II shall be transferable otherwise than by will or by the laws of descent and distribution and, during the lifetime of the Employee Optionee to whom any such option is granted, it shall be exercisable only by the Employee Optionee. Any attempt to transfer, assign, pledge, hypothecate or otherwise dispose of, or to subject to execution, attachment or similar process, any nonqualified option granted under this Article II, or any right thereunder, contrary to the provisions hereof, shall be void and ineffective, shall give no right to the purported transferee, and shall, at the sole discretion of the -10- 11 Committee, result in forfeiture of the option with respect to the shares involved in such attempt. (e) ADJUSTMENT OF SHARES. In the event that at any time after the effective date of the Plan the outstanding shares of Common Stock are changed into or exchanged for a different number or kind of shares of the Company or other securities of the Company by reason of merger, consolidation, recapitalization, reclassification, stock split, stock dividend, or combination of shares, the Committee shall make an appropriate and equitable adjustment in the number and kind of shares subject to this Article II (including shares as to which all outstanding nonqualified options granted under this Article II, or portions thereof then unexercised, shall be exercisable), to the end that after such event the shares subject to this Article II of the Plan and each Employee Optionee's proportionate interest shall be maintained as before the occurrence of such event. Such adjustment in an outstanding nonqualified option granted under this Article II shall be made without change in the total price applicable to the option or the unexercised portion of the option (except for any change in the aggregate price resulting from rounding-off of share quantities or prices) and with any necessary corresponding adjustment in exercise price per share. Any such adjustment made by the Committee shall be final and binding upon all Employee Optionees, the Company, and all other interested persons. (f) LISTING AND REGISTRATION OF SHARES. Each nonqualified option granted under this Article II shall be subject to the requirement that if at any time the Committee determines, in its discretion, that the listing, registration, or qualification of the shares subject to such option under any securities exchange or under any state or Federal law, or the consent or approval of any governmental regulatory body, is necessary or desirable as a condition of, or in connection with, the issue or purchase of shares thereunder, such option may not be exercised in whole or in part unless such listing, registration, qualification, consent or approval shall have been effected or obtained and the same shall have been free of any conditions not acceptable to the Committee. (g) CERTAIN REGRANTS/REPRICING IS NOT PERMITTED. Once granted, no option may be repriced or exchanged for an option having a lower exercise price. 4. AMENDMENT. The Committee may, with the consent of the person or persons entitled to exercise any outstanding nonqualified option granted under this Article II, amend such nonqualified option. The Committee may at any time or from time to time, in its discretion, in the case of any nonqualified option previously granted under this Article II which is not then immediately exercisable in full, accelerate the time or times at which such option may be exercised to any earlier time or times. 5. OTHER PROVISIONS. (a) The person or persons entitled to exercise, or who have exercised, a nonqualified option granted under this Article II shall not be entitled to any rights as a -11- 12 stockholder of the Company with respect to any shares subject to such option until he shall have become the holder of record of such shares. (b) No nonqualified option granted under this Article II shall be construed as limiting any right which the Company or any subsidiary of the Company may have to terminate at any time, with or without cause, the employment of any person to whom such option has been granted. (c) Notwithstanding any provision of the Plan or the terms of any nonqualified option granted under this Article II, the Company shall not be required to issue any shares hereunder if such issuance would, in the judgment of the Committee, constitute a violation of any state or Federal law or of the rules or regulations of any governmental regulatory body. -12- EX-10.34 20 AMEND. NO. 1999-1 TO 1998 EMP. STOCK OPTION PLAN 1 EXHIBIT 10.34 AMENDMENT NO. 1999-1 TO THE 1998 EMPLOYEE STOCK OPTION PLAN This Amendment No. 1999-1 is made to the Baker Hughes Incorporated 1998 Employee Stock Option Plan ("the Plan"). Capitalized terms used but not defined herein shall have the meanings ascribed to them in the Plan. WHEREAS, Baker Hughes Incorporated (the "Company") has determined that it is in its best interest and that of its stockholders to amend the Plan as set forth herein; NOW, THEREFORE, the Plan is amended as follows: 1. Article I, Paragraphs 9(a), (b) and (f) of the Plan are amended in their entirety to read as follows: "9. Change in Control. (a) Notwithstanding any provision of the Plan to the contrary other than Article I, Paragraph 10, in the event of an occurrence of a Change in Control other than an event described only in clause (3) of Article I, Paragraph 9(f) of the Plan, all options granted pursuant to this Plan shall become fully vested and exercisable. (b) Notwithstanding any provision of the Plan to the contrary, all outstanding options held by an Employee Optionee shall become fully vested and exercisable as of the effective date of termination of such Employee Optionee's employment if (i) such Employee Optionee'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) such Employee Optionee terminates his or her employment for Good Reason prior to a Change in Control (whether or not a 1 2 Change in Control ever occurs) and the circumstance or event which constitutes Good Reason occurs at the request or direction of the Person described in clause (i), (iii) such Employee Optionee's employment is terminated by the Company without Cause or by the Employee Optionee 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) or (iv) such Employee Optionee's employment is terminated by the Company without Cause or by the Employee Optionee for Good Reason, in either case within 2 years following the occurrence of a Change in Control described in clause (3) of Article I, Paragraph 9(f) of the Plan. (f) 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: (1) 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 (3) below; or (2) 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 of Directors of the Company 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 of Directors of the Company or nomination for election by the Company's stockholders was ap- 2 3 proved 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 (3) 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 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 (4) 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 a merger or consolidation immediately following which the individuals who comprise the Board immediately prior thereto constitute at least a majority of the board of directors of the Com- 3 4 pany, the entity surviving such merger or any parent thereof (or a majority plus one member where such board comprises an odd number of members); or (5) 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." 2 Article II, Paragraph 3(b)(2)(iv) of the Plan is amended in its entirety to read as follows: "At the expiration of a period of three months after the Employee Optionee's employment is terminated (but in no event later than the Nonqualified Option Expiration Date) if the Employee Optionee's employment is terminated for any reason other than his death, retirement, disability or the reasons specified in this Article II, Paragraph 3(b)(2)(i), if such termination of employment occurs prior to a Change in Control or after the second anniversary of a Change in Control, and two years 4 5 following such termination of employment (but in no event later than the Nonqualified Option Expiration Date) if such termination is either by the Company without Cause or by the Employee Optionee for Good Reason and, in either case, occurs within two years following a Change in Control (in each case, as such term is defined in Article I, Paragraph 9 hereof)." The effective date of this Amendment No. 1999-1 shall be January 27, 1999; provided, however, that, 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 the Plan and (C) individuals who satisfy the requirements in clauses (i) and (ii) below constitute at least two-thirds (2/3) of the number of directors of the entity surviving such transaction or any parent thereof: individuals who (i) immediately prior to such transaction constitute the Board of Directors of the Company and (ii) on the date hereof constitute the Board of Directors of the Company 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 of Directors of the Company 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 Amendment No. 1999-1 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 sentence does not preserve the availability of such accounting treatment, then, to the extent that any provision or combination of provisions of this Amendment No. 1999-1 disqualifies the transaction as a "pooling" transaction (including, if applicable, this entire Amendment No. 1999-1), the Board of Directors of the Company shall amend 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 with respect to this paragraph shall be made by 5 6 the Company, 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. Except as herein modified, the Plan shall remain in full force and effect. BAKER HUGHES INCORPORATED By: ------------------------------- Name: G.S. Finley Title: Senior Vice President and Chief Administrative Officer 6 EX-10.35 21 FROM OF CREDIT AGREEMENT, - RE: $750,000,000 1 EXHIBIT 10.35 CREDIT AGREEMENT By and Between BAKER HUGHES INCORPORATED and Dated as of October 1, 1998 2 Table of Contents
ARTICLE I - DEFINITIONS & INTERPRETATION......................................................................... 1 1.01 ....................................................................................................... 1 1.02 NUMBER................................................................................................. 6 ARTICLE II - LOAN COMMITMENT..................................................................................... 7 2.01 COMMITMENT TO LEND..................................................................................... 7 2.02 CHANGE OF LAW.......................................................................................... 7 2.03 TERMINATION AND REDUCTION OF COMMITMENT................................................................ 7 2.04 FACILITY AND ORIGINATION FEES.......................................................................... 8 2.05 WITHHOLDING TAXES...................................................................................... 8 2.06 INCREASED COSTS........................................................................................ 9 2.07 BANK AS FOREIGN PERSON................................................................................. 9 2.08 BANK'S OBLIGATION FOR TAXES............................................................................11 2.09 CHANGE OF LENDING OFFICE...............................................................................12 ARTICLE III - REVOLVING CREDIT LOANS TO THE COMPANY..............................................................12 3.01 ADVANCES TO THE COMPANY................................................................................12 3.02 DISPOSITION OF FUNDS AND AMOUNT PAYABLE IN THE EVENT OF REFINANCING....................................15 3.03 FUNDING LOSSES.........................................................................................15 3.04 CONDITIONS TO THE INITIAL BORROWING....................................................................15 3.05 CONDITIONS TO ALL ADVANCES.............................................................................16 ARTICLE IV - REPRESENTATIONS AND WARRANTIES OF THE COMPANY.......................................................16 4.01 EXISTENCE AND RIGHTS...................................................................................16 4.02 AGREEMENT AND NOTE.....................................................................................17 4.03 NO CONFLICT............................................................................................17 4.04 LITIGATION.............................................................................................17 4.05 FINANCIAL CONDITION....................................................................................18 4.06 TITLE TO ASSETS........................................................................................18 4.07 TRADEMARKS, PATENTS....................................................................................18 4.08 MARGIN SECURITIES......................................................................................18 4.09 ERISA..................................................................................................18 4.10 INVESTMENT COMPANY ACT.................................................................................19 4.11 LABOR MATTERS..........................................................................................19 4.12 ENVIRONMENTAL LAWS.....................................................................................19 4.13 OTHER BANK AGREEMENTS..................................................................................19 ARTICLE V AFFIRMATIVE COVENANTS..................................................................................19 5.01 CORPORATE RIGHTS AND FRANCHISES........................................................................19 5.02 INSURANCE..............................................................................................20 5.03 TAXES AND OTHER LIABILITIES............................................................................20 5.04 RECORDS................................................................................................20 5.05 REPORTS BY THE COMPANY.................................................................................20 5.06 AMENDMENTS.............................................................................................22 ARTICLE VI - NEGATIVE COVENANT'S.................................................................................22 6.01 LIENS AND ENCUMBRANCES.................................................................................22 6.02 SALES OF ASSETS OR BUSINESS...........................................................................24 6.03 LIQUIDATION, DISSOLUTION, CONSOLIDATION OR MERGER.....................................................24
3
ARTICLE VII - EVENT'S OF DEFAULT AND REMEDIES....................................................................25 7.01 FAILURE TO PAY NOTE, BREACH OF CERTAIN COVENANTS.......................................................25 7.02 BREACH OF REMAINING COVENANTS..........................................................................25 7.04 OTHER OBLIGATIONS......................................................................................26 7.05 INSOLVENCY; RECEIVER...................................................................................26 7.06 JUDGMENTS; ATTACHMENTS.................................................................................26 7.07 ERISA..................................................................................................27 7.08 REMEDIES...............................................................................................27 ARTICLE VIII - MISCELLANEOUS....................................................................................28 8.01 SURVIVAL...............................................................................................28 8.02 FAILURE OR INDULGENCE NOT WAIVER.......................................................................28 8.03 NOTICES................................................................................................28 8.04 APPLICABLE LAW.........................................................................................28 8.05 INTEREST LIMITATION....................................................................................28 8.06 ASSIGNMENT.............................................................................................29 8.07 COMPUTATION OF INTEREST RATES AND FEES: TIME OF PAYMENT................................................29 8.08 EXPENSES; INDEMNITY BY THE COMPANY.....................................................................30 8.09 MODIFICATIONS AND AMENDMENTS...........................................................................30 8.10 RESTRICTION ON TRANSFERS...............................................................................30 8.11 TABLE OF CONTENTS; HEADINGS............................................................................31 8.12 ARTICLES; SECTIONS.....................................................................................31 8.13 COUNTERPARTS...........................................................................................31 8.14 SURVIVAL OF AGREEMENTS.................................................................................31 8.15 SEVERABILITY...........................................................................................31 8.16 CONFIDENTIALITY........................................................................................31 8.17 CONSEQUENTIAL DAMAGES..................................................................................32 8.18 FINAL AGREEMENT........................................................................................32 EXHIBIT A FORM OF COMPANY NOTE.................................................................................. 1 EXHIBIT B BANK AND OTHER BANKS.................................................................................. 1 EXHIBIT C COMPANY REQUEST FOR ADVANCE........................................................................... 1 EXHIBIT D FORM OF OPINION OF COMPANY COUNSEL.................................................................... 1
-ii- 4 BAKER HUGHES INCORPORATED CREDIT AGREEMENT THIS CREDIT AGREEMENT, dated as of October 1, 1998, is hereby made and entered into by and between BAKER HUGHES INCORPORATED, a Delaware corporation (the "Company" and the bank listed on the signature pages to this Credit Agreement (the "Bank"), on the following terms and conditions: ARTICLE I DEFINITIONS & INTERPRETATION 1.01 For the purposes of this Agreement, unless the context otherwise requires: "Advance(s)" means any or all of the Eurodollar Advances and Reference Rate Advances made to the Company by the Bank pursuant to Section 3.01. "Agreement" means this Credit Agreement as originally executed or, if later amended or supplemented, then as so amended or supplemented. "Business Day" means any day (other than a day which is Saturday, Sunday or a legal holiday in London, England, the State of Texas, the State of New York, or the State within the U.S., if any, where the Bank maintains its corporate headquarters) on which commercial banks are open for domestic and international business in London, England, Houston, Texas, New York, New York, and the city within the U.S., if any, where the Bank maintains its corporate headquarters; provided, that when used in connection with a Eurodollar Advance, the term "Business Day" shall also exclude any day on which banks are not open for dealings in dollar deposits in the London interbank market. "Commitment" means the Bank's commitment to lend an aggregate amount not to exceed the Commitment Limit at any time outstanding pursuant to Section 2.01 as that commitment may be reduced or terminated pursuant to Sections 2.02, 2.03 or Article VII. "Commitment Limit" means the dollar amount listed as the Commitment Limit on the signature page to this Agreement. "Control Group" means all members of a controlled group of corporations and all trades or businesses (whether or not incorporated) under common control which, together with the Company, are treated as a single employer under Section 414(b) or 414(c) of the Internal Revenue Code of 1986, as from time to time amended. 5 "Default Rate" means a rate per annum equal to the sum of 1% plus the Reference Rate (changing when and as the Reference Rate changes). "Dollars" and "$" mean the lawful currency of the United States of America and in respect of all payments to be made in Dollars under this Agreement mean funds that are for same day settlement in immediately available funds through the Federal Reserve wire transfer system (or such other United States dollar funds as may at the relevant time be customary for the settlement of international banking transactions denominated in United States dollars). "Effective Date" means the date of this Agreement first written above. "Encumbrance" means any mortgage, deed of trust, pledge, lien, security interest, conditional sale or other title retention agreement or other similar encumbrance, but excluding any right of off-set or off-set that arises by operation of law or which may be granted to a lender in connection with credit facilities for the Company or any of its Subsidiaries, and further excluding any encumbrance that arises by reason of any restraining order, injunction or similar impediment or restriction that affects the transfer of any assets. "ERISA" means the Employee Retirement Income Security Act of 1974, as from time to time amended. "Eurodollar Advance(s)" means loans made by the Bank to the Company under Section 3.01 that bear interest at the Eurodollar Rate. "Eurodollar Rate" means, in respect of each Interest Period of each Eurodollar Advance, a rate per annum, equal to LIBOR plus the LIBOR Margin; provided, that if the Bank incurs a reserve requirement (as set forth below in the definition of Eurodollar Reserve Percentage) on any day of any Interest Period and the Bank notifies the Company within 30 days after incurring the reserve requirement that it has incurred same, then "Eurodollar Rate" means, in respect of the portion of the Interest Period of the Eurodollar Advance in which the reserve requirement is in effect, a rate per annum equal to the sum of LIBOR Margin plus the quotient obtained (rounded upwards, if necessary, to the next higher 1/16 of 1%) by dividing (i) LIBOR by (ii) 1.00 minus the Eurodollar Reserve Percentage in effect during the portion of the Interest Period. "Eurodollar Reserve Percentage" means for any day that a Eurodollar Advance is outstanding, that percentage (expressed as a decimal) which is in effect on the day of the applicable Interest Period, as prescribed by the Board of Governors of the Federal Reserve System (or any successor) for determining the reserve requirement for the Bank in respect of "eurocurrency liabilities" (or in respect of any other category of liabilities that includes deposits by reference to which the interest rate on Eurodollar Advances is determined or any category of extensions of credit or other assets that includes loans by a non-United States office of the Bank to United States residents). -2- 6 "Event of Default" shall have the meaning attributed thereto in Article VII. "Facility Fee" means the fee payable to, the, Bank pursuant to Section 2.04. "Facility Fee Rate" means the rate per annum that shall be used to calculate the Facility Fee and is equal to (a) 7.5/100 of 1% if the Company has a senior unsecured credit rating by Standard and Poors of better than BBB+ or a senior unsecured credit rating by Moody's Investor Services of better than Baal; (b) 1/10 of 1% if the Company has a senior unsecured credit rating by Standard and Poors between BBB+ and BBB-, inclusive, or a senior unsecured credit rating by Moody's Investor Services between Baa1 and Baa3, inclusive; or (c) 2/10 of 1% if the Company has a senior unsecured credit rating by Standard and Poors of less than BBB-, or a senior unsecured credit rating by Moody's Investor Services of less than Baa3; provided, that the higher (better) senior unsecured credit rating (Standard and Poors or Moody's Investor Services) shall always be applied to determine the Facility Fee Rate, and if Standard and Poors (or Moody's Investor Services) changes its rating designations, then the new equivalent Standard and Poors (or Moody's Investor Services) credit ratings shall be applied. "GAAP" means those generally accepted accounting principles that are in effect on the date of determination and are recognized as such by the Financial Accounting Standards Board (or any generally recognized successor). "Governmental Requirement" means any law, statute, code, ordinance, order, rule, regulation, guideline, judgment, decree, injunction, franchise, permit, certificate, license, authorization or other direction or requirement (including, without limitation, any of the foregoing that relate to environmental standards or controls, energy regulations and occupational, safety and health standards or controls) of any (domestic or foreign) federal, state, county, municipal parish, provincial or other government or any department, commission, board, court, agency or any other instrumentality of any of them. "Interest Period" means (a) in respect of each Eurodollar Advance made to the Company, the period commencing on the date of the Eurodollar Advance and ending one, three or six months thereafter (as designated by the Company pursuant to -3- 7 Section 3.01(a)) or such other time period as may be mutually agreed upon by the Bank and the Company, and (b) in respect of each Reference Rate Advance made to the Company, the period commencing on the date of the Reference Rate Advance and ending one, three or six months thereafter (as designated by the Company pursuant to Section 3.01(a)) or such other time period as may be mutually agreed upon by the Bank and the Company; provided, that in each case: (i) any Interest Period that would otherwise end on a day that is not a Business Day shall be extended to the next succeeding Business Day unless by the extension it would fall in another calendar month, in which case the Interest Period shall end on the next preceding Business Day; (ii) any Interest Period that begins on a day for which there is no numerically corresponding day in the calendar month during which the Interest Period is to end shall, subject to the provisions of clause (i) of this definition, end on the last day of the calendar month; (iii) no Interest Period shall extend beyond the Termination Date; and (iv) no more than ten different Interest Periods may be outstanding at any one time. "Lenders" means, collectively, the banks that are parties to the Other Credit Agreements. "Lending Office" means the office or offices of the Bank specified as its Domestic Lending Office or Eurodollar Lending Office, as the case may be, below, its name on the signature page hereof or such other office or offices of the Bank as the Bank may from time to time specify in writing to the Company, or, if the Bank fails to so notify the Company, the Bank's Domestic Lending Office listed below its name on the signature page hereof. "LIBOR" means, in respect of each Interest Period of each Eurodollar Advance, the rate per annum, quoted by the Bank at which deposits in Dollars, in amounts comparable to the amount of the subject Eurodollar Advance and with maturities comparable to the Interest Period, are offered to the principal office of the Bank in London, England (or if the Bank does not have an office in London, England, the rate at which the deposits are offered to the principal offices of major banks in London, England) by major banks in the interbank market at 11:00 a.m. London time two Business Days prior to the first day of the Interest Period (rounded upward, if necessary, to the next higher 1/16 of 1%). -4- 8 "LIBOR Margin" means the rate per annum which shall added to determine the Eurodollar Rate and is equal to (a) .145% if the Company has a senior unsecured credit rating by Standard and Poors of better than BBB+ or a senior unsecured credit rating by Moody's Investor Services of better than Baa1; (b) .25% if the Company has a senior unsecured credit rating by Standard and Poors between BBB+ and BBB-, inclusive, or a senior unsecured credit rating by Moody's Investor Services between Baa1 and Baa3, inclusive; or (c) .4% if the Company has a senior unsecured credit rating by Standard and Poors of less than BBB- or a senior unsecured credit rating by Moody's Investor Services of less than Baa3; provided, that, in each case, the higher (better) senior unsecured credit rating (Standard and Poors or Moody's Investor Services) shall always be applied to determine the LIBOR Margin, and if Standard and Poors (or Moody's Investor Services) changes its rating designations, then the new equivalent Standard and Poors ( or Moody's Investor Services) credit ratings shall be applied. "Material Adverse Effect" means a material adverse effect on (a) the financial condition and operations of the Company and its Subsidiaries on a consolidated basis or (b) the validity or enforceability of this Agreement or the Note. "Mortgage" means any Encumbrance, excluding Permitted Encumbrances. "Note" means the note substantially in the form of Exhibit A issued by the Company pursuant to Section 3.01. "Other Bank(s)" means, collectively, the banks set forth on Exhibit B, other than the Bank. "Other Bank Agreement(s)" shall have the meaning attributed thereto in Section 4.13. "Other Credit Agreements" means, collectively, the Credit Agreements between the Company and each bank named as a party thereto, dated as of the Effective Date, providing for Revolving Loans to be made available to the Company in an aggregate principal amount not to exceed at any one time outstanding $250,000,000. "PBGC" means the Pension Benefit Guaranty Corporation or any successor established under ERISA. -5- 9 "Permitted Encumbrance" shall have the meaning attributed thereto in Section 6.01. "Person" means an individual corporation, partnership, joint venture, trust, unincorporated organization, association, joint stock company, government or any agency or political subdivision thereof or any other entity. "Plan" means each employee benefit plan or other plan maintained by the Company or any member of the Control Group for employees of the Company or any member of the Control Group and covered by Title IV of ERISA or subject to the minimum funding standards under Section 412 of the Internal Revenue Code of 1986, as from time to time amended. "Reference Rate" means the varying rate of interest per annum equal to the rate of interest per annum publicly announced from time to time by Citibank, NA, New York, New York, or its successor, as its "Base Rate" of interest, changing as and when a change in such rate occurs; provided, that if the rate ceases or fails to be published, the Reference Rate shall be equal to the "Prime Rate" published in the Wall Street Journal in the Money Rates Column, as it may change from time to time. "Reference Rate Advance(s)" means loans made by the Bank to the Company under Section 3.01 that bear interest at the Reference Rate. "Reportable Event" means any event described in Section 4043 of ERISA, but excluding Sections 4043(b)(2) and 4043(b)(3) thereof. "Stockholders' Equity" means the excess of assets over liabilities, in each case of the Company and its Subsidiaries on a consolidated basis, as determined and computed in accordance with GAAP. "Subsidiary" means, a corporation of which the Company or one or more of its other subsidiaries of any tier own, directly or indirectly, such number of outstanding shares as have the power (disregarding any voting power, solely by reason of the happening of any default, of shares of any class) to elect a majority of the Board of Directors of such corporation. "Taxes" means all present and future taxes, levies, imposts, duties, fees, assessments, or charges of whatever nature (excluding income and similar taxes) now or hereafter imposed by any governmental authority, or any political subdivision or taxing authority thereof together with interest thereon and penalties in respect thereof. "Termination Date" means the date on which the Commitment expires, which shall be five years after the Effective Date (October 1, 2003), or such earlier date as the Bank's obligation to honor its Commitment shall have terminated under Section 2.02, Section 2.03 or Article VII of this Agreement. -6- 10 1.02 Number. Singular terms used in this Agreement shall include the plural, and vice versa. ARTICLE II LOAN COMMITMENT 2.01 Commitment to Lend. The Bank agrees, on the terms and conditions of this Agreement and in reliance upon the representations and warranties set forth in Article IV, to make Eurodollar Advances and Reference Rate Advances to the Company, from time to time, from the Effective Date to but excluding the Termination Date, at such times and in such amounts as the Company shall request in accordance with Section 3.01, in an aggregate principal amount not to exceed at any one time outstanding the Commitment Limit. 2.02 Change of Law. Notwithstanding any other provision herein, if any change in any applicable Governmental Requirement or in the interpretation or administration thereof shall make it unlawful or impossible for the Bank to (a) honor its Commitment under Section 2.01, then the obligation of the Bank to make Advances to the Company under Section 2.01 and the obligation of the Company to pay the Facility Fee for the period of time subsequent thereto shall terminate, or (b) maintain its Advances, then the aggregate principal amount of the Bank's Advances that are then outstanding and cannot be lawfully maintained, together with interest accrued and unpaid thereon and all other amounts payable hereunder to the Bank in respect thereof shall be paid, all as provided below in this Section 2.02. Upon the occurrence of any change making it unlawful for the Bank to honor its Commitment under Section 2.01 or maintain its Advances as aforesaid, the Bank shall immediately notify an officer of the Company thereof by telephone (which shall be confirmed by written notice in accordance with Section 8.03, and shall furnish to the Company written evidence of the change. Any payment of the principal amount of the Bank's Advances that is required under this Section 2.02 shall be made, together with accrued and unpaid interest and all other amounts payable hereunder to the Bank in respect thereof on the earlier of (i) the last day of the respective Interest Periods applicable to the Advances or (ii) such earlier date or dates required by any such Governmental Requirement or any such interpretation or administration thereof, provided, that the Company has been notified of the earlier date or dates. 2.03 Termination and Reduction of Commitment. The Company may, upon at least five Business Days' prior written notice given by the Company to the Bank, and upon payment of -7- 11 the Facility Fee accrued through the date of such termination or reduction, at any time wholly terminate or from time to time permanently reduce the unused portion of the Commitment; provided, that any such partial reduction of the Commitment must be in the amount of $1,000,000 or an integral multiple thereof. 2.04 Facility and Origination Fees. (a) Facility Fee. The Company agrees to pay the Bank a Facility Fee, in Dollars, equal to the Facility Fee Rate multiplied by the daily average amount of the Commitment Limit, used and unused, as it may exist for the period from and including the Effective Date, to but not including the Termination Date (or such earlier date as the Bank's obligation to honor its Commitment shall have terminated pursuant to Sections 2.02, 2.03 or 7.08). The applicable Facility Fee Rate shall be determined as of, and the accrued Facility Fee shall be paid to the Bank on, (i) the last Business Day of each March, June, September and December, commencing with the first of those dates which follows the Effective Date, and (ii) the date of any early termination of the Commitment pursuant to Sections 2.02, 2.03 or 2.08. (b) Origination Fee. The Company agrees to pay the Bank a one-time origination fee, in Dollars, equal to .02% of the Commitment Limit, payable within 15 days of the Effective Date of this Agreement. 2.05 Withholding Taxes. Subject to Sections 2.07 and 2.08, if at any time any applicable law, regulation or regulatory requirement or any governmental authority, monetary agency or central bank enacted after the Effective Date requires the Company to make any deduction or withholding in respect of Taxes from any payment due under this Agreement for the account of the Bank, the sum due from the Company in respect of such payment shall be increased to the extent necessary to ensure that, after the making of such deduction or withholding, the Bank receives on the due date for such payment a net sum equal to the sum which it would have received had no such deduction or withholding been required to be made, and the Company shall indemnify the Bank against any losses or costs incurred by the Bank by reason of any failure of the Company to make any such deduction or withholding or by reason of any increased payment not being made on the due date for such payment, except to the extent the same arise by reason of a transfer, sale, or assignment of the Note. The Company shall promptly deliver to the Bank any receipts, certificates or other proof evidencing the amounts (if any) paid or payable in respect of any deduction or withholding as aforesaid. If the Bank should, in connection with any payment made by the Company pursuant to this Section 2.05, receive any offsetting tax credit or obtain any similar tax benefit which may reasonably be applied to the benefit of the Company, the Bank will in a timely manner reimburse the Company an amount equal to the amount of such credit or benefit after deducting any expenses reasonably and properly attributable thereto. The Bank agrees to use its reasonable efforts to obtain any such tax credit or similar tax benefit. If any such tax credit or benefit, the amount of which has been -8- 12 reimbursed to the Company, is subsequently disallowed in whole or in part by the appropriate taxation authorities, the Company agrees to repay on demand to the Bank the amount of credit or benefit so reimbursed to the Company and subsequently disallowed. 2.06 Increased Costs. Without duplication of any amounts otherwise payable under this Agreement, the Company agrees to reimburse the Bank, within ten days after receipt of written notice from the Bank, for any increase in its cost or decrease in its effective rate of return incurred after the Effective Date hereof (which shall include, but not be limited to, taxes (other than income or similar taxes), fees, charges or reserves) directly or indirectly resulting from the making of any Advances to the Company or maintaining of its Commitment, and arising as a result of: (a) any change after the Effective Date in any Governmental Requirement or the interpretation thereof by any governmental authority, court, bureau or agency charged with the administration or interpretation thereof (whether or not having the force of law); or (b) any capital or similar requirements imposed on the Bank or any corporation controlling the Bank against assets or liabilities (or against any class thereof or any required change in the amount thereof) of, or commitments or extensions of credit by, the Bank (including, without limitation, the Bank's obligation to make Advances hereunder); except to the extent the same arise by reason of a transfer, sale or assignment of the Note. Such reimbursement shall be made to the Bank within ten days after the receipt by the Company of notice from the Bank setting forth the nature and amount of such loss, decrease in its effective rate of return, or expense and an explanation as to how such amounts were calculated by the Bank, said notice to be conclusive and binding in the absence of manifest error. The Company will pay all amounts required pursuant to this Section 2.06 to the Bank in immediately available funds. 2.07 Bank as Foreign Person. If the Bank is a foreign Person (i.e., a Person other than a United States Person for United States federal income tax purposes), then the Bank hereby agrees that: (a) it shall on or prior to the Effective Date deliver to the Company one original of the following: (i) if any Lending Office is located in the United States of America, accurate and complete signed copies of IRS Form 4224 or any successor thereto ("Form 4224") and IRS Form W-9 or any successor thereto ("Form W-9"); or (ii) if any Lending Office is located outside the United States of America, accurate and complete signed copies of IRS Form 1001 or any successor thereto ("Form 1001") and IRS Form W-8 or any successor thereto ("Form W-8"); -9- 13 in each case, indicating that the Bank is on the date of delivery thereof entitled to receive payments of principal, interest and fees for the account of the Lending Office or Lending Offices under this Agreement free from withholding of United States Federal income tax; (b) if at any time the Bank changes its Lending Office or Lending Offices or selects an additional Lending Office, it shall at the same time, but only to the extent the forms previously delivered by it hereunder are no longer effective, deliver to the Company one original, in replacement for the forms previously delivered by it hereunder: (i) if such changed or additional Lending Office is located in the United States of America, accurate and complete signed originals of Form 4224 and Form W-9; or (ii) otherwise, accurate and complete signed originals of Form 1001 and Form W-8; in each case, indicating that the Bank is on the date of delivery thereof entitled to receive payments of principal, interest and fees for the account of such changed or additional Lending Office under this Agreement free from withholding of United States federal income tax; (c) it shall, upon the occurrence of any event (including the passing of time, but excluding any event mentioned in Section 2.07(b)) requiring a change in the most recent Form 4224, Form W-9, Form 1001 or Form W-8 previously delivered by the Bank, deliver to the Company one original accurate and complete signed copies of Form 4224, Form W-9, Form 1001 or Form W-8 in replacement for the forms previously delivered by the Bank; (d) it shall promptly upon the request of the Company, deliver to the Company such other forms or similar documentation as may be required from time to time by any applicable law, treaty, rule or regulation in order to establish the Bank's tax status for withholding purposes; (e) if the Company claims exemption from withholding tax under a United States tax treaty by providing a Form 1001 and the Bank sells or grants a participation of all or part of its rights under this Agreement, it shall notify the Company of the percentage amount in which it is no longer the beneficial owner under this Agreement. To the extent of this percentage amount, the Company shall treat the Bank's Form 1001 as no longer applicable for purposes of this Section 2.07. If the Bank is claiming exemption from United States withholding tax by filing Form 4224 with the Company, and sells or grants a participation in its rights under this Agreement, the Bank agrees to undertake sole responsibility for complying with the withholding tax requirements imposed by Sections 1441 and 1442 of the Code; and -10- 14 (f) if the IRS or any authority of the United States of America or other jurisdiction asserts a claim that the Company did not properly withhold tax from amounts paid to or for the account of the Bank (because the appropriate form was not delivered, was not properly executed, or because the Bank failed to notify the Company of a change in circumstances that rendered the exemption from withholding tax ineffective), the Bank shall indemnify the Company fully for all amounts paid, directly or indirectly, by the Company, as tax or otherwise, including penalties and interest, and including any taxes imposed by any jurisdiction on the amounts payable by the Company under Sections 2.05 and 2.06 together with all costs, expenses and reasonable attorneys' fees (including the allocated cost of in-house counsel). Without limiting or restricting the Bank's right to increased amounts under Sections 2.05 and 2.06 from the Company upon satisfaction of the Bank's obligations under the provisions of this Section 2.07, if the Bank is a foreign Person and is entitled to a reduction in the applicable withholding tax, the Company may withhold from any interest to the Bank an amount equivalent to the applicable withholding tax after taking into account such reduction. If the forms or other documentation required by Section 2.07(a) are not delivered to the Company, then the Company may withhold from any interest payment to the Bank an amount equivalent to the applicable withholding tax. In addition, the Company may also withhold against periodic payments other than interest payments to the extent United States withholding tax is not eliminated by obtaining Form 4224 or Form 1001. 2.08 Bank's Obligation for Taxes. Notwithstanding anything to the contrary contained herein, the Company shall not be required to pay any additional amounts in respect of United States federal income tax pursuant to Sections 2.05 or 2.06 to the Bank for the account of any Lending Office of the Bank: (a) if the obligation to pay such additional amounts would not have arisen but for a failure by the Bank to comply with its obligations under Section 2.07 in respect of such Lending Office; (b) if the Bank shall have delivered to the Company a Form 4224 and a Form W-9 in respect of such Lending Office pursuant to Sections 2.07(a)(i), 2.07(b)(i) or 2.07(c) and the Bank shall not at any time be entitled to exemption from deduction or withholding of United States federal income tax in respect of payments by the Company hereunder for the account of such Lending Office for any reason other than a change in United States law or regulations or in the official interpretation of such law or regulations by any governmental authority charged with the interpretation or administration thereof (whether or not having the force of law) after the date of delivery of such Form 4224 and Form W-9; or (c) if the Bank shall have delivered to the Company a Form 1001 and a Form W-8 in respect of such Lending Office pursuant to Sections 2.07(a)(ii), 2.07(b)(ii), or 2.07(c) and the Bank shall not at any time be entitled to exemption from deduction or withholding of United States federal income tax in respect of payments by the Company -11- 15 hereunder for the account of such Lending Office for any reason other than a change in United States law or regulations or any applicable tax treaty or regulations or in the official interpretation of any such law, treaty or regulations by any governmental authority charged with the interpretation or administration thereof (whether or not having the force of law) after the date of delivery of such Form 1001 and Form W-8; then, any and all present or future Taxes and related liabilities (including penalties, interest, additions to tax and expenses) which are not required to be paid by the Company pursuant to Sections 2.05 and 2.06 shall be paid by the Bank, and the Bank agrees to indemnify and hold the Company harmless from the same. 2.09 Change of Lending Office. The Bank agrees that upon the occurrence of any event giving rise to the payment of taxes or withholding pursuant to Sections 2.05 or 2.06, it will if so requested by the Company, use reasonable efforts (consistent with its internal policy and legal and regulatory restrictions) to designate a different Lending Office for any Advances affected by such event with the object of avoiding the consequence of the event giving rise to the payment of taxes or withholding pursuant to those Sections; provided, that such designation would not, in the judgment of the Bank, be otherwise disadvantageous to the Bank. Nothing in this Section 2.09 shall affect or postpone any of the obligations of the Company or the right of the Bank provided in Sections 2.05 or 2.06. ARTICLE III REVOLVING CREDIT LOANS TO THE COMPANY 3.01 Advances to the Company. Subject to the terms and conditions of this Agreement, the Company may from time to time borrow under this Section 3.01, pay pursuant to this Section 3.01 and reborrow under this Section 3.01. Each Advance made to the Company and payment thereof shall be in Dollars in an aggregate principal amount of not less than $1,000,000. All Advances to the Company shall be subject to the provisions of Section 3.01(a) through 3.01(g). (a) Manner of Borrowing. The Company shall give the Bank, not later than 10:00 A.M. (Houston, Texas time) three Business Days prior to the drawdown date in the case of a Eurodollar Advance and not later than 10:00 A.M. (Houston, Texas time) on the drawdown date in the case of a Reference Rate Advance, irrevocable notice (effective upon receipt), substantially in the form of Exhibit C, of each requested Advance to be made to the Company specifically (i) the amount of the requested Advance, (ii) the drawdown date of the requested Advance (which shall be a Business Day), -12- 16 (iii) whether the Advance is to be comprised of Eurodollar Advances or Reference Rate Advances, and (iv) the term of the Interest Period for the Advance, provided that if the Company fails to specify the duration of the term, the Interest Period for such Advance shall be three months. If the Advance will be a Eurodollar Advance, the Bank shall notify the Company of the Eurodollar Rate by no later than 11:00 A.M. (Houston, Texas time) one Business Day prior to the drawdown date specified for the Advance. If the Advance will be a Reference Rate Advance, the Bank shall notify the Company of the Reference Rate by not later than 11:30 A.M. (Houston, Texas time) on the drawdown date specified for the Advance. (b) Manner of Making Funds Available. The Bank, not later than 12:00 noon Houston, Texas time, on the drawdown date specified for the Advance, shall make the Advance available to the Company by transferring in immediately available funds the amount of the Advance to Chase Bank of Texas, National Association, 707 Travis Street, Houston, Texas 77252-8086, ABA #113000609 for credit to the Company's account #00100139733 or to such other bank or account as the Company shall designate to the Bank in writing. (c) Payment of Principal. The Company hereby promises to pay to the Bank the principal of each Advance made to the Company on the last day of the Interest Period applicable to the Advance. The Company shall have the right, at any time and from time to time, to prepay, in whole or in part, any Advance by giving Bank not less than (i) three Business Days prior written notice in the case of a prepayment of a Eurodollar Advance; and (ii) one Business Day prior written notice in the case of a Reference Rate Advance; together with accrued interest to the date of the prepayment on the principal amount prepaid; provided, that each partial prepayment of principal shall be in an integral multiple of $1,000,000 and further provided that the Company shall. be required to pay reasonable costs and losses incurred by the Bank as a result of the Company prepaying any Eurodollar Advance, pursuant to Section 3.03. (d) Payment of Interest. The Company hereby promises to the Bank accrued but unpaid interest on the principal amount of each Advance made to the Company, from the date of the Advance until the principal amount of the Advance shall be paid in full (i) at the Eurodollar Rate for Eurodollar Advances; and (ii) at the Reference Rate for Reference Rate Advances; -13- 17 payable on the last day of the Interest Period applicable to the Advance and, if the Interest Period is longer than six months, also on each six-month anniversary of the making of the Advance; provided, that any amount of such principal and, to the extent permitted by law, any interest thereon which is not paid when due (whether at stated maturity, by acceleration or otherwise) shall bear interest from the date on which such amount is due until the amount is paid in full, payable on demand, at the Default Rate. (e) Currency of Payment. All payments of principal of, and interest on, Advances shall be made in Dollars. (f) Note. All Advances that the Bank makes to the Company shall be evidenced by a Note substantially in the form attached hereto as Exhibit A with appropriate insertions, payable to the order of the Bank, dated the Effective Date, maturing on the Termination Date and bearing interest from the Effective Date on the unpaid principal amount thereof from time to time outstanding at the rates provided for in this Agreement. The Bank shall record and endorse on the Note all transactions in the space provided thereon, which recordation and endorsement, absent manifest error, shall be prima facie evidence of Advances made to the Company and payments thereon; provided, that the Bank's failure to make recordation and endorsement shall not limit or otherwise affect the obligations of the Company hereunder or under the Note and payments of principal of, and interest on, the Note by the Company shall not be affected by the failure to make any such recordation and endorsement thereof on the Note. Although the Note shall be dated the Effective Date, interest in respect thereof shall be payable only for the periods during which the Advances evidenced thereby are outstanding and then only with respect to those Advances. (g) Available London Interbank Rate. Notwithstanding anything herein to the contrary, if with respect to any proposed Eurodollar Advance to the Company, the Bank determines that (i) for any reason whatsoever the rates for the offering of Dollars for deposit in the London interbank market in immediately available funds in an amount and for a period comparable to the scheduled maturity of the Eurodollar Advance are not being offered to the Bank in the London interbank market or (ii) the rates offered for purposes of computing the rate of interest on the requested Eurodollar Advance do not accurately reflect the cost to the Bank of making the Eurodollar Advance, then the Bank shall notify an officer of the Company immediately by telephone (which shall be promptly confirmed by written notice in accordance with Section 8.03) and so long as the failure to offer those rates continue or the rates fail to accurately reflect costs to the Bank, the Bank shall be under no obligation to make the Eurodollar Advance under this Agreement; provided, that the Company shall have the option to elect to have the -14- 18 Advance changed to a Reference Rate Advance by giving the Bank notice at any time prior to 11:00 a.m. (Houston, Texas time) on the date of the proposed Advance. 3.02 Disposition of Funds and Amount Payable in the Event of Refinancing. If the Bank makes a new Advance to the Company hereunder on a day on which the Company is to pay all or any part of an outstanding Advance, (a) the Bank shall apply the proceeds of the new Advance to make the payment; (b) the Bank shall make available to the Company as provided in Section 3.01(b) only an amount equal to the excess, if any, of the amount the Company borrows over the amount the Bank applies to make the payment; and (c) the Company shall pay the Bank on that day an amount equal to only the excess, if any, of the amount payable by the Company to the Bank on that day over the amount the Bank applies to make the payment. 3.03 Funding Losses. The Company shall pay to the Bank upon written request (which request shall set forth in reasonable detail the basis for the request), an amount that shall be sufficient (in the reasonable opinion of the Bank) to reasonably compensate the Bank for any loss or expense (other than the loss of margin) incurred by the Bank as a result of: (a) any Company prepayment of any Eurodollar Advance made to the Company on a date other than the last day of the Interest Period applicable thereto (except payments made in accordance with Section 2.02), or (b) any Company failure to borrow an Advance on the date scheduled for the borrowing pursuant to Section 3.01 except a failure to borrow a requested Eurodollar Advance following the occurrence of one of the events set forth in Section 3.0l(g) whether because of any Event of Default by the Company or otherwise. 3.04 Conditions to the Initial Borrowing. The Bank's obligation to make its initial Advance to the Company is subject to the conditions precedent that the Bank shall have received: (a) Note. In the case of the initial Advance to the Company, the Note drawn to the order of the Bank complying with the provisions of Section 3.01. (b) Authorized Signatories of the Company. A certificate of the Secretary or an Assistant Secretary of the Company that shall certify the names of the officers of the Company authorized to sign this Agreement, the Note and any other document related to this Agreement, together with the true specimen signatures of those officers. The Bank may conclusively rely upon that certificate unless it receives written evidence to the contrary. -15- 19 (c) Evidence of Corporate Action of the Company. Certified copies of the requisite corporate action that the Company takes to authorize this Agreement, the Note and the borrowings by the Company hereunder, and such other papers as the Bank shall reasonably require. (d) Opinion of Company. Opinion of the General Counsel or Deputy General Counsel of the Company in substantially the form set forth in Exhibit D. (e) Certificate of the Company. A certificate dated the date of the Advance and signed by an authorized executive or financial officer of the Company stating that the representations and warranties of the Company contained in Article IV are true and correct as of the date thereof and that no Event of Default, or event which with the giving of notice or lapse of time or both would constitute an Event of Default, has occurred and is continuing. 3.05 Conditions To All Advances. The Bank's obligation to make each Advance to the Company is subject to the conditions precedent that on the date of the Advance: (a) Notice. The Bank shall have received the applicable notice that Section 3.01 requires. (b) Compliance with Agreement. The Company shall have complied, and shall then be in compliance with, all the terms, covenants and conditions of this Agreement that are binding upon it. (c) No Default. There shall exist or result from the Advance no Event of Default and no event which, with the giving of notice or the lapse of time, or both, would constitute an Event of Default. (d) Accuracy of Representations and Warranties. The Company's representations and warranties in Article IV shall be true with the same effect as though the representations and warranties had been made at the time of the Advance. In the case of each Advance to the Company hereunder, each Company notice or request to the Bank to make each borrowing shall be deemed to be a representation and warranty to the foregoing effects in this Section 3.05(d). ARTICLE IV REPRESENTATIONS AND WARRANTIES OF THE COMPANY 4.01 Existence and Rights. The Company (a) is duly organized, validly existing and in good standing under the laws of the State of Delaware, -16- 20 (b) has all necessary corporate power to own its properties and to carry on its businesses as now conducted and (c) is duly qualified and in good standing (to the extent those concepts are applicable) in each United States jurisdiction that requires qualification and in which the character of the properties owned by it or the conduct of its business therein makes the qualification necessary, except where the failure to so qualify would not have a Material Adverse Effect. The Company has all necessary corporate power and authority to make and carry out this Agreement and to issue and deliver and perform the Note as herein provided. 4.02 Agreement and Note. The Company's execution, delivery and performance of this Agreement and the Note have been duly authorized by all necessary corporate action and do not require the consent or approval of any governmental body or other regulatory authority, are not in contravention of or in conflict with any law or regulation applicable to the Company or any term or provision of the charter or bylaws of the Company. This Agreement is, and the Note when delivered for value received will be, the valid and legally binding obligations of the Company, enforceable in accordance with their terms, except as such enforceability may be (i) limited by the effect of any applicable bankruptcy, insolvency, reorganization, moratorium, fraudulent transfer or other similar laws from time to time in effect and judicial decisions relating to or affecting the enforceability of creditors' rights and debtor's obligations generally, and (ii) subject to the effect of general principles of equity (regardless of whether such enforceability is considered in a proceeding in equity or at law). 4.03 No Conflict. The Company's execution, delivery and performance of this Agreement and the Note are not in contravention of, or in conflict with, any material agreement, indenture, undertaking or Governmental Requirement to which the Company or any of its Subsidiaries is a party or by which any of them or any of their property is subject, and do not cause any Mortgage to be created or imposed upon any such property, except pursuant to the terms of this Agreement. 4.04 Litigation. There are no proceedings pending or, so far as the officers of the Company know, threatened before any court, administrative agency or arbitration panel that, in the reasonable opinion of the officers of the Company, are expected to have a Material Adverse Effect. Neither the Company nor any of its Subsidiaries is in material default with respect to any order, writ, injunction or decree of any court or other governmental or regulatory authority which, in the opinion of the officers of the Company, is expected to have a Material Adverse Effect. -17- 21 4.05 Financial Condition. The consolidated balance sheet of the Company and its Subsidiaries as of September 30, 1997 and the related consolidated statement of income for the fiscal year then ended, covered by the opinion of Deloitte & Touche L.L.P., and the unaudited consolidated balance sheet of the Company and its Subsidiaries as of June 30, 1998 and the related unaudited consolidated statement of income for the quarter then ended, in both cases as heretofore delivered to the Bank, present fairly the financial position of the Company and its consolidated Subsidiaries as of the respective dates of those balance sheets and the results of their operations for the respective periods then ended and have been prepared in accordance with GAAP; provided, that the balance sheet as of June 30, 1998 and the statement of income for the quarter then ended are subject to normal year-end adjustments and lack footnotes and other presentation items. There were no material liabilities, direct or indirect, fixed or contingent, of the Company or any of its consolidated Subsidiaries as of the date of the June 30, 1998 balance sheet that are not reflected therein or in the notes thereto. Other than as has been previously disclosed to the Bank in writing through the date hereof (including through the delivery of filings made with the U.S. Securities and Exchange Commission), there has been since June 30, 1998 no material adverse change in the financial condition and operations of the Company and its Subsidiaries on a consolidated basis. 4.06 Title to Assets. The Company and its Subsidiaries have sufficient title to their respective assets to enable them to conduct their business, and those assets are subject to no Mortgage not permitted by Section 6.01, except where the failure to have such title would not have a Material Adverse Effect. 4.07 Trademarks, Patents. The Company and each of its Subsidiaries as of the date hereof possess all necessary trademarks, copyrights, patents, patent rights and licenses to conduct their respective businesses as now operated, without any known material infringement of valid trademarks, trade names, copyrights, patents or license rights of others, except to the extent that the failure of the foregoing would not have a Material Adverse Effect. 4.08 Margin Securities. The Company is not incurring the indebtedness evidenced by the Note hereunder for the purpose, directly or indirectly, of purchasing or carrying any "margin stock" as that term is defined in Regulations U and X of the Board of Governors of the Federal Reserve System, as amended from time to time. Neither the Company nor any of its Subsidiaries is engaged principally, or as one of its important activities, in the business of extending credit for the purpose of purchasing or carrying margin stock. 4.09 ERISA. Neither the Company nor any member of the Control Group has incurred any material accumulated funding deficiency within the meaning of Section 412 of the Internal Revenue Code of 1986, as from time to time amended, or has incurred any material liability to the PBGC under Title IV of ERISA in connection with any Plan or other class of benefit that the PBGC has elected to insure. No Reportable Event has occurred with respect to any Plan that would have a Material Adverse Effect. -18- 22 4.10 Investment Company Act. The Company is not an "investment company" or a company "controlled" by an "investment company", within the meaning of the Investment Company Act of 1940, as amended. 4.11 Labor Matters. There are no strikes or other labor disputes pending, or to the knowledge of Company threatened, against the Company or any of its Subsidiaries that would have a Material Adverse Effect. 4.12 Environmental Laws. Except as may have been previously disclosed to the Bank or may be disclosed in any information furnished by the Company to the Bank pursuant to Section 5.05, the Company and its Subsidiaries are in compliance with all environmental health, and safety laws applicable to the Company and its Subsidiaries, and their respective operations and properties, except to the extent that such non-compliance would not have a Material Adverse Effect. 4.13 Other Bank Agreements. Substantially concurrently with or prior to the execution of this Agreement by the Company and the Bank, the Company is executing with each of the Other Banks a substantively identical (other than with respect to the amount of the Commitment) form of this Agreement (each an "Other Bank Agreement"), except that the Other Bank Agreement between the Company and Revolving Commitment Vehicle Corporation ("RCV") will permit the Company to pay a reduced Facility Fee to RCV and will require the Company to permit (a) Morgan Guaranty Trust Company of New York ("Morgan") to assume the obligations of RCV, and (b) RCV to assign its rights to Morgan, under the Other Credit Agreement between RCV and the Company, under certain circumstances. ARTICLE V AFFIRMATIVE COVENANTS Unless the Bank shall otherwise consent in writing, it is agreed that, so long as any credit hereunder shall be available and until payment in full of the Note: 5.01 Corporate Rights and Franchises. The Company will, and will cause each of its Subsidiaries to, except as may be otherwise permitted by the provisions of Sections 6.02 and 6.03, (i) maintain and preserve its corporate, partnership or other existence and all rights, franchises and other authority necessary for the conduct of its business unless, in the judgment of management of the Company, the preservation thereof is no longer desirable to the conduct of the business of the Company and its Subsidiaries taken as a whole and the loss thereof is not disadvantageous in any material respect to the Bank, and (ii) maintain its properties, equipment and facilities in good working order and repair and conduct its business in an orderly manner without voluntary interruption -19- 23 unless, in the judgment of management of the Company, those activities are no longer desirable to the conduct of the Company's business and the discontinuance thereof is not disadvantageous in any material respect to the Bank. 5.02 Insurance. The Company will, and will cause each of its Subsidiaries to, maintain with responsible insurance carriers liability, property damage and workers compensation insurance coverage in such amounts and with such deductibles and retentions as the management of the Company considers reasonable. 5.03 Taxes and Other Liabilities. The Company will, and will cause each of its Subsidiaries to, pay and discharge, before the same become delinquent and before penalties accrue thereon, all taxes, assessments and governmental charges upon or against it or any of its properties, and all its other liabilities at any time existing which, if unpaid, might by law become a Mortgage on a material portion of its property, except to the extent that and so long as: (a) the same are being contested in good faith and by appropriate proceedings in such manner as not to cause any Material Adverse Effect or the loss of any material right of redemption from any sale thereunder; and (b) it shall have set aside on its books reserves (segregated in accordance with GAAP) deemed by it adequate with respect thereto. 5.04 Records. The Company will maintain, and cause each of its Subsidiaries to maintain, a system of accounting in accordance with GAAP and permit representatives of the Bank to have reasonable access to, and to examine the properties and publicly available information of, the Company and its Subsidiaries at all reasonable times. 5.05 Reports by the Company. The Company will furnish the Bank: (a) As soon as available, and in any event within 45 days after the close of each of the first three quarters of each fiscal year of the Company, commencing with the quarter next ending following the Effective Date, a copy of its Quarterly Report on Form 10-Q for the quarter as filed with the U.S. Securities and Exchange Commission. (b) As soon as available, and in any event within one 120 days after the close of each fiscal year of the Company ending following the Effective Date: (i) a balance sheet of the Company and its consolidated Subsidiaries as of the end of the fiscal year and the related income statement and statement of changes in cash flows of the Company and its consolidated Subsidiaries for the fiscal year then ended, in reasonable detail in accordance with GAAP and stating, when appropriate, in comparative form the corresponding figures for the previous fiscal year, together with a signed opinion of Deloitte & Touche L.L.P. (or other independent certified public accountants reasonably satisfactory to the Bank) based on an audit using generally accepted auditing standards, certifying that the -20- 24 financial statements present fairly the financial position of the Company and its consolidated Subsidiaries as of the end of the fiscal year and the results of their consolidated operations for the fiscal year then ended, which opinion shall not contain any material qualification or exception not reasonably satisfactory to the Bank, and (ii) a certificate of those accountants stating that in the course of their examination they became aware of nothing of an accounting nature that would indicate the occurrence of an Event of Default or the occurrence of any event which, upon the lapse of time or the giving of notice, or both, would constitute an Event of Default, or, if such is not the case, stating the facts with respect thereto. (c) As soon as possible, and in any event within 45 days after the close of each of the first three quarters of each fiscal year of the Company, and 90 days after the close of each fiscal year of the Company, commencing with the quarter next ending following the Effective Date, a certificate of the Chief Financial Officer, Vice President-Finance, Treasurer or Assistant Treasurer of the Company, any one acting alone, stating that the Company has performed and observed each and every covenant contained in this Agreement to be performed by it and that no event has occurred and no condition then exists which constitutes an Event of Default or would constitute an Event of Default upon the lapse of time or upon the giving of notice or both, or, if any such event has occurred or any such condition exists, specifying the nature thereof and the action which the Company proposes to take with respect thereto. (d) Such other publicly available information of the Company as the Bank may from time to time reasonably request, within a reasonable period of time following the request. (e) Within ten Business Days after the same are known, written notice of the following: (i) Each Event of Default or event which, with the giving of notice or lapse of time or both, would constitute an Event of Default. (ii) Any other matter that has resulted or may or might have resulted in a Material Adverse Effect, including, copies of any detailed report or "management letter" submitted by independent certified public accountants relating thereto. (iii) All Events of Default under any notes, debentures, other evidences of indebtedness or preferred stock, or under any indenture, mortgage, deed of trust or other agreement relating to any evidence of indebtedness including, any Other Bank Agreement, for which the Company or any Subsidiary is liable, including the occurrence of any event which upon the lapse of time or giving of notice or both would constitute such a default, if those events or the exercise of any remedies arising therefrom would have a Material Adverse Effect. -21- 25 (iv) The occurrence of any Reportable Event with respect to any Plan, together with the statement of the Chief Financial Officer, Vice President - Finance, Treasurer, or Assistant Treasurer of the Company setting forth the details as to the Reportable Event and the action that the Company proposes to take, if any, with respect thereto. (v) Any material modification or amendment to, or termination of, any of the Other Bank Agreements. (vi) If at any time the value of all "margin stock" (as defined in Regulation U of the Board of Governors of the Federal Reserve System, amended from time to time) owned by the Company and its Subsidiaries exceeds 25% of the value of the assets of the Company and its Subsidiaries, on a consolidated basis, as reasonably determined by the Company. 5.06 Amendments. The Company agrees that it will not amend any of the Other Bank Agreements on terms materially more favorable to any Other Bank than the terms in this Agreement unless the Company and the Bank also agree to the same terms as amended. For the avoidance of doubt, the Bank acknowledges that the Company may terminate any of the Other Bank Agreements or terminate or reduce the commitment of any of the Other Banks pursuant to any Other Bank Agreement without the requirement of having to terminate this Agreement or terminate or reduce the Commitment or the Commitment Limit hereunder. ARTICLE VI NEGATIVE COVENANTS Unless the Bank otherwise consents in writing, the Company agrees that so long as any credit hereunder shall be available and until payment in full of the Note, the Company will not do, or permit any of its Subsidiaries to do, any of the following: 6.01 Liens and Encumbrances. Create, incur, assume or permit to exist any Mortgage affecting the assets of the Company or any Subsidiary except the following (herein being collectively called "Permitted Encumbrances"): (a) Encumbrances simultaneously created in favor of (i) the Bank and the Other Banks, on a pari passu basis, to secure the indebtedness (up to an aggregate of $750,000,000) under this Agreement and the Other Bank Agreements and (ii) the Lenders, on a pari passu basis, to secure the indebtedness (up to an aggregate of $250,000,000) under the Other Credit Agreements; (b) Encumbrances existing as of the date hereof and any and all extensions, renewals -22- 26 or refinancings of any of the foregoing (provided that the extensions, renewals or refinancings do not increase the outstanding aggregate principal amount of indebtedness secured by those Encumbrances); (c) Encumbrances upon any materials, supplies, tools, articles or other things acquired or manufactured in connection with the performance of contracts with the United States of America or any department or agency thereof to secure partial progress or other payments or performance under those contracts; (d) Encumbrances against assets which (i) existed when the assets were acquired by the Company or the Subsidiary or (ii) were owned by an entity which, subsequent to the date hereof, becomes a Subsidiary, and the Encumbrance is in existence at the time the entity becomes a Subsidiary and which, in the case of each of Sections 6.01(d)(i) and (ii) (A) do not attach to assets other than those encumbered at the time of the acquisition or transaction resulting in the entity becoming a Subsidiary and (B) were not created in contemplation of the acquisition or transaction resulting in the entity becoming a Subsidiary; (e) Mechanics', workmen's, materialmen's, landlord's, carriers', repairmen's, construction and other similar Encumbrances arising in the ordinary course of business in respect of obligations not delinquent or which are being contested in good faith; (f) Encumbrances in connection with worker's compensation, unemployment insurance or other social security obligations; (g) Encumbrances securing bids, tenders, contracts (other than contracts for the payment of money), leases, statutory obligations, surety, appeal and customs bonds and other obligations of like nature, and other Encumbrances arising by operation of law in respect of the providing of goods or services, arising in the ordinary course of business; (h) Encumbrances on any property that the Company or the Subsidiary hereafter acquires that are created contemporaneously with the acquisition to secure or provide for the payment or financing of any part of the purchase price thereof; provided, that: (i) the obligation thereby secured consists primarily of the unpaid balance of the purchase price of the property (including improvements existing or to be constructed) that the Company or the Subsidiary acquires; -23- 27 (ii) the unpaid purchase price so secured does not exceed 90% of the total purchase price of the property being acquired; and (iii) any such Encumbrance does not extend to, or otherwise affect or apply to, property other than that being so acquired; (i) Encumbrances on any property of a Subsidiary in favor of the Company or any other Subsidiary that the Company directly or indirectly wholly owns (except for directors' or other qualifying shares); (j) Encumbrances for taxes, assessments or other governmental charges or levies (i) which are not yet due or (ii) which are due so long as the Company or the Subsidiary is contesting the validity thereof in good faith and by appropriate proceedings so as not to cause any Material Adverse Effect and has set aside on its books reserves (segregated in accordance with GAAP) deemed by it adequate with respect thereto; (k) Any right of set-off granted to any lending institution in connection with that lending institution providing cash management services or other financings to the Company and any of its Subsidiaries; and (1) Any other Encumbrances; provided, that the aggregate claim secured by the other Encumbrances (excluding those Encumbrances otherwise permitted pursuant to this Section 6.01) shall not exceed 10% of Stockholders Equity. 6.02 Sales of Assets or Business. Other than sales or dispositions by a Subsidiary to the Company or another Subsidiary or by the Company to a Subsidiary, or sales in the ordinary course of business, the Company shall not sell, lease or otherwise dispose of its assets, business or stock or other investment in any Subsidiary having a value, in each case, in excess of $25,000,000 unless the Board of Directors of the Company determines that the sale, lease or other disposition thereof (a) is in the best interest of the Company and its Subsidiaries taken as a whole, and (b) will not significantly adversely affect the Company's ability to meet its financial obligations as they become due. 6.03 Liquidation, Dissolution, Consolidation or Merger. Liquidate, dissolve or enter into any consolidation or merger unless: (a) in the case of a consolidation or merger (i) involving the Company, the Company will be the surviving corporation, and -24- 28 (ii) involving a Subsidiary, (A) a Subsidiary will be the surviving entity, (B) the fair market value of the Company's investment in such Subsidiary is less than $25,000,000, or (C) the fair market value of the Company's investment in the Subsidiary is $25,000,000 or greater and the Board of Directors of the Company determines that the preservation thereof is no longer desirable to the business of the Company and its Subsidiaries taken as a whole and that the absence thereof will not significantly adversely affect the Company's ability to meet its financial obligations as they become due; and (b) After giving effect to any such merger or consolidation, there will exist neither an Event of Default nor any event which, upon the giving of notice of lapse of time or both would constitute such an Event of Default. ARTICLE VII EVENTS OF DEFAULT AND REMEDIES The occurrence of any one or more of the following events described in Sections 7.01 through 7.07 shall be deemed an event of default under this Agreement (an "Event of Default"): 7.01 Failure to Pay Note, Breach of Certain Covenants. Failure to make any payment of principal of, or interest on, the Note, or any payment of any Facility Fee or any other amount due under this Agreement, when due and payable as required under this Agreement, whether at the end of the applicable Interest Period, at maturity, or otherwise, and the failure shall have continued unremedied for a period of three Business Days after the Bank's written notice to the Company, or the failure to observe or perform any term, covenant or agreement of the Company contained in Sections 5.05(e), 6.02, or 6.03; or 7.02 Breach of Remaining Covenants. The failure to observe or perform any term, covenant or agreement of the Company contained in this Agreement (other than those described in Section 7.01), and the failure shall have continued unremedied for a period of 30 days after the Bank's written notice to the Company or beyond a reasonable period of time thereafter, if the Event of Default is not reasonably capable of being cured within the 30-day period, and the Company is diligently pursuing its cure; or 7.03 Breach of Warranty. Any representation or warranty the Company makes herein, or any statement or representation made in any certificate, report or opinion delivered pursuant to this Agreement, shall prove to have been incorrect in any material respect when made; or -25- 29 7.04 Other Obligations. The Company or any Subsidiary shall default (as principal, guarantor or surety): (a) in the payment of any principal of, or premium, if any, or interest on, any indebtedness (other than its indebtedness hereunder and indebtedness between the Company and any Subsidiary or between Subsidiaries) beyond the applicable grace period, if any, (i) for borrowed money in an amount in excess of an aggregate of $20,000,000 or (ii) representing the deferred purchase price of property with an outstanding deferred aggregate liability in excess of $25,000,000; or (b) with respect to the performance or observance of any term of any instrument pursuant to which any indebtedness described in Section 7.04(a) was created, or any mortgage, indenture or other agreement relating thereto, if the effect of the default (after giving effect to any applicable grace period) is to cause or permit that indebtedness exceeding an aggregate of $20,000,000 to become due and payable prior to its stated maturity; or 7.05 Insolvency; Receiver. (a) If the Company makes an assignment for the benefit of creditors, files a petition in bankruptcy, is adjudicated or held to be insolvent or bankrupt, petitions or applies to any tribunal for any receiver or any trustee for the Company or any substantial part of the Company's property, commences any proceeding relating to the Company under any reorganization, arrangement, readjustment of debt or similar law or statute of any jurisdiction, whether now or hereafter in effect, or if there is commenced against the Company any such proceeding which remains undismissed, unstayed (or, if stayed, the stay shall have been set aside) or unvacated for a period of 60 days, or the Company by any act indicates its consent to, approval of, or acquiescence in, any such proceeding or the appointment of any receiver or of any trustee for the Company or any substantial part of the Company's property, or suffers any such receivership or trusteeship to continue undischarged, unstayed (or, if stayed, such stay shall have been set aside) or unvacated for a period of 60 days; or (b) If any of the foregoing events described in Section 7.05(a) occurs with respect to a Subsidiary instead of the Company and that event will have a material adverse effect on the ability of the Company to meet its financial obligations as they become due; or -26- 30 7.06 Judgments; Attachments. (a) The Company or any Subsidiary shall suffer the entry against it of a final judgment or decree for any amount in excess of $20,000,000 (not adequately covered by insurance or reserves as determined by the Bank in its reasonable discretion) unless, within 30 days after the entry thereof the same is satisfied or discharged or an appeal or appropriate proceeding for review thereof is taken and a stay of execution pending such appeal is obtained; or (b) The Company or any Subsidiary shall suffer one or more writs or warrants of attachment to be issued by any court against any of its property exceeding in the aggregate $20,000,000 in value, and such writs or warrants of attachment are not satisfied, stayed or released within 30 days after the entry or levy thereof or after any stay is vacated or set aside; or 7.07 ERISA. Any Reportable Event that the Bank shall determine in good faith constitutes grounds for the PBGC to terminate any Plan or for the appropriate United States District Court to appoint a trustee to administer any Plan shall have occurred and be continuing for 30 days after the Bank shall have given the Company written notice, or any Plan shall be terminated without another Plan being available to replace or substitute for the terminated Plan; or an appropriate United States District Court shall have appointed a trustee to administer any Plan; or the PBGC shall institute proceedings to terminate any Plan or to appoint a trustee to administer any Plan; and in any situation described above the aggregate amount of the excess of the current value of the Plan's; benefits guaranteed under Title IV of ERISA over the current value of the Plan's s assets allocable to those benefits under Section 4044 of ERISA shall exceed $20,000,000. 7.08 Remedies. If any one or more of the Events of Default described in Sections 7.01 through 7.07 above shall occur and be continuing, then the Bank, by notice to the Company, may take either or both of the following actions in this Section 7.08: (a) declare the obligation of the Bank to make Advances to the Company hereunder to be terminated whereupon the same shall forthwith terminate, or (b) declare the entire unpaid principal amount of the Note, all interest accrued and unpaid thereon, all accrued Facility Fees and all other amounts due and payable by the Company under this Agreement to be forthwith due and payable, whereupon the Note, all such accrued and unpaid interest, accrued Facility Fees and all such other amounts due and payable by the Company shall become and be forthwith due and payable, without presentment, demand, protest, notice of intent to accelerate, a notice of acceleration or further notice of any kind, all of which are hereby expressly waived by the Company; provided, that if an Event of Default described in Section 7.05(a) shall occur, then the actions described in Sections 7.08(a) and (b) shall occur automatically, without any notice to the Company or declaration by the Bank. -27- 31 ARTICLE VIII MISCELLANEOUS 8.01 Survival. All agreements, representations and warranties made herein or made in writing in connection herewith shall survive the execution and delivery of this Agreement, the making of the Advances hereunder and the execution and delivery of the Note. 8.02 Failure or Indulgence Not Waiver. No failure or delay on the part of the Bank, or any holder of the Note in the exercise of any power, right or privilege hereunder or under the Note shall operate as a waiver thereof, and no single or partial exercise of any such power, right or privilege shall preclude other or further exercise thereof or of any other right, power or privilege. All rights and remedies existing under this Agreement and the Note are cumulative to, and not exclusive of, any rights or remedies otherwise available. 8.03 Notices. Any notice herein required or permitted to be given shall be in writing, and may be sent by facsimile, personal delivery or mail and, in each case, shall be deemed to have been given when received by the party to which the notice was addressed. Notices shall be sent to the addresses that are set out in the signature pages hereof (until notice of change thereof is served in the manner provided in this Section 8.03). 8.04 Applicable Law. This Agreement, the Note, all documents provided for herein and the rights and obligations of the parties hereto shall be governed by and construed in accordance with the laws of the State of Texas, United States of America. The foregoing provision is not intended to limit the rate of interest payable with respect to the Bank to the maximum rate permitted by the laws of the State of Texas, United States of America if a higher rate is permitted with respect to the Bank by supervening provisions of United States federal law. The Company and the Bank hereby specifically declare that the provisions of Chapter 346 of the Texas Finance Code (Vernon's Texas Code Annotated) are not to be applicable to this Agreement, the Note or the transactions contemplated hereby and thereby. 8.05 Interest Limitation. It is the intention of the Company and the Bank to conform strictly to the usury laws as set forth in Section 8.04. Accordingly, if the transactions contemplated hereby would be usurious under those laws or any other applicable laws, then, in that event, notwithstanding anything to the contrary in the Note, or this Agreement, it is agreed as follows in this Section 8.05: (a) the aggregate of all consideration that constitutes interest that is contracted for, taken, reserved, charged or received under the Note, or this Agreement, or otherwise in connection with any Advance, shall under no circumstances exceed the maximum amount allowed by those laws, and any excess shall be credited by the Bank on the principal amount of the Advance (or, if the principal amount of the Advance shall have been paid in full, refunded to the Company); and (b) if the maturity of any Advance is accelerated or in the event of any required or permitted prepayment, then the consideration that constitutes interest may never include -28- 32 more than the maximum amount allowed by those laws, and excess interest, if any, provided for in this Agreement or otherwise shall be canceled automatically as of the date of the acceleration or prepayment and, if theretofore paid, shall be credited by the Bank on the principal amount of the Advance (or, if the principal amount of the Advance shall have been paid in full, refunded by the Bank to the Company). To the extent that Chapter 1D, Subtitle 1, Title 79, Revised Civil Statutes of Texas, 1925, as amended, is relevant to the Bank for the purposes of determining the highest lawful interest rate applicable to this Agreement and the Note, the Bank hereby elects to determine the applicable rate ceiling under that chapter by the indicated (weekly) rate ceiling from time to time in effect, subject to the Bank's right subsequently to change that method in accordance with applicable law. In determining whether the interest paid or payable under any specific contingency exceeds the highest lawful rate, the Company and the Bank shall, to the maximum extent permitted under applicable law; (i) characterize any nonprincipal payment (other than payments expressly designated as interest payments hereunder) as an expense or fee rather than as interest, (ii) exclude voluntary prepayments and the effect thereof and (iii) spread the total amount of interest throughout the entire contemplated term of the Note so that the interest rate is uniform throughout that term. 8.06 Assignment. Subject to Section 8.10, this Agreement shall be binding upon, and inure to the benefit of, the Company and the Bank and their respective successors and permitted assigns. The Company may not assign or transfer its rights hereunder without the prior written consent of the Bank, which will not be unreasonably withheld in the case of an assignment or transfer to a Subsidiary; provided, that it shall be deemed to be reasonable for the Bank to (a) require the assignee or transferee to execute a written note in favor of the Bank substantially in the form of Exhibit A with respect to the amount that the assignee or transferee borrows; and (b) require the Company to execute a written guarantee of the assignee's or transferee's obligations under such a note; provided, that such a guarantee does not contain obligations any greater than the obligations that the Company has pursuant to this Agreement, in each case, for the Bank to give its consent to such an assignment or transfer even though such an assignment or transfer would not relieve the Company of its obligations under this Agreement. 8.07 Computation of Interest Rates and Fees: Time of Payment. All computations of interest and fees shall be made on the basis of a year of 360 days for the actual number of days elapsed (including the first day but excluding the last day) (which results in greater interest than if a year of 365 days is used). The Company shall make each payment of principal of, and interest on, the Advances made to it, and of the fees due hereunder by it, not later than 11:00 A.M. (in the time of the city in which the Bank has its principal office) on the date when due. -29- 33 8.08 Expenses; Indemnity by the Company. The Company agrees to pay and hold the Bank harmless against liability for the payment of all reasonable attorneys' fees (including, without limitation, the allocated costs of in-house counsel) and court costs incurred by the Bank arising in connection with the enforcement against the Company of this Agreement, the Note, and the other instruments and documents to be delivered by the Company hereunder. 8.09 Modifications and Amendments. This Agreement and the Note may only be modified or amended by a written agreement duly executed by the Company and the Bank. 8.10 Restriction on Transfers. (a) The Bank may, without the consent of the Company, sell participations to one or more banks or other entities (including, without limitation, the Other Banks) in all or a portion of its rights and obligations under this Agreement (including, without limitation, the Bank's Commitment), the Advances then owing to the Bank and the Note; provided, that (i) those sales are made in compliance with all applicable United States federal and state securities laws, (ii) the Bank's obligations under this Agreement shall remain unchanged, (iii) the Bank shall remain solely responsible and liable to the Company for the performance of those obligations, (iv) the participating banks or other entities shall be entitled to the cost protection provisions contained in Sections 2.05, 2.06, and 3.03 but only to the extent that the protection would have been available to the Bank, calculated as if no such participation had been sold, (v) the Company shall continue to deal solely and directly with the Bank in connection with the Bank's rights and obligations under this Agreement, and (vi) the Bank shall retain the sole right and responsibility to enforce the obligations of the Company relating to this Agreement, the Advances and the Note, including, without limitation, the right to approve any amendment, modification or waiver of any provision hereof or thereof. (b) The Bank may, with the prior written consent of the Company (which consent shall not be unreasonably withheld in the case of a proposed assignment by the Bank to one of its subsidiaries or affiliates, and which consent may be withheld in the sole discretion of the Company in the case of any other proposed assignment by the Bank), assign to one or more banks or other institutions (including, without limitation, the Other Banks and subsidiaries or affiliates of the Bank) all or a portion of the Banks -30- 34 Commitment and its other rights and obligations under this Agreement and the same portion of the then outstanding Advances and Note; provided, that (i) each such assignment shall be of a constant, and not a varying, percentage of the Bank's Commitment and its other rights and obligations under this Agreement, and the then outstanding Advances and the Note, and (ii) the parties to each such assignment shall execute and deliver to the Company an assignment and assumption agreement in form and substance satisfactory to the Company. Upon such execution and delivery, from and after the effective date specified in the assignment and assumption agreement, the assignee shall be a party hereto and, to the extent provided in the assignment and assumption agreement, shall have the rights and obligations of the Bank under this Agreement, and the Bank shall, to the extent provided in the assignment and assumption agreement, be released from its obligations under this Agreement. (c) The Bank may, without the consent of the Company, assign to a Federal Reserve Bank all or a portion of the Banks rights and obligations under this Agreement, the then outstanding Advances and the Note; provided, that the Bank's obligations under this Agreement shall remain unchanged, and the Bank shall remain solely responsible to the Company for performance of those obligations. 8.11 Table of Contents; Headings. The Table of Contents and the section headings used in this Agreement are for convenience only and shall not affect the construction of this Agreement. 8.12 Articles; Sections. References herein to "Article(s)" and "Section(s)" mean the respective Article(s) and Section(s) of this Agreement. 8.13 Counterparts. This Agreement may be separately executed (including execution by delivery of a facsimile or telecopied signature) in any number of counterparts and by different parties hereto in separate counterparts, each of which when so executed shall be deemed to constitute one and the same Agreement. 8.14 Survival of Agreements. All of the agreements of the Company in this Agreement shall survive the Company's repayment of all Advances made by the Bank pursuant hereto. 8.15 Severability. If any term or provision of this Agreement and the Note shall be determined to be illegal or unenforceable, all other terms and provisions of those documents shall nevertheless remain effective and shall be enforced to the fullest extent permitted by applicable law. 8.16 Confidentiality. The Bank agrees to take normal and reasonable precautions and exercise due care to maintain the confidentiality of all non-public information provided to it by -31- 35 the Company in connection with this Agreement and agrees and undertakes that neither the Bank nor any of its affiliates shall use any such information for any purpose or in any manner other than pursuant to the terms contemplated by this Agreement. The Bank may disclose such information (a) at the request of any bank regulatory authority or in connection with an examination of the Bank by that authority; (b) to Bank's independent auditors, counsel and other professional advisors; provided, that the Bank shall cause its auditors, counsel and other professional advisors to comply with the Bank's obligations pursuant to this Section 8.16; or (c) pursuant to subpoena or other court process or when required to do so in accordance with the provisions of any applicable law or at the express direction of any agency of any State of the United States of America or of any other jurisdiction in which the Bank conducts its business, if the Company, after written notice to it (except in cases where notice would be prohibited by law or court order), has failed to obtain a protective or similar order to prevent the disclosure or to preserve the confidentiality of the information prior to the time that the Bank is advised by its legal counsel that immediate disclosure is necessary to avoid liability for failure to disclose; (d) in connection with the defense of any litigation or other proceeding brought against it arising out of the transactions contemplated by this Agreement and related documents when the disclosure is necessary for its defense; (e) in connection with the enforcement of the rights and remedies of the Bank under this Agreement when the disclosure is necessary for enforcement; and (f) to its subsidiaries and affiliates (provided the Bank procures their respective agreements to be bound by the provisions of this Section 8.16). Notwithstanding the foregoing in this Section 8.16, the Company authorizes the Bank to disclose to any participant, assignee, prospective participant, prospective assignee or the Bank's U.S. investment banking affiliates, such financial and other information in the Bank's possession concerning the Company or its Subsidiaries that has been delivered to the Bank; provided, that such participant, assignee, prospective participant, prospective assignee or the Bank's U.S. investment banking affiliates, as the case may be, agrees in writing to the Bank to keep such information confidential to the same extent required of the Bank hereunder. 8.17 Consequential Damages. Notwithstanding anything herein to the contrary, neither party shall have any liability for any consequential, indirect, punitive, exemplary or special damages, including, without limitation, loss of business, opportunities, revenue or profits. 8.18 Final Agreement. THIS WRITTEN LOAN AGREEMENT REPRESENTS THE FINAL AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED -32- 36 BY EVIDENCE OF PRIOR, CONTEMTORANEOUS OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES. -33- 37 IN WITNESS WHEREOF, the Company and the Bank have caused this Agreement to be duly executed as of the day and year first above written. COMPANY: BAKER HUGHES INCORPORATED, a Delaware corporation By: ----------------------------- Douglas C. Doty Treasurer Address for Notices: BAKER HUGHES INCORPORATED 3900 Essex Lane, Suite 1200 Houston, Texas 77027 Attention: Treasurer Facsimile: 713/439-8699 Telephone: 713/439-8600 BANK: By: ----------------------------- Name: Title: Commitment Limit: Addresses for Notices: Facsimile: Telephone: Bank's Domestic Lending Office: Bank's Eurodollar Lending Office: -34- 38 EXHIBIT A FORM OF COMPANY NOTE October 1, 1998 For value received, BAKER HUGHES INCORPORATED, a Delaware corporation (the "Company") promises to pay to the order of (the "Bank"), for the account of its applicable lending office, at the principal office of the Bank at , the principal amount of each Advance made by the Bank to the Company pursuant to Section 3.01 of the Credit Agreement hereinafter referred to on the last day of the Interest Period for the Advance. In any event, the aggregate unpaid principal amount of each Advance shall be due and payable on the Termination Date. The Company also promises to pay interest on the unpaid principal amount of each such Advance from the date of the Advance until the principal amount is paid in full, at such interest rates, and payable at such times, as are specified in the Credit Agreement; provided, that any amount of such principal and, to the extent permitted by law, any interest thereon that is not paid when due (whether at stated maturity, by acceleration or otherwise) shall bear interest from the date on which such amount is due until such amount is paid in full, payable on demand, at the Default Rate. Loans and payments under this note shall be recorded and endorsed hereon by the holder hereof; provided, that the failure by the holder hereof to make such recordation and endorsement shall not limit or otherwise affect the obligation of the Company hereunder, and payments of principal and interest hereof by the Company shall not be affected by the failure to make any such recordation and endorsement thereof hereon. Principal and interest shall be payable in United States dollars in immediately available funds. This note is the Note referred to in, is issued in connection with, and is entitled to the benefits of, that certain Credit Agreement dated as of October 1, 1998, between the Company and the Bank, to which Credit Agreement reference is hereby made for a statement of the terms and provisions under which this note is issued. Capitalized terms used herein shall have the respective meanings set forth in the Credit Agreement. This note shall be governed by and construed in accordance with the laws of the State of Texas, United States of America. Except for notice required to be given to the Company under the Credit Agreement, the Company hereby waives presentment, demand, protest, notice of intent to accelerate, notice of acceleration or other notice in connection with this Note. 39 THIS WRITTEN LOAN AGREEMENT REPRESENTS THE FINAL AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES. BAKER HUGHES INCORPORATED By: Name: Title: -2- 40 Transactions Noted on the Note
Unpaid Amount of Maturity Interest Amount of Principal Notation Date Advance Date Rate Payment Balance Made By
-3- 41 EXHIBIT B BANK AND OTHER BANKS
Bank and Other Banks Commitment Limit - -------------------- ---------------- ABN AMRO Bank N.V. 37,500,000 Australia and New Zealand Banking Group Limited 37,500,000 Bank of America National Trust and Savings Association 84,375,000 The Bank of New York 37,500,000 Barclays Bank PLC 75,000,000 Bayerische Hypo Und Vereinsbank AG, Los Angeles Agency 37,500,000 Chase Bank of Texas, National Association 84,375,000 Citibank, NA 84,375,000 Credit Suisse First Boston 37,500,000 Dresdner Bank AG, New York Branch 37,500,000 Northern Trust Company 37,500,000 Revolving Commitment Vehicle Corporation 84,375,000 Royal Bank of Canada 37,500,000 Toronto Dominion (Texas), Inc. 37,500,000 ----------- TOTAL 750,000,000
42 EXHIBIT C COMPANY REQUEST FOR ADVANCE [Date] [Name and address of Bank] Gentlemen: Baker Hughes Incorporated (the "Company") refers to the Credit Agreement dated as of October 1, 1998 (the "Credit Agreement", the terms defined therein being used herein as therein defined), by and between the Company and you. The Company hereby gives you notice pursuant to Section 3.01 of the Credit Agreement that the Company hereby requests an Advance under the Credit Agreement and in that connection sets forth the terms on which the proposed Advance is requested to be made. The principal amount of the proposed Advance is $_______; the drawdown date of the proposed Advance is __________; the proposed Advance is to be a [Eurodollar Advance] or a [Reference Rate Advance]; the term of the Interest Period for the proposed Advance is ____ months; the maturity date for payment of the principal amount of the proposed Advance is ______________ 19 ___; the interest payment date[s] of the proposed Advance is/are __________; and the other terms applicable to the proposed Advance are _______________________. In accordance with Section 3.01 of the Credit Agreement, please advise the Company of the [Eurodollar Rate] or [Reference Rate]. Sincerely, BAKER HUGHES INCORPORATED By: Name: Title: 43 EXHIBIT D FORM OF OPINION OF COMPANY COUNSEL [date] [Bank name and address] Ladies and Gentlemen: I am the _______________ of Baker Hughes Incorporated, a Delaware corporation (the "Company"), and have acted as counsel to the Company in connection with the preparation and execution of that certain Credit Agreement dated as of October 1, 1998 (the "Credit Agreement"), by and between the Company and ________________ ("Bank"). Terms used herein that are defined in the Credit Agreement have the respective meanings ascribed to those terms in the Credit Agreement, unless the context otherwise indicates. In that connection, I have examined the Note and the Credit Agreement that have been executed by the Company, but not by the Bank (herein being collectively referred to as the "Examined Documents"). I have also examined the originals or photostatic copies, certified or otherwise identified to my satisfaction, of the Certificate of Incorporation and Bylaws of the Company, each as amended to date, corporate records of the Company, certificates of public officials, and certificates of representatives of the Company, and such other documents as I have deemed necessary or appropriate for the purposes of this opinion. Based upon the foregoing, subject to the qualifications, limitations, exceptions and assumptions hereinafter set forth, and having due regard for such legal considerations as I deem relevant, I am of the opinion that: 1. The Company is a corporation duly incorporated, validly existing and in good standing under the laws of the State of Delaware and has all necessary corporate power and authority to own its properties and carry on its business as now conducted and is duly qualified and in good standing in each United States jurisdiction which requires qualification, except those jurisdictions, if any, in which the failure to so qualify would not have a material adverse affect on the business, properties or financial condition of the Company and its Subsidiaries taken as a whole. 2. The Company has all necessary corporate power and authority to enter into and perform the Credit Agreement and to issue and deliver the Note, as provided in the Credit Agreement. The execution, delivery and performance of the Credit Agreement and the Note have been authorized by all necessary corporate action on the part of the Company. 44 3. The Credit Agreement is, and the Note when duly executed and delivered for value received will be, the valid and legally binding obligations of the Company enforceable in accordance with their terms, except as such enforceability may be (i) limited by the effect of any applicable bankruptcy, insolvency, reorganization, moratorium, fraudulent transfer and other similar laws from time to time in effect and judicial decisions relating to or affecting the enforcement of creditors' rights and debtor's obligations generally, or (ii) subject to the effect of general principles of equity (regardless of whether such enforceability is considered in a proceeding in equity or at law). 4. The execution, delivery and performance of the Credit Agreement and the Note by the Company do not require the consent or approval of any United States governmental body or other regulatory authority and are not in contravention of or in conflict with any law or regulation applicable to the Company or any term or provision of the Certificate of Incorporation or Bylaws of the Company. 5. The execution, delivery and performance of the Credit Agreement and the Note, to the best of my knowledge, are not in contravention of, or in conflict with, any agreement or indenture that is material to the Company and its Subsidiaries, taken as a whole, and to which the Company is a party or by which any of its property is bound, and do not cause any Mortgage upon any such property to be created or imposed or to mature except as may be permitted by the terms of the Credit Agreement. 6. To my knowledge, there is no pending or threatened litigation before any court, administrative agency or arbitration panel to which the Company is a party, which, in view of the facts currently available to me, is expected to have a material adverse effect on the financial condition or operations of the Company and its Subsidiaries, taken as a whole. To my knowledge, the Company is not in default with respect to any material order, writ, injunction or decree of any court or other governmental or regulatory authority that is expected to have a material adverse effect on the financial condition or operations of the Company and its Subsidiaries, taken as a whole. The opinions expressed herein are subject to the following qualifications, limitations, exceptions and assumptions: (A) In rendering the opinions expressed in Paragraph 1, above, I have relied in part on certificates or telegrams of recent date of public officials of the State of Delaware. Such opinions are limited to the date of the relevant certificates or telegrams. (B) The opinions expressed in Paragraph 5 hereof are limited to the agreements, indentures and instruments, filed by the Company with the U.S. Securities and Exchange Commission ("SEC") as material agreements pursuant to the rules and regulations of the SEC as a part of its annual report on Form 10-K for the year ending September 30, 1997, and those filed by the Company with the SEC subsequent to September 30, 1997. -2- 45 (C) I have assumed, without independent investigation, that the Bank will duly execute and deliver to the Company each of the Examined Documents to which it is a party, with all necessary power and authority (corporate and otherwise) and that (i) if the Company or the Bank exercises any rights or enforce any remedies, it will do so in good faith and in a commercially reasonable manner and will abide by any implied covenant of good faith and fair dealing which may be imposed by law, and (ii) the Bank will comply with any applicable state or federal securities laws. (D) As to matters of fact relevant to this opinion, I have, to the extent I have deemed appropriate, relied upon (i) certificates and other representations of officers and representatives of the Company and its Subsidiaries who have made investigations outside of my personal control, and (ii) certificates and telegrams of governmental officials. (E) In my examination of the documents referred to above, I have assumed all documents submitted to me as originals are authentic and complete, (ii) all documents submitted to me as certified or photostatic copies conform to the original document, and such original document is authentic and complete, (iii) that signatures on all documents are genuine, (iv) all statements of fact contained in the Examined Documents and all other documents, certificates, and records that I have examined are true, accurate, and correct, and all statements of fact made to me by officers and representatives of the Company and its Subsidiaries are true and correct, and (v) there has been no material change in the facts set forth in the Examined Documents, or such other documents, certificates, and records that I have examined or representations made to me, prior to the date hereof. I have no knowledge that any such documents, certificates, and records were not authentic and complete, or that any of such statements are not true and correct as of the date hereof. (F) I have assumed there has been no cancellation or withdrawal of any of the organizational documents of the Company, and that no act or event has occurred which would, pursuant to the terms of such organizational documents or other applicable law, permit or require the dissolution of the Company, and I have no knowledge of any such cancellation, withdrawal, act or event. I have further assumed due authorization for execution, delivery, and performance of such organizational documents by each party by whom such authorization is required, and that none of the signatories to such organizational documents was operating under any legal disability under the laws of the state of residence or incorporation of such party. (G) I express no opinion as to the availability or enforceability of the following provisions and remedies set forth in the Examined Documents: (i) equitable remedies, including specific performance, or any other remedy set forth in the Examined Documents; (ii) provisions relating to waivers by any of the parties or precluding any of the parties from asserting certain claims or defenses or from obtaining certain rights and remedies, or which purport to waive any applicable statute of limitations, or rights to any stay or extension laws, or which purport to establish evidential standards; (iii) provisions expressly or by implication waiving broadly or vaguely stated rights, unknown future rights, or defenses to obligations or rights granted by law; (iv) provisions relating to subrogation rights, delay or omission or enforcement of rights or -3- 46 remedies, severability, injunctions, appointment of receivers, waivers or ratifications of future acts, the rights of third parties, prohibitions against the sale, transfer, or assignment of any property or interest, marshalling of assets, set-offs, or sale in the inverse order of alienation; (v) provisions at variance with public laws which do not affect the practical benefits of the Examined Documents; (vi) provisions covenanting to take actions, the taking of which are discretionary with or subject to the approval of a third party or which are otherwise subject to a contingency, the fulfillment of which is not within the control of the parties so covenanting; (vii) provisions purporting to apply subsequently enacted laws; (viii) provisions to the effect that rights or remedies may be exercised without notice, that rights or remedies are not exclusive, that every right or remedy is cumulative and may be exercised in addition to or with any other right or remedy, or that the election of a particular remedy or remedies does not preclude recourse to one or more other remedies, or that the failure to exercise or delay in exercising rights or remedies will not operate as a waiver of such right or remedy; and (ix) limitations on enforceability posed by public policy consideration or court decisions which may limit the right to obtain indemnification under certain circumstances. Enforcement of obligations under the Examined Documents may also be limited by constitutional limitations (including notice and due process requirements), by the redemption rights of the United States under the Federal Tax Lien Act of 1966, as amended, and requirements that the Bank exercise rights under the Examined Documents in a commercially reasonable manner. (H) The opinions expressed herein relate solely to, are based solely upon, and are limited exclusively to the laws of the State of Texas, the General Corporation Law of the State of Delaware, and the laws of the United States of America, to the extent applicable and as currently in effect. I assume no, and hereby specifically disclaim any, obligation to supplement this opinion if any applicable laws change after the date of this opinion, of if I become aware of any facts that might change the opinions expressed above after the date of this opinion. (I) The opinions set forth herein are limited to the specific matters addressed hereby, and no opinion is to be implied or may be inferred beyond the matters specifically addressed. (J) This letter is provided to you as a legal opinion only and not as a guaranty or warranty of the matters discussed herein, nor does this letter constitute a guarantee of any of the obligations set forth in the Examined Documents. By rendering this opinion, I am not guaranteeing or insuring the obligations set forth in the Examined Documents, or other matters referred to herein or opined upon herein. This opinion is furnished to you solely for your benefit pursuant to the Credit Agreement. This letter and the opinions expressed herein may not be used or relied upon by you for any other purpose and may not be relied upon for any purpose by any other person or entity without my prior written consent. Except for the use permitted herein, this letter is not to be quoted or reproduced in whole or in part or otherwise referred to in any manner, nor is it to be filed with any governmental agency or delivered to any other person or entity without my prior written consent. Very truly yours, -4- EX-10.36 22 FORM OF CREDIT AGREEMENT - RE: $250,000,000 1 EXHIBIT 10.36 CREDIT AGREEMENT By and Between BAKER HUGHES INCORPORATED and Dated as of October 1, 1998 2 Table of Contents ARTICLE I - DEFINITIONS & INTERPRETATION..........................................................................1 1.01 ........................................................................................................1 1.02 NUMBER..................................................................................................7 ARTICLE II - LOAN COMMITMENT......................................................................................7 2.01 COMMITMENT TO LEND......................................................................................7 2.02 CHANGE OF LAW...........................................................................................7 2.03 TERMINATION AND REDUCTION OF COMMITMENT.................................................................8 2.04 FACILITY AND ORIGINATION FEES...........................................................................8 2.05 WITHHOLDING TAXES.......................................................................................9 2.06 INCREASED COSTS.........................................................................................9 2.07 BANK AS FOREIGN PERSON.................................................................................10 2.08 BANK'S OBLIGATION FOR TAXES............................................................................11 2.09 CHANGE OF LENDING OFFICE...............................................................................12 ARTICLE III - REVOLVING CREDIT LOANS TO THE COMPANY..............................................................13 3.01 ADVANCES TO THE COMPANY................................................................................13 3.02 DISPOSITION OF FUNDS AND AMOUNT PAYABLE IN THE EVENT OF REFINANCING....................................16 3.03 FUNDING LOSSES.........................................................................................16 3.04 CONDITIONS TO THE INITIAL BORROWING....................................................................17 3.05 CONDITIONS TO ALL ADVANCES.............................................................................17 ARTICLE IV - REPRESENTATIONS AND WARRANTIES OF THE COMPANY.......................................................18 4.01 EXISTENCE AND RIGHTS...................................................................................18 4.02 AGREEMENT AND NOTE.....................................................................................18 4.03 NO CONFLICT............................................................................................19 4.04 LITIGATION.............................................................................................19 4.05 FINANCIAL CONDITION....................................................................................19 4.06 TITLE TO ASSETS........................................................................................19 4.07 TRADEMARKS, PATENTS....................................................................................20 4.08 MARGIN SECURITIES......................................................................................20 4.09 ERISA..................................................................................................20 4.10 INVESTMENT COMPANY ACT.................................................................................20 4.11 LABOR MATTERS..........................................................................................20 4.12 ENVIRONMENTAL LAWS.....................................................................................20 4.13 OTHER BANK AGREEMENTS..................................................................................20 ARTICLE V - AFFIRMATIVE COVENANTS................................................................................21 5.01 CORPORATE RIGHTS AND FRANCHISES........................................................................21 5.02 INSURANCE..............................................................................................21 5.03 TAXES AND OTHER LIABILITIES............................................................................21 5.04 RECORDS................................................................................................21 5.05 REPORTS BY THE COMPANY.................................................................................21 5.06 AMENDMENTS.............................................................................................23 ARTICLE VI - NEGATIVE COVENANT'S.................................................................................24 6.01 LIENS AND ENCUMBRANCES.................................................................................24 6.02 SALES OF ASSETS OR BUSINESS............................................................................26 6.03 LIQUIDATION, DISSOLUTION, CONSOLIDATION OR MERGER.....................................................26
3 ARTICLE VII - EVENTS OF DEFAULT AND REMEDIES.....................................................................27 7.01 FAILURE TO PAY NOTE, BREACH OF CERTAIN COVENANTS.......................................................27 7.02 BREACH OF REMAINING COVENANTS..........................................................................27 7.04 OTHER OBLIGATIONS......................................................................................27 7.05 INSOLVENCY; RECEIVER...................................................................................28 7.06 JUDGMENTS; ATTACHMENTS.................................................................................28 7.07 ERISA..................................................................................................28 7.08 REMEDIES...............................................................................................29 ARTICLE VIII - MISCELLANEOUS....................................................................................29 8.01 SURVIVAL...............................................................................................29 8.02 FAILURE OR INDULGENCE NOT WAIVER.......................................................................29 8.03 NOTICES................................................................................................29 8.04 APPLICABLE LAW.........................................................................................29 8.05 INTEREST LIMITATION....................................................................................30 8.06 ASSIGNMENT.............................................................................................30 8.07 COMPUTATION OF INTEREST RATES AND FEES: TIME OF PAYMENT................................................31 8.08 EXPENSES; INDEMNITY BY THE COMPANY.....................................................................31 8.09 MODIFICATIONS AND AMENDMENTS...........................................................................31 8.10 RESTRICTION ON TRANSFERS...............................................................................31 8.11 TABLE OF CONTENTS; HEADINGS............................................................................33 8.12 ARTICLES; SECTIONS.....................................................................................33 8.13 COUNTERPARTS...........................................................................................33 8.14 SURVIVAL OF AGREEMENTS.................................................................................33 8.15 SEVERABILITY...........................................................................................33 8.16 CONFIDENTIALITY........................................................................................33 8.17 CONSEQUENTIAL DAMAGES..................................................................................34 8.18 FINAL AGREEMENT........................................................................................34 EXHIBIT A FORM OF COMPANY NOTE...................................................................................1 EXHIBIT B BANK AND OTHER BANKS...................................................................................1 EXHIBIT C COMPANY REQUEST FOR ADVANCE............................................................................1 EXHIBIT D FORM OF OPINION OF COMPANY COUNSEL......................................................................1
-ii- 4 BAKER HUGHES INCORPORATED CREDIT AGREEMENT THIS CREDIT AGREEMENT, dated as of October 1, 1998, is hereby made and entered into by and between BAKER HUGHES INCORPORATED, a Delaware corporation (the "Company") and the bank listed on the signature pages to this Credit Agreement (the "Bank"), on the following terms and conditions: ARTICLE I DEFINITIONS & INTERPRETATION 1.01 For the purposes of this Agreement, unless the context otherwise requires: "Advance(s)" means any or all of the Eurodollar Advances and Reference Rate Advances made to the Company by the Bank pursuant to Section 3.01. "Agreement" means this Credit Agreement as originally executed or, if later amended or supplemented, then as so amended or supplemented. "Business Day" means any day (other than a day which is Saturday, Sunday or a legal holiday in London, England, the State of Texas, the State of New York, or the State within the U.S., if any, where the Bank maintains its corporate headquarters) on which commercial banks are open for domestic and international business in London, England, Houston, Texas, New York, New York, and the city within the U.S., if any, where the Bank maintains its corporate headquarters; provided, that when used in connection with a Eurodollar Advance, the term "Business Day" shall also exclude any day on which banks are not open for dealings in dollar deposits in the London interbank market. "Commitment" means the Bank's commitment to lend an aggregate amount not to exceed the Commitment Limit at any time outstanding pursuant to Section 2.01 as that commitment may be reduced or terminated pursuant to Section 2.02, 2.03 or 3.01(i) or Article VII. "Commitment Limit" means the dollar amount listed as the Commitment Limit on the signature page to this Agreement as that dollar amount may be reduced or terminated pursuant to Section 2.02, 2.03 or 3.01(i) or Article VII. "Control Group" means all members of a controlled group of corporations and all trades or businesses (whether or not incorporated) under common control which, together 5 with the Company, are treated as a single employer under Section 414(b) or 414(c) of the Internal Revenue Code of 1986, as from time to time amended. "Default Rate" means a rate per annum equal to the sum of 1% plus the Reference Rate (changing when and as the Reference Rate changes). "Dollars" and "$" mean the lawful currency of the United States of America and in respect of all payments to be made in Dollars under this Agreement mean funds that are for same day settlement in immediately available funds through the Federal Reserve wire transfer system (or such other United States dollar funds as may at the relevant time be customary for the settlement of international banking transactions denominated in United States dollars). "Effective Date" means the date of this Agreement first written above. "Encumbrance" means any mortgage, deed of trust, pledge, lien, security interest, conditional sale or other title retention agreement or other similar encumbrance, but excluding any right of off-set or off-set that arises by operation of law or which may be granted to a lender in connection with credit facilities for the Company or any of its Subsidiaries, and further excluding any encumbrance that arises by reason of any restraining order, injunction or similar impediment or restriction that affects the transfer of any assets. "ERISA" means the Employee Retirement Income Security Act of 1974, as from time to time amended. "Eurodollar Advance(s)" means loans made by the Bank to the Company under Section 3.01 that bear interest at the Eurodollar Rate. "Eurodollar Rate" means, in respect of each Interest Period of each Eurodollar Advance, a rate per annum, equal to LIBOR plus the LIBOR Margin; provided, that if the Bank incurs a reserve requirement (as set forth below in the definition of Eurodollar Reserve Percentage) on any day of any Interest Period and the Bank notifies the Company within 30 days after incurring the reserve requirement that it has incurred same, then "Eurodollar Rate" means, in respect of the portion of the Interest Period of the Eurodollar Advance in which the reserve requirement is in effect, a rate per annum equal to the sum of LIBOR Margin plus the quotient obtained (rounded upwards, if necessary, to the next higher 1/16 of 1%) by dividing (i) LIBOR by (ii) 1.00 minus the Eurodollar Reserve Percentage in effect during the portion of the Interest Period. "Eurodollar Reserve Percentage" means for any day that a Eurodollar Advance is outstanding, that percentage (expressed as a decimal) which is in effect on the day of the applicable Interest Period, as prescribed by the Board of Governors of the Federal Reserve System (or any successor) for determining the reserve requirement for the Bank in respect of "eurocurrency liabilities" (or in respect of any other category of liabilities 2 6 that includes deposits by reference to which the interest rate on Eurodollar Advances is determined or any category of extensions of credit or other assets that includes loans by a non-United States office of the Bank to United States residents). "Exclusion Request" shall have the meaning attributed thereto in Section 3.01(h)(i). "Extended Termination Date" shall have the meaning attributed thereto in Section 3.01(i). "Extension Request" shall have the meaning attributed thereto in Section 3.01(h)(i). "Event of Default" shall have the meaning attributed thereto in Article VII. "Facility Fee" means the fee payable to the Bank pursuant to Section 2.04. "Facility Fee Rate" means the rate per annum that shall be used to calculate the Facility Fee and is equal to (a) 5.5/100 of 1% if the Company has a senior unsecured credit rating by Standard and Poors of better than BBB+ or a senior unsecured credit rating by Moody's Investor Services of better than Baal; (b) 8/100 of 1% if the Company has a senior unsecured credit rating by Standard and Poors between BBB+ and BBB-, inclusive, or a senior unsecured credit rating by Moody's Investor Services between Baa1 and Baa3, inclusive; or (c) 16/100 of 1% if the Company has a senior unsecured credit rating by Standard and Poors of less than BBB-, or a senior unsecured credit rating by Moody's Investor Services of less than Baa3; provided, that, in each case, the higher (better) senior unsecured credit rating (Standard and Poors or Moody's Investor Services) shall always be applied to determine the Facility Fee Rate, and if Standard and Poors (or Moody's Investor Services) changes its rating designations, then the new equivalent Standard and Poors (or Moody's Investor Services) credit ratings shall be applied. "GAAP" means those generally accepted accounting principles that are in effect on the date of determination and are recognized as such by the Financial Accounting Standards Board (or any generally recognized successor). "Governmental Requirement" means any law, statute, code, ordinance, order, rule, regulation, guideline, judgment, decree, injunction, franchise, permit, certificate, license, authorization or other direction or requirement (including, without limitation, any of the 3 7 foregoing that relate to environmental standards or controls, energy regulations and occupational, safety and health standards or controls) of any (domestic or foreign) federal, state, county, municipal parish, provincial or other government or any department, commission, board, court, agency or any other instrumentality of any of them. "Initial Termination Date" shall have the meaning attributed thereto in Section 3.01(i). "Interest Period" means (a) in respect of each Eurodollar Advance made to the Company, the period commencing on the date of the Eurodollar Advance and ending one, three or six months thereafter (as designated by the Company pursuant to Section 3.01(a)) or such other time period as may be mutually agreed upon by the Bank and the Company, and (b) in respect of each Reference Rate Advance made to the Company, the period commencing on the date of the Reference Rate Advance and ending one, three or six months thereafter (as designated by the Company pursuant to Section 3.01(a)) or such other time period as may be mutually agreed upon by the Bank and the Company; provided, that in each case: (i) any Interest Period that would otherwise end on a day that is not a Business Day shall be extended to the next succeeding Business Day unless by the extension it would fall in another calendar month, in which case the Interest Period shall end on the next preceding Business Day; (ii) any Interest Period that begins on a day for which there is no numerically corresponding day in the calendar month during which the Interest Period is to end shall, subject to the provisions of clause (i) of this definition, end on the last day of the calendar month; (iii) no Interest Period shall extend beyond the Termination Date; and (iv) no more than ten different Interest Periods may be outstanding at any one time. "Lenders" means, collectively, the banks that are parties to one of the Other Credit Agreements. "Lending Office" means the office or offices of the Bank specified as its Domestic Lending Office or Eurodollar Lending Office, as the case may be, below, its name on the signature page hereof or such other office or offices of the Bank as the Bank may from 4 8 time to time specify in writing to the Company, or, if the Bank fails to so notify the Company, the Bank's Domestic Lending Office listed below its name on the signature page hereof. "LIBOR" means, in respect of each Interest Period of each Eurodollar Advance, the rate per annum, quoted by the Bank at which deposits in Dollars, in amounts comparable to the amount of the subject Eurodollar Advance and with maturities comparable to the Interest Period, are offered to the principal office of the Bank in London, England (or if the Bank does not have an office in London, England, the rate at which the deposits are offered to the principal offices of major banks in London, England) by major banks in the interbank market at 11:00 a.m. London time two Business Days prior to the first day of the Interest Period (rounded upward, if necessary, to the next higher 1/16 of 1%). "LIBOR Margin" means the rate per annum which shall added to determine the Eurodollar Rate and is equal to (a) .165% if the Company has a senior unsecured credit rating by Standard and Poors of better than BBB+ or a senior unsecured credit rating by Moody's Investor Services of better than Baa1; (b) .27% if the Company has a senior unsecured credit rating by Standard and Poors between BBB+ and BBB-, inclusive, or a senior unsecured credit rating by Moody's Investor Services between Baa1 and Baa3, inclusive; or (c) .44% if the Company has a senior unsecured credit rating by Standard and Poors of less than BBB- or a senior unsecured credit rating by Moody's Investor Services of less than Baa3; provided, that, in each case, the higher (better) senior unsecured credit rating (Standard and Poors or Moody's Investor Services) shall always be applied to determine the LIBOR Margin, and if Standard and Poors (or Moody's Investor Services) changes its rating designations, then the new equivalent Standard and Poors ( or Moody's Investor Services) credit ratings shall be applied. "Material Adverse Effect" means a material adverse effect on (a) the financial condition and operations of the Company and its Subsidiaries on a consolidated basis or (b) the validity or enforceability of this Agreement or the Note. "Mortgage" means any Encumbrance, excluding Permitted Encumbrances. "Note" means the note substantially in the form of Exhibit A issued by the Company pursuant to Section 3.01. 5 9 "Other Bank(s)" means, collectively, the banks set forth on Exhibit B, other than the Bank. "Other Bank Agreement(s)" shall have the meaning attributed thereto in Section 4.13. "Other Credit Agreements" means, collectively, the Credit Agreements between the Company and each bank named as a party thereto, dated as of the Effective Date or April 2, 1998, and as amended (if applicable), providing for revolving loans to be made available to the Company in an aggregate principal amount not to exceed at any one time outstanding $750,000,000. "PBGC" means the Pension Benefit Guaranty Corporation or any successor established under ERISA. "Permitted Encumbrance" shall have the meaning attributed thereto in Section 6.01. "Person" means an individual corporation, partnership, joint venture, trust, unincorporated organization, association, joint stock company, government or any agency or political subdivision thereof or any other entity. "Plan" means each employee benefit plan or other plan maintained by the Company or any member of the Control Group for employees of the Company or any member of the Control Group and covered by Title IV of ERISA or subject to the minimum funding standards under Section 412 of the Internal Revenue Code of 1986, as from time to time amended. "Reference Rate" means the varying rate of interest per annum equal to the rate of interest per annum publicly announced from time to time by Citibank, NA, New York, New York, or its successor, as its "Base Rate" of interest, changing as and when a change in such rate occurs; provided, that if the rate ceases or fails to be published, the Reference Rate shall be equal to the "Prime Rate" published in the Wall Street Journal in the Money Rates Column, as it may change from time to time. "Reference Rate Advance(s)" means loans made by the Bank to the Company under Section 3.01 that bear interest at the Reference Rate. "Reportable Event" means any event described in Section 4043 of ERISA, but excluding Sections 4043(b)(2) and 4043(b)(3) thereof. "Response Date" shall have the meaning attributed thereto in Section 3.01(h)(i). 6 10 "Stockholders' Equity" means the excess of assets over liabilities, in each case of the Company and its Subsidiaries on a consolidated basis, as determined and computed in accordance with GAAP. "Subsidiary" means, a corporation of which the Company or one or more of its other subsidiaries of any tier own, directly or indirectly, such number of outstanding shares as have the power (disregarding any voting power, solely by reason of the happening of any default, of shares of any class) to elect a majority of the Board of Directors of such corporation. "Taxes" means all present and future taxes, levies, imposts, duties, fees, assessments, or charges of whatever nature (excluding income and similar taxes) now or hereafter imposed by any governmental authority, or any political subdivision or taxing authority thereof together with interest thereon and penalties in respect thereof. "Term Advances" shall have the meaning attributed thereto in Section 3.01(i). "Term Conversion Notice" shall have the meaning attributed thereto in Section 3.01(i). "Termination Date" means September 30, 1999, or such later date to which the Termination Date may be extended pursuant to Section 3.01(h) or 3.01(i). 1.02 Number. Singular terms used in this Agreement shall include the plural, and vice versa. ARTICLE II LOAN COMMITMENT 2.01 Commitment to Lend. The Bank agrees, on the terms and conditions of this Agreement and in reliance upon the representations and warranties set forth in Article IV, to make Eurodollar Advances and Reference Rate Advances to the Company, from time to time, from the Effective Date to but excluding the Termination Date, at such times and in such amounts as the Company shall request in accordance with Section 3.01, in an aggregate principal amount not to exceed at any one time outstanding the Commitment Limit. 2.02 Change of Law. Notwithstanding any other provision herein, if any change in any applicable Governmental Requirement or in the interpretation or administration thereof shall make it unlawful or impossible for the Bank to (a) honor its Commitment under Section 2.01, then the obligation of the Bank to make Advances to the Company under Section 2.01 and the obligation of the Company to pay the Facility Fee for the period of time subsequent thereto shall terminate, or 7 11 (b) maintain its Advances, then the aggregate principal amount of the Bank's Advances that are then outstanding and cannot be lawfully maintained, together with interest accrued and unpaid thereon and all other amounts payable hereunder to the Bank in respect thereof shall be paid, all as provided below in this Section 2.02. Upon the occurrence of any change making it unlawful for the Bank to honor its Commitment under Section 2.01 or maintain its Advances as aforesaid, the Bank shall immediately notify an officer of the Company thereof by telephone (which shall be confirmed by written notice in accordance with Section 8.03, and shall furnish to the Company written evidence of the change. Any payment of the principal amount of the Bank's Advances that is required under this Section 2.02 shall be made, together with accrued and unpaid interest and all other amounts payable hereunder to the Bank in respect thereof on the earlier of (i) the last day of the respective Interest Periods applicable to the Advances or (ii) such earlier date or dates required by any such Governmental Requirement or any such interpretation or administration thereof, provided, that the Company has been notified of the earlier date or dates. 2.03 Termination and Reduction of Commitment. The Company may, upon at least five Business Days' prior written notice given by the Company to the Bank, and upon payment of the Facility Fee accrued through the date of such termination or reduction, at any time wholly terminate or from time to time permanently reduce the unused portion of the Commitment and the Commitment Limit; provided, that any such partial reduction of the Commitment and the Commitment Limit must be in the amount of $1,000,000 or an integral multiple thereof. 2.04 Facility and Origination Fees. (a) Facility Fee. The Company agrees to pay the Bank a Facility Fee, in Dollars, equal to the Facility Fee Rate multiplied by the daily average amount of the Commitment Limit, used and unused, as it may exist for the period from and including the Effective Date, to but not including the Termination Date (or such earlier date as the Bank's obligation to honor its Commitment shall have terminated pursuant to Sections 2.02, 2.03 or 7.08). The applicable Facility Fee Rate shall be determined as of, and the accrued Facility Fee shall be paid to the Bank on, (i) the last Business Day of each March, June, September and December, commencing with the first of those dates which follows the Effective Date, and (ii) the date of any early termination of the Commitment pursuant to Sections 2.02, 2.03 or 2.08. 8 12 (b) Origination Fee. The Company agrees to pay the Bank a one-time origination fee, in Dollars, equal to .02% of the Commitment Limit, payable within 15 days of the Effective Date of this Agreement. 2.05 Withholding Taxes. Subject to Sections 2.07 and 2.08, if at any time any applicable law, regulation or regulatory requirement or any governmental authority, monetary agency or central bank enacted after the Effective Date requires the Company to make any deduction or withholding in respect of Taxes from any payment due under this Agreement for the account of the Bank, the sum due from the Company in respect of such payment shall be increased to the extent necessary to ensure that, after the making of such deduction or withholding, the Bank receives on the due date for such payment a net sum equal to the sum which it would have received had no such deduction or withholding been required to be made, and the Company shall indemnify the Bank against any losses or costs incurred by the Bank by reason of any failure of the Company to make any such deduction or withholding or by reason of any increased payment not being made on the due date for such payment, except to the extent the same arise by reason of a transfer, sale, or assignment of the Note. The Company shall promptly deliver to the Bank any receipts, certificates or other proof evidencing the amounts (if any) paid or payable in respect of any deduction or withholding as aforesaid. If the Bank should, in connection with any payment made by the Company pursuant to this Section 2.05, receive any offsetting tax credit or obtain any similar tax benefit which may reasonably be applied to the benefit of the Company, the Bank will in a timely manner reimburse the Company an amount equal to the amount of such credit or benefit after deducting any expenses reasonably and properly attributable thereto. The Bank agrees to use its reasonable efforts to obtain any such tax credit or similar tax benefit. If any such tax credit or benefit, the amount of which has been reimbursed to the Company, is subsequently disallowed in whole or in part by the appropriate taxation authorities, the Company agrees to repay on demand to the Bank the amount of credit or benefit so reimbursed to the Company and subsequently disallowed. 2.06 Increased Costs. Without duplication of any amounts otherwise payable under this Agreement, the Company agrees to reimburse the Bank, within ten days after receipt of written notice from the Bank, for any increase in its cost or decrease in its effective rate of return incurred after the Effective Date hereof (which shall include, but not be limited to, taxes (other than income or similar taxes), fees, charges or reserves) directly or indirectly resulting from the making of any Advances to the Company or maintaining of its Commitment, and arising as a result of: (a) any change after the Effective Date in any Governmental Requirement or the interpretation thereof by any governmental authority, court, bureau or agency charged with the administration or interpretation thereof (whether or not having the force of law); or (b) any capital or similar requirements imposed on the Bank or any corporation controlling the Bank against assets or liabilities (or against any class thereof or any required change in the amount thereof) of, or commitments or extensions of credit by, the Bank (including, without limitation, the Bank's obligation to make Advances hereunder); 9 13 except to the extent the same arise by reason of a transfer, sale or assignment of the Note. Such reimbursement shall be made to the Bank within ten days after the receipt by the Company of notice from the Bank setting forth the nature and amount of such loss, decrease in its effective rate of return, or expense and an explanation as to how such amounts were calculated by the Bank, said notice to be conclusive and binding in the absence of manifest error. The Company will pay all amounts required pursuant to this Section 2.06 to the Bank in immediately available funds. 2.07 Bank as Foreign Person. If the Bank is a foreign Person (i.e., a Person other than a United States Person for United States federal income tax purposes), then the Bank hereby agrees that: (a) it shall on or prior to the Effective Date deliver to the Company one original of the following: (i) if any Lending Office is located in the United States of America, accurate and complete signed copies of IRS Form 4224 or any successor thereto ("Form 4224") and IRS Form W-9 or any successor thereto ("Form W-9"); or (ii) if any Lending Office is located outside the United States of America, accurate and complete signed copies of IRS Form 1001 or any successor thereto ("Form 1001") and IRS Form W-8 or any successor thereto ("Form W-8"); in each case, indicating that the Bank is on the date of delivery thereof entitled to receive payments of principal, interest and fees for the account of the Lending Office or Lending Offices under this Agreement free from withholding of United States Federal income tax; (b) if at any time the Bank changes its Lending Office or Lending Offices or selects an additional Lending Office, it shall at the same time, but only to the extent the forms previously delivered by it hereunder are no longer effective, deliver to the Company one original, in replacement for the forms previously delivered by it hereunder: (i) if such changed or additional Lending Office is located in the United States of America, accurate and complete signed originals of Form 4224 and Form W-9; or (ii) otherwise, accurate and complete signed originals of Form 1001 and Form W-8; in each case, indicating that the Bank is on the date of delivery thereof entitled to receive payments of principal, interest and fees for the account of such changed or additional Lending Office under this Agreement free from withholding of United States federal income tax; 10 14 (c) it shall, upon the occurrence of any event (including the passing of time, but excluding any event mentioned in Section 2.07(b)) requiring a change in the most recent Form 4224, Form W-9, Form 1001 or Form W-8 previously delivered by the Bank, deliver to the Company one original accurate and complete signed copies of Form 4224, Form W-9, Form 1001 or Form W-8 in replacement for the forms previously delivered by the Bank; (d) it shall promptly upon the request of the Company, deliver to the Company such other forms or similar documentation as may be required from time to time by any applicable law, treaty, rule or regulation in order to establish the Bank's tax status for withholding purposes; (e) if the Company claims exemption from withholding tax under a United States tax treaty by providing a Form 1001 and the Bank sells or grants a participation of all or part of its rights under this Agreement, it shall notify the Company of the percentage amount in which it is no longer the beneficial owner under this Agreement. To the extent of this percentage amount, the Company shall treat the Bank's Form 1001 as no longer applicable for purposes of this Section 2.07. If the Bank is claiming exemption from United States withholding tax by filing Form 4224 with the Company, and sells or grants a participation in its rights under this Agreement, the Bank agrees to undertake sole responsibility for complying with the withholding tax requirements imposed by Sections 1441 and 1442 of the Code; and (f) if the IRS or any authority of the United States of America or other jurisdiction asserts a claim that the Company did not properly withhold tax from amounts paid to or for the account of the Bank (because the appropriate form was not delivered, was not properly executed, or because the Bank failed to notify the Company of a change in circumstances that rendered the exemption from withholding tax ineffective), the Bank shall indemnify the Company fully for all amounts paid, directly or indirectly, by the Company, as tax or otherwise, including penalties and interest, and including any taxes imposed by any jurisdiction on the amounts payable by the Company under Sections 2.05 and 2.06 together with all costs, expenses and reasonable attorneys' fees (including the allocated cost of in-house counsel). Without limiting or restricting the Bank's right to increased amounts under Sections 2.05 and 2.06 from the Company upon satisfaction of the Bank's obligations under the provisions of this Section 2.07, if the Bank is a foreign Person and is entitled to a reduction in the applicable withholding tax, the Company may withhold from any interest to the Bank an amount equivalent to the applicable withholding tax after taking into account such reduction. If the forms or other documentation required by Section 2.07(a) are not delivered to the Company, then the Company may withhold from any interest payment to the Bank an amount equivalent to the applicable withholding tax. In addition, the Company may also withhold against periodic payments other than interest payments to the extent United States withholding tax is not eliminated by obtaining Form 4224 or Form 1001. 11 15 2.08 Bank's Obligation for Taxes. Notwithstanding anything to the contrary contained herein, the Company shall not be required to pay any additional amounts in respect of United States federal income tax pursuant to Sections 2.05 or 2.06 to the Bank for the account of any Lending Office of the Bank: (a) if the obligation to pay such additional amounts would not have arisen but for a failure by the Bank to comply with its obligations under Section 2.07 in respect of such Lending Office; (b) if the Bank shall have delivered to the Company a Form 4224 and a Form W-9 in respect of such Lending Office pursuant to Sections 2.07(a)(i), 2.07(b)(i) or 2.07(c) and the Bank shall not at any time be entitled to exemption from deduction or withholding of United States federal income tax in respect of payments by the Company hereunder for the account of such Lending Office for any reason other than a change in United States law or regulations or in the official interpretation of such law or regulations by any governmental authority charged with the interpretation or administration thereof (whether or not having the force of law) after the date of delivery of such Form 4224 and Form W-9; or (c) if the Bank shall have delivered to the Company a Form 1001 and a Form W-8 in respect of such Lending Office pursuant to Sections 2.07(a)(ii), 2.07(b)(ii), or 2.07(c) and the Bank shall not at any time be entitled to exemption from deduction or withholding of United States federal income tax in respect of payments by the Company hereunder for the account of such Lending Office for any reason other than a change in United States law or regulations or any applicable tax treaty or regulations or in the official interpretation of any such law, treaty or regulations by any governmental authority charged with the interpretation or administration thereof (whether or not having the force of law) after the date of delivery of such Form 1001 and Form W-8; then, any and all present or future Taxes and related liabilities (including penalties, interest, additions to tax and expenses) which are not required to be paid by the Company pursuant to Sections 2.05 and 2.06 shall be paid by the Bank, and the Bank agrees to indemnify and hold the Company harmless from the same. 2.09 Change of Lending Office. The Bank agrees that upon the occurrence of any event giving rise to the payment of taxes or withholding pursuant to Sections 2.05 or 2.06, it will if so requested by the Company, use reasonable efforts (consistent with its internal policy and legal and regulatory restrictions) to designate a different Lending Office for any Advances affected by such event with the object of avoiding the consequence of the event giving rise to the payment of taxes or withholding pursuant to those Sections; provided, that such designation would not, in the judgment of the Bank, be otherwise disadvantageous to the Bank. Nothing in this Section 2.09 shall affect or postpone any of the obligations of the Company or the right of the Bank provided in Sections 2.05 or 2.06. 12 16 ARTICLE III REVOLVING CREDIT LOANS TO THE COMPANY 3.01 Advances to the Company. Subject to the terms and conditions of this Agreement, the Company may from time to time borrow under this Section 3.01, pay pursuant to this Section 3.01 and reborrow under this Section 3.01. Each Advance made to the Company and payment thereof shall be in Dollars in an aggregate principal amount of not less than $1,000,000. All Advances to the Company shall be subject to the provisions of Section 3.01(a) through 3.01(i). (a) Manner of Borrowing. The Company shall give the Bank, not later than 10:00 A.M. (Houston, Texas time) three Business Days prior to the drawdown date in the case of a Eurodollar Advance and not later than 10:00 A.M. (Houston, Texas time) on the drawdown date in the case of a Reference Rate Advance, irrevocable notice (effective upon receipt), substantially in the form of Exhibit C, of each requested Advance to be made to the Company specifically (i) the amount of the requested Advance, (ii) the drawdown date of the requested Advance (which shall be a Business Day), (iii) whether the Advance is to be comprised of Eurodollar Advances or Reference Rate Advances, and (iv) the term of the Interest Period for the Advance, provided that if the Company fails to specify the duration of the term, the Interest Period for such Advance shall be three months. If the Advance will be a Eurodollar Advance, the Bank shall notify the Company of the Eurodollar Rate by no later than 11:00 A.M. (Houston, Texas time) one Business Day prior to the drawdown date specified for the Advance. If the Advance will be a Reference Rate Advance, the Bank shall notify the Company of the Reference Rate by not later than 11:30 A.M. (Houston, Texas time) on the drawdown date specified for the Advance. (b) Manner of Making Funds Available. The Bank, not later than 12:00 noon Houston, Texas time, on the drawdown date specified for the Advance, shall make the Advance available to the Company by transferring in immediately available funds the amount of the Advance to Chase Bank of Texas, National Association, 707 Travis Street, Houston, Texas 77252-8086, ABA #113000609 for credit to the Company's account #00100139733 or to such other bank or account as the Company shall designate to the Bank in writing. 13 17 (c) Payment of Principal. The Company hereby promises to pay to the Bank the principal of each Advance made to the Company on the last day of the Interest Period applicable to the Advance. The Company shall have the right, at any time and from time to time, to prepay, in whole or in part, any Advance by giving Bank not less than (i) three Business Days prior written notice in the case of a prepayment of a Eurodollar Advance; and (ii) one Business Day prior written notice in the case of a Reference Rate Advance; together with accrued interest to the date of the prepayment on the principal amount prepaid; provided, that each partial prepayment of principal shall be in an integral multiple of $1,000,000 and further provided that the Company shall. be required to pay reasonable costs and losses incurred by the Bank as a result of the Company prepaying any Eurodollar Advance, pursuant to Section 3.03. (d) Payment of Interest. The Company hereby promises to the Bank accrued but unpaid interest on the principal amount of each Advance made to the Company, from the date of the Advance until the principal amount of the Advance shall be paid in full (i) at the Eurodollar Rate for Eurodollar Advances; and (ii) at the Reference Rate for Reference Rate Advances; payable on the last day of the Interest Period applicable to the Advance and, if the Interest Period is longer than six months, also on each six-month anniversary of the making of the Advance; provided, that any amount of such principal and, to the extent permitted by law, any interest thereon which is not paid when due (whether at stated maturity, by acceleration or otherwise) shall bear interest from the date on which such amount is due until the amount is paid in full, payable on demand, at the Default Rate. (e) Currency of Payment. All payments of principal of, and interest on, Advances shall be made in Dollars. (f) Note. All Advances that the Bank makes to the Company shall be evidenced by a Note substantially in the form attached hereto as Exhibit A with appropriate insertions, payable to the order of the Bank, dated the Effective Date, maturing on the Termination Date and bearing interest from the Effective Date on the unpaid principal amount thereof from time to time outstanding at the rates provided for in this Agreement. The Bank shall record and endorse on the Note all transactions in the space provided thereon, which recordation and endorsement, absent manifest error, shall be prima facie evidence of Advances made to the Company and payments thereon; provided, that the Bank's failure to make recordation and endorsement shall not limit or otherwise affect the obligations of the Company hereunder or under the Note and 14 18 payments of principal of, and interest on, the Note by the Company shall not be affected by the failure to make any such recordation and endorsement thereof on the Note. Although the Note shall be dated the Effective Date, interest in respect thereof shall be payable only for the periods during which the Advances evidenced thereby are outstanding and then only with respect to those Advances. (g) Available London Interbank Rate. Notwithstanding anything herein to the contrary, if with respect to any proposed Eurodollar Advance to the Company, the Bank determines that (i) for any reason whatsoever the rates for the offering of Dollars for deposit in the London interbank market in immediately available funds in an amount and for a period comparable to the scheduled maturity of the Eurodollar Advance are not being offered to the Bank in the London interbank market or (ii) the rates offered for purposes of computing the rate of interest on the requested Eurodollar Advance do not accurately reflect the cost to the Bank of making the Eurodollar Advance, then the Bank shall notify an officer of the Company immediately by telephone (which shall be promptly confirmed by written notice in accordance with Section 8.03) and so long as the failure to offer those rates continue or the rates fail to accurately reflect costs to the Bank, the Bank shall be under no obligation to make the Eurodollar Advance under this Agreement; provided, that the Company shall have the option to elect to have the Advance changed to a Reference Rate Advance by giving the Bank notice at any time prior to 11:00 a.m. (Houston, Texas time) on the date of the proposed Advance. (h) Optional Extension of Termination Date. The Company may, from time to time, request that the Bank extend the Termination Date as follows: (i) The Company may, upon notice (by telephone (confirmed in writing promptly thereafter) or telecopy) received by the Bank not earlier than 60 days and not later than 50 days prior to the Termination Date as in effect on the date of each such notice, request (each, an "Extension Request") that the Bank extend such Termination Date for an additional 364 days from such Termination Date. The Bank may, at its option, accept or reject such Extension Request by giving written notice to the Company delivered no earlier than 30 days prior to (but no later than 20 days prior to) such Termination Date (the "Response Date"). If the Bank shall fail to give such notice to the Company by the Response Date, the Bank shall be deemed to have rejected the requested extension. If the Bank consents to the Extension Request by the Response Date, the Termination Date hereunder shall be automatically extended to the date which is the 364th day after the Termination Date as in effect on the date of such Extension Request. 15 19 (ii) The Company acknowledges that (a) the Bank has not made any representations to the Company regarding its intent to agree to any extension of the Termination Date and (b) except as set forth in Section 3.01(i), the Bank shall not have any obligation to extend the Termination Date. (i) Notwithstanding anything herein to the contrary, if the Bank shall reject an Extension Request pursuant to Section 3.01(h)(i), then (unless an Event of Default shall have occurred and be continuing), the Company may, at its option, elect to extend the Termination Date as in effect on the date of such Extension Request (the "Initial Termination Date") to the date that is one year after the Initial Termination Date (the "Extended Termination Date") by delivering notice of such extension (a "Term Conversion Notice") to the Bank not later than 15 days prior to the Initial Termination Date. If a Term Conversion Notice shall be delivered in accordance with this Section 3.01(i), then (i) the Termination Date shall be automatically extended to the Extended Termination Date, (ii) effective as of the Initial Termination Date, the principal amount of all Advances outstanding on the Initial Termination Date shall be converted into, and shall remain outstanding as, term advances (the "Term Advances", which term shall be deemed to include any Advances made hereunder on or after the Initial Termination Date to repay all or any portion of the principal of any other Term Advance), (iii) effective as of the Initial Termination Date, the Commitment and the Commitment Limit shall be automatically and permanently reduced to an amount equal to the aggregate principal amount of all Term Advances outstanding on the Initial Termination Date and (iv) any payment or prepayment of the principal amount of any Term Advance following the Initial Termination Date, other than payments or prepayments made with the proceeds of one or more additional Term Advances pursuant to Section 3.02(a), shall automatically and permanently reduce the Commitment and the Commitment Limit by an amount equal to the amount of such payment or prepayment. The Term Advances shall continue to constitute Advances for all purposes of this Agreement. 3.02 Disposition of Funds and Amount Payable in the Event of Refinancing. If the Bank makes a new Advance to the Company hereunder on a day on which the Company is to pay all or any part of an outstanding Advance, (a) the Bank shall apply the proceeds of the new Advance to make the payment; (b) the Bank shall make available to the Company as provided in Section 3.01(b) only an amount equal to the excess, if any, of the amount the Company borrows over the amount the Bank applies to make the payment; and (c) the Company shall pay the Bank on that day an amount equal to only the excess, if any, of the amount payable by the Company to the Bank on that day over the amount the Bank applies to make the payment. 3.03 Funding Losses. The Company shall pay to the Bank upon written request (which request shall set forth in reasonable detail the basis for the request), an amount that shall be 16 20 sufficient (in the reasonable opinion of the Bank) to reasonably compensate the Bank for any loss or expense (other than the loss of margin) incurred by the Bank as a result of: (a) any Company prepayment of any Eurodollar Advance made to the Company on a date other than the last day of the Interest Period applicable thereto (except payments made in accordance with Section 2.02), or (b) any Company failure to borrow an Advance on the date scheduled for the borrowing pursuant to Section 3.01 except a failure to borrow a requested Eurodollar Advance following the occurrence of one of the events set forth in Section 3.0l(g) whether because of any Event of Default by the Company or otherwise. 3.04 Conditions to the Initial Borrowing. The Bank's obligation to make its initial Advance to the Company is subject to the conditions precedent that the Bank shall have received: (a) Note. In the case of the initial Advance to the Company, the Note drawn to the order of the Bank complying with the provisions of Section 3.01. (b) Authorized Signatories of the Company. A certificate of the Secretary or an Assistant Secretary of the Company that shall certify the names of the officers of the Company authorized to sign this Agreement, the Note and any other document related to this Agreement, together with the true specimen signatures of those officers. The Bank may conclusively rely upon that certificate unless it receives written evidence to the contrary. (c) Evidence of Corporate Action of the Company. Certified copies of the requisite corporate action that the Company takes to authorize this Agreement, the Note and the borrowings by the Company hereunder, and such other papers as the Bank shall reasonably require. (d) Opinion of Company. Opinion of the General Counsel or Deputy General Counsel of the Company in substantially the form set forth in Exhibit D. (e) Certificate of the Company. A certificate dated the date of the Advance and signed by an authorized executive or financial officer of the Company stating that the representations and warranties of the Company contained in Article IV are true and correct as of the date thereof and that no Event of Default, or event which with the giving of notice or lapse of time or both would constitute an Event of Default, has occurred and is continuing. 3.05 Conditions To All Advances. The Bank's obligation to make each Advance to the Company is subject to the conditions precedent that on the date of the Advance: (a) Notice. The Bank shall have received the applicable notice that Section 3.01 requires. 17 21 (b) Compliance with Agreement. The Company shall have complied, and shall then be in compliance with, all the terms, covenants and conditions of this Agreement that are binding upon it. (c) No Default. There shall exist or result from the Advance no Event of Default and no event which, with the giving of notice or the lapse of time, or both, would constitute an Event of Default. (d) Accuracy of Representations and Warranties. The Company's representations and warranties in Article IV shall be true with the same effect as though the representations and warranties had been made at the time of the Advance. In the case of each Advance to the Company hereunder, each Company notice or request to the Bank to make each borrowing shall be deemed to be a representation and warranty to the foregoing effects in this Section 3.05(d). ARTICLE IV REPRESENTATIONS AND WARRANTIES OF THE COMPANY 4.01 Existence and Rights. The Company (a) is duly organized, validly existing and in good standing under the laws of the State of Delaware, (b) has all necessary corporate power to own its properties and to carry on its businesses as now conducted and (c) is duly qualified and in good standing (to the extent those concepts are applicable) in each United States jurisdiction that requires qualification and in which the character of the properties owned by it or the conduct of its business therein makes the qualification necessary, except where the failure to so qualify would not have a Material Adverse Effect. The Company has all necessary corporate power and authority to make and carry out this Agreement and to issue and deliver and perform the Note as herein provided. 4.02 Agreement and Note. The Company's execution, delivery and performance of this Agreement and the Note have been duly authorized by all necessary corporate action and do not require the consent or approval of any governmental body or other regulatory authority, are not in contravention of or in conflict with any law or regulation applicable to the Company or any term or provision of the charter or bylaws of the Company. This Agreement is, and the Note when delivered for value received will be, the valid and legally binding obligations of the Company, enforceable in accordance with their terms, except as such enforceability may be 18 22 (i) limited by the effect of any applicable bankruptcy, insolvency, reorganization, moratorium, fraudulent transfer or other similar laws from time to time in effect and judicial decisions relating to or affecting the enforceability of creditors' rights and debtor's obligations generally, and (ii) subject to the effect of general principles of equity (regardless of whether such enforceability is considered in a proceeding in equity or at law). 4.03 No Conflict. The Company's execution, delivery and performance of this Agreement and the Note are not in contravention of, or in conflict with, any material agreement, indenture, undertaking or Governmental Requirement to which the Company or any of its Subsidiaries is a party or by which any of them or any of their property is subject, and do not cause any Mortgage to be created or imposed upon any such property, except pursuant to the terms of this Agreement. 4.04 Litigation. There are no proceedings pending or, so far as the officers of the Company know, threatened before any court, administrative agency or arbitration panel that, in the reasonable opinion of the officers of the Company, are expected to have a Material Adverse Effect. Neither the Company nor any of its Subsidiaries is in material default with respect to any order, writ, injunction or decree of any court or other governmental or regulatory authority which, in the opinion of the officers of the Company, is expected to have a Material Adverse Effect. 4.05 Financial Condition. The consolidated balance sheet of the Company and its Subsidiaries as of September 30, 1997 and the related consolidated statement of income for the fiscal year then ended, covered by the opinion of Deloitte & Touche L.L.P., and the unaudited consolidated balance sheet of the Company and its Subsidiaries as of June 30, 1998 and the related unaudited consolidated statement of income for the quarter then ended, in both cases as heretofore delivered to the Bank, present fairly the financial position of the Company and its consolidated Subsidiaries as of the respective dates of those balance sheets and the results of their operations for the respective periods then ended and have been prepared in accordance with GAAP; provided, that the balance sheet as of June 30, 1998 and the statement of income for the quarter then ended are subject to normal year-end adjustments and lack footnotes and other presentation items. There were no material liabilities, direct or indirect, fixed or contingent, of the Company or any of its consolidated Subsidiaries as of the date of the June 30, 1998 balance sheet that are not reflected therein or in the notes thereto. Other than as has been previously disclosed to the Bank in writing through the date hereof (including through the delivery of filings made with the U.S. Securities and Exchange Commission), there has been since June 30, 1998 no material adverse change in the financial condition and operations of the Company and its Subsidiaries on a consolidated basis. 4.06 Title to Assets. The Company and its Subsidiaries have sufficient title to their respective assets to enable them to conduct their business, and those assets are subject to no 19 23 Mortgage not permitted by Section 6.01, except where the failure to have such title would not have a Material Adverse Effect. 4.07 Trademarks, Patents. The Company and each of its Subsidiaries as of the date hereof possess all necessary trademarks, copyrights, patents, patent rights and licenses to conduct their respective businesses as now operated, without any known material infringement of valid trademarks, trade names, copyrights, patents or license rights of others, except to the extent that the failure of the foregoing would not have a Material Adverse Effect. 4.08 Margin Securities. The Company is not incurring the indebtedness evidenced by the Note hereunder for the purpose, directly or indirectly, of purchasing or carrying any "margin stock" as that term is defined in Regulations U and X of the Board of Governors of the Federal Reserve System, as amended from time to time. Neither the Company nor any of its Subsidiaries is engaged principally, or as one of its important activities, in the business of extending credit for the purpose of purchasing or carrying margin stock. 4.09 ERISA. Neither the Company nor any member of the Control Group has incurred any material accumulated funding deficiency within the meaning of Section 412 of the Internal Revenue Code of 1986, as from time to time amended, or has incurred any material liability to the PBGC under Title IV of ERISA in connection with any Plan or other class of benefit that the PBGC has elected to insure. No Reportable Event has occurred with respect to any Plan that would have a Material Adverse Effect. 4.10 Investment Company Act. The Company is not an "investment company" or a company "controlled" by an "investment company", within the meaning of the Investment Company Act of 1940, as amended. 4.11 Labor Matters. There are no strikes or other labor disputes pending, or to the knowledge of Company threatened, against the Company or any of its Subsidiaries that would have a Material Adverse Effect. 4.12 Environmental Laws. Except as may have been previously disclosed to the Bank or may be disclosed in any information furnished by the Company to the Bank pursuant to Section 5.05, the Company and its Subsidiaries are in compliance with all environmental health, and safety laws applicable to the Company and its Subsidiaries, and their respective operations and properties, except to the extent that such non-compliance would not have a Material Adverse Effect. 4.13 Other Bank Agreements. Substantially concurrently with the execution of this Agreement by the Company and the Bank, the Company is executing with each of the Other Banks a substantively identical (other than with respect to the amount of the Commitment) form of this Agreement (each an "Other Bank Agreement"). 20 24 ARTICLE V AFFIRMATIVE COVENANTS Unless the Bank shall otherwise consent in writing, it is agreed that, so long as any credit hereunder shall be available and until payment in full of the Note: 5.01 Corporate Rights and Franchises. The Company will, and will cause each of its Subsidiaries to, except as may be otherwise permitted by the provisions of Sections 6.02 and 6.03, (i) maintain and preserve its corporate, partnership or other existence and all rights, franchises and other authority necessary for the conduct of its business unless, in the judgment of management of the Company, the preservation thereof is no longer desirable to the conduct of the business of the Company and its Subsidiaries taken as a whole and the loss thereof is not disadvantageous in any material respect to the Bank, and (ii) maintain its properties, equipment and facilities in good working order and repair and conduct its business in an orderly manner without voluntary interruption unless, in the judgment of management of the Company, those activities are no longer desirable to the conduct of the Company's business and the discontinuance thereof is not disadvantageous in any material respect to the Bank. 5.02 Insurance. The Company will, and will cause each of its Subsidiaries to, maintain with responsible insurance carriers liability, property damage and workers compensation insurance coverage in such amounts and with such deductibles and retentions as the management of the Company considers reasonable. 5.03 Taxes and Other Liabilities. The Company will, and will cause each of its Subsidiaries to, pay and discharge, before the same become delinquent and before penalties accrue thereon, all taxes, assessments and governmental charges upon or against it or any of its properties, and all its other liabilities at any time existing which, if unpaid, might by law become a Mortgage on a material portion of its property, except to the extent that and so long as: (a) the same are being contested in good faith and by appropriate proceedings in such manner as not to cause any Material Adverse Effect or the loss of any material right of redemption from any sale thereunder; and (b) it shall have set aside on its books reserves (segregated in accordance with GAAP) deemed by it adequate with respect thereto. 5.04 Records. The Company will maintain, and cause each of its Subsidiaries to maintain, a system of accounting in accordance with GAAP and permit representatives of the Bank to have reasonable access to, and to examine the properties and publicly available information of, the Company and its Subsidiaries at all reasonable times. 21 25 5.05 Reports by the Company. The Company will furnish the Bank: (a) As soon as available, and in any event within 45 days after the close of each of the first three quarters of each fiscal year of the Company, commencing with the quarter next ending following the Effective Date, a copy of its Quarterly Report on Form 10-Q for the quarter as filed with the U.S. Securities and Exchange Commission. (b) As soon as available, and in any event within one 120 days after the close of each fiscal year of the Company ending following the Effective Date: (i) a balance sheet of the Company and its consolidated Subsidiaries as of the end of the fiscal year and the related income statement and statement of changes in cash flows of the Company and its consolidated Subsidiaries for the fiscal year then ended, in reasonable detail in accordance with GAAP and stating, when appropriate, in comparative form the corresponding figures for the previous fiscal year, together with a signed opinion of Deloitte & Touche L.L.P. (or other independent certified public accountants reasonably satisfactory to the Bank) based on an audit using generally accepted auditing standards, certifying that the financial statements present fairly the financial position of the Company and its consolidated Subsidiaries as of the end of the fiscal year and the results of their consolidated operations for the fiscal year then ended, which opinion shall not contain any material qualification or exception not reasonably satisfactory to the Bank, and (ii) a certificate of those accountants stating that in the course of their examination they became aware of nothing of an accounting nature that would indicate the occurrence of an Event of Default or the occurrence of any event which, upon the lapse of time or the giving of notice, or both, would constitute an Event of Default, or, if such is not the case, stating the facts with respect thereto. (c) As soon as possible, and in any event within 45 days after the close of each of the first three quarters of each fiscal year of the Company, and 90 days after the close of each fiscal year of the Company, commencing with the quarter next ending following the Effective Date, a certificate of the Chief Financial Officer, Vice President-Finance, Treasurer or Assistant Treasurer of the Company, any one acting alone, stating that the Company has performed and observed each and every covenant contained in this Agreement to be performed by it and that no event has occurred and no condition then exists which constitutes an Event of Default or would constitute an Event of Default upon the lapse of time or upon the giving of notice or both, or, if any such event has occurred or any such condition exists, specifying the nature thereof and the action which the Company proposes to take with respect thereto. (d) Such other publicly available information of the Company as the Bank may from time to time reasonably request, within a reasonable period of time following the request. 22 26 (e) Within ten Business Days after the same are known, written notice of the following: (i) Each Event of Default or event which, with the giving of notice or lapse of time or both, would constitute an Event of Default. (ii) Any other matter that has resulted or may or might have resulted in a Material Adverse Effect, including, copies of any detailed report or "management letter" submitted by independent certified public accountants relating thereto. (iii) All Events of Default under any notes, debentures, other evidences of indebtedness or preferred stock, or under any indenture, mortgage, deed of trust or other agreement relating to any evidence of indebtedness including, any Other Bank Agreement, for which the Company or any Subsidiary is liable, including the occurrence of any event which upon the lapse of time or giving of notice or both would constitute such a default, if those events or the exercise of any remedies arising therefrom would have a Material Adverse Effect. (iv) The occurrence of any Reportable Event with respect to any Plan, together with the statement of the Chief Financial Officer, Vice President Finance, Treasurer, or Assistant Treasurer of the Company setting forth the details as to the Reportable Event and the action that the Company proposes to take, if any, with respect thereto. (v) Any material modification or amendment to, or termination of, any of the Other Bank Agreements. (vi) If at any time the value of all "margin stock" (as defined in Regulation U of the Board of Governors of the Federal Reserve System, amended from time to time) owned by the Company and its Subsidiaries exceeds 25% of the value of the assets of the Company and its Subsidiaries, on a consolidated basis, as reasonably determined by the Company. 5.06 Amendments. The Company agrees that it will not amend any of the Other Bank Agreements on terms materially more favorable to any Other Bank than the terms in this Agreement unless the Company and the Bank also agree to the same terms as amended. For the avoidance of doubt, the Bank acknowledges that the Company may terminate any of the Other Bank Agreements or terminate or reduce the commitment of any of the Other Banks pursuant to any Other Bank Agreement without the requirement of having to terminate this Agreement or terminate or reduce the Commitment or the Commitment Limit hereunder. 23 27 ARTICLE VI NEGATIVE COVENANTS Unless the Bank otherwise consents in writing, the Company agrees that so long as any credit hereunder shall be available and until payment in full of the Note, the Company will not do, or permit any of its Subsidiaries to do, any of the following: 6.01 Liens and Encumbrances. Create, incur, assume or permit to exist any Mortgage affecting the assets of the Company or any Subsidiary except the following (herein being collectively called "Permitted Encumbrances"): (a) Encumbrances simultaneously created in favor of (i) the Bank and the Other Banks, on a pari passu basis, to secure the indebtedness (up to an aggregate of $250,000,000) under this Agreement and the Other Bank Agreements and (ii) the Lenders, on a pari passu basis, to secure the indebtedness (up to an aggregate of $750,000,000) under the Other Credit Agreements; (b) Encumbrances existing as of the date hereof and any and all extensions, renewals or refinancings of any of the foregoing (provided that the extensions, renewals or refinancings do not increase the outstanding aggregate principal amount of indebtedness secured by those Encumbrances); (c) Encumbrances upon any materials, supplies, tools, articles or other things acquired or manufactured in connection with the performance of contracts with the United States of America or any department or agency thereof to secure partial progress or other payments or performance under those contracts; (d) Encumbrances against assets which (i) existed when the assets were acquired by the Company or the Subsidiary or (ii) were owned by an entity which, subsequent to the date hereof, becomes a Subsidiary, and the Encumbrance is in existence at the time the entity becomes a Subsidiary and which, in the case of each of Sections 6.01(d)(i) and (ii) (A) do not attach to assets other than those encumbered at the time of the acquisition or transaction resulting in the entity becoming a Subsidiary and (B) were not created in contemplation of the acquisition or transaction resulting in the entity becoming a Subsidiary; 24 28 (e) Mechanics', workmen's, materialmen's, landlord's, carriers', repairmen's, construction and other similar Encumbrances arising in the ordinary course of business in respect of obligations not delinquent or which are being contested in good faith; (f) Encumbrances in connection with worker's compensation, unemployment insurance or other social security obligations; (g) Encumbrances securing bids, tenders, contracts (other than contracts for the payment of money), leases, statutory obligations, surety, appeal and customs bonds and other obligations of like nature, and other Encumbrances arising by operation of law in respect of the providing of goods or services, arising in the ordinary course of business; (h) Encumbrances on any property that the Company or the Subsidiary hereafter acquires that are created contemporaneously with the acquisition to secure or provide for the payment or financing of any part of the purchase price thereof; provided, that: (i) the obligation thereby secured consists primarily of the unpaid balance of the purchase price of the property (including improvements existing or to be constructed) that the Company or the Subsidiary acquires; (ii) the unpaid purchase price so secured does not exceed 90% of the total purchase price of the property being acquired; and (iii) any such Encumbrance does not extend to, or otherwise affect or apply to, property other than that being so acquired; (i) Encumbrances on any property of a Subsidiary in favor of the Company or any other Subsidiary that the Company directly or indirectly wholly owns (except for directors' or other qualifying shares); (j) Encumbrances for taxes, assessments or other governmental charges or levies (i) which are not yet due or (ii) which are due so long as the Company or the Subsidiary is contesting the validity thereof in good faith and by appropriate proceedings so as not to cause any Material Adverse Effect and has set aside on its books reserves (segregated in accordance with GAAP) deemed by it adequate with respect thereto; (k) Any right of set-off granted to any lending institution in connection with that lending institution providing cash management services or other financings to the Company and any of its Subsidiaries; and (1) Any other Encumbrances; provided, that the aggregate claim secured by the other Encumbrances (excluding those Encumbrances otherwise permitted pursuant to this Section 6.01) shall not exceed 10% of Stockholders Equity. 25 29 6.02 Sales of Assets or Business. Other than sales or dispositions by a Subsidiary to the Company or another Subsidiary or by the Company to a Subsidiary, or sales in the ordinary course of business, the Company shall not sell, lease or otherwise dispose of its assets, business or stock or other investment in any Subsidiary having a value, in each case, in excess of $25,000,000 unless the Board of Directors of the Company determines that the sale, lease or other disposition thereof (a) is in the best interest of the Company and its Subsidiaries taken as a whole, and (b) will not significantly adversely affect the Company's ability to meet its financial obligations as they become due. 6.03 Liquidation, Dissolution, Consolidation or Merger. Liquidate, dissolve or enter into any consolidation or merger unless: (a) in the case of a consolidation or merger (i) involving the Company, the Company will be the surviving corporation, and (ii) involving a Subsidiary, (A) a Subsidiary will be the surviving entity, (B) the fair market value of the Company's investment in such Subsidiary is less than $25,000,000, or (C) the fair market value of the Company's investment in the Subsidiary is $25,000,000 or greater and the Board of Directors of the Company determines that the preservation thereof is no longer desirable to the business of the Company and its Subsidiaries taken as a whole and that the absence thereof will not significantly adversely affect the Company's ability to meet its financial obligations as they become due; and (b) After giving effect to any such merger or consolidation, there will exist neither an Event of Default nor any event which, upon the giving of notice of lapse of time or both would constitute such an Event of Default. 26 30 ARTICLE VII EVENTS OF DEFAULT AND REMEDIES The occurrence of any one or more of the following events described in Sections 7.01 through 7.07 shall be deemed an event of default under this Agreement (an "Event of Default"): 7.01 Failure to Pay Note, Breach of Certain Covenants. Failure to make any payment of principal of, or interest on, the Note, or any payment of any Facility Fee or any other amount due under this Agreement, when due and payable as required under this Agreement, whether at the end of the applicable Interest Period, at maturity, or otherwise, and the failure shall have continued unremedied for a period of three Business Days after the Bank's written notice to the Company, or the failure to observe or perform any term, covenant or agreement of the Company contained in Sections 5.05(e), 6.02, or 6.03; or 7.02 Breach of Remaining Covenants. The failure to observe or perform any term, covenant or agreement of the Company contained in this Agreement (other than those described in Section 7.01), and the failure shall have continued unremedied for a period of 30 days after the Bank's written notice to the Company or beyond a reasonable period of time thereafter, if the Event of Default is not reasonably capable of being cured within the 30-day period, and the Company is diligently pursuing its cure; or 7.03 Breach of Warranty. Any representation or warranty the Company makes herein, or any statement or representation made in any certificate, report or opinion delivered pursuant to this Agreement, shall prove to have been incorrect in any material respect when made; or 7.04 Other Obligations. The Company or any Subsidiary shall default (as principal, guarantor or surety): (a) in the payment of any principal of, or premium, if any, or interest on, any indebtedness (other than its indebtedness hereunder and indebtedness between the Company and any Subsidiary or between Subsidiaries) beyond the applicable grace period, if any, (i) for borrowed money in an amount in excess of an aggregate of $20,000,000 or (ii) representing the deferred purchase price of property with an outstanding deferred aggregate liability in excess of $25,000,000; or (b) with respect to the performance or observance of any term of any instrument pursuant to which any indebtedness described in Section 7.04(a) was created, or any mortgage, indenture or other agreement relating thereto, if the effect of the default (after giving effect to any applicable grace period) is to cause or permit that indebtedness exceeding an aggregate of $20,000,000 to become due and payable prior to its stated maturity; or 27 31 7.05 Insolvency; Receiver. (a) If the Company makes an assignment for the benefit of creditors, files a petition in bankruptcy, is adjudicated or held to be insolvent or bankrupt, petitions or applies to any tribunal for any receiver or any trustee for the Company or any substantial part of the Company's property, commences any proceeding relating to the Company under any reorganization, arrangement, readjustment of debt or similar law or statute of any jurisdiction, whether now or hereafter in effect, or if there is commenced against the Company any such proceeding which remains undismissed, unstayed (or, if stayed, the stay shall have been set aside) or unvacated for a period of 60 days, or the Company by any act indicates its consent to, approval of, or acquiescence in, any such proceeding or the appointment of any receiver or of any trustee for the Company or any substantial part of the Company's property, or suffers any such receivership or trusteeship to continue undischarged, unstayed (or, if stayed, such stay shall have been set aside) or unvacated for a period of 60 days; or (b) If any of the foregoing events described in Section 7.05(a) occurs with respect to a Subsidiary instead of the Company and that event will have a material adverse effect on the ability of the Company to meet its financial obligations as they become due; or 7.06 Judgments; Attachments. (a) The Company or any Subsidiary shall suffer the entry against it of a final judgment or decree for any amount in excess of $20,000,000 (not adequately covered by insurance or reserves as determined by the Bank in its reasonable discretion) unless, within 30 days after the entry thereof the same is satisfied or discharged or an appeal or appropriate proceeding for review thereof is taken and a stay of execution pending such appeal is obtained; or (b) The Company or any Subsidiary shall suffer one or more writs or warrants of attachment to be issued by any court against any of its property exceeding in the aggregate $20,000,000 in value, and such writs or warrants of attachment are not satisfied, stayed or released within 30 days after the entry or levy thereof or after any stay is vacated or set aside; or 7.07 ERISA. Any Reportable Event that the Bank shall determine in good faith constitutes grounds for the PBGC to terminate any Plan or for the appropriate United States District Court to appoint a trustee to administer any Plan shall have occurred and be continuing for 30 days after the Bank shall have given the Company written notice, or any Plan shall be terminated without another Plan being available to replace or substitute for the terminated Plan; or an appropriate United States District Court shall have appointed a trustee to administer any Plan; or the PBGC shall institute proceedings to terminate any Plan or to appoint a trustee to administer any Plan; and in any situation described above the aggregate amount of the excess of 28 32 the current value of the Plan's; benefits guaranteed under Title IV of ERISA over the current value of the Plan's s assets allocable to those benefits under Section 4044 of ERISA shall exceed $20,000,000. 7.08 Remedies. If any one or more of the Events of Default described in Sections 7.01 through 7.07 above shall occur and be continuing, then the Bank, by notice to the Company, may take either or both of the following actions in this Section 7.08: (a) declare the obligation of the Bank to make Advances to the Company hereunder to be terminated whereupon the same shall forthwith terminate, or (b) declare the entire unpaid principal amount of the Note, all interest accrued and unpaid thereon, all accrued Facility Fees and all other amounts due and payable by the Company under this Agreement to be forthwith due and payable, whereupon the Note, all such accrued and unpaid interest, accrued Facility Fees and all such other amounts due and payable by the Company shall become and be forthwith due and payable, without presentment, demand, protest, notice of intent to accelerate, a notice of acceleration or further notice of any kind, all of which are hereby expressly waived by the Company; provided, that if an Event of Default described in Section 7.05(a) shall occur, then the actions described in Sections 7.08(a) and (b) shall occur automatically, without any notice to the Company or declaration by the Bank. ARTICLE VIII MISCELLANEOUS 8.01 Survival. All agreements, representations and warranties made herein or made in writing in connection herewith shall survive the execution and delivery of this Agreement, the making of the Advances hereunder and the execution and delivery of the Note. 8.02 Failure or Indulgence Not Waiver. No failure or delay on the part of the Bank, or any holder of the Note in the exercise of any power, right or privilege hereunder or under the Note shall operate as a waiver thereof, and no single or partial exercise of any such power, right or privilege shall preclude other or further exercise thereof or of any other right, power or privilege. All rights and remedies existing under this Agreement and the Note are cumulative to, and not exclusive of, any rights or remedies otherwise available. 8.03 Notices. Any notice herein required or permitted to be given shall be in writing, and may be sent by facsimile, personal delivery or mail and, in each case, shall be deemed to have been given when received by the party to which the notice was addressed. Notices shall be sent to the addresses that are set out in the signature pages hereof (until notice of change thereof is served in the manner provided in this Section 8.03). 8.04 Applicable Law. This Agreement, the Note, all documents provided for herein and the rights and obligations of the parties hereto shall be governed by and construed in 29 33 accordance with the laws of the State of Texas, United States of America. The foregoing provision is not intended to limit the rate of interest payable with respect to the Bank to the maximum rate permitted by the laws of the State of Texas, United States of America if a higher rate is permitted with respect to the Bank by supervening provisions of United States federal law. The Company and the Bank hereby specifically declare that the provisions of Chapter 346 of the Texas Finance Code (Vernon's Texas Code Annotated) are not to be applicable to this Agreement, the Note or the transactions contemplated hereby and thereby. 8.05 Interest Limitation. It is the intention of the Company and the Bank to conform strictly to the usury laws as set forth in Section 8.04. Accordingly, if the transactions contemplated hereby would be usurious under those laws or any other applicable laws, then, in that event, notwithstanding anything to the contrary in the Note, or this Agreement, it is agreed as follows in this Section 8.05: (a) the aggregate of all consideration that constitutes interest that is contracted for, taken, reserved, charged or received under the Note, or this Agreement, or otherwise in connection with any Advance, shall under no circumstances exceed the maximum amount allowed by those laws, and any excess shall be credited by the Bank on the principal amount of the Advance (or, if the principal amount of the Advance shall have been paid in full, refunded to the Company); and (b) if the maturity of any Advance is accelerated or in the event of any required or permitted prepayment, then the consideration that constitutes interest may never include more than the maximum amount allowed by those laws, and excess interest, if any, provided for in this Agreement or otherwise shall be canceled automatically as of the date of the acceleration or prepayment and, if theretofore paid, shall be credited by the Bank on the principal amount of the Advance (or, if the principal amount of the Advance shall have been paid in full, refunded by the Bank to the Company). To the extent that Chapter 1D, Subtitle 1, Title 79, Revised Civil Statutes of Texas, 1925, as amended, is relevant to the Bank for the purposes of determining the highest lawful interest rate applicable to this Agreement and the Note, the Bank hereby elects to determine the applicable rate ceiling under that chapter by the indicated (weekly) rate ceiling from time to time in effect, subject to the Bank's right subsequently to change that method in accordance with applicable law. In determining whether the interest paid or payable under any specific contingency exceeds the highest lawful rate, the Company and the Bank shall, to the maximum extent permitted under applicable law; (i) characterize any nonprincipal payment (other than payments expressly designated as interest payments hereunder) as an expense or fee rather than as interest, (ii) exclude voluntary prepayments and the effect thereof and (iii) spread the total amount of interest throughout the entire contemplated term of the Note so that the interest rate is uniform throughout that term. 8.06 Assignment. Subject to Section 8.10, this Agreement shall be binding upon, and inure to the benefit of, the Company and the Bank and their respective successors and permitted assigns. The Company may not assign or transfer its rights hereunder without the prior written 30 34 consent of the Bank, which will not be unreasonably withheld in the case of an assignment or transfer to a Subsidiary; provided, that it shall be deemed to be reasonable for the Bank to (a) require the assignee or transferee to execute a written note in favor of the Bank substantially in the form of Exhibit A with respect to the amount that the assignee or transferee borrows; and (b) require the Company to execute a written guarantee of the assignee's or transferee's obligations under such a note; provided, that such a guarantee does not contain obligations any greater than the obligations that the Company has pursuant to this Agreement, in each case, for the Bank to give its consent to such an assignment or transfer even though such an assignment or transfer would not relieve the Company of its obligations under this Agreement. 8.07 Computation of Interest Rates and Fees: Time of Payment. All computations of interest and fees shall be made on the basis of a year of 360 days for the actual number of days elapsed (including the first day but excluding the last day) (which results in greater interest than if a year of 365 days is used). The Company shall make each payment of principal of, and interest on, the Advances made to it, and of the fees due hereunder by it, not later than 11:00 A.M. (in the time of the city in which the Bank has its principal office) on the date when due. 8.08 Expenses; Indemnity by the Company. The Company agrees to pay and hold the Bank harmless against liability for the payment of all reasonable attorneys' fees (including, without limitation, the allocated costs of in-house counsel) and court costs incurred by the Bank arising in connection with the enforcement against the Company of this Agreement, the Note, and the other instruments and documents to be delivered by the Company hereunder. 8.09 Modifications and Amendments. Except as set forth in Sections 3.01(h) and 3.01(i), this Agreement and the Note may only be modified or amended by a written agreement duly executed by the Company and the Bank. 8.10 Restriction on Transfers. (a) The Bank may, without the consent of the Company, sell participations to one or more banks or other entities (including, without limitation, the Other Banks) in all or a portion of its rights and obligations under this Agreement (including, without limitation, the Bank's Commitment), the Advances then owing to the Bank and the Note; provided, that (i) those sales are made in compliance with all applicable United States federal and state securities laws, (ii) the Bank's obligations under this Agreement shall remain unchanged, 31 35 (iii) the Bank shall remain solely responsible and liable to the Company for the performance of those obligations, (iv) the participating banks or other entities shall be entitled to the cost protection provisions contained in Sections 2.05, 2.06, and 3.03 but only to the extent that the protection would have been available to the Bank, calculated as if no such participation had been sold, (v) the Company shall continue to deal solely and directly with the Bank in connection with the Bank's rights and obligations under this Agreement, and (vi) the Bank shall retain the sole right and responsibility to enforce the obligations of the Company relating to this Agreement, the Advances and the Note, including, without limitation, the right to approve any amendment, modification or waiver of any provision hereof or thereof. (b) The Bank may, with the prior written consent of the Company (which consent shall not be unreasonably withheld in the case of a proposed assignment by the Bank to one of its subsidiaries or affiliates, and which consent may be withheld in the sole discretion of the Company in the case of any other proposed assignment by the Bank), assign to one or more banks or other institutions (including, without limitation, the Other Banks and subsidiaries or affiliates of the Bank) all or a portion of the Banks Commitment and its other rights and obligations under this Agreement and the same portion of the then outstanding Advances and Note; provided, that (i) each such assignment shall be of a constant, and not a varying, percentage of the Bank's Commitment and its other rights and obligations under this Agreement, and the then outstanding Advances and the Note, and (ii) the parties to each such assignment shall execute and deliver to the Company an assignment and assumption agreement in form and substance satisfactory to the Company. Upon such execution and delivery, from and after the effective date specified in the assignment and assumption agreement, the assignee shall be a party hereto and, to the extent provided in the assignment and assumption agreement, shall have the rights and obligations of the Bank under this Agreement, and the Bank shall, to the extent provided in the assignment and assumption agreement, be released from its obligations under this Agreement. (c) The Bank may, without the consent of the Company, assign to a Federal Reserve Bank all or a portion of the Banks rights and obligations under this Agreement, the then outstanding Advances and the Note; provided, that the Bank's obligations under this Agreement shall remain unchanged, and the Bank shall remain solely responsible to the Company for performance of those obligations. 32 36 8.11 Table of Contents; Headings. The Table of Contents and the section headings used in this Agreement are for convenience only and shall not affect the construction of this Agreement. 8.12 Articles; Sections. References herein to "Article(s)" and "Section(s)" mean the respective Article(s) and Section(s) of this Agreement. 8.13 Counterparts. This Agreement may be separately executed (including execution by delivery of a facsimile or telecopied signature) in any number of counterparts and by different parties hereto in separate counterparts, each of which when so executed shall be deemed to constitute one and the same Agreement. 8.14 Survival of Agreements. All of the agreements of the Company in this Agreement shall survive the Company's repayment of all Advances made by the Bank pursuant hereto. 8.15 Severability. If any term or provision of this Agreement and the Note shall be determined to be illegal or unenforceable, all other terms and provisions of those documents shall nevertheless remain effective and shall be enforced to the fullest extent permitted by applicable law. 8.16 Confidentiality. The Bank agrees to take normal and reasonable precautions and exercise due care to maintain the confidentiality of all non-public information provided to it by the Company in connection with this Agreement and agrees and undertakes that neither the Bank nor any of its affiliates shall use any such information for any purpose or in any manner other than pursuant to the terms contemplated by this Agreement. The Bank may disclose such information (a) at the request of any bank regulatory authority or in connection with an examination of the Bank by that authority; (b) to Bank's independent auditors, counsel and other professional advisors; provided, that the Bank shall cause its auditors, counsel and other professional advisors to comply with the Bank's obligations pursuant to this Section 8.16; or (c) pursuant to subpoena or other court process or when required to do so in accordance with the provisions of any applicable law or at the express direction of any agency of any State of the United States of America or of any other jurisdiction in which the Bank conducts its business, if the Company, after written notice to it (except in cases where notice would be prohibited by law or court order), has failed to obtain a protective or similar order to prevent the disclosure or to preserve the confidentiality of the information prior to the time that the Bank is advised by its legal counsel that immediate disclosure is necessary to avoid liability for failure to disclose; 33 37 (d) in connection with the defense of any litigation or other proceeding brought against it arising out of the transactions contemplated by this Agreement and related documents when the disclosure is necessary for its defense; (e) in connection with the enforcement of the rights and remedies of the Bank under this Agreement when the disclosure is necessary for enforcement; and (f) to its subsidiaries and affiliates (provided the Bank procures their respective agreements to be bound by the provisions of this Section 8.16). Notwithstanding the foregoing in this Section 8.16, the Company authorizes the Bank to disclose to any participant, assignee, prospective participant, prospective assignee or the Bank's U.S. investment banking affiliates, such financial and other information in the Bank's possession concerning the Company or its Subsidiaries that has been delivered to the Bank; provided, that such participant, assignee, prospective participant, prospective assignee or the Bank's U.S. investment banking affiliates, as the case may be, agrees in writing to the Bank to keep such information confidential to the same extent required of the Bank hereunder. 8.17 Consequential Damages. Notwithstanding anything herein to the contrary, neither party shall have any liability for any consequential, indirect, punitive, exemplary or special damages, including, without limitation, loss of business, opportunities, revenue or profits. 8.18 Final Agreement. THIS WRITTEN LOAN AGREEMENT REPRESENTS THE FINAL AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMTORANEOUS OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES. 34 38 IN WITNESS WHEREOF, the Company and the Bank have caused this Agreement to be duly executed as of the day and year first above written. COMPANY: BAKER HUGHES INCORPORATED, a Delaware corporation By: -------------------- Douglas C. Doty Treasurer Address for Notices: BAKER HUGHES INCORPORATED 3900 Essex Lane, Suite 1200 Houston, Texas 77027 Attention: Treasurer Facsimile: 713/439-8699 Telephone: 713/439-8600 BANK: By: -------------------- Name: Title: Commitment Limit: Addresses for Notices: Facsimile: Telephone: Bank's Domestic Lending Office: Bank's Eurodollar Lending Office: 35 39 EXHIBIT A FORM OF COMPANY NOTE October 1, 1998 For value received, BAKER HUGHES INCORPORATED, a Delaware corporation (the "Company") promises to pay to the order of [ ] (the "Bank"), for the account of its applicable lending office, at the principal office of the Bank at [ ], the principal amount of each Advance made by the Bank to the Company pursuant to Section 3.01 of the Credit Agreement hereinafter referred to on the last day of the Interest Period for the Advance. In any event, the aggregate unpaid principal amount of each Advance shall be due and payable on the Termination Date. The Company also promises to pay interest on the unpaid principal amount of each such Advance from the date of the Advance until the principal amount is paid in full, at such interest rates, and payable at such times, as are specified in the Credit Agreement; provided, that any amount of such principal and, to the extent permitted by law, any interest thereon that is not paid when due (whether at stated maturity, by acceleration or otherwise) shall bear interest from the date on which such amount is due until such amount is paid in full, payable on demand, at the Default Rate. Loans and payments under this note shall be recorded and endorsed hereon by the holder hereof; provided, that the failure by the holder hereof to make such recordation and endorsement shall not limit or otherwise affect the obligation of the Company hereunder, and payments of principal and interest hereof by the Company shall not be affected by the failure to make any such recordation and endorsement thereof hereon. Principal and interest shall be payable in United States dollars in immediately available funds. This note is the Note referred to in, is issued in connection with, and is entitled to the benefits of, that certain Credit Agreement dated as of October 1, 1998, between the Company and the Bank, to which Credit Agreement reference is hereby made for a statement of the terms and provisions under which this note is issued. Capitalized terms used herein shall have the respective meanings set forth in the Credit Agreement. This note shall be governed by and construed in accordance with the laws of the State of Texas, United States of America. Except for notice required to be given to the Company under the Credit Agreement, the Company hereby waives presentment, demand, protest, notice of intent to accelerate, notice of acceleration or other notice in connection with this Note. 40 THIS WRITTEN LOAN AGREEMENT REPRESENTS THE FINAL AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES. BAKER HUGHES INCORPORATED By: Name: Title: 2 41 Transactions Noted on the Note Unpaid Amount of Maturity Interest Amount of Principal Notation Date Advance Date Rate Payment Balance Made By 3 42 EXHIBIT B BANK AND OTHER BANKS
Bank and Other Banks Commitment Limit - -------------------- ---------------- ABN AMRO Bank N.V. 12,500,000 Australia and New Zealand Banking Group Limited 12,500,000 Bank of America National Trust and Savings Association 28,125,000 The Bank of New York 12,500,000 Barclays Bank PLC 25,000,000 Bayerische Hypo Und Vereinsbank AG, Los Angeles Agency 12,500,000 Chase Bank of Texas, National Association 28,125,000 Citibank, NA 28,125,000 Credit Suisse First Boston 12,500,000 Dresdner Bank AG, New York Branch 12,500,000 Morgan Guaranty Trust Company of New York 28,125,000 Northern Trust Company 12,500,000 Royal Bank of Canada 12,500,000 Toronto Dominion (Texas), Inc. 12,500,000 -------------- TOTAL 250,000,000
43 EXHIBIT C COMPANY REQUEST FOR ADVANCE [Date] [Name and address of Bank] Gentlemen: Baker Hughes Incorporated (the "Company") refers to the Credit Agreement dated as of October 1, 1998 (the "Credit Agreement", the terms defined therein being used herein as therein defined), by and between the Company and you. The Company hereby gives you notice pursuant to Section 3.01 of the Credit Agreement that the Company hereby requests an Advance under the Credit Agreement and in that connection sets forth the terms on which the proposed Advance is requested to be made. The principal amount of the proposed Advance is $_______; the drawdown date of the proposed Advance is __________; the proposed Advance is to be a [Eurodollar Advance] or a [Reference Rate Advance]; the term of the Interest Period for the proposed Advance is ____ months; the maturity date for payment of the principal amount of the proposed Advance is ______________ 19 ___; the interest payment date[s] of the proposed Advance is/are __________; and the other terms applicable to the proposed Advance are ________________________. In accordance with Section 3.01 of the Credit Agreement, please advise the Company of the [Eurodollar Rate] or [Reference Rate]. Sincerely, BAKER HUGHES INCORPORATED By: Name: Title: 44 EXHIBIT D FORM OF OPINION OF COMPANY COUNSEL [date] [Bank name and address] Ladies and Gentlemen: I am the _______________ of Baker Hughes Incorporated, a Delaware corporation (the "Company"), and have acted as counsel to the Company in connection with the preparation and execution of that certain Credit Agreement dated as of October 1, 1998 (the "Credit Agreement"), by and between the Company and ________________ ("Bank"). Terms used herein that are defined in the Credit Agreement have the respective meanings ascribed to those terms in the Credit Agreement, unless the context otherwise indicates. In that connection, I have examined the Note and the Credit Agreement that have been executed by the Company, but not by the Bank (herein being collectively referred to as the "Examined Documents"). I have also examined the originals or photostatic copies, certified or otherwise identified to my satisfaction, of the Certificate of Incorporation and Bylaws of the Company, each as amended to date, corporate records of the Company, certificates of public officials, and certificates of representatives of the Company, and such other documents as I have deemed necessary or appropriate for the purposes of this opinion. Based upon the foregoing, subject to the qualifications, limitations, exceptions and assumptions hereinafter set forth, and having due regard for such legal considerations as I deem relevant, I am of the opinion that: 1. The Company is a corporation duly incorporated, validly existing and in good standing under the laws of the State of Delaware and has all necessary corporate power and authority to own its properties and carry on its business as now conducted and is duly qualified and in good standing in each United States jurisdiction which requires qualification, except those jurisdictions, if any, in which the failure to so qualify would not have a material adverse affect on the business, properties or financial condition of the Company and its Subsidiaries taken as a whole. 2. The Company has all necessary corporate power and authority to enter into and perform the Credit Agreement and to issue and deliver the Note, as provided in the Credit Agreement. The execution, delivery and performance of the Credit Agreement and the Note have been authorized by all necessary corporate action on the part of the Company. 3. The Credit Agreement is, and the Note when duly executed and delivered for value received will be, the valid and legally binding obligations of the Company 45 enforceable in accordance with their terms, except as such enforceability may be (i) limited by the effect of any applicable bankruptcy, insolvency, reorganization, moratorium, fraudulent transfer and other similar laws from time to time in effect and judicial decisions relating to or affecting the enforcement of creditors' rights and debtor's obligations generally, or (ii) subject to the effect of general principles of equity (regardless of whether such enforceability is considered in a proceeding in equity or at law). 4. The execution, delivery and performance of the Credit Agreement and the Note by the Company do not require the consent or approval of any United States governmental body or other regulatory authority and are not in contravention of or in conflict with any law or regulation applicable to the Company or any term or provision of the Certificate of Incorporation or Bylaws of the Company. 5. The execution, delivery and performance of the Credit Agreement and the Note, to the best of my knowledge, are not in contravention of, or in conflict with, any agreement or indenture that is material to the Company and its Subsidiaries, taken as a whole, and to which the Company is a party or by which any of its property is bound, and do not cause any Mortgage upon any such property to be created or imposed or to mature except as may be permitted by the terms of the Credit Agreement. 6. To my knowledge, there is no pending or threatened litigation before any court, administrative agency or arbitration panel to which the Company is a party, which, in view of the facts currently available to me, is expected to have a material adverse effect on the financial condition or operations of the Company and its Subsidiaries, taken as a whole. To my knowledge, the Company is not in default with respect to any material order, writ, injunction or decree of any court or other governmental or regulatory authority that is expected to have a material adverse effect on the financial condition or operations of the Company and its Subsidiaries, taken as a whole. The opinions expressed herein are subject to the following qualifications, limitations, exceptions and assumptions: (A) In rendering the opinions expressed in Paragraph 1, above, I have relied in part on certificates or telegrams of recent date of public officials of the State of Delaware. Such opinions are limited to the date of the relevant certificates or telegrams. (B) The opinions expressed in Paragraph 5 hereof are limited to the agreements, indentures and instruments, filed by the Company with the U.S. Securities and Exchange Commission ("SEC") as material agreements pursuant to the rules and regulations of the SEC as a part of its annual report on Form 10-K for the year ending September 30, 1997, and those filed by the Company with the SEC subsequent to September 30, 1997. (C) I have assumed, without independent investigation, that the Bank will duly execute and deliver to the Company each of the Examined Documents to which it is a party, with 2 46 all necessary power and authority (corporate and otherwise) and that (i) if the Company or the Bank exercises any rights or enforce any remedies, it will do so in good faith and in a commercially reasonable manner and will abide by any implied covenant of good faith and fair dealing which may be imposed by law, and (ii) the Bank will comply with any applicable state or federal securities laws. (D) As to matters of fact relevant to this opinion, I have, to the extent I have deemed appropriate, relied upon (i) certificates and other representations of officers and representatives of the Company and its Subsidiaries who have made investigations outside of my personal control, and (ii) certificates and telegrams of governmental officials. (E) In my examination of the documents referred to above, I have assumed all documents submitted to me as originals are authentic and complete, (ii) all documents submitted to me as certified or photostatic copies conform to the original document, and such original document is authentic and complete, (iii) that signatures on all documents are genuine, (iv) all statements of fact contained in the Examined Documents and all other documents, certificates, and records that I have examined are true, accurate, and correct, and all statements of fact made to me by officers and representatives of the Company and its Subsidiaries are true and correct, and (v) there has been no material change in the facts set forth in the Examined Documents, or such other documents, certificates, and records that I have examined or representations made to me, prior to the date hereof. I have no knowledge that any such documents, certificates, and records were not authentic and complete, or that any of such statements are not true and correct as of the date hereof. (F) I have assumed there has been no cancellation or withdrawal of any of the organizational documents of the Company, and that no act or event has occurred which would, pursuant to the terms of such organizational documents or other applicable law, permit or require the dissolution of the Company, and I have no knowledge of any such cancellation, withdrawal, act or event. I have further assumed due authorization for execution, delivery, and performance of such organizational documents by each party by whom such authorization is required, and that none of the signatories to such organizational documents was operating under any legal disability under the laws of the state of residence or incorporation of such party. (G) I express no opinion as to the availability or enforceability of the following provisions and remedies set forth in the Examined Documents: (i) equitable remedies, including specific performance, or any other remedy set forth in the Examined Documents; (ii) provisions relating to waivers by any of the parties or precluding any of the parties from asserting certain claims or defenses or from obtaining certain rights and remedies, or which purport to waive any applicable statute of limitations, or rights to any stay or extension laws, or which purport to establish evidential standards; (iii) provisions expressly or by implication waiving broadly or vaguely stated rights, unknown future rights, or defenses to obligations or rights granted by law; (iv) provisions relating to subrogation rights, delay or omission or enforcement of rights or remedies, severability, injunctions, appointment of receivers, waivers or ratifications of future acts, the rights of third parties, prohibitions against the sale, transfer, or assignment of any property or interest, marshalling of assets, set-offs, or sale in the inverse order of alienation; 3 47 (v) provisions at variance with public laws which do not affect the practical benefits of the Examined Documents; (vi) provisions covenanting to take actions, the taking of which are discretionary with or subject to the approval of a third party or which are otherwise subject to a contingency, the fulfillment of which is not within the control of the parties so covenanting; (vii) provisions purporting to apply subsequently enacted laws; (viii) provisions to the effect that rights or remedies may be exercised without notice, that rights or remedies are not exclusive, that every right or remedy is cumulative and may be exercised in addition to or with any other right or remedy, or that the election of a particular remedy or remedies does not preclude recourse to one or more other remedies, or that the failure to exercise or delay in exercising rights or remedies will not operate as a waiver of such right or remedy; and (ix) limitations on enforceability posed by public policy consideration or court decisions which may limit the right to obtain indemnification under certain circumstances. Enforcement of obligations under the Examined Documents may also be limited by constitutional limitations (including notice and due process requirements), by the redemption rights of the United States under the Federal Tax Lien Act of 1966, as amended, and requirements that the Bank exercise rights under the Examined Documents in a commercially reasonable manner. (H) The opinions expressed herein relate solely to, are based solely upon, and are limited exclusively to the laws of the State of Texas, the General Corporation Law of the State of Delaware, and the laws of the United States of America, to the extent applicable and as currently in effect. I assume no, and hereby specifically disclaim any, obligation to supplement this opinion if any applicable laws change after the date of this opinion, of if I become aware of any facts that might change the opinions expressed above after the date of this opinion. (I) The opinions set forth herein are limited to the specific matters addressed hereby, and no opinion is to be implied or may be inferred beyond the matters specifically addressed. (J) This letter is provided to you as a legal opinion only and not as a guaranty or warranty of the matters discussed herein, nor does this letter constitute a guarantee of any of the obligations set forth in the Examined Documents. By rendering this opinion, I am not guaranteeing or insuring the obligations set forth in the Examined Documents, or other matters referred to herein or opined upon herein. This opinion is furnished to you solely for your benefit pursuant to the Credit Agreement. This letter and the opinions expressed herein may not be used or relied upon by you for any other purpose and may not be relied upon for any purpose by any other person or entity without my prior written consent. Except for the use permitted herein, this letter is not to be quoted or reproduced in whole or in part or otherwise referred to in any manner, nor is it to be filed with any governmental agency or delivered to any other person or entity without my prior written consent. Very truly yours, 4 EX-10.37 23 FORM OF NONQUALIFIED STOCK OPTION AGMT.- OFFICERS 1 BAKER HUGHES INCORPORATED EXHIBIT 10.37 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 Long Term Incentive 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 $21.00 for each share subject to this option, payable at the time of exercise. Subject to the terms of the Plan and this Stock Option Agreement regarding exercise, this option will vest and become exercisable with respect to increments of thirty-three and one-third percent (33-1/3%) of the shares subject to this option on the first day of October in each of the years 1999, 2000 and 2001, provided the Grantee remains employed by the Company or its subsidiaries. This option may not be exercised after October 1, 2008. 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 fraud, theft, embezzlement, conflict of interest, death, retirement or disability, which is covered by paragraphs 2, 3 and 4 below), this option will wholly and completely terminate on the date of termination of employment, to the extent it is not then exercisable; however, to the extent the option is exercisable, Grantee shall have three months from the date of termination of employment to exercise the option but in no event later than October 1, 2008. 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. 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 October 1, 2008). 4. 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 October 1, 2008). 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: October 1, 1998 BAKER HUGHES INCORPORATED --------------------------------- G.S. FINLEY SENIOR VICE PRESIDENT EX-10.38 24 FORM OF NONQUALIFIED STOCK OPTION AGMT.- EMPLOYEES 1 BAKER HUGHES INCORPORATED EXHIBIT 10.38 NONQUALIFIED STOCK OPTION AGREEMENT 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 1998 Employee 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 $21.00 for each share subject to this option, payable at the time of exercise. Subject to the terms of the Plan and this Stock Option Agreement regarding exercise, this option will vest and become exercisable with respect to increments of thirty-three and one-third percent (33-1/3%) of the shares subject to this option on the first day of October in each of the years 1999, 2000 and 2001, provided the Grantee remains employed by the Company or its subsidiaries. This option may not be exercised after October 1, 2008. 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 fraud, theft, embezzlement, conflict of interest, death, retirement or disability which is covered by paragraphs 2, 3 and 4 below), this option will wholly and completely terminate on the date of termination of employment, to the extent it is not then exercisable; however, to the extent the option is exercisable, Grantee shall have three months from the date of termination of employment to exercise the option but in no event later than October 1, 2008. 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. 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 October 1, 2008). 4. 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 October 1, 2008). 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: October 1, 1998 BAKER HUGHES INCORPORATED --------------------------------- G.S. FINLEY SENIOR VICE PRESIDENT EX-10.39 25 FORM OF NONQUALIFIED STOCK OPTION AGMT. - OFFICERS 1 EXHIBIT 10.39 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 Long Term Incentive 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 $21.00 for each share subject to this option, payable at the time of exercise. Subject to the terms of the Plan and this Stock Option Agreement regarding exercise, this option will vest and become exercisable with respect to increments of thirty-three and one-third percent (33-1/3%) of the shares subject to this option on the first day of December in each of the years 2001, 2002 and 2003, provided the Grantee remains employed by the Company or its subsidiaries. This option may not be exercised after December 2, 2008. The option shall vest and become exercisable in the event of a Change in Control, other than an event described only in clause (3) of Section 16(f) of the Plan. In addition, this option shall vest and become exercisable upon (i) the termination of employment of the Grantee by the Company without Cause or by the Grantee for Good Reason within two years following an event described in clause (3) of Section 16(f) of the Plan or (ii) the consummation of a merger or consolidation of the Company or any direct or indirect subsidiary of the Company with any other corporation, other than a merger or consolidation immediately following which the individuals who comprise the Board of Directors of the Company immediately prior thereto constitute at least a majority of the Board of Directors of the Company, the entity surviving such merger or any parent thereof (or a majority plus one member where such board comprises an odd number of members). The provisions of Section 5.4 of the Severance Agreement by and between the Company and Grantee shall not apply to this option, and vesting and the period of exercisability of this option following a Change in Control shall be governed by this agreement and the Plan. This agreement will control in the event of any conflict in terms with the Plan or any other agreement or plan with respect to vesting and excercisability following a Change in Control. 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 fraud, theft, embezzlement, conflict of interest, death, retirement or disability, or by the Company without Cause or by the Grantee for Good Reason within two years following a Change in Control, which is covered by paragraphs 2, 3, 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; however, to the extent the option is exercisable, Grantee shall have three months from the date of termination of employment to exercise the option but in no event later than December 2, 2008. 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. 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 December 2, 2008). 4. 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 December 2, 2008). 5. Upon the termination of employment of the Grantee by the Company without Cause or by the Grantee for Good Reason within two years following a Change in Control, the Grantee shall have two years from the date of termination of employment to exercise the option but in no event later than December 2, 2008. In the event that the Company is party to a transaction which is otherwise intended to qualify for "pooling of interests" accounting treatment (i) the provisions of this option shall, to the extent practicable, be interpreted so as to permit such accounting treatment, and (ii) to the extent that application of clause (i) of this sentence does not preserve the availability of such accounting treatment, then, to the extent that any of the provisions of this option disqualifies the transaction as a "pooling" transaction, the Board of Directors of the Company may amend any provisions of this option and/or declare this option null and void 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." 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. Capitalized terms which are not defined herein shall have the meaning ascribed to such terms in 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: December 2, 1998 BAKER HUGHES INCORPORATED ---------------------------- G.S. FINLEY SENIOR VICE PRESIDENT Agreed and Accepted this ____ day of _________, 1999. - ------------------------------------------- [NAME] EX-10.40 26 FORM OF INCENTIVE STOCK OPTION AGRMT. - OFFICERS 1 BAKER HUGHES INCORPORATED EXHIBIT 10.40 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 Long Term Incentive 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 $21.00 for each share subject to this option, payable at the time of exercise. Subject to the terms of the Plan and this Stock Option Agreement regarding exercise, this option will vest and become exercisable with respect to increments of thirty-three and one-third percent (33-1/3%) of the shares subject to this option on the first day of October in each of the years 1999, 2000 and 2001, provided the Grantee remains employed by the Company or its subsidiaries. This option may not be exercised after October 1, 2008. 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 fraud, theft, embezzlement, conflict of interest, death, retirement or disability, which is covered by paragraphs 2, 3 and 4 below), this option will wholly and completely terminate on the date of termination of employment, to the extent it is not then exercisable; however, to the extent the option is exercisable, Grantee shall have three months from the date of termination of employment to exercise the option but in no event later than October 1, 2008. 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. 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 October 1, 2008). 4. 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 October 1, 2008). 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: October 1, 1998 BAKER HUGHES INCORPORATED --------------------------------- G.S. FINLEY SENIOR VICE PRESIDENT EX-10.50 27 CORPORATE EXECUTIVE LOAN PROGRAM 1 EXHIBIT 10.50 BAKER HUGHES INCORPORATED CORPORATE EXECUTIVE LOAN PROGRAM I. PURPOSE: To provide loans to Company executives. II. ADMINISTRATION: The Compensation Committee of the Board of Directors will administer the loan program. The Company's Chief Executive Officer will provide a report to the Compensation Committee periodically on the participants, amount of loans outstanding, and activity under this program. III. PARTICIPANTS: Any executive of the Company on the Strategic Leadership Team. IV. LOAN AMOUNT LIMITATIONS: No more than $6,000,000 principal amount of loans in the aggregate may be outstanding to all participants under this program at any time. No participant may receive a loan if the aggregate of loans outstanding to that participant would exceed his current annual salary rate. V. INTEREST: Interest shall be due and payable with respect to any loan on a quarterly basis at the greater of (a) the weighted average borrowing rate of the Company at the inception of the loan, or (b) the Applicable Federal Interest Rate as described from time to time under Section 1274(d) of the Internal Revenue Code of 1986 in effect at the inception of the loan for the relevant period within the meaning of Section 1274(d). VI. TERM: No loan may have a term of more than five years. All loans shall also be due and payable upon the earlier to occur of demand by the Company or termination of the participant's employment with the Company. A loan that must be repaid by reason of the expiration of its term may be renewed at the discretion of the administrator. VII. OFFSETS: If any amount payable with respect to a loan is past due, the Company may offset, to the extent of such overdue amount, any amounts otherwise due and payable to the participant under any severance plan or policy of the Company or under the Company's Supplemental Retirement Plan or as compensation. Upon termination of a participant's employment, the Company shall be entitled to offset any amounts otherwise due under any severance plan or policy of the Company or under the Company's Supplemental Retirement Plan or as compensation. VIII. OTHER PROVISIONS: A participant will be required, as a condition to making a loan, to enter into such agreements as may be required by the Compensation Committee, in the case of the Chief Executive Officer, or by the Chief Executive Officer, in the case of other participants, including a note, a security instrument or other agreements. The note evidencing a loan shall comply in all respects with the provisions of this program and must be executed by the participant before the loan is funded. EX-13.1 28 PORTIONS OF 1998 ANNUAL REPORT TO STOCKHOLDERS 1 EXHIBIT 13.1 BAKER HUGHES INCORPORATED SELECTED FINANCIAL DATA
Year Ended Three Months Ended Year Ended September 30, December 31, December 31, ---------------------------------------------- (In millions, except per share amounts) 1998 1997 1997 1996 1995 1994 ------------ ---------- --------- --------- ---------- -------- Revenues $ 6,311.9 $ 1,572.9 $ 5,343.6 $ 4,445.8 $ 3,920.4 $3,699.3 ------------ ---------- --------- --------- ---------- -------- Costs and expenses: Costs of revenues 4,710.9 1,045.7 3,676.9 3,062.8 2,711.4 2,551.5 Selling, general and administrative 1,301.8 324.6 1,036.1 889.2 818.2 831.9 Merger related costs 219.1 Unusual charge 215.8 52.1 39.6 31.8 Acquired in-process research and development 118.0 Operating income of business sold (10.5) ------------ ---------- --------- --------- ---------- -------- Total 6,447.6 1,370.3 4,883.1 3,991.6 3,529.6 3,404.7 ------------ ---------- --------- --------- ---------- -------- Operating income (loss) (135.7) 202.6 460.5 454.2 390.8 294.6 Interest expense (149.0) (24.5) (91.4) (87.9) (89.1) (106.4) Interest income 3.6 1.1 3.6 4.9 6.6 5.2 Spin-off related costs (8.4) Gain on sale of Varco stock 44.3 Gain on sale of Pumpsystems 101.0 ------------ ---------- --------- --------- ---------- -------- Income (loss) from continuing operations before income taxes, extraordinary loss and cumulative effect of accounting changes (281.1) 179.2 364.3 415.5 308.3 294.4 Income taxes (16.3) (68.0) (163.4) (169.1) (126.9) (123.5) ------------ ---------- --------- --------- ---------- -------- Income (loss) from continuing operations before extraordinary loss and cumulative effect of accounting changes (297.4) 111.2 200.9 246.4 181.4 170.9 Extraordinary loss (44.3) Cumulative effect of accounting changes (12.1) (14.6) (44.2) ------------ ---------- --------- --------- ---------- -------- Income (loss) from continuing operations (297.4) 111.2 188.8 246.4 166.8 82.4 Discontinued operations, net of tax 2.8 (154.9) 55.7 38.4 38.0 ------------ ---------- --------- --------- ---------- -------- Net income (loss) $ (297.4) $ 114.0 $ 33.9 $ 302.1 $ 205.2 $ 120.4 ============ ========== ========= ========= ========== ======== Per share of common stock: Income (loss) from continuing operations before extraordinary loss and cumulative effect of accounting changes: Basic $ (.92) $ .35 $ .67 $ .86 $ .55 $ .59 Diluted (.92) .34 .66 .85 .54 .58 Dividends .46 .12 .46 .46 .46 .46 Financial position: Working capital $ 1,414.6 $ 1,502.7 $ 1,398.4 $ 1,856.1 $ 1,812.2 $1,584.4 Total assets 7,810.8 7,230.6 7,087.0 5,796.6 5,435.2 5,141.3 Long-term debt 2,726.3 1,605.3 1,473.3 1,124.2 1,295.3 1,128.0 Stockholders' equity 3,199.4 3,519.0 3,491.5 3,190.9 2,870.3 2,886.8
See Notes 1 and 2 of Notes to Consolidated Financial Statements for a discussion of the Merger with Western Atlas Inc. and the adoption of new accounting standards in 1997. In 1995, the Company adopted a new accounting standard related to the accounting for postemployment benefits. In 1994, the Company adopted new accounting standards related to accounting for income taxes and employers accounting for post retirement benefits other than pensions. See Note 7 of Notes to Consolidated Financial Statements for a discussion of acquisitions made in 1998, the Transition Period, 1997 and 1996. The Company sold EnviroTech Pumpsystems and EnviroTech Measurements and Controls in 1994. See Note 8 of Notes to Consolidated Financial Statements for a description of the unusual and other nonrecurring charges in 1998, 1997 and 1996. The unusual charge in 1994 consisted of the restructuring and reorganization of certain Oilfield divisions and the discontinuance of an MWD product line, offset by an insurance recovery. The Company repurchased or defeased debt in 1994 resulting in an extraordinary loss. 2 BAKER HUGHES INCORPORATED 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, 1998, 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 is distributed throughout the Company. Management maintains a systematic program to assess compliance with the policies included in the code. 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 arrangement. 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/ MAX L. LUKENS /s/ ERIC L. MATTSON /s/ JAMES W. HARRIS Max L. Lukens Eric L. Mattson James W. Harris Chairman, President Senior Vice President Vice President-Tax and Controller and Chief Executive Officer and Chief Financial Officer
1 3 BAKER HUGHES INCORPORATED 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 Baker Hughes Incorporated ("Baker Hughes" or the "Company") for the year ended December 31, 1998, the three months ended December 31, 1997 and for the years ended September 30, 1997 and 1996 and the related notes to consolidated financial statements. FORWARD-LOOKING STATEMENTS MD&A includes 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 are intended to identify forward-looking statements. No assurance can be given that actual results may not differ materially from those in the forward-looking statements herein for reasons including the effects of competition, the level of petroleum industry exploration and production expenditures, world economic conditions, prices of, and the demand for, crude oil and natural gas, drilling activity, weather, the legislative environment in the United States and other countries,OPEC policy, conflict in the Middle East and other major petroleum producing or consuming regions, the development of technology that lowers overall finding and development costs and the condition of the capital and equity markets. Baker Hughes' expectations regarding its level of capital expenditures and its capital expenditures on Project Renaissance described in "Investing Activities" 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; and the need to replace any unanticipated losses in capital assets. CHANGE IN YEAR-END On August 27, 1998, the Board of Directors of Baker Hughes 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 (the "Transition Period") precedes the start of the 1998 fiscal year. "1997" and "1996" refer to the respective years ended September 30, the Transition Period refers to the three months ended December 31, 1997, and "1998" refers to the twelve months ended December 31, 1998. MERGER On August 10, 1998, Baker Hughes completed a merger ("the Merger") with Western Atlas Inc. ("Western Atlas") by issuing 148.6 million shares of its common stock for all of the outstanding common stock of Western Atlas. Each share of Western Atlas common stock was exchanged for 2.7 shares of Baker Hughes common stock. Western Atlas is a leading supplier of oilfield services and reservoir information technologies for the worldwide oil and gas industry. It specializes in land, marine and transition-zone seismic data acquisition and processing services, well-logging and completion services and reservoir characterization and project management services. The Merger was accounted for as a pooling of interests and, accordingly, all prior period consolidated financial statements of Baker Hughes have been restated to include the results of operations, financial position and cash flows of Western Atlas. Information concerning common stock, employee stock plans and per share data has been restated on an equivalent share basis. The consolidated financial statements as of September 30, 1997 and for each of the two years in the period ended September 30, 1997 include Baker Hughes' previous September 30 fiscal year amounts and Western Atlas' December 31 calendar year amounts for the respective fiscal years of Baker Hughes. Consolidated financial statements for the three months ended December 31, 1997 include amounts for Baker Hughes and Western Atlas for the three months ended December 31, 1997. As a result, Western Atlas' results of operations for the three 2 4 BAKER HUGHES INCORPORATED MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS months ended December 31, 1997 are included in both the consolidated financial statements for the year ended September 30, 1997 and for the three months ended December 31, 1997. BUSINESS ENVIRONMENT The Company is primarily engaged in the oilfield service industry. Oilfield operations generated more than 90 percent of the Company's consolidated revenues in 1998, the Transition Period, 1997 and 1996 and currently consists of eight business units- Baker Atlas, Baker Hughes INTEQ, Baker Oil Tools, Baker Petrolite, Centrilift, E&P Solutions, Hughes Christensen and Western Geophysical - that manufacture and sell equipment and provide related services used in the drilling, completion, production, and maintenance of oil and gas wells and in reservoir measurement and evaluation. The business environment for the Company and its corresponding operating results are affected significantly by the petroleum industry exploration and production expenditures. These expenditures are influenced strongly by oil company expectations about the supply and demand for crude oil and natural gas, energy prices, and finding and development costs. Petroleum supply and demand, pricing, and finding and development costs, in turn, are influenced by numerous factors including, but not limited to, those described above in "Forward-Looking Statements." Four key factors that currently influence the worldwide crude oil market and therefore current and future expenditures for exploration and development by our customers are: o The degree to which certain large producing countries, in particular Saudi Arabia and Venezuela, are willing and able to restrict production and exports of crude oil. o The increasing rate of depletion of known hydrocarbon reserves. Technological advances are resulting in accelerated decline rates and shorter well lives. In general, accelerated decline rates require additional customer spending to hold production levels. o The level of economic growth in certain key areas of the world, particularly developing Asia, where the correlation between energy demand and economic growth is particularly strong. o The amount of crude oil in storage relative to historic levels. These four factors, together with oil and gas company projections for future commodity price movement, influence overall levels of expenditures for exploration and development by the Company's customers. More specifically, two key factors influence the level of exploration and development spending: Technology: Advances in the design and application of more technologically advanced products and services allow oil and gas companies to drill fewer wells, place the wells they drill more precisely in the higher yielding or more easily produced hydrocarbon zones of the reservoir, and allow operators to drill, complete, and operate wells at lower overall costs. Price Volatility: Changes in hydrocarbon markets create uncertainty in the future price of hydrocarbons and therefore create uncertainty about the aggregate level of customer spending. Multiyear projects, such as deepwater exploration and drilling, are the least likely to be impacted by price volatility. Projects with relatively short payback periods or low profit margins, such as workover activity or the extraction of heavy oil, are more likely to be impacted. Crude oil and natural gas prices and the Baker Hughes rotary rig count are summarized in the tables below as averages for the periods indicated and are followed by the Company's outlook. While reading the Company's outlook set forth below, 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 AND GAS PRICES
Transition 1998 Period 1997 1996 ------ ----------- ------ ------ West Texas Intermediate Crude ($/bbl) 14.41 20.02 21.83 20.51 U. S. Spot Natural Gas ($/mcf) 2.01 2.72 2.47 2.21
3 5 Crude oil prices experienced record low levels in 1998, trading below $15/bbl for most of the year and averaging only $14.41/bbl - the lowest yearly average recorded since 1983 and down over 30 percent from year-ago levels. Prices were lower due to increased supply from renewed Iraqi exports, increased OPEC and non-OPEC production, higher inventories (particularly in North America) and a simultaneous slowing of demand growth due to the Asian economic downturn and a generally warmer than normal winter. U.S. natural gas weakened in 1998 compared to the prior year periods, also due to the abnormally warm winter weather. ROTARY RIG COUNT
Transition 1998 Period 1997 1996 ------ ---------- ------ ------ U.S.-Land 703 873 788 652 U.S.-Offshore 123 125 118 107 Canada 259 448 340 247 ----- ----- ----- ----- North America 1,085 1,446 1,246 1,006 ----- ----- ----- ----- Latin America 243 280 277 279 North Sea 52 55 58 53 Other Europe 46 56 57 69 Africa 74 75 80 76 Middle East 166 165 150 138 Asia Pacific 173 173 181 173 ----- ----- ----- ----- International 754 804 803 788 ----- ----- ----- ----- Worldwide 1,839 2,250 2,049 1,794 ----- ----- ----- ----- U.S. Workover 1,088 1,427 1,412 1,306
OUTLOOK The factors discussed above resulted in historically high inventory levels and lower oil prices by the end of 1998. Oil prices that had ranged from $18-$26/bbl in 1997 fell to $15-$18/bbl in the first part of 1998. At the end of 1998 oil prices were trading between $10-$13/bbl. In response to lower oil prices and expectations for continued low oil prices in 1999, oil companies cut upstream capital spending particularly in the second half of 1998. Baker Hughes expects oil prices to remain at relatively low levels throughout 1999, strengthening modestly from current levels towards the latter part of 1999. As a result, 1999 oil company capital spending is expected to decline approximately 25-30 percent from 1998 spending levels. Cuts in upstream capital spending were more significant in North and South America than in the Eastern Hemisphere in 1998. The Company expects customer spending in the Eastern Hemisphere to be reduced more significantly in 1999. Customer spending is expected to decline sequentially during the first two quarters of 1999 before stabilizing in the second half of the year. DISCONTINUED OPERATIONS On October 31, 1997, Western Atlas distributed all the shares of UNOVA, Inc. ("UNOVA"), its then wholly owned industrial automation systems subsidiary, as a stock dividend to its shareholders (the "Spin-off"). The operations of UNOVA for the Transition Period, 1997 and 1996 are classified as discontinued operations in the Company's consolidated financial statements. For periods prior to the Spin-off, cash, debt, and the related net interest expense were allocated based on the capital needs of UNOVA's operations. All corporate general and administrative costs of the Company are included in continuing operations and no allocation was made to UNOVA for any of the periods presented. The UNOVA results of operations for 1997 include a $203.0 million charge for acquired in-process research and development activities related to UNOVA's acquisition of Norand Corporation and United Barcode Industries in April 1997. ACQUISITIONS In addition to the acquisitions discussed below, the Company made several acquisitions to expand its technology base and to increase its presence in key geographic areas. None of these acquisitions individually or in the aggregate are material to the Company's consolidated financial statements. 1998 In April 1998, the Company acquired all the outstanding stock of WEDGE DIA-Log, Inc. ("WEDGE") for $218.5 million in cash. WEDGE specializes in cased-hole logging and pipe recovery services. Also in April 1998, the Company acquired 3-D Geophysical, Inc. ("3-D") for $117.5 million in cash. 3-D is a supplier of primarily land-based seismic data acquisition services. The purchase method of accounting was used to record both of these acquisitions. The operating results of these acquisitions are included in the consolidated statement of operations from their respective acquisition date. 4 6 BAKER HUGHES INCORPORATED MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 1997 In July 1997, the Company completed the acquisition of Petrolite Corporation ("Petrolite"). Baker Hughes issued 19.3 million shares of its common stock having an aggregate value of $730.2 million. Additionally, the Company assumed Petrolite's outstanding vested and unvested employee stock options which had a fair market value of $21.0 million, resulting in total consideration of $751.2 million. The Company recorded an unusual charge of $35.5 million related to the combination of Petrolite with Baker Performance Chemicals, the Company's existing oilfield and industrial chemicals operations, forming Baker Petrolite, a leading provider of oilfield chemicals in the major oilfield markets. Also in July 1997, the Company acquired Drilex International Inc. ("Drilex"), a provider of products and services used in the directional and horizontal drilling and workover of oil and gas wells, for 2.7 million shares of the Company's common stock. The acquisition of Drilex, which has been combined with the operations of Baker Hughes INTEQ, provides the Company with an increased presence in the U.S. land directional and horizontal drilling market. In connection with the acquisition of Drilex, the Company recorded an unusual charge of $7.1 million related to transaction and other one-time costs. RESULTS OF OPERATIONS REVENUES Revenues for 1998 were $6,311.9 million, an increase of 18.1 percent over 1997 revenues of $5,343.6 million. The increase was due, in part, to acquisitions in 1998 and in the latter part of 1997, offset by activity level declines as rig counts in 1998 fell 12.9 percent in North America and 6.1 percent outside North America when compared to 1997. These activity declines were brought about by the significant drop in the price of oil and natural gas in the second half of 1998 and the resultant decrease in customer spending. Approximately 65 percent of the Company's revenues were derived from international activities in 1998 and 1997. Quarterly revenues peaked in the June 1998 quarter at $1,659.7 million and declined $240.5 million, or 14.5 percent, to $1,419.2 million by the December 1998 quarter. The impact on the Company's business was most dramatic in North America land-based activity and in Venezuela. Excluding acquisitions, Western Geophysical is the only division that reported revenue increases in the second half of 1998 as it benefited from strong licensing sales of multiclient seismic data, where customer spending has been less impacted by fluctuations in oil prices. The Company expects revenues in the March 1999 quarter to be lower than the revenues reported for the December 1998 quarter. Revenues for the three months ended December 31, 1997 were $1,572.9 million, an increase of 30.4 percent over revenues for the three months ended December 31, 1996 of $1,206.7 million. The revenue improvement resulted from higher activity levels as the worldwide rig count increased 14.7 percent. Revenues for 1997 were $5,343.6 million, an increase of 20.2 percent over 1996 revenues of $4,445.8 million. Revenue from 1997 acquisitions contributed $218.7 million of the revenue improvement in 1997. Revenue growth in 1997 outpaced the 14.2 percent increase in the worldwide rig count. In particular, revenues in Venezuela increased $136.2 million, or 55.2 percent in 1997 when compared to 1996, as that country continued to work towards its then-stated goal of significantly increasing production. GROSS MARGIN Gross margins for 1998, the Transition Period, 1997 and 1996, were 25.4 percent, 33.5 percent, 31.2 percent and 31.1 percent, respectively. The decrease in 1998 is due primarily to other nonrecurring charges recorded in costs of revenues of $305.0 million as discussed in "Unusual and Other Nonrecurring Charges," manufacturing under-absorption and pricing pressure experienced during the last half of 1998. The increases in the Transition Period, 1997 and 1996 resulted primarily from higher incremental gross profit on increasing revenues, changes in the revenue mix and continued emphasis on productivity and cost improvements. SELLING, GENERAL AND ADMINISTRATIVE Selling, general and administrative ("SG&A") expense as a percent of consolidated revenues for 1998, the Transition Period, 1997 5 7 and 1996, were 20.6 percent, 20.6 percent, 19.4 percent and 20.0 percent, respectively. In 1998, other nonrecurring charges totaling $68.7 million were recorded in SG&A, offset by cost reduction efforts taken in the September and December 1998 quarters. In 1997, SG&A expense as a percent of consolidated revenues declined compared to 1996 due to foreign exchange gains incurred in 1997 compared to foreign exchange losses incurred in 1996 offset by higher marketing costs due to increased activity levels. MERGER RELATED CHARGES In connection with the Merger, in 1998 the Company recorded Merger related costs of $219.1 million. The categories of costs incurred, the actual cash payments made in 1998 and the accrued balances at December 31, 1998 are summarized below:
Accrued Amounts Balance at paid in December 31, Total 1998 1998 ------- ------- ------ Cash costs Transaction costs $ 51.5 $ 46.9 $ 4.6 Employee costs 87.7 66.7 21.0 Other Merger integration costs 21.7 9.8 11.9 ------- ------- ------ Subtotal cash cost 160.9 $ 123.4 $ 37.5 ======= ====== Noncash 58.2 ------- Total $ 219.1 =======
Transaction costs of $51.5 million include banking, legal and printing fees and other costs directly related to the Merger. The Company had contracted for and incurred most of the cost of the services for the remaining accrual; however, such amounts had not been paid. The Company expects that all amounts accrued for transaction costs will be paid by June 30, 1999. Employee-related costs of $87.7 million consist of payments made to certain officers of Western Atlas and Baker Hughes pursuant to change in control provisions and severance benefits paid to terminated employees whose responsibilities were deemed redundant as a result of the Merger. Accrued employee costs, other than retirement benefits, at December 31, 1998 of $12.8 million are scheduled to be paid to the employees upon leaving the Company during the first quarter of 1999. The remaining accrued employee costs at December 31, 1998 of $8.2 million represent retirement benefits of certain employees that will be paid, in accordance with the terms of the agreements, over the lives of the covered employees. Other integration costs include the costs of changing legal registrations in various jurisdictions, terminating a joint venture as a result of the Merger, changing signs and logos at the Company's major facilities around the world, and other integration costs. The Company expects that the remaining balance of $11.9 million for other integration costs will be paid by June 30, 1999. The noncash charge of $58.2 million consists of a charge of $45.3 million related to the triggering of change of control rights contained in certain Western Atlas employee stock option plans that were not converted to Baker Hughes options concurrent with the Merger; a charge of $3.9 million for the issuance of the Company's common stock pursuant to certain stock plans as a result of the change in control; and a $9.0 million charge recorded to write-off the carrying value of a product line that was discontinued as a result of the Merger. UNUSUAL AND OTHER NONRECURRING CHARGES 1998 The Company had experienced high growth levels for its products and services from 1994 through the second quarter of 1998. During the third and fourth quarters of 1998, the Company experienced a decline in demand for its products and services as a result of a significant decrease in the price of oil and natural gas. The decline in customer demand materialized quickly from the previous high growth rates. As a result of this sharp decline in demand and to adjust to the lower level of activity, the Company assessed its overall operations and recorded charges of $549.0 million in the September quarter and $40.5 million in the December quarter as summarized below: 6 8 BAKER HUGHES INCORPORATED MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Accrued Amounts Balance at paid in December 31, Total 1998 1998 ------- ------- ------- Cash charges: Severance for approximately 5,300 employees $ 64.3 $ 26.6 $ 37.7 Integration costs, abandoned leases and other contractual obligations 40.0 14.7 25.3 Environmental reserves 8.8 4.3 4.5 Other cash costs (includes litigation reserves) 21.4 4.7 16.7 ------- ------- ------- Subtotal cash charges 134.5 $ 50.3 $ 84.2 ======= ======= ======= Noncash charges - write-down of: Inventory and rental tools 173.2 PetroAlliance Services Company Limited 83.2 Property and other assets 80.1 Oil and gas properties (ceiling-test) 69.3 Intangible assets 21.5 Real estate held for sale 17.0 Investments in affiliates 10.7 ------- Subtotal noncash charges 455.0 ------- Total cash and noncash charges $ 589.5 =======
The above charges were reflected in the following captions of the consolidated statement of operations:
Total -------- Costs of revenues $ 305.0 Selling, general and administrative 68.7 Unusual charge 215.8 -------- Total $ 589.5 ========
The amount accrued for severance is based upon the Company's written severance policy and the positions eliminated. The accrued severance does not include any portion of the employees' salaries through their severance dates. Based upon current severance dates, the Company expects that of the accrued severance remaining at December 31, 1998, $27.0 million will be paid during the first quarter of 1999 and the remaining $10.7 million will be paid during the second quarter of 1999 when the employees leave the Company. The Company accrued $40.0 million to combine operations and consolidate facilities. Such accrual includes costs to settle leases on idled facilities based upon lease agreements; to shut-down oil and gas operations in certain countries based upon management's decision to abandon operations; to terminate a rig contract based upon the terms of the agreement; and other collocation costs based upon the estimated exit costs for approved plans. The accrual does not include any portion of the costs before actual abandonment of the facilities or ceasing of the operations. The Company expects to spend approximately $9.4 million of the accrued balance as of December 31, 1998 during the first quarter of 1999 and, except for amounts payable under terms of leases and other contracts, the remaining amounts accrued will be paid during the remainder of 1999. The impairment of inventory and rental tool assets of $173.2 million impacted virtually all operating divisions and was due to advances in technology that have obsoleted certain product lines, as well as a decline in market demand that has resulted in an excess supply of certain products. The product lines most affected were completion products, drilling and evaluation systems and tools, tricone and diamond drill bits, and filtration systems. Much of the obsolete and excess inventory will be scrapped and has been written off completely. The remaining assets have been written down to their estimated value based on the Company's inventory and rental tool obsolescence policy. In the third quarter of 1998, the Company recorded an $83.2 million write-down of PetroAlliance Services Company Limited ("PAS"), a former consolidated joint venture operating in the former Soviet Union. The write-down of the joint venture was based upon the Company's estimated value of assets ultimately received in consideration of the sale of the PAS investment in November 1998. The Company received as consideration for the sale of PAS a seismic vessel, other seismic and well-logging assets, certain PAS assets in Kazakhstan and Turkmenistan, certain customer receivables and a $33.0 million note from the purchasers. The write-down included $10.7 million for equipment, $22.0 million of goodwill, and $50.5 million of net current assets. The impairment of property and other assets of $80.1 million includes an $18.1 million write-down to reduce the carrying value of a portion of the Company's drilling equipment; a $12.6 million write-off of obsolete solid and oil-filled streamer sections used on seismic vessels; a $14.9 million write-down of surplus well-logging equipment; a $9.5 million write-off of prepaid royalties 7 9 on an abandoned product line; and $25.0 million of assets written down to fair market value. The write-down of these assets was determined based on internally developed valuations using a variety of methods. A $69.3 million charge results from the application of the ceiling test prescribed for oil and gas properties accounted for under the full cost method. With the sharp decline in price of both oil and natural gas, the carrying value of the Company's oil and gas interests were required to be written down. The write-off of intangible assets of $21.5 million includes $2.7 million for capitalized software costs for product lines abandoned as a result of recent acquisitions; $5.3 million for capitalized development costs for software systems that are being replaced by the Company's implementation of SAP R/3; and $13.5 million for goodwill associated with a discontinued business and a subsidiary held for sale. The write-down of real estate held for sale of $17.0 million is for a specific property and the charge reduces the carrying value to the property's appraised value. The $10.7 million charge is to write-off investments in joint ventures in both Russia and Indonesia and also includes a loss on the sale of Tracor Europa, a discontinued subsidiary. 1997 During 1997, the Company recorded unusual charges of $52.1 million. This included charges in connection with the acquisitions of Petrolite and Drilex of $35.5 million and $7.1 million, respectively, to combine the acquired operations with those of the Company. An additional $9.5 million charge was recorded as a result of the decision to discontinue a low margin, oilfield product line in Latin America and to sell the Tracor Europa subsidiary, a computer peripherals operation. This resulted in a write-down of the investment in Tracor Europa to net realizable value. Cash provisions of the unusual charge totaled $19.4 million. The Company spent $5.5 million during 1997 and $1.6 million during the Transition Period. The Company spent substantially all of the remaining $12.3 million in 1998. Such expenditures relate to specific plans and clearly defined actions and were funded from operations and available credit facilities. 1996 During 1996, the Company recorded an unusual charge of $39.6 million. The charge consisted of the write-off of $8.5 million of oilfield operations patents that no longer protected commercially significant technology, a $5.0 million impairment of a Latin America joint venture due to changing market conditions in the region in which it operates, restructuring charges totaling $24.1 million, and $2.0 million of other charges. The restructuring charges included the downsizing of Baker Hughes INTEQ's Singapore and Paris operations, a reorganization of EIMCO Process Equipment's Italian operations, and the consolidation of certain Baker Oil Tools manufacturing operations. Noncash provisions of the charge totaled $25.3 million and consisted primarily of the write-down of assets to net realizable value. The remaining $14.3 million of the charge represents expected cash expenditures related to severance under existing benefit arrangements, abandoned leases, and the relocation of people and equipment. The Company spent $4.2 million of the cash during 1996, $6.3 million during 1997 and the remaining $3.8 million during the Transition Period. ACQUIRED IN-PROCESS RESEARCH AND DEVELOPMENT The acquisition of Petrolite in 1997 was accounted for as a purchase. Accordingly, the purchase price was allocated to the assets acquired and the liabilities assumed based on their estimated fair market values at the date of the acquisition. In accordance with generally accepted accounting principles, the $118.0 million allocated to in-process research and development has been recorded as a charge in the consolidated statement of operations as of the acquisition date because the technological feasibility of the projects in-process had not been established and there was no alternative future use at that date. There were 26 individual research and development projects that were in development at the time of the acquisition that were classified as in-process research and development. The products under development were valued using a discounted cash flow analysis at a 14 percent discount factor. The cash flows were projected for a 20-year period and included additional research and development and capital expenditures required to 8 10 BAKER HUGHES INCORPORATED MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS complete the projects. The gross margins used for these products were generally consistent with those of other chemical products sold by the Company. The 14 percent discount factor used considered the time value of money, inflation and the risk inherent in the projects under development. In aggregate, the remaining completion costs for these products were projected to exceed $7.2 million with completion periods varying from 90 days to two years. Significant cash inflows from these products in total were expected to commence during 1999. During 1998, 16 of these products generated commercial sales, five had product sales on a trial basis only, and five were determined not to be viable products. INTEREST EXPENSE Interest expense in 1998 increased $57.6 million compared to 1997. Interest expense in 1997 increased $3.5 million compared to 1996. These increases were due to higher debt levels that funded acquisitions, capital expenditures, and working capital. SPIN-OFF RELATED COSTS Costs related to the Spin-off of UNOVA of $8.4 million were charged to continuing operations during 1997. GAIN ON SALE OF VARCO STOCK In May 1996, the Company sold 6.3 million shares of Varco International, Inc. ("Varco") common stock, representing its entire investment in Varco. The Company received net proceeds of $95.5 million and recognized a pretax gain of $44.3 million. The Company's investment in Varco was accounted for using the equity method. Equity income included in the Consolidated Statement of Operations for 1996 was $1.8 million. INCOME TAXES A significant portion of the Merger related costs and the unusual and other nonrecurring charges recorded in 1998 are not deductible for tax purposes in any jurisdiction. In addition, the Company operates in certain jurisdictions that assess tax on a deemed profit or turnover basis. As a result, the Company provided $16.3 million of income taxes on the net loss of $297.4 million in 1998. The effective tax rates before Merger and acquisition related costs, Spin- off related costs, unusual, and other nonrecurring items were 35.5 percent, 37.9 percent, 35.2 percent and 40.0 percent for the periods ended December 31, 1998, December 31, 1997, September 30, 1997 and September 30, 1996, respectively. CAPITAL RESOURCES AND LIQUIDITY OPERATING ACTIVITIES Net cash inflows from operating activities of continuing operations were $809.7 million, $141.1 million, $713.5 million and $636.6 million in 1998, the Transition Period, 1997 and 1996, respectively. The increase in operating cash flow in each successive period resulted from the increasing business levels from period to period. INVESTING ACTIVITIES Net cash outflows from investing activities of continuing operations were $1,675.8 million in 1998, $319.2 million in the Transition Period, $971.8 million in 1997 and $485.4 million in 1996. Property additions in 1998 increased as the Company added capacity to meet increased market demand and due to an increase in the acquisition of multiclient seismic data. In light of the more recent activity decline, the Company reviewed significant capital projects and currently expects 1999 capital expenditures to be approximately $600.0 million (excluding acquisitions), a significant reduction from 1998 capital spending. Funds provided from operations and outstanding lines of credit are expected to be adequate to meet future capital expenditure requirements. Proceeds from the disposal of assets generated $100.0 million in 1998, $20.5 million in the Transition Period, $66.3 million in 1997 and $98.3 million in 1996. The Company obtained $68.7 million of cash from the two stock acquisitions of Petrolite Corporation and Drilex that occurred in 1997. In July 1997, the Company sold all of the marketable securities it obtained from Wm. S. Barnickel & Company in association with the Petrolite acquisition for $48.5 million. In May 1996, the Company sold its entire investment in Varco receiving net proceeds of $95.5 million. In 1998 the Company used short-term borrowings to purchase various businesses including WEDGE for $218.4 million, net of 9 11 cash acquired, 3-D for $117.5 million and Western Rock Bit for $31.4 million. In the Transition Period, the Company used short-term borrowings to purchase various businesses, including Oilfield Dynamics Inc. for $34.2 million. In 1997, the Company used existing cash on hand and short-term borrowings to purchase various businesses, including Environmental Technology Divisions of Deutz AG for $52.2 million, net of cash acquired. In 1996, the Company acquired Vortoil Separation Systems and KTM Process Equipment Inc. for a total of $32.7 million, net of cash acquired. During the June 1997 quarter, the Company began a multi-year initiative designed to develop and implement an enterprise- wide software system. The initiative, named "Project Renaissance," will utilize SAP R/3 as its software platform across the entire Company and is expected to cost in excess of $300 million over a four-year period. The words "expected" and "expects" are intended to identify Forward-Looking Statements in "Investing Activities." See "Forward-Looking Statements" and "Business Environment" above for a description of risk factors related to these Forward-Looking Statements. FINANCING ACTIVITIES Net cash inflows (outflows) from financing activities of continuing operations were $838.6 million, $173.7 million, $462.3 million and ($133.9) million in 1998, the Transition Period, 1997 and 1996, respectively. Total debt outstanding at December 31, 1998 was $2,770.7 million, compared to $1,782.6 million at December 31, 1997 and $1,589.5 million and $1,179.1 million at September 30, 1997 and 1996, respectively. The increase in debt is primarily due to increased borrowings from commercial paper and revolving credit facilities that funded acquisitions, capital expenditures and increases in working capital. The debt-to-equity ratio was 0.87 at December 31, 1998 compared to 0.51 at December 31, 1997. Cash dividends in 1998 increased due to the increase in the number of shares of common stock outstanding. On an annualized basis the cash dividend of $0.46 per share of common stock will require approximately $150.0 million of cash which compares to an annual requirement of approximately $80.0 million before the Merger. At December 31, 1998, the Company had $2,237.4 million of credit facilities with commercial banks, of which $1,000.0 million was committed. These facilities are subject to normal banking terms and conditions that do not significantly restrict the Company's activities. Subsequent to December 31, 1998, the Company issued $400 million of 6.875 percent Notes due January 2029, $325 million of 6.25 percent Notes due January 2009, $200 million 6.0 percent Notes due February 2009 and $100 million of 5.8 percent Notes due 2003 with effective interest rates of 7.07 percent, 6.36 percent, 6.09 percent and 6.01 percent, respectively. The proceeds were used to repay current portions of long-term debt, commercial paper, and other short-term borrowings. ACCOUNTING STANDARDS DERIVATIVE AND HEDGE ACCOUNTING In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities. 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 its fair value. Depending on the intended use of the derivative, changes in its fair value will be reported in the period of change as either a component of earnings or a component of other comprehensive income. SFAS No. 133 is effective for all quarters of fiscal years beginning after June 15, 1999. Retroactive application to periods prior to adoption is not allowed. The Company will adopt the standard in the first quarter of 2000. The Company has not quantified the impact of the adoption of SFAS No. 133 on its consolidated financial statements. QUANTITATIVE AND QUALITATIVE MARKET RISK DISCLOSURES The Company is exposed to certain market risks that are inherent in the Company's financial instruments arising from transactions that are entered into in the normal course of business. The Company may enter into derivative financial instrument transactions to manage or reduce market risk; that is, the Company does not enter into derivative financial instrument transactions for speculative 10 12 BAKER HUGHES INCORPORATED MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 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 have maturities of less than three months or have variable interest rates. All other things being equal, the fair market value of debt with a fixed interest rate will increase, and the amount required to retire the debt today 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. Generally, the Company desires to maintain between 45 percent and 65 percent of total borrowings at variable interest rates. The following table sets forth, as of December 31, 1998 and 1997, 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 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.
1998 1999 2000 2001 2002 2003 Thereafter Total As of December 31, 1998: Long-term debt (4) $ 152.0 $ 95.1 $ 1.5 $ 9.2 $ 885.1(1) $ 1,142.9 Weighted average interest rates 7.61% 8.55% 6.77% 6.77% 6.10% 6.51% Fixed to variable swaps (5) $ 93.0 Pay rate 7.76%(2) Receive rate 8.59% As of December 31, 1997: Long-term debt (4) $ 49.1 $ 150.0 $ 93.0 $ 890.6(1) $ 1,182.7 Weighted average interest rates 5.65% 7.73% 8.59% 6.11% 6.48% Fixed to variable swaps (5) $ 230.5 $ 93.0 Pay rate 3.55%(3) 7.82%(2) Receive rate 3.50% 8.59%
(1) Includes a zero-coupon instrument with an accreted value of $275.5 million and $265.7 million at December 31, 1998 and 1997, respectively. (2) Six-month LIBOR plus 2 percent settled semi-annually, maturing in January 2000. (3) 30-day commercial paper minus 1.96 percent settled at maturity in May 1998. (4) Fair value of long-term debt is $1,114.8 million and $1,257.9 million at December 31, 1998 and 1997, respectively. (5) Fair value of the interest rate swaps is $1.6 million and $2.8 million at December 31, 1998 and 1997, respectively. Included in the table above in the "Thereafter" column is the Company's Liquid Yield Option Notes ("LYONS") which are convertible into Company common stock at the option of the holder. As such, the fair value of the LYONS is determined, in addition to changes in interest rates, by changes in the market price of the Company's common stock. Holding interest rates constant, a 20 percent decline in the market price of the Company's common stock would not cause the fair value of the LYONS at December 31, 1998 to decrease by a comparable percentage amount because the LYONS currently trade more like a debt instrument than an equity instrument. This occurs because the market price of the Company's common stock at December 31, 1998 of $17.625 was significantly below the LYONS conversion price of $38.88. INVESTMENTS The Company's investment in common stock and common stock warrants of Tuboscope, Inc. ("Tuboscope") is subject to equity price risk as the common stock of Tuboscope is traded on the New York Stock Exchange. Warrants to buy shares of Tuboscope common stock derive their value, in part, from the market value of Tuboscope common stock. This investment is classified as available for sale and, consequently, is reflected in the consolidated statement of financial position at fair value with unrealized gains and losses reported as a separate component of comprehensive income within stockholders' equity. The Company has no current intention of acquiring more shares of, or disposing of its interest in, Tuboscope; however, the Company's intentions may change in light of facts and circumstances that may arise in future dealings in the marketplace or other events affecting Tuboscope or the Company. 11 13 At December 31, 1998 and 1997, the fair value of the Company's investment in common stock and common stock warrants of Tuboscope was $26.9 million and $91.4 million, respectively. The Tuboscope common stock was valued at the closing price at December 31, 1998 and 1997, as reported on the New York Stock Exchange, and the warrants were valued using the Black-Scholes option-pricing model. No actions have been taken by the Company to hedge this market risk exposure. A 20 percent decline in the market price of Tuboscope common stock would cause the fair value of the investment in common stock and common stock warrants of Tuboscope to decrease $5.9 million at December 31, 1998. FOREIGN CURRENCY The Company's operations are conducted around the world in a number of different currencies. As such, there is exposure to future earnings due to changes in foreign currency exchange rates when transactions are denominated in currencies other than the Company's functional currencies, which are the primary currencies in which the Company conducts its business in various jurisdictions. As a general rule, the Company hedges all or part of the future earnings exposure when it believes the risk of loss is greater than the cost of the associated hedge. At December 31, 1998 and 1997, the Company had Norwegian Krone denominated commitments of $81.4 million and $84.0 million, respectively, to purchase two seismic vessels. The Company entered into forward exchange contracts with notional amounts of $88.9 million as of December 31, 1998 and 1997 to hedge these commitments. At December 31, 1998, the fair market value of these contracts was $80.8 million resulting in an unrealized loss of $8.1 million. At December 31, 1997, the unrealized loss was not significant. Also at December 31, 1998, the Company had Australian Dollar denominated commitments of $32.6 million primarily related to a long-term equipment purchase commitment for which the Company entered into forward exchange contracts with notional amounts of $29.1 million to hedge the majority of this commitment. At December 31, 1998, the fair market value of these contracts was $30.2 million resulting in an unrealized gain of $1.1 million. The notional amounts are used to express the volume of these transactions and do not represent exposure to loss. The fair market value of these contracts was based on year end quoted market prices for contracts with similar terms and maturity dates. The carrying value of the contracts was not significant. Foreign currency gains and losses for such purchases are deferred and become part of the bases of the assets. 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 and, in management's opinion, present no significant credit risk to the Company. 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 spot rate differential. Certain borrowings of the Company are denominated in currencies other than its functional currency. At December 31, 1998, these nonfunctional currency borrowings totaled $28.5 million where the primary exposure was between the U.S. Dollar and the British Pound. At December 31, 1997, the Company's nonfunctional currency short-term borrowings totaled $8.7 million where the primary exposure was between the U.S. Dollar and the French Franc. A 10 percent appreciation of the U.S. Dollar against these currencies would not have a significant effect on the future earnings of the Company. YEAR 2000 ISSUE Forward-Looking Statements Regarding the Year 2000 Issue The words "expect," "believe," "will," "estimate," "target" and similar expressions are intended to identify Forward-Looking Statements in "Year 2000 Issue." Although the Company expects that it will complete various phases of its Year 2000 Program Plan (the "Program Plan") as described below, including (without limitation) the specific remedial and corrective aspects of the program or the contingency plans described below, there can be no assurance that the Company will be successful in completing each and every aspect of the Program Plan and, if successful, within the expected schedules described below. Factors that could affect the Company's implementation of its Program Plan include unforeseen difficulties in remediating a 12 14 BAKER HUGHES INCORPORATED MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS specific problem due to the complexity of hardware and software, the inability of third parties to adequately address their own year 2000 issues, including vendors, contractors, financial institutions, U.S. and foreign governments and customers, the delay in completion of a phase of the Program Plan necessary to begin a later phase, the discovery of a greater number of hardware and software systems or technologies with material year 2000 issues than the Company presently anticipates, and the lack of alternatives that the Company previously believed existed. OVERVIEW Many computer hardware and software products have not been engineered with internal calendars or date-processing logic capable of accommodating dates after December 31, 1999. In most cases, the problem is due to the hardware or software application storing the year as a two-digit field. In applications where this year 2000 ("Y2K") problem exists, the year 2000 will appear as 00, and current applications could interpret the year as 1900 or some other date rather than 2000. The same error may exist for years later than 2000 because the application cannot distinguish which century the date represents. These errors could negatively affect the Company's business application systems, manufacturing, engineering and process control systems, products sold to customers, equipment used in providing services, facilities equipment and information technology ("IT") infrastructure. Additionally, Y2K issues impacting suppliers and customers could have an indirect negative impact on the Company. YEAR 2000 PROGRAM PLAN Baker Hughes has developed a Year 2000 Program Plan for identifying, assessing and correcting its Y2K problems. This Program Plan strives to achieve a consistent approach to the Y2K issue throughout the Company. The Program Plan has the following aspects: program management, inventory and risk assessment, remediation, testing and implementation, contingency planning, and quality assurance. The Company is currently completing an inventory of all hardware and software that the Company incorporates in its products or utilizes to support its operations or provide services to its customers. The Company is also determining whether the inventoried items have Y2K problems. If a Y2K problem exists, the Company will assess the risks associated with the problem. At December 31, 1998, the Company had inventoried well over half of its hardware and software. All inventories and assessments are in progress and expected to be substantially complete by mid-March. Since the inventory and assessment phase is still in progress, the Company could identify additional hardware and software that has Y2K problems. Baker Hughes has adopted the British Standards Institute Year 2000 Conformity Guidelines as a reasonable standard for determining whether software and hardware are not materially affected by Y2K problems. When meeting these guidelines, the Company has deemed that hardware and software are not materially affected by Y2K problems and, thus, are "in Y2K compliance." The Company's remediation efforts include the correction or replacement of noncompliant hardware and software and are scheduled to be completed by mid to late 1999 for all material noncompliant hardware and software that the Company has identified to date. Both the Company's employees and outside vendors are performing this work. The Company has established a target date of June 30, 1999 for the completion of the work on a majority of its material noncompliant systems and technologies. The Company expects to complete its development of contingency plans prior to the end of 1999 for any material systems and technologies not remediated by June 1999. The Company is unable to reasonably estimate the absolute dollar effect on the Company's results of operation, liquidity or financial condition if its remediation efforts are unsuccessful, although the Company believes the effect would be material. Baker Hughes has performed testing and validation of the compliance status for all critical hardware and software as the Company has completed each remediation project. Hardware and software that is not critical may not be tested and validated. The Company is currently testing and validating, among other hardware and software, its seismic data acquisition and analysis systems, surface data acquisition and logging systems, wireline logging systems, certain filtration and separation equipment that has been customized with program logic controllers, and certain motor controllers that include embedded chips and internal clocks. The 13 15 Company's employees and, in some cases, third-party contractors have performed the testing and validation work. Near the completion of the inventory and risk assessment phase, the Company expects to use external resources to evaluate the Company's program management and the adequacy and completeness of its risk assessment, testing and validation. YEAR 2000 PROGRAM PLAN COSTS Baker Hughes has approximately 80 full-time equivalent employees ("FTEs") involved in the Y2K effort, which the Company estimates has an associated annual cost of approximately $5.6 million. Generally, these FTEs are full-time employees who are devoting some portion of their schedule to the Y2K effort. In addition to the payroll and payroll-related costs, Baker Hughes estimates spending approximately $48.0 million in the Y2K compliance effort, of which approximately $35.0 million would be capitalized as replacement hardware and software equipment. Of the $48.0 million, the Company has spent approximately $26 million through December 31, 1998. The Company has funded, and expects to continue to fund, these expenditures from cash that it generates from operating activities or existing credit facilities. These cost estimates could change materially based upon the completion of the inventory and risk assessment phase of the Program Plan. THIRD-PARTY ISSUES The failure of third-parties, which have a material relationship with the Company, to address their Y2K problems could negatively and materially impact the Company. To address this risk, the Company is assessing the effect of Y2K on key vendor and contractor relationships and has begun to do the same with respect to key customer relationships. This assessment includes key relationships with parties with which the Company interfaces electronically and with which the Company has entered into strategic alliances. The Company is evaluating vendors that the Company believes are material to its operations and assessing the business risk of Y2K noncompliance on their part. Based upon this assessment, the Company is seeking to obtain written confirmation from key vendors and contractors that they are adequately addressing their Y2K issues. Additionally, the Company seeks to review the Y2K statements of these vendors and contractors to the extent they exist. Where the Company cannot obtain satisfactory confirmation from these vendors, the purchasing departments of each operating division of the Company intend to identify alternate sources, if available, for vendors if those sources are needed because of an inability to perform due to Y2K noncompliance. The Company expects to complete this assessment by May 1999. KNOWN MATERIAL Y2K NONCOMPLIANT HARDWARE AND SOFTWARE INTEQ and Baker Oil Tools are implementing SAP R/3 for domestic operations during 1999. INTEQ has delayed remediation of its existing payroll system, and Baker Oil Tools has delayed remediation for certain other business applications, in each case, pending the implementation of SAP R/3. Contingencies for these operational areas are being evaluated, and the Company expects to implement a contingency plan if the SAP implementation is not timely. Older versions of INTEQ's PC-based surface data acquisition systems are not Y2K compliant. The software is in the process of being remediated. The noncompliant PC hardware cannot be economically remediated, and the purchase of new, higher grade personal computers is required to replace the noncompliant equipment. This remediation began in 1997 with the replacement of personal computers being phased in and is expected to be completed by late 1999. The Company estimates that as of December 31, 1998, it was 60 percent complete in the replacement of the noncompliant personal computer hardware and software for the surface data acquisition systems. Baker Atlas is rewriting its bonded inventory control module that tracks assets that are used in international waters that may be exempt from import duties. The upgrade is expected to be in place by June 1999. The Company's Western Geophysical operating division relies heavily upon Global Positioning System ("GPS") equipment that the U.S. Navy operates. The noncompliance of this equipment is a known problem outside the control of the Company that affects other businesses, the government, the military services and individuals that rely upon GPS services, including most of the 14 16 BAKER HUGHES INCORPORATED MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Company's seismic business competitors. Based upon information obtained from the U.S. government, the Company believes that the government is adequately addressing its GPS Y2K noncompliance problem and expects this system to be compliant in early 1999. However, there can be no assurance that any Y2K noncompliance with respect to the government's GPS equipment or the equipment of its contractors and subcontractors will be corrected on schedule. The Company is not aware of any contingency system that its GPS receivers can utilize if the government's GPS equipment is not made Y2K compliant. A failure to correct the Y2K problems of this equipment could have a material adverse impact on the Company's results of operations. Western Geophysical uses a seismic acquisition synchronizer as part of its marine seismic acquisition services. This product is not Y2K compliant, and its noncompliance would have a material impact on the Company's marine seismic acquisition revenues if not corrected. The Company is discussing the issue with the manufacturer to complete an upgrade remediation plan. Western Geophysical anticipates that this software will be Y2K compliant by June 1999. A seismic acquisition system that Western Geophysical uses is also not Y2K compliant. The manufacturer has informed Western Geophysical that it intends to make the system Y2K compliant in the first quarter of 1999. Finally, Western Geophysical has a prospect data logger software system that is not Y2K compliant. Western Geophysical is internally generating software upgrades for this system. Baker Process is implementing a new business application system to replace its existing systems, which are not Y2K compliant. This system includes financial, purchasing, inventory management and manufacturing functionality. The Company expects Baker Process to complete the implementation of the new system by late 1999. The Baker Process operating division provides mechanical equipment that, in some cases, has been customized at the request of the customer to include control panels and circuit boards. The Company obtained these control panels and circuit boards from third-party vendors at the request of various customers. The Company is researching the Y2K compliance status of these boards. This status is often dependent upon the purchase date and serial number of the product. The warranties from the Company or its subcontractors have, in many instances, lapsed with respect to these panels and circuit boards. The Company expects to have completed its investigation of these systems by mid 1999. Pending the results of this evaluation, there could be a material noncompliance issue with these products. EURO CONVERSION A single European currency ("the Euro") was introduced on January 1, 1999, at which time the conversion rates between legacy currencies and the Euro were set for 11 participating member countries. However, the legacy currencies in those countries will continue to be used as legal tender through January 1, 2002. Thereafter, the legacy currencies will be canceled, and Euro bills and coins will be used in the eleven participating countries. Transition to the Euro creates a number of issues for the Company. Business issues that must be addressed include pricing policies and ensuring the continuity of business and financial contracts. Finance and accounting issues include the conversion of accounting systems, statutory records, tax books and payroll systems to the Euro, as well as conversion of bank accounts and other treasury and cash management activities. The Company is assessing and addressing these transition issues. The Company does not presently anticipate that the transition to the Euro will have a significant impact on its results of operations, financial position or cash flows. The word "anticipate" is intended to identify a Forward-Looking Statement in "Euro Conversion." Baker Hughes' anticipation regarding the lack of significance of the Euro introduction on Baker Hughes' operations is only its forecast regarding this matter. This forecast may be substantially different from actual results, which are affected by factors substantially similar to those described in "Year 2000 Issue - Forward-Looking Statements Regarding the Year 2000 Issue" above. 15 17 BAKER HUGHES INCORPORATED INDEPENDENT AUDITORS' REPORT STOCKHOLDERS OF BAKER HUGHES INCORPORATED: We have audited the accompanying consolidated statements of financial position of Baker Hughes Incorporated and its subsidiaries as of December 31, 1998 and 1997, and the related consolidated statements of operations, stockholders' equity and cash flows for the year ended December 31, 1998, the three month period ended December 31, 1997 and for each of the two years in the period ended September 30, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Baker Hughes Incorporated and its subsidiaries at December 31, 1998 and 1997, and the results of their operations and their cash flows for the year ended December 31, 1998, the three month period ended December 31, 1997 and for each of the two years in the period ended September 30, 1997 in conformity with generally accepted accounting principles. As discussed in Note 2 to the consolidated financial statements, the Company changed its method of accounting for impairment of long-lived assets to be disposed of effective October 1, 1996 to conform with Statement of Financial Accounting Standards No. 121. /s/ DELOITTE & TOUCHE LLP February 17, 1999 Houston, Texas 16 18 BAKER HUGHES INCORPORATED CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended Three Months Ended Year Ended September 30, (In millions, except per share amounts) December 31, 1998 December 31, 1997 1997 1996 ----------------- ----------------- --------- --------- Revenues $ 6,311.9 $ 1,572.9 $ 5,343.6 $ 4,445.8 --------- --------- --------- --------- Costs and expenses: Costs of revenues 4,710.9 1,045.7 3,676.9 3,062.8 Selling, general and administrative 1,301.8 324.6 1,036.1 889.2 Merger related costs 219.1 Unusual charge 215.8 52.1 39.6 Acquired in-process research and development 118.0 --------- --------- --------- --------- Total 6,447.6 1,370.3 4,883.1 3,991.6 --------- --------- --------- --------- Operating income (loss) (135.7) 202.6 460.5 454.2 Interest expense (149.0) (24.5) (91.4) (87.9) Interest income 3.6 1.1 3.6 4.9 Spin-off related costs (8.4) Gain on sale of Varco stock 44.3 --------- --------- --------- --------- Income (loss) from continuing operations before income taxes and cumulative effect of accounting change (281.1) 179.2 364.3 415.5 Income taxes (16.3) (68.0) (163.4) (169.1) --------- --------- --------- --------- Income (loss) from continuing operations before cumulative effect of accounting change (297.4) 111.2 200.9 246.4 Cumulative effect of accounting change: Impairment of long-lived assets to be disposed of (net of $6.0 income tax benefit) (12.1) --------- --------- --------- --------- Income (loss) from continuing operations (297.4) 111.2 188.8 246.4 Discontinued operations, net of tax 2.8 (154.9) 55.7 --------- --------- --------- --------- Net income (loss) $ (297.4) $ 114.0 $ 33.9 $ 302.1 ========= ========= ========= ========= Basic earnings per share: Income (loss) from continuing operations before cumulative effect of accounting change $ (0.92) $ 0.35 $ 0.67 $ 0.86 Cumulative effect of accounting change (0.04) Discontinued operations 0.01 (0.52) 0.19 --------- --------- --------- --------- Net income (loss) $ (0.92) $ 0.36 $ 0.11 $ 1.05 --------- --------- --------- --------- Diluted earnings per share: Income (loss) from continuing operations before cumulative effect of accounting change $ (0.92) $ 0.34 $ 0.66 $ 0.85 Cumulative effect of accounting change (0.04) Discontinued operations 0.01 (0.51) 0.19 --------- --------- --------- --------- Net income (loss) $ (0.92) $ 0.35 $ 0.11 $ 1.04 ========= ========= ========= =========
See Notes to Consolidated Financial Statements 17 19 BAKER HUGHES INCORPORATED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
(In millions, except par value) December 31, 1998 December 31, 1997 ----------------- ----------------- ASSETS CURRENT ASSETS: Cash and cash equivalents $ 16.6 $ 41.9 Receivables-less allowance for doubtful accounts: December 31, 1998, $50.1; December 31, 1997, $54.4 1,422.3 1,519.4 Inventories 1,065.7 1,145.0 Other current assets 219.9 213.5 ---------- ---------- Total current assets 2,724.5 2,919.8 Property-net 2,292.3 1,979.0 Goodwill and other intangibles - less accumulated amortization: December 31, 1998, $285.5; December 31, 1997, $238.4 1,898.4 1,537.2 Multiclient seismic data and other assets 895.6 794.6 ---------- ---------- Total assets $ 7,810.8 $ 7,230.6 ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable $ 560.5 $ 601.5 Short-term borrowings and current portion of long-term debt 44.4 177.3 Accrued employee compensation 284.3 287.0 Other accrued liabilities 420.7 351.3 ---------- ---------- Total current liabilities 1,309.9 1,417.1 ---------- ---------- Long-term debt 2,726.3 1,605.3 ---------- ---------- Deferred income taxes 156.5 283.8 ---------- ---------- Deferred revenue and other long-term liabilities 418.7 405.4 ---------- ---------- Commitments and contingencies Stockholders' equity: Common stock, $1 par value (shares authorized - 400.0; outstanding - 327.1 at December 31, 1998 and 316.8 at December 31, 1997) 327.1 316.8 Capital in excess of par value 2,931.8 2,834.0 Retained earnings 100.4 494.1 Cumulative foreign currency translation adjustment (155.4) (160.5) Unrealized gain (loss) on securities available for sale (0.1) 38.1 Pension liability adjustment (4.4) (3.5) ---------- ---------- Total stockholders' equity 3,199.4 3,519.0 ---------- ---------- Total liabilities and stockholders' equity $ 7,810.8 $ 7,230.6 ========== ==========
See Notes to Consolidated Financial Statements 18 20 BAKER HUGHES INCORPORATED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Accumulated Other Comprehensive Income -------------------------------------- Unrealized Capital Foreign Gain (Loss) In Excess Currency on Securities Pension Common of Retained Translation Available Liability Treasury (In millions, except per share amounts) Stock Par Value Earnings Adjustment for Sale Adjustment Stock Total ------ --------- -------- ----------- ------------- ---------- -------- --------- BALANCE, SEPTEMBER 30, 1995 $142.2 $ 1,342.3 $ 140.1 $ (107.7) $ (3.4) $ -- $ -- $ 1,513.5 as previously reported Western Atlas pooling of interests 143.6 1,039.0 165.8 8.4 1,356.8 ------ --------- -------- ----------- ------------- ---------- -------- --------- BALANCE, SEPTEMBER 30, 1995 285.8 2,381.3 305.9 (99.3) (3.4) -- -- 2,870.3 Comprehensive income Net income 302.1 Other comprehensive income: Foreign currency translation adjustment, net of $.5 tax (7.0) Unrealized gain adjustment, net of $12.2 tax 22.7 Total comprehensive income 317.8 Cash dividends on common stock ($.46 per share) (65.9) (65.9) Stock issued pursuant to employee stock plans 3.7 67.1 70.8 Treasury stock purchase (2.1) (2.1) ------ --------- -------- ----------- ------------- ---------- -------- --------- BALANCE, SEPTEMBER 30, 1996 289.5 2,448.4 542.1 (106.3) 19.3 -- (2.1) 3,190.9 Comprehensive income Net income 33.9 Other comprehensive income: Foreign currency translation adjustment, net of $1.1 tax (29.8) Unrealized gain adjustment, net of $22.3 tax 41.4 Pension adjustment, net of $1.9 tax (3.5) Total comprehensive income 42.0 Drilex pooling of interests 2.7 46.9 5.7 55.3 Spin-off of UNOVA (See Note 3) (513.1) (77.9) (8.8) (599.8) Cash dividends on common stock ($.46 per share) (69.6) (69.6) Petrolite and other acquisitions 20.2 758.4 778.6 Stock issued pursuant to employee stock plans 4.1 87.9 13.5 105.5 Treasury stock purchase (11.4) (11.4) ------ --------- -------- ----------- ------------- ---------- -------- --------- BALANCE, SEPTEMBER 30, 1997 316.5 2,828.5 434.2 (144.9) 60.7 (3.5) -- 3,491.5 Comprehensive income Net income 114.0 Other comprehensive income: Foreign currency translation adjustment, net of $1.6 tax (15.6) Unrealized gain adjustment, net of $10.3 tax (22.6) Total comprehensive income 75.8 Cash dividends on common stock ($.115 per share) (19.5) (19.5) Stock issued pursuant to employee stock plans 0.3 5.5 5.8 Adjustment for change in year end (34.6) (34.6) ------ --------- -------- ----------- ------------- ---------- -------- --------- BALANCE, DECEMBER 31, 1997 316.8 2,834.0 494.1 (160.5) 38.1 (3.5) -- 3,519.0 Comprehensive income Net loss (297.4) Other comprehensive income: Foreign currency translation adjustment, net of $.5 tax 5.1 Unrealized loss adjustment, net of $22.5 tax (38.2) Pension adjustment, net of $.5 tax (.9) Total comprehensive income (331.4) Cash dividends on common stock ($.46 per share) (96.3) (96.3) Stock issued pursuant to employee stock plans 10.3 97.8 108.1 ------ --------- -------- ----------- ------------- ---------- -------- --------- BALANCE, DECEMBER 31, 1998 $327.1 $ 2,931.8 $ 100.4 $ (155.4) $ (0.1) $ (4.4) $ -- $ 3,199.4 ====== ========= ======== =========== ============= ========== ======== =========
See Notes to Consolidated Financial Statements 19 21 BAKER HUGHES INCORPORATED CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended Three Months Ended Year Ended September 30, (In millions) December 31, 1998 December 31, 1997 1997 1996 ----------------- ------------------ ------------------------ Cash flows from operating activities: Income (loss) from continuing operations $ (297.4) $ 111.2 $ 188.8 $ 246.4 Adjustments to reconcile income (loss) from continuing operations to net cash flows from operating activities: Depreciation, depletion and amortization 758.3 141.7 554.9 465.0 Provision (benefit) for deferred income taxes (107.0) (4.2) (3.9) 28.6 Noncash portion of nonrecurring charges 513.2 32.7 25.3 Acquired in-process research and development 118.0 Gain on sale of Varco stock (44.3) Gain on disposal of assets (32.0) (12.0) (20.7) (38.0) Cumulative effect of accounting changes 12.1 Change in receivables 99.5 (84.4) (209.2) (132.1) Change in inventories (39.5) (58.2) (110.1) (79.4) Change in accounts payable (59.8) 8.5 82.9 43.6 Change in other assets and liabilities (25.6) 38.5 68.0 121.5 ---------- ---------- ---------- ---------- Net cash flows from continuing operations 809.7 141.1 713.5 636.6 Net cash flows from discontinued operations 10.5 12.1 22.3 ---------- ---------- ---------- ---------- Net cash flows from operating activities 809.7 151.6 725.6 658.9 ---------- ---------- ---------- ---------- Cash flows from investing activities: Expenditures for capital assets and multiclient seismic data (1,318.2) (296.6) (1,047.7) (657.7) Proceeds from disposal of assets 100.0 20.5 66.3 98.3 Cash obtained in stock acquisitions 68.7 Proceeds from sale of businesses 12.1 Acquisition of businesses, net of cash acquired (457.6) (43.1) (107.6) (33.6) Proceeds from sale of investments 48.5 95.5 ---------- ---------- ---------- ---------- Net cash flows from continuing operations (1,675.8) (319.2) (971.8) (485.4) Net cash flows from discontinued operations (0.6) (406.3) 9.6 ---------- ---------- ---------- ---------- Net cash flows from investing activities (1,675.8) (319.8) (1,378.1) (475.8) ---------- ---------- ---------- ---------- Cash flows from financing activities: Net borrowings (payments) from commercial paper and revolving credit facilities 977.3 (29.0) 471.0 (19.4) Repayment of indebtedness (69.5) (21.4) (128.7) (111.6) Proceeds from issuance of common stock 27.1 13.6 80.0 60.1 Dividends (96.3) (19.5) (69.6) (65.9) Payment from UNOVA, Inc. 230.0 109.6 2.9 ---------- ---------- ---------- ---------- Net cash flows from continuing operations 838.6 173.7 462.3 (133.9) Net cash flows from discontinued operations 13.1 210.4 (44.5) ---------- ---------- ---------- ---------- Net cash flows from financing activities 838.6 186.8 672.7 (178.4) Adjustment for change in year end (17.3) Effect of foreign exchange rate changes on cash 2.2 (1.5) (2.1) (0.7) ---------- ---------- ---------- ---------- Increase (decrease) in cash and cash equivalents (25.3) (0.2) 18.1 4.0 Cash and cash equivalents, beginning of year 41.9 42.1 24.0 20.0 ---------- ---------- ---------- ---------- Cash and cash equivalents, end of year $ 16.6 $ 41.9 $ 42.1 $ 24.0 ========== ========== ========== ==========
See Notes to Consolidated Financial Statements 20 22 BAKER HUGHES INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1. BASIS OF PRESENTATION The consolidated financial statements include the accounts of Baker Hughes Incorporated and all majority-owned subsidiaries (the "Company" or "Baker Hughes"). In the Notes to Consolidated Financial Statements, all dollar amounts in tabulations are in millions of dollars unless otherwise indicated. CHANGE IN YEAR-END On August 27, 1998, the Board of Directors of Baker Hughes 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 (the "Transition Period") precedes the start of the 1998 fiscal year. "1997" and "1996" refer to the respective years ended September 30, the Transition Period refers to the three months ended December 31, 1997 and "1998" refers to the twelve months ended December 31, 1998. MERGER On August 10, 1998, Baker Hughes completed a merger (the "Merger") with Western Atlas Inc. ("Western Atlas") by issuing 148.6 million shares of Baker Hughes common stock for all of the outstanding common stock of Western Atlas. Each share of Western Atlas common stock was exchanged for 2.7 shares of Baker Hughes common stock. Western Atlas, the common stock of which was previously publicly traded, is a leading supplier of oilfield services and reservoir information technologies for the worldwide oil and gas industry. It specializes in land, marine and transition-zone seismic data acquisition and processing services, well-logging and completion services, and reservoir characterization and project management services. The Merger was accounted for as a pooling of interests and, accordingly, all prior period consolidated financial statements of Baker Hughes have been restated to include the results of operations, financial position and cash flows of Western Atlas. Information concerning common stock, employee stock plans and per share data has been restated on an equivalent share basis. The consolidated financial statements as of September 30, 1997 and for each of the two years in the period ended September 30, 1997 include Baker Hughes' previous September 30 fiscal year amounts and Western Atlas' December 31 calendar year amounts for the corresponding fiscal years of Baker Hughes. Consolidated financial statements for the three months ended December 31, 1997 include amounts for Baker Hughes and Western Atlas for the three months ended December 31, 1997. As a result, Western Atlas' results of operations for the three months ended December 31, 1997 are included in both the consolidated financial statements for the year ended September 30, 1997 and for the Transition Period. Included in the consolidated statement of stockholders' equity is a $34.6 million adjustment for the change in year end which represents Western Atlas' results of operations for the three months ended December 31, 1997 that is included in both 1997 and the Transition Period. The reconciliations of revenue, income from continuing operations and net income (loss) of Baker Hughes and Western Atlas for the periods prior to the combination are as follows:
Three Months Ended Year Ended September 30, December 31, 1997 1997 1996 ------------------ -------- -------- Revenues: Baker Hughes $ 1,133.4 $3,685.4 $3,027.7 Western Atlas 439.5 1,658.2 1,418.1 --------- -------- -------- Combined $ 1,572.9 $5,343.6 $4,445.8 ========= ======== ======== Income from continuing operations: Baker Hughes $ 79.4 $ 97.0 $ 176.4 Western Atlas 31.8 91.8 70.0 --------- -------- -------- Combined $ 111.2 $ 188.8 $ 246.4 ========= ======== ======== Net income (loss): Baker Hughes $ 79.4 $ 97.0 $ 176.4 Western Atlas 34.6 (63.1) 125.7 --------- -------- -------- Combined $ 114.0 $ 33.9 $ 302.1 ========= ======== ========
There were no material adjustments required to conform the accounting policies of the two companies. Certain amounts of Western Atlas have been reclassified to conform to the reporting practices of Baker Hughes. In connection with the Merger, in 1998 the Company recorded merger related costs of $219.1 million. The categories of costs 21 23 incurred, the actual cash payments made in 1998 and the accrued balances at December 31, 1998 are summarized below:
Accrued Amounts Balance at paid in December 31, Total 1998 1998 ------- ------- ------------ Cash costs: Transaction costs $ 51.5 $ 46.9 $ 4.6 Employee costs 87.7 66.7 21.0 Other Merger integration costs 21.7 9.8 11.9 ------- ------- ------------ Subtotal cash cost 160.9 $ 123.4 $ 37.5 ------- ======= ============ Noncash 58.2 ------- Total $ 219.1 =======
Transaction costs of $51.5 million include banking, legal and printing fees and other costs directly related to the Merger. The Company had contracted for and incurred most of the cost of the services for the remaining accrual, however, such amounts had not been paid. The Company expects that all amounts accrued for transaction costs will be paid by June 30, 1999. Employee related costs of $87.7 million consist of payments made to certain officers of Western Atlas and Baker Hughes pursuant to change in control provisions and severance benefits paid to terminated employees whose responsibilities were deemed redundant as a result of the Merger. Accrued employee costs, other than retirement benefits, at December 31, 1998 of $12.8 million are scheduled to be paid to the employees upon leaving the Company during the first quarter of 1999. The remaining accrued employee costs at December 31, 1998 of $8.2 million represent retirement benefits of certain employees that will be paid, in accordance with the terms of the agreements, over the lives of the covered employees. Other integration costs include the costs of changing legal registrations in various jurisdictions, terminating a joint venture as a result of the Merger, changing signs and logos at the Company's major facilities around the world and other integration costs. The Company expects that the remaining balance of $11.9 million for other integration costs will be paid by June 30, 1999. The noncash charge of $58.2 million consists of a charge of $45.3 million related to the triggering of change of control rights contained in certain Western Atlas employee stock option plans that were not converted to Baker Hughes options concurrent with the Merger; a charge of $3.9 million for the issuance of the Company's common stock pursuant to certain stock plans as a result of the change in control; and a $9.0 million charge recorded to write-off the carrying value of a product line that was discontinued as a result of the Merger. NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Principles of consolidation: The consolidated financial statements include those of the Company and all majority owned subsidiaries. Investments in which the Company owns 20 percent to 50 percent and exercises significant influence over operating and financial policies are accounted for using the equity method. All significant intercompany accounts and transactions have been eliminated in consolidation. Use of estimates: The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and 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. Actual results could differ from those estimates. Revenue recognition: Revenue from product sales are recognized upon delivery of products to the customer. Revenue from services and rentals are recorded when such services are rendered. 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 primarily at the lower of average cost or market. Property: Property is stated principally at cost less accumulated depreciation, which is generally provided by using the straight-line method over the estimated useful lives of individual items. The Company manufactures a substantial portion of its rental tools and equipment, and the cost of these items includes direct and indirect manufacturing costs. The Company is developing and implementing SAP R/3 as an enterprise-wide software system. External direct costs of con- 22 24 BAKER HUGHES INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS sulting services and payroll related cost of employees who work full-time on implementation of the enterprise-wide software system are capitalized. Costs associated with business process reengineering are expensed as incurred. 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 is computed using the unit-of-production method based upon production and estimates of proved reserves. Due to ceiling test limitations, the Company had write-downs of $69.3 million, $12.5 million and $7.0 million during 1998, 1997 and 1996, respectively. Multiclient Seismic Data: Costs incurred in the creation of Company-owned multiclient seismic data are capitalized and amortized over the estimated revenue that the Company expects to receive from the licensing of such data. Cash prepayments received from customers for specific contracts are included in deferred revenue until earned. Impairment of assets: The Company adopted Statement of Financial Accounting Standards ("SFAS") No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of, effective October 1, 1996. The statement sets forth guidance as to when to recognize an impairment of long-lived assets, including goodwill, and how to measure such an impairment. The methodology set forth in SFAS No. 121 is not significantly different from the Company's prior policy and, therefore, the adoption of SFAS No. 121 did not have a significant impact on the consolidated financial statements as it relates to impairment of long-lived assets used in operations. The accounting for long-lived assets to be disposed of requires these assets to be carried at the lower of cost or fair market value as determined by a discounted cash flow analysis, rather than the lower of cost or net realizable value, the method that was previously used by the Company. The Company recognized a charge to income of $12.1 million ($.04 per share-diluted), net of a tax benefit of $6.0 million, in 1997 as the cumulative effect of a change in accounting. Investments: Investments in debt and equity securities, other than those accounted for by the equity method, are classified as available for sale and reported at fair value with unrealized gains or losses, net of tax, recorded as a separate component of comprehensive income within stockholders' equity. Goodwill: Goodwill arising from acquisitions is amortized on the straight-line method over the lesser of its expected useful life or 40 years. Income taxes: Deferred income taxes are determined utilizing an asset and liability approach. This method gives consideration to the future tax consequences associated with differences between the financial accounting and tax bases of assets and liabilities. Environmental matters: Remediation costs are accrued based on estimates of known environmental remediation exposure. 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 Federal Superfund site, the Company accrues its share of the estimated remediation costs of the site based on the ratio that the estimated volume of waste contributed to the site by the Company bears to the total volume of waste at the site. Stock-based compensation: The intrinsic value method of accounting is used for stock-based employee compensation whereby no compensation expense is recognized when the exercise price of an 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: Gains and losses resulting from balance sheet translation of foreign operations where a foreign currency is the functional currency are included as a separate component of comprehensive income within stockholders' equity. Gains and losses resulting from balance sheet translation of foreign operations where the U.S. Dollar is the functional currency are included in the consolidated statements of operations. Financial instruments: The Company uses forward exchange contracts and currency swaps to hedge certain firm commitments and transactions denominated in foreign currencies. Gains and losses on forward contracts are deferred and offset against foreign exchange gains or losses on the underlying hedged item. The 23 25 Company uses interest rate swaps to manage interest rate risk. The interest differentials from interest rate swaps are recognized as an adjustment to interest expense. The Company's policies do not permit financial instrument transactions for speculative purposes. NOTE 3. DISCONTINUED OPERATIONS In May 1997, the Western Atlas Board of Directors approved, in principle, a plan to distribute (the "Spin-off") to Western Atlas shareholders all of the outstanding common stock of UNOVA, Inc. ("UNOVA"), a wholly owned subsidiary of Western Atlas, organized to conduct Western Atlas' industrial automation systems business. Pursuant to the Spin-off, on October 31, 1997 each Western Atlas shareholder received an equivalent number of shares of UNOVA common stock in a tax-free transaction. As explained in Note 1, the fiscal year financial information for Baker Hughes for the year ended September 30, 1997 includes Western Atlas' results for calendar year 1997. Hence, on the statements of consolidated stockholders' equity, the Spin-off of UNOVA is included in the year ended September 30, 1997. Income (loss) from discontinued operations includes interest expense allocated on the basis of debt levels assumed in the Spinoff. Corporate, general and administrative costs of Western Atlas were not allocated to UNOVA for any of the periods presented. Concurrent with the Spin-off, UNOVA repaid Western Atlas for intercompany indebtedness totaling $230.0 million. Discontinued operations of UNOVA are as follows:
Three Months Ended Year Ended September 30, December 31, 1997 1997 1996 ------------------ --------- ----------- Revenue $107.0 $ 1,201.1 $ 1,164.7 Allocated interest expense 1.7 17.2 11.5 Allocated interest income 2.7 4.4 Income (loss) before income taxes 4.7 (122.7) 92.9 Provision for income taxes (1.9) (32.2) (37.2) ------ --------- -------- Discontinued operations $ 2.8 $ (154.9) $ 55.7 ====== ========= ========
The UNOVA results of operations in 1997 include a $203.0 million charge for acquired in-process research and development activities related to UNOVA's acquisition of Norand Corporation and United Barcode Industries in 1997. The net assets of UNOVA as of the distribution date were as follows: Current assets $ 752.7 Noncurrent assets 586.9 --------------- Total assets 1,339.6 --------------- Current liabilities (652.2) Noncurrent liabilities (87.6) --------------- Total liabilities (739.8) --------------- Net assets of UNOVA $ 599.8 ===============
NOTE 4. EARNINGS PER SHARE The Company adopted SFAS No. 128, "Earnings per Share," in the Transition Period. SFAS No. 128 establishes new standards for computing and presenting earnings per share ("EPS"), and requires all prior periods to be restated. Reconciliation of the numerators and denominators of the basic and diluted EPS computations for income from continuing operations is as follows:
Year Ended Year Ended September 30, 1997 September 30, 1996 ---------------------- --------------------- (Loss) Shares Income Shares -------- -------- -------- -------- Basic $ (297.4) 321.7 $ 111.2 316.2 Effect of dilutive securities, net of tax: Stock plans 6.2 Liquid Yield Option Notes 1.7 7.2 -------- -------- -------- -------- Diluted $ (297.4) 321.7 $ 112.9 329.6 ======== ======== ======== ========
Year Ended Year Ended September 30, 1997 September 30, 1996 ---------------------- --------------------- Income Shares Income Shares -------- -------- -------- -------- Basic $ 200.9 299.5 $ 246.4 287.7 Effect of dilutive securities, net of tax: Stock plans 5.2 2.9 Liquid Yield Option Notes 6.0 7.2 -------- -------- -------- -------- Diluted $ 200.9 304.7 $ 252.4 297.8 ======== ======== ======== ========
Securities excluded from the computation of diluted EPS for the year ended December 31, 1998 that could potentially dilute basic EPS in the future were options to purchase 13.3 million shares, Liquid Yield Option Notes convertible into 7.2 million shares and 1.6 million shares estimated to be issued under the Company's employee stock purchase plan. Since the Company incurred a loss for 1998, such dilutive securities were excluded as they would be anti-dilutive to basic EPS. 24 26 BAKER HUGHES INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 5. INVENTORIES Inventories are comprised of the following:
December 31, 1998 December 31, 1997 ----------------- ----------------- Finished goods $ 855.2 $ 911.5 Work in process 83.2 138.2 Raw materials 127.3 95.3 ---------- ---------- Total $ 1,065.7 $ 1,145.0 ========== ==========
NOTE 6. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment is comprised of the following:
December 31, 1998 December 31, 1997 ----------------- ----------------- Land $ 86.0 $ 73.0 Buildings 613.3 534.3 Machinery and equipment 2,313.6 1,983.6 Rental tools and equipment 906.5 820.0 Oil and gas properties, full cost method 225.1 114.8 ---------- ---------- Total property 4,144.5 3,525.7 Accumulated depreciation and depletion 1,852.2 1,546.7 ---------- ---------- Property-net $ 2,292.3 $ 1,979.0 ========== ==========
NOTE 7. ACQUISITIONS AND DISPOSITIONS In addition to the acquisitions discussed separately below, the Company made several smaller acquisitions in each respective year with an aggregate purchase price of $119.2 million during 1998, $74.3 million during the Transition Period, $98.4 million in 1997 and $32.9 million in 1996. These acquisitions were accounted for using the purchase method of accounting. Accordingly, the cost of each acquisition has been allocated to assets acquired and liabilities assumed based on their estimated fair market values at the date of the acquisition. The operating results of these acquisitions are included in the consolidated statements of operations from their respective acquisition date. Pro forma results of these acquisitions have not been presented as the pro forma revenue, income before accounting change, and earnings per share would not be materially different from the Company's actual results. 1998 WEDGE and 3-D In April 1998, the Company acquired all the outstanding stock of WEDGE DIA-Log, Inc. ("WEDGE") for $218.5 million in cash. WEDGE specializes in cased-hole logging and pipe recovery services. Also in April 1998, the Company acquired 3-D Geophysical, Inc. ("3-D") for $117.5 million in cash. 3-D is a supplier of primarily land-based seismic data acquisition services. The purchase method of accounting was used to record both of these acquisitions. Pro forma results of these two acquisitions have not been presented as the pro forma revenue, net income, and earnings per share would not be materially different from the Company's actual results. 1997 PETROLITE In July 1997, the Company acquired Petrolite Corporation ("Petrolite") and Wm. S. Barnickel & Company ("Barnickel"), the holder of 47.1 percent of Petrolite's common stock, for 19.3 million shares of the Company's common stock having a value of $730.2 million in a three-way business combination. The purchase method of accounting was used to record these acquisitions. Additionally, the Company assumed Petrolite's outstanding vested and unvested employee stock options which were converted into the right to acquire 1.0 million shares of the Company's common stock. Such assumption of Petrolite options by the Company had a fair market value of $21.0 million resulting in total consideration in the acquisitions of $751.2 million. Petrolite, the shares of which were previously publicly traded, is a manufacturer and marketer of specialty chemicals used in the petroleum and process industries. Barnickel was a privately held company that owned marketable securities, which were sold after the acquisition, in addition to its investment in Petrolite. The acquisition of Petrolite in 1997 was accounted for as a purchase. Accordingly, the purchase price was allocated to the assets acquired and the liabilities assumed based on their estimated fair market values at the date of the acquisition. In accordance with generally accepted accounting principles, the $118.0 million 25 27 allocated to in-process research and development has been recorded as a charge in the consolidated statement of operations as of the acquisition date because the technological feasibility of the projects in-process had not been established and there was no alternative future use at that date. There were 26 individual research and development projects that were in development at the time of the acquisition that were classified as in-process research and development. The products under development were valued using a discounted cash flow analysis at a 14 percent discount factor. The cash flows were projected for a 20-year period and included additional research and development and capital expenditures required to complete the projects. The gross margins used for these products were generally consistent with those of other chemical products sold by the Company. The 14 percent discount factor used considered the time value of money, inflation, and the risk inherent in the projects under development. In aggregate, the remaining completion costs for these products were projected to exceed $7.2 million with completion periods varying from 90 days to two years. Significant cash inflows from these products in total were expected to commence during 1999. During 1998, 16 of these products generated commercial sales, five had product sales on a trial basis only, and five were determined not to be viable products. The Company incurred certain liabilities as part of the plan to combine the operations of Petrolite with those of the Company. These liabilities relate to the Petrolite operations and include severance of $13.8 million for redundant marketing, manufacturing, and administrative personnel, relocation of $5.8 million for moving equipment and transferring marketing and technology personnel, primarily from St. Louis to Houston, and environmental remediation of $16.5 million for redundant properties and facilities that were to be sold. Cash spent during 1998, the Transition Period, and 1997 totaled $12.9 million, $2.1 million and $7.7 million, respectively. DRILEX In July 1997, the Company acquired Drilex International Inc. ("Drilex"), a provider of products and services used in the directional and horizontal drilling and workover of oil and gas wells, for 2.7 million shares of the Company's common stock. The acquisition was accounted for using the pooling of interests method of accounting. Under this method of accounting, the historical cost bases of the assets and liabilities of the Company and Drilex are combined at recorded amounts and the results of operations of the combined companies for 1997 are included in the 1997 consolidated statement of operations. The historical results of the separate companies for years prior to 1997 are not combined because the retained earnings and results of operations of Drilex are not material to the consolidated financial statements of the Company. NORAND AND UNITED BARCODE INDUSTRIES The Company acquired Norand Corporation ("Norand") on March 3, 1997, and United Barcode Industries ("UBI") on April 4, 1997. These companies were integrated into the Company's industrial automation systems operations and included in the Spin-off of UNOVA. The purchase method of accounting was used to record these acquisitions; and, accordingly, the acquisition costs of $280.0 million and $107.0 million for Norand and UBI, respectively, were allocated to the net assets acquired based upon their relative fair values. In accordance with generally accepted accounting principles, such allocation assigned a combined value for the two acquisitions of $203.0 million to in-process research and development activities, which was expensed in 1997 because its technological feasibility had not been established and it had no alternative future use at the date of acquisition. 1996 In May 1996, the Company sold 6.3 million shares of Varco International, Inc. ("Varco") common stock, representing its entire investment in Varco. The Company received net proceeds of $95.5 million and recognized a pretax gain of $44.3 million. The Company's investment in Varco was accounted for using the equity method. Equity income included in the consolidated statement of operations for 1996 was $1.8 million. 26 28 BAKER HUGHES INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 8. UNUSUAL AND OTHER NONRECURRING CHARGES 1998 The Company had experienced high growth levels for its products and services from 1994 through the second quarter of 1998. During the third and fourth quarters of 1998, the Company experienced a decline in demand for its products and services as a result of a significant decrease in the price of oil and natural gas. The decline in customer demand materialized quickly from the previous high growth rates. As a result of this sharp decline in demand and to adjust to the lower level of activity, the Company assessed its overall operations and recorded charges of $549.0 million in the September quarter and $40.5 million in the December quarter as summarized below:
Accrued Amounts Balance at paid in December 31, Total 1998 1998 ------------ ------------ ------------ Cash charges: Severance for approximately 5,300 employees $ 64.3 $ 26.6 $ 37.7 Integration costs, abandoned leases and other contractual obligations 40.0 14.7 25.3 Environmental reserves 8.8 4.3 4.5 Other cash costs (includes litigation reserves) 21.4 4.7 16.7 ------------ ------------ ------------ Subtotal cash charges 134.5 $ 50.3 $ 84.2 ------------ ============ ============ Noncash charges - write-down of: Inventory and rental tools 173.2 PetroAlliance Services Company Limited 83.2 Property and other assets 80.1 Oil and gas properties (ceiling-test) 69.3 Intangible assets 21.5 Real estate held for sale 17.0 Investments in affiliates 10.7 ------------ Subtotal noncash charges 455.0 ------------ Total cash and noncash charges $ 589.5 ============
The above charges were reflected in the following captions of the consolidated statement of operations: Costs of revenues $ 305.0 Selling, general and administrative 68.7 Unusual charge 215.8 ------------ Total $ 589.5 ============
The amount accrued for severance is based upon the Company's written severance policy and the positions eliminated. The accrued severance does not include any portion of the employees' salaries through their severance dates. Based upon current severance dates, the Company expects that of the accrued severance remaining at December 31, 1998, $27.0 million will be paid during the first quarter of 1999 and the remaining $10.7 million will be paid during the second quarter of 1999 when the employees leave the Company. The Company accrued $40.0 million to combine operations and consolidate facilities. Such accrual includes costs to settle leases on idled facilities based upon lease agreements; to shut-down oil and gas operations in certain countries based upon management's decision to abandon operations; to terminate a rig contract based upon the terms of the agreement; and other collocation costs based upon the estimated exit costs for approved plans. The accrual does not include any portion of the costs before actual abandonment of the facilities or ceasing of the operations. The Company expects to spend approximately $9.4 million of the accrued balance as of December 31, 1998 during the first quarter of 1999 and, except for amounts payable under terms of leases and other contracts, the remaining amounts accrued will be paid during the remainder of 1999. The impairment of inventory and rental tool assets of $173.2 million impacted virtually all operating divisions and was due to advances in technology that have obsoleted certain product lines, as well as a decline in market demand that has resulted in an excess supply of certain products. The product lines most affected were completion products, drilling and evaluation systems and tools, tricone and diamond drill bits, and filtration systems. Much of the obsolete and excess inventory will be scrapped and has been written off completely. The remaining assets have been written down to their estimated value based on the Company's inventory and rental tool obsolescence policy. In the third quarter of 1998, the Company recorded an $83.2 million write-down of PetroAlliance Services Company Limited ("PAS"), a former consolidated joint venture operating in the former Soviet Union. The write-down of the joint venture was based upon the Company's estimated value of assets ultimately received in consideration of the sale of the PAS investment in November 1998. The Company received as consideration for the 27 29 sale of PAS a seismic vessel, other seismic and well-logging assets, certain PAS assets in Kazakhstan and Turkmenistan, certain customer receivables and a $33.0 million note from the purchasers. The write-down included $10.7 million for equipment, $22.0 million of goodwill, and $50.5 million of net current assets. The impairment of property and other assets of $80.1 million includes an $18.1 million write-down to reduce the carrying value of a portion of the Company's drilling equipment; a $12.6 million write-off of obsolete solid and oil-filled streamer sections used on seismic vessels; a $14.9 million write-down of surplus well-logging equipment; a $9.5 million write-off of prepaid royalties on an abandoned product line; and $25.0 million of assets written down to fair market value. The write-down of these assets was determined based on internally developed valuations using a variety of methods. The write-off of intangible assets of $21.5 million includes $2.7 million for capitalized software costs for product lines abandoned as a result of recent acquisitions; $5.3 million for capitalized development costs for software systems that are being replaced by the Company's implementation of SAP R/3; and $13.5 million for goodwill associated with a discontinued business and a subsidiary held for sale. The write-down of real estate held for sale of $17.0 million is for a specific property and the charge reduces the carrying value to the property's appraised value. The $10.7 million charge is to write-off investments in joint ventures in both Russia and Indonesia and also includes a loss on the sale of Tracor Europa, a discontinued subsidiary. 1997 During the year ended September 30, 1997, the Company recognized a $52.1 million unusual charge consisting of the following: Baker Petrolite: Severance for 140 employees $ 2.2 Relocation of people and equipment 3.4 Environmental 5.0 Abandoned leases 1.5 Integration costs 2.8 Inventory write-down 11.3 Write-down of other assets 9.3 Drilex: Write-down of property and other assets 4.1 Banking and legal fees 3.0 Discontinued product lines: Severance for 50 employees 1.5 Write-down of inventory, property and other assets 8.0 ------------ Total $ 52.1 ============
In connection with the acquisitions of Petrolite, accounted for as a purchase, and Drilex, accounted for as a pooling of interests, the Company recorded unusual charges of $35.5 million and $7.1 million, respectively, to combine the acquired operations with those of the Company. The charges include the cost of closing redundant facilities, eliminating or relocating personnel and equipment and rationalizing inventories which required disposal at amounts less than cost. A $9.5 million charge was recorded as a result of the decisions to: 1) discontinue a low margin, oilfield product line in Latin America; and, 2) sell the Tracor Europa subsidiary, a computer peripherals distributor, which was written down to net realizable value. Cash provisions of the unusual charge totaled $19.4 million. The Company spent $12.3 million in 1998, $1.6 million during the Transition Period, and $5.5 million during 1997. 1996 During the year ended September 30, 1996, the Company recognized a $39.6 million unusual charge consisting of the following: Patent write-off $ 8.5 Impairment of joint venture 5.0 Restructurings: Severance for 360 employees 7.1 Relocation of people and equipment 2.3 Abandoned leases 2.8 Inventory write-down 1.5 Write-down of assets 10.4 Other 2.0 ------------ Total $ 39.6 ============
The Company recorded a $24.1 million restructuring charge, which includes costs associated with the downsizing of Baker Hughes INTEQ's Singapore and Paris operations, a reorganization of EIMCO Process Equipment's Italian operations, and the consolidation of certain Baker Oil Tools manufacturing operations. The Company had certain oilfield operations patents which no longer protected commercially significant technology resulting 28 30 BAKER HUGHES INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS in a write-off of $8.5 million. A $5.0 million impairment of a Latin America joint venture was recorded due to changing market conditions in the region in which it operates. Cash provisions of the charge totaled $14.3 million. The Company spent $3.8 million during the Transition Period, $6.3 million during 1997 and $4.2 million during 1996. NOTE 9. INDEBTEDNESS Total debt consisted of the following:
December 31, 1998 December 31, 1997 ----------------- ----------------- Short-term debt with an average interest rate of 5.72% at December 31, 1998 $ 943.3 $ 355.8 Commercial Paper with an average interest rate of 5.28% at December 31, 1998 759.1 370.3 Liquid Yield Option Notes ("LYONS") due May 2008 with a yield to maturity of 3.5% per annum, net of unamortized discount of $109.6 at December 31, 1998 ($119.5 at December 31, 1997) 275.5 265.7 7.625% Notes due February 1999 with an effective interest rate of 7.73%, net of unamortized discount of $.3 at December 31, 1997 150.0 149.7 8% Notes due May 2004 with an effective interest rate of 8.08%, net of unamortized discount of $.8 at December 31, 1998 ($.9 at December 31, 1997) 99.2 99.1 7.875% Notes due June 2004 with an effective interest rate of 8.13%, net of unamortized discount of $2.2 at December 31, 1998 ($2.6 at December 31, 1997) 247.8 247.4 8.55% Debentures due June 2024 with an effective interest rate of 8.80%, net of unamortized discount of $2.8 at December 31, 1998 ($2.9 at December 31, 1997) 147.2 147.1 8.59% Debentures due January 2000 with an effective interest rate of 6.75% 93.0 93.0 5.65% Notes due 1998 48.5 Other debt with an effective interest rate of 6.08% at December 31, 1998 55.6 6.0 -------- -------- Total debt 2,770.7 1,782.6 Less short-term debt and current maturities 44.4 177.3 -------- -------- Long-term debt $2,726.3 $1,605.3 ======== ========
At December 31, 1998, the Company had $2,237.4 million of credit facilities with commercial banks, of which $1,000.0 million was committed. The committed facilities mature as follows: $250.0 million in 2000 and $750.0 million in 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 and to the extent of its intent to refinance the short-term obligations, since the Company has the ability under certain credit agreements, and the intent, to maintain these obligations for longer than one year. The Liquid Yield Option Notes ("LYONS") are convertible into the Company's common stock at a conversion price of $38.88 per share, as of December 31, 1998, which increases at an annual rate of 3.5 percent. At the option of the Company, the LYONS may be redeemed for cash at a redemption price equal to the issue price plus accrued original issue discount through the date of redemption. At the option of the holder, the LYONS may be redeemed for cash on May 5, 2003, for a redemption price equal to the issue price plus accrued original issue discount through the date of redemption. Subsequent to December 31, 1998, the Company issued $400 million of 6.875 percent Notes due January 2029, $325 million of 6.25 percent Notes due January 2009, $200 million 6.0 percent Notes due February 2009 and $100 million of 5.8 percent Notes due 2003 with effective interest rates of 7.07 percent, 6.36 percent, 6.09 percent and 6.01 percent, respectively. The proceeds were used to repay $150.0 million of the 7.625 percent Notes due February 1999, commercial paper and other short-term borrowings. Accordingly, such amounts are presented as long-term debt in the accompanying consolidated statement of financial position. 29 31 Maturities of debt at December 31, 1998 after consideration of the refinancing subsequent to year end as discussed above are as follows: 1999-$44.4 million; 2000-$185.1 million; 2001-$1.5 million, 2002-$9.2 million, 2003-$849.3 million and $1,681.2 million thereafter. NOTE 10. FINANCIAL INSTRUMENTS INTEREST RATE SWAPS At December 31, 1998, the Company was party to an interest rate swap agreement for a notional amount of $93.0 million on which the Company pays interest at a rate of LIBOR plus 2 percent and receives interest at a rate of 8.59 percent. The interest rate swap settles semi-annually and terminates on January 27, 2000. In the unlikely event that the counterparty fails to meet the terms of the interest rate swap agreement, the Company's exposure is limited to the interest rate differential. Subsequent to December 31, 1998, the Company entered into an interest rate swap with a notional amount of $325.0 million. The Company will receive interest at a rate of 6.25 percent and pay interest at a rate equal to the average of 6 month LIBOR for Yen, Euro and Swiss Franc plus a 3.16 percent spread. The interest rate swap will settle semi-annually and terminate in January 2009. In the unlikely event that the counterparty fails to meet the terms of the interest rate swap agreement, the Company's exposure is limited to the interest rate differential. FOREIGN CURRENCY CONTRACTS At December 31, 1998, the Company had entered into foreign currency forward contracts with notional amounts of $88.9 million to hedge the commitment to purchase two seismic vessels and $29.1 million to hedge equipment purchases under a long-term purchase agreement. The fair value of these contracts, based on year-end quoted market prices for contracts with similar terms and maturity dates, was $80.8 million and $30.2 million, respectively. Foreign currency gains and losses for such purchases are deferred and will become part of the cost of the assets. 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 and, in management's opinion, present no significant credit risk to the Company. FAIR VALUE OF FINANCIAL INSTRUMENTS The Company's financial instruments include cash and short-term investments, receivables, long-term investments, payables, debt and interest rate, and foreign currency contracts. Except as described below, the estimated fair values of such financial instruments at December 31, 1998 and 1997 approximate their carrying value as reflected in the consolidated statements of financial position. The fair value of the Company's debt and interest rate and foreign currency contracts has been estimated based on quoted market prices and the Black-Scholes option-pricing model. The estimated fair value of the Company's debt at December 31, 1998 and 1997 was $2,818.7 million and $1,913.8 million, respectively, which differs from the carrying amounts of $2,770.7 million and $1,782.6 million, respectively, included in the consolidated statements of financial position. The fair value of the Company's interest rate swap contracts at December 31, 1998 and 1997 was $1.6 million and $2.8 million, respectively. CONCENTRATION OF CREDIT RISK The Company sells its products and services to various 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 limited 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 receivables. 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 which from time to time may exceed federally insured limits. The Company periodically assesses the financial condition of the institutions and believes that any possible loss is minimal. 30 32 BAKER HUGHES INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 11. EMPLOYEE STOCK PLANS The Company has stock option plans that provide for granting of options for the purchase of common stock to officers and other key employees. These stock options may be granted subject to terms ranging from one to 10 years at a price equal to or greater than the fair market value of the stock at the date of grant. Stock option activity for the Company was as follows:
Weighted Average Number Exercise Price (Shares in thousands) of Shares Per Share --------- --------- Outstanding at September 30, 1995 12,758 $ 15.30 ------- -------- Granted 2,803 20.75 Exercised (2,965) 15.89 Forfeited (403) 18.45 ------- -------- Outstanding at September 30, 1996 12,193 16.30 ------- -------- Granted 3,237 30.15 Options assumed in acquisitions 2,324 16.04 Spin-off adjustment 2,387 Exercised (3,590) 16.04 Forfeited (204) 21.32 ------- -------- Outstanding at September 30, 1997 16,347 16.54 ------- -------- Granted 3,173 47.81 Exercised (818) 12.26 Forfeited (4) 30.83 Adjustment for change in year end 528 ------- -------- Outstanding at December 31, 1997 19,226 21.66 ------- -------- Granted 6,233 21.29 Exercised (1,661) 10.90 Forfeited (655) 28.30 Change in control rights converted (9,811) ------- -------- Outstanding at December 31, 1998 13,332 $ 27.24 ------- --------
The Merger with Western Atlas triggered change in control rights contained in certain Western Atlas employee stock option plans. Conversion of 9.8 million options with these change in control rights resulted in the issuance of 7.5 million shares of the Company's common stock. In connection with the Spin-off, all employee and director options of Western Atlas outstanding immediately prior to the Spin-off were adjusted by increasing the number of shares subject to the option and decreasing the exercise price per share so as to preserve the difference between the aggregate exercise price of the option and the aggregate market value of the shares subject to the option. Under the terms of the Baker Hughes and Western Atlas stock option plans, all outstanding options at August 10, 1998 vested as a result of the Merger. At December 31, 1998, 4.6 million shares were available for future option grants. The fair market value of the options granted in 1998, the Transition Period, 1997 and 1996 was $7.79, $14.47, $11.18 and $6.49, respectively, using the following assumptions for those respective years in the Black-Scholes option-pricing model: dividend yield of 2.2 percent, 0.96 percent, 1.5 percent and 2.2 percent; expected volatility of 49.4 percent, 36.4 percent, 33.5 percent and 26.7 percent; risk-free interest rate of 4.2 percent, 5.6 percent, 6.2 percent and 6.2 percent; and expected life of each option of 4.3 years, 3.2 years, 4.6 years and 4.6 years. The following table summarizes information for stock options outstanding at December 31, 1998 (shares in thousands):
Outstanding Exercisable --------------------------------------------------------------------------- Weighted Average Remaining Weighted Weighted Range of Contractual Average Average Exercise Prices Shares Life (Years) Exercise Price Shares Exercise Price - --------------- ------ ----------------- -------------- ------ -------------- $ 0.61 - 14.86 872 6.45 $ 10.49 578 $ 10.94 16.74 - 20.50 1,720 6.51 19.07 1,650 19.15 21.00 - 27.85 6,733 9.18 21.19 725 22.77 28.50 - 38.69 1,020 7.25 35.13 952 35.08 39.88 - 47.81 2,987 8.73 47.75 2,975 47.78 ------ ---- ------- ----- ------- Total 13,332 8.41 $ 27.24 6,880 $ 33.43 ====== ==== ======= ===== =======
31 33 The following table summarizes pro forma disclosures assuming the Company had used the fair market value method of accounting for its stock based compensation plans:
Year Ended Three Months Year Ended December 31, Ended December 31, September 30, 1998 1997 1997 1996 ------------ ------------------ ------- ------ Pro forma net income (loss) $ (318.0) $ 99.2 $ 16.2 $ 294.0 Pro forma EPS - basic (0.99) 0.31 0.05 1.02 Pro forma EPS - diluted (0.99) 0.31 0.05 1.01
The effects of applying the fair market value method of accounting in the above pro forma disclosure 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. INCOME TAXES The geographic sources of income (loss) from continuing operations before income taxes and cumulative effect of accounting changes are as follows:
Year Ended Three Months Year Ended December 31, Ended December 31, September 30, 1998 1997 1997 1996 -------- ------- ------- ------- United States $ (293.1) $ 40.9 $ 52.9 $ 149.6 Foreign 12.0 138.3 311.4 265.9 -------- ------- ------- ------- Total $ (281.1) $ 179.2 $ 364.3 $ 415.5 ======== ======= ======= =======
The provision for income taxes is comprised of:
Year Ended Three Months Year Ended December 31, Ended December 31, September 30, 1998 1997 1997 1996 ------------ ------------------ ---------------- Current: United States $ 35.9 $ 32.2 $ 54.6 $ 42.7 Foreign 87.4 40.0 112.7 97.8 -------- ------- ------- ------- Total current 123.3 72.2 167.3 140.5 -------- ------- ------- ------- Deferred: United States (74.7) (14.1) 2.7 19.1 Foreign (32.3) 9.9 (6.6) 9.5 -------- ------- ------- ------- Total deferred (107.0) (4.2) (3.9) 28.6 -------- ------- ------- ------- Provision for income taxes $ 16.3 $ 68.0 $ 163.4 $ 169.1 ======== ======= ======= =======
Tax benefits of $16.1 million, $1.4 million, $11.0 million, and $5.1 million associated with the exercise of employee stock options were allocated to equity in the periods ended December 31, 1998, December 31, 1997, September 30, 1997 and September 30, 1996, 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 and cumulative effect of accounting changes for the reasons set forth below:
Year Ended Three Months Year Ended December 31, Ended December 31, September 30, 1998 1997 1997 1996 ------------ ------------------ --------------- Statutory income tax at 35% $ (98.4) $ 62.7 $ 127.5 $ 145.4 Merger and acquisition related costs 55.8 41.3 IRS audit agreement and refund claims (18.4) (11.4) Nondeductible goodwill amortization 13.7 2.0 6.1 7.0 State income taxes - net of U.S. tax benefit 4.0 2.1 4.6 1.6 Incremental effect of foreign operations 25.4 6.5 (6.7) 8.9 Foreign losses with no tax benefit 36.0 1.7 4.9 Utilization of operating loss carryforwards (0.6) (4.2) (3.3) Other-net (1.8) (4.7) 4.5 4.6 ------- ------- ------- ------- Provision for income taxes $ 16.3 $ 68.0 $ 163.4 $ 169.1 ======= ======= ======= =======
The effective tax rates before Merger and acquisition related costs, Spin-off related costs, unusual and other nonrecurring items were 35.5 percent, 37.9 percent, 35.2 percent and 40.0 percent for the periods ended December 31, 1998, December 31, 1997, September 30, 1997 and September 30, 1996, respectively. Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting for income tax purposes, and of operating loss and tax credit carryforwards. The tax effects of the Company's temporary differences and carryforwards are as follows: 32 34 BAKER HUGHES INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, December 31, 1998 1997 ------------ ------------ Deferred tax liabilities: Property $ 90.4 $ 95.6 Other assets 55.6 153.8 Excess costs arising from acquisitions 72.5 68.1 Undistributed earnings of foreign subsidiaries 39.3 41.3 Other 41.1 43.4 ------- ------- Total 298.9 402.2 Deferred tax assets: Receivables 12.4 3.0 Inventory 126.7 99.1 Employee benefits 26.1 24.2 Other accrued expenses 75.6 52.6 Operating loss carryforwards 19.1 10.8 Tax credit carryforwards 55.3 15.5 Other 8.6 40.5 ------- ------- Subtotal 323.8 245.7 Valuation allowances (32.3) (12.6) ------- ------- Total 291.5 233.1 ------- ------- Net deferred tax liability $ 7.4 $ 169.1 ======= =======
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. The Company has reserved the 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 permanently 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, 1998, the Company had approximately $47.5 million of foreign tax credits, $6.5 million of general business credits, and $1.3 million of alternative minimum tax credits available to offset future payments of federal income taxes, expiring in varying amounts between 2003 and 2009. The alternative minimum tax credits may be carried forward indefinitely under current U.S. law. NOTE 13. SEGMENT AND RELATED INFORMATION The Company's nine business units have separate management teams and infrastructures that offer different products and services. The business units have been aggregated into two reportable segments--oilfield and process--since the long-term financial performance of these reportable segments is affected by similar economic conditions. Oilfield: This segment consists of eight business units - Baker Atlas, Baker Hughes INTEQ, Baker Oil Tools, Baker Petrolite, Centrilift, E&P Solutions, Hughes Christensen and Western Geophysical - 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. 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 multinational, independent and national or state-owned oil companies. Process: This segment consists of one business unit--Baker Process --that manufactures and sells process equipment for separating solids from liquids and liquids from liquids through filtration, sedimentation, centrifugation and floatation 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 accounting policies of the reportable segments are the same as those described in Note 2 of Notes to Consolidated Financial Statements. The Company evaluates the performance of its operating segments based on income before income taxes, accounting changes, nonrecurring items, and interest income and expense. Intersegment sales and transfers are not significant. 33 35 Summarized financial information concerning the Company's reportable segments 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.
Oilfield Process Other Total -------- ------- ----- ----- 1998 Revenues $5,801.8 $ 490.2 $ 19.9 $6,311.9 Segment profit (loss) 737.7 24.1 (1,042.9) (281.1) Total assets 6,969.2 425.4 416.2 7,810.8 Capital expenditures 1,258.5 17.2 42.5 1,318.2 Depreciation, depletion and amortization 729.7 12.9 15.7 758.3 Transition period Revenues $1,441.6 $ 124.1 $ 7.2 $1,572.9 Segment profit (loss) 215.2 9.0 (45.0) 179.2 Total assets 6,314.8 375.3 540.5 7,230.6 Capital expenditures 279.0 1.6 16.0 296.6 Depreciation, depletion and amortization 135.7 2.7 3.3 141.7 1997 Revenues $4,942.3 $ 386.1 $ 15.2 $5,343.6 Segment profit (loss) 676.8 36.3 (348.8) 364.3 Total assets 6,222.2 363.7 501.1 7,087.0 Capital expenditures 1,013.0 6.4 28.3 1,047.7 Depreciation, depletion and amortization 529.9 8.4 16.6 554.9 1996 Revenues $4,065.4 $ 352.8 $ 27.6 $4,445.8 Segment profit (loss) 518.9 31.2 (134.6) 415.5 Total assets 4,429.7 258.9 1,108.0 5,796.6 Capital expenditures 646.4 6.6 4.7 657.7 Depreciation, depletion and amortization 436.5 6.7 21.8 465.0
The following table presents the details of "Other" segment profit (loss).
Three Months Year Ended Ended Year Ended December 31, December 31, September 30, 1998 1997 1997 1996 ------------ ------------ --------- -------- Corporate expenses $ (88.9) $ (21.6) $ (61.8) $ (59.2) Interest expense-net (145.4) (23.4) (87.8) (83.0) Unusual charge (215.8) (52.1) (39.6) Acquired in-process research and development (118.0) Nonrecurring charges to costs of revenues and SG&A (373.7) (21.9) Gain on sale of Varco stock 44.3 Merger related costs (219.1) Spin-off related costs (8.4) Other 1.2 2.9 --------- ------- -------- ------- Total $(1,042.9) $ (45.0) $ (348.8) $(134.6) ========= ======= ======== =======
The following table presents consolidated revenues by country based on the location of the use of the product or service.
Year Ended Three Months Year Ended December 31, Ended December 31, September 30, 1998 1997 1997 1996 ------------ ------------------ --------- --------- United States $2,196.4 $ 545.6 $ 1,849.0 $ 1,479.3 United Kingdom 572.2 117.8 426.6 383.1 Venezuela 350.4 107.5 383.0 246.8 Norway 269.7 64.2 222.8 185.4 Canada 257.8 87.6 266.3 203.9 Other countries (approximately 65 countries) 2,665.4 650.2 2,195.9 1,947.3 -------- -------- --------- --------- Total $6,311.9 $1,572.9 $ 5,343.6 $ 4,445.8 ======== ======== ========= =========
The following table presents long-lived assets by country based on the location of the asset.
Year Ended Three Months Ended Year Ended December 31, December 31, September 30, 1998 1997 1997 1996 ------------ ------------------ --------- --------- United States $ 929.0 $ 879.2 $ 823.7 $ 547.4 United Kingdom 242.0 204.2 192.7 118.9 Venezuela 70.1 70.8 54.8 45.6 Nigeria 86.9 41.4 38.9 30.4 Norway 50.0 37.2 32.0 45.5 Other countries 367.9 319.6 340.6 178.8 Western Geophysical mobile assets (*) 546.4 426.6 426.6 324.6 --------- --------- --------- --------- Total $ 2,292.3 $ 1,979.0 $ 1,909.3 $ 1,291.2 ========= ========= ========= =========
(*) 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 are located. NOTE 14. EMPLOYEE BENEFIT PLANS DEFINED BENEFIT PENSION PLANS AND POSTRETIREMENT BENEFITS OTHER THAN PENSIONS The Company adopted SFAS No. 132, Employers' Disclosures about Pensions and Other Postretirement Benefits, which is effective for the Company for the year ended December 31, 1998. The statement revises the required disclosures about pensions and postretirement benefit plans. The Company has several noncontributory 34 36 BAKER HUGHES INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS defined benefit pension plans covering various domestic and foreign employees. Generally, the Company makes annual contributions to the plans in amounts necessary to meet minimum governmental funding requirements. The Company has a defined benefit postretirement plan that provides certain health care and life insurance benefits for substantially all U.S. employees who retire having met certain age and service requirements.
Postretirement Benefits Pension Benefits Other Than Pensions -------------------------------------- ---------------------------------------- Year Ended Three Months Ended Year Ended Three Months Ended December 31, 1998 December 31, 1997 December 31, 1998 December 31, 1997 ----------------- ------------------ ----------------- ------------------ Change in benefit obligation: Benefit obligation at beginning of year $ 184.6 $ 178.3 $ 115.7 $ 116.0 Service cost 5.0 1.2 1.6 0.3 Interest cost 13.3 3.3 8.4 2.0 Plan participants' contributions 1.1 Acquisition 2.8 Amendments (2.1) 0.2 Actuarial (gain)/loss 24.5 1.8 7.0 Curtailment loss 2.5 2.1 Settlement gain (6.7) Benefits paid (9.0) (1.9) (9.0) (2.8) Exchange rate adjustment 2.5 (0.9) -------- -------- -------- -------- Benefits obligation at end of year 217.8 184.6 123.7 115.7 -------- -------- -------- -------- Change in plan assets: Fair value of plan assets at beginning of year 269.3 260.3 Actual return on plan assets 2.0 7.3 Employer contribution 2.0 0.3 Settlement (6.7) Plan participants' contributions 1.1 Acquisition 3.4 Benefits paid (7.4) (1.7) Exchange rate adjustment 1.9 (0.3) -------- -------- -------- -------- Fair value of plan assets at end of year 262.2 269.3 -- -- -------- -------- -------- -------- Funded status 44.4 84.7 (123.7) (115.7) Unrecognized actuarial (gain)/loss 23.0 (17.0) (4.2) (10.3) Unrecognized prior service cost 0.7 0.4 (2.2) (0.1) -------- -------- -------- -------- Net amount recognized 68.1 68.1 (130.1) (126.1) Benefits paid - October to December 1998 0.5 2.8 -------- -------- -------- -------- Net amount recognized $ 68.6 $ 68.1 $ (127.3) $ (126.1) ======== ======== ======== ======== Postretirement Benefits Pension Benefits Other Than Pensions -------------------------------------- -------------------------------------- Year Ended Three Months Ended Year Ended Three Months Ended December 31, 1998 December 31, 1997 December 31, 1998 December 31, 1997 ----------------- ------------------ ----------------- ------------------ Amounts recognized in the statement of financial position consist of: Prepaid benefit cost $ 96.2 $ 87.2 Accrued benefit liability (34.9) (24.7) $ (127.3) $ (126.1) Intangible asset 0.5 0.2 Accumulated other comprehensive income 6.8 5.4 -------- -------- -------- -------- Net amount recognized $ 68.6 $ 68.1 $ (127.3) $ (126.1) ======== ======== ======== ========
35 37
Year Ended Three Months Ended Year Ended September 30, Pension Benefits December 31, 1998 December 31, 1997 1997 1996 ----------------- ------------------ --------- --------- Weighted-average assumptions: Discount rate 6.54% 7.51% 7.56% 7.90% Expected return on plan assets 8.68% 8.92% 8.92% 8.81% Rate of compensation increase 3.95% 3.89% 3.73% 4.73% Components of net periodic benefit cost: Service cost $ 5.0 $ 1.2 $ 3.9 $ 3.0 Interest cost 13.3 3.3 7.7 5.2 Expected return on plan assets (22.5) (5.4) (9.9) (6.1) Amortization of transition (asset)/obligation (0.1) (0.4) Recognized actuarial (gain)/loss (0.1) (0.2) 0.3 0.1 -------- -------- -------- -------- Net periodic benefit cost (4.3) (1.1) 1.9 1.8 Curtailment effect recognized 2.5 -------- -------- -------- -------- Total net periodic benefit cost $ (1.8) $ (1.1) $ 1.9 $ 1.8 ======== ======== ======== ======== Postretirement Benefits Year Ended Three Months Ended Year Ended September 30, Other Than Pensions December 31, 1998 December 31, 1997 1997 1996 ----------------- ------------------ -------- -------- Weighted-average assumptions: Discount rate 6.75% 7.50% 7.48% 7.50% Components of net periodic benefit cost: Service cost $ 1.6 $ 0.3 $ 1.3 $ 1.3 Interest cost 8.4 2.0 7.6 7.4 Recognized actuarial (gain)/loss .3 .1 -------- -------- -------- -------- Net periodic benefit cost $ 10.3 $ 2.3 $ 9.0 $ 8.7 ======== ======== ======== ========
36 38 BAKER HUGHES INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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 $43.8 million, $39.0 million and $11.0 million as of December 31, 1998, and $30.7 million, $26.3 million and $4.5 million as of December 31, 1997. The assumed health care cost trend rate used in measuring the accumulated benefit obligation for postretirement benefits other than pensions as of December 31, 1998 was 6.50% for 1999 declining gradually each successive year until it reaches 5% in 2002. Assumed health care cost trend rates have a significant effect on the amounts reported for the health care plan. A one-percentage-point change in assumed health care cost trend rates would have the following effects:
1-Percentage 1-Percentage Point Increase Point Decrease -------------- -------------- Effect on total service and interest cost components $ 426.0 $ (411.0) Effect on postretirement benefit obligation 5,237.0 (5,103.0)
DEFINED CONTRIBUTION PLANS During the periods reported, generally all Baker Hughes U.S. employees (other than those employed at the time by Western Atlas) not covered under one of the Baker Hughes pension plans were eligible to participate in the Baker Hughes sponsored Thrift Plan. The Thrift Plan allows eligible employees to elect to contribute from 2 percent to 15 percent of their salaries to an investment trust. Employee contributions are matched by the Company at the rate of $1.00 per $1.00 employee contribution for the first 2 percent and $.50 per $1.00 employee contribution for the next 4 percent of the employee's salary. In addition, the Company contributes for all eligible employees between 2 percent and 5 percent of their salary depending on the employee's age as of January 1 each year. Such contributions become fully vested to the employee after five years of employment. Baker Hughes' contribution to the Thrift Plan and other defined contribution plans amounted to $51.0 million, $10.6 million, $35.9 million and $30.0 million in 1998, the Transition Period, 1997 and 1996, respectively. During the periods reported, most of Western Atlas' U.S. employees were covered by a defined contribution plan. Western Atlas contributed an amount based on its consolidated pretax earnings in accordance with the provisions of such plan. This plan includes a voluntary savings feature that is intended to qualify under Section 401(k) of the Internal Revenue Code and is designed to enhance the retirement programs of participating employees. Under this feature, Western Atlas matches up to 67 percent of a certain portion of participants' contributions. Western Atlas' contributions to this plan were $31.4 million, $10.5 million, $39.0 million, and $32.8 million in 1998, the Transition Period, 1997 and 1996, respectively. POSTEMPLOYMENT BENEFITS During the periods reported, the Company provided certain postemployment disability and medical benefits to substantially all qualifying former or inactive Baker Hughes U.S. employees (other than those employed at the time by Western Atlas) following employment but before retirement. 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 which currently earns interest at 7.2 percent. The actuarially determined obligation is calculated at a discount rate of 6.5 percent. Disability Benefits expense was $2.9 million, $.5 million and $1.1 million in 1998, the Transition Period and 1997, respectively. Disability Benefits income was $.1 million in 1996. The continuation of medical, life insurance and Thrift Plan benefits while on disability, and the service related salary continuance benefits ("Continuation Benefits") were provided through a nonqualified, unfunded plan until April 1997. The continuation of the medical benefit portion of the plan was merged into the disability income benefits plan beginning in April 1997. Expense for Continuation Benefits, 37 39 which is primarily interest cost on the projected benefit obligation, was $3.8 million, $.7 million, $3.3 million and $2.9 million for 1998, the Transition Period, 1997 and 1996, respectively. The following table sets forth the funded status and amounts recognized in the Company's consolidated statements of financial position for Disability Benefits and Continuation Benefits:
December 31, 1998 December 31, 1997 ----------------- ------------------ Actuarial present value of accumulated benefit obligation $ (46.3) $ (40.2) Plan assets at fair value 15.1 15.0 ----------- ----------- Accumulated benefit obligation in excess of plan assets (31.2) (25.2) Unrecognized net loss 8.9 5.7 ----------- ----------- Postemployment liability $ (22.3) $ (19.5) =========== ===========
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. Additional assumptions used in the accounting for Continuation Benefits were a discount rate of 6.5 percent in 1998, 7.0 percent in the Transition Period and 1997, and increases in compensation of 5.0 percent for all periods presented. NOTE 15. LITIGATION The Company is sometimes named as a defendant in litigation relating to the products and services it provides. 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 in every case fully indemnify the Company against liabilities arising out of pending and future legal proceedings relating to its ordinary business activities. Many of these policies contain self insured retentions in amounts the Company deems prudent. NOTE 16. 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 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 number of gallons of waste estimated to have been contributed to the site by the Company bears to the total number of gallons of waste estimated to have been disposed at the site. The Company has accrued what it believes to have been its pro rata share of the total 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, 1998 and 1997, the Company had accrued $26.4 million, and $23.7 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. 38 40 BAKER HUGHES INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 17. OTHER MATTERS Supplemental consolidated statement of operations information is as follows:
Year Ended Three Months Ended Year Ended December 31, December 31, September 30, 1998 1997 1997 1996 ------------ ------------------- ------------- Rental expense (generally transportation equipment and warehouse facilities) $ 190.4 $40.5 $ 154.2 $ 114.6 Research and development 128.4 31.8 118.7 98.8 Income taxes paid 134.5 64.7 148.7 84.2 Interest paid 150.3 33.1 92.4 90.0
NOTE 18. COMMITMENTS AND CONTINGENCIES At December 31, 1998, the Company had commitments outstanding for capital expenditures under purchase orders and contracts of approximately $214.2 million. Of this amount, $145.1 million related primarily to construction of two seismic vessels. The cost of the vessels and related equipment is currently estimated to be $204.0 million, excluding capitalized interest. Completion of the vessels, including all related seismic equipment, is now expected for the year 2000. At December 31, 1998, the Company had long-term operating leases covering certain facilities and equipment on which minimum annual rental commitments for each of the five years in the period ending December 31, 2003 are $61.5 million, $45.2 million, $26.4 million, $16.6 million and $7.4 million, respectively, and $40.9 million in the aggregate thereafter. The Company has not entered into any significant capital leases. For the purpose of governing certain relationships between UNOVA and the Company after the Spin-off, UNOVA and the Company entered into various agreements including a Distribution and Indemnity Agreement, a Tax-Sharing Agreement, a Benefits Agreement and an Intellectual Property Agreement. 39 41 BAKER HUGHES INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 19.
QUARTERLY DATA (UNAUDITED) Fiscal Year 1998 (*) -------------------------------------------------------------------------------- First Second Third Fourth Total (Per share amounts in dollars) Quarter Quarter Quarter Quarter Fiscal Year --------- --------- --------- --------- ----------- Revenues $ 1,648.1 $ 1,659.7 $ 1,584.9 $ 1,419.2 $ 6,311.9 Gross profit (**) 531.0 513.9 160.1 396.0 1,601.0 Income (loss) from continuing operations before cumulative effect of accounting change 112.9 118.1 (534.5) 6.1 (297.4) Net income (loss) 112.9 118.1 (534.5) 6.1 (297.4) Per share of common stock: Income (loss) from continuing operations before cumulative effect of accounting change Basic 0.36 0.37 (1.65) 0.02 (0.92) Diluted 0.35 0.36 (1.65) 0.02 (0.92) Net income (loss) Basic 0.36 0.37 (1.65) 0.02 (0.92) Diluted 0.35 0.36 (1.65) 0.02 (0.92) Common stock market prices: High $ 44.13 $ 44.00 $ 34.94 $ 23.88 Low $ 34.88 $ 33.13 $ 17.75 $ 15.00 QUARTERLY DATA (UNAUDITED) Three Months Ended December 31, 1997(*) Fiscal Year 1997(*) ---------- ---------------------------------------------------------------------------- Transition First Second Third Fourth Total (Per share amounts in dollars) Period Quarter Quarter Quarter Quarter Fiscal Year --------- --------- --------- --------- --------- ----------- Revenues $ 1,572.9 $ 1,206.7 $ 1,268.7 $ 1,337.5 $ 1,530.7 $ 5,343.6 Gross profit (**) 527.2 365.9 386.2 428.4 486.2 1,666.7 Income (loss) from continuing operations before cumulative effect of accounting change 111.2 67.6 74.6 109.8 (51.1) 200.9 Net income (loss) 114.0 70.2 (111.9) 123.9 (48.3) 33.9 Per share of common stock: Income (loss) from continuing operations before cumulative effect of accounting change Basic 0.35 0.23 0.25 0.37 (0.16) 0.67 Diluted 0.34 0.23 0.25 0.36 (0.16) 0.66 Net income (loss) Basic 0.36 0.24 (0.38) 0.42 (0.15) 0.11 Diluted 0.35 0.24 (0.36) 0.41 (0.15) 0.11 Common stock market prices: High $ 49.63 $ 38.88 $ 41.25 $ 40.13 $ 47.25 Low $ 39.00 $ 29.50 $ 34.13 $ 32.63 $ 38.38
(*) See Note 2 for accounting changes; see Note 3 for discontinued operations; see Note 7 for acquisitions and dispositions; see Note 8 for unusual charges. (**) Represents revenues less costs of revenues. 40 42 BAKER HUGHES INCORPORATED CORPORATE INFORMATION
CORPORATE OFFICERS: BOARD OF DIRECTORS: MAX L. LUKENS LINDA J. SMITH LESTER M. ALBERTHAL, JR. JOHN F. MAHER* Chairman, President, and Corporate Secretary Retired Chairman of the Board Retired President and Chief Chief Executive Officer of EDS Executive Officer of Great M. GLEN BASSETT Western Financial Corporation THOMAS R. BATES, JR. Vice President and President, VICTOR G. BEGHINI Senior Vice President Baker Petrolite Corporation Vice Chairman - Marathon Group JAMES F. MCCALL USX Corporation and President, Lt. General, U.S. Army (Retired), ERIC L. MATTSON JOSEPH F. BRADY Marathon Oil Company Executive Director of the American Senior Vice President and Vice President and President, Society of Military Comptrollers Chief Financial Officer Centrilift ALTON J. BRANN Chairman and Chief Executive H. JOHN RILEY, JR. G. STEPHEN FINLEY MATTHEW G. DICK Officer of UNOVA, Inc. Chairman, President, and Senior Vice President and Vice President and President, Chief Executive Officer of Chief Administrative Officer Baker Process JOSEPH T. CASEY Cooper Industries, Inc. Retired Vice Chairman ANDREW J. SZESCILA GERALD M. GILBERT and Chief Financial Officer JOHN R. RUSSELL Senior Vice President Vice President and President, of Western Atlas Inc. Retired President of Baker E&P Solutions Hughes Incorporated and Former RAY A. BALLANTYNE EUNICE M. FILTER President and Chief Executive Vice President Marketing, EDWIN C. HOWELL Vice President, Secretary, Officer of Western Atlas Inc. Technology, and Business Vice President and President, and Treasurer of Xerox Development Baker Oil Tools Corporation CHARLES L. WATSON Chairman and Chief Executive DOUGLAS C. DOTY GARY E. JONES JOE B. FOSTER Officer of Dynegy, Inc. Vice President and Treasurer Vice President and President, Chairman and Chief Executive Baker Atlas Officer of Newfield MAX P. WATSON, JR. ARTHUR T. DOWNEY Exploration Company Chairman, President, and Chief Vice President, TIMOTHY J. PROBERT Executive Officer of BMC Software, Government Affairs Vice President and President, CLAIRE W. GARGALLI Inc. Baker Hughes INTEQ Former Vice Chairman, JAMES W. HARRIS Diversified Search and * Will retire at the Annual Vice President, Tax DOUGLAS J. WALL Diversified Health Search Meeting of Stockholders to and Controller Vice President and President, Companies be held on April 28, 1999. Hughes Christensen Company JOHN A. O'DONNELL RICHARD D. KINDER Vice President, Business RICHARD C. WHITE Chairman and Chief Executive Process Development Vice President and President, Officer of Kinder Morgan Western Geophysical Energy Partners, L.P. LAWRENCE O'DONNELL, III Vice President and MAX L. LUKENS General Counsel Chairman, President, and Chief Executive Officer of Baker Hughes Incorporated SHAREHOLDER INFORMATION: INVESTOR RELATIONS OFFICE CORPORATE OFFICE LOCATION Gary R. Flaharty AND MAILING ADDRESS TRANSFER AGENT AND REGISTRAR Director Investor Relations 3900 Essex Lane ChaseMellon Shareholder Services, L.L.C. Baker Hughes Incorporated Houston, Texas 77027 85 Challenger Road P.O. Box 4740 Telephone (713)439-8600 Ridgefield Park NJ 07660 Houston, Texas 77210-4740 P.O. Box 4740 1(888)216-8057 gary.flaharty@bakerhughes.com Houston, Texas 77210-4740 INDEPENDENT ACCOUNTANTS FORM 10-K WEBSITE Deloitte & Touche LLP A copy of the Company's Annual Report to the http://www.bakerhughes.com Houston, Texas Securities and Exchange Commission (Form 10-K) is available by writing to Baker Hughes Investor BAKER HUGHES INFORMATION SYSTEM STOCK EXCHANGE LISTINGS Relations. 1(800)969-7447 Ticker Symbol "BHI" New York Stock Exchange, ANNUAL MEETING Pacific Exchange, Inc., The Company's Annual Meeting of Stockholders will The Swiss Stock Exchange be held at 11:00 AM on April 28, 1999 at the offices of the company: 3900 Essex Lane, Suite 210, Houston, Texas.
41 EX-21.1 29 SUBSIDIARIES OF REGISTRANT 1 BAKER HUGHES INCORPORATED EXHIBIT 21
PERCENTAGE PERCENTAGE JURISDICTION OR OWNED BY OWNED BY NAME OF SIGNIFICANT SUBSIDIARIES ORGANIZATION REGISTRANT SUBSIDIARY -------------------------------- --------------- ---------- ---------- WESTERN ATLAS INC. DELAWARE 100% Baker Hughes Financing Company Delaware 100% Baker Hughes Oilfield Operations, Inc. California (1) Baker Canada Holding, Inc. Delaware (2) Baker Hughes (Canada) Holding Company, Inc. Nova Scotia 100% Baker Hughes Canada Inc. Nova Scotia 100% Baker Hughes International Branches, Inc. Delaware (3) Baker Hughes EHHC, Inc. Delaware 100% Baker Hughes GmbH Austria 100% Baker Hughes Asia Pacific Ltd. Cayman Islands 100% Baker Hughes Espana Srl Spain 100% Baker Hughes Limited England 100% Baker Hughes Nederland Holdings B.V. The Netherlands 100% JDI International Leasing Limited Cayman Islands 100% Baker Process, Inc. Delaware 100% Western Research Holdings, Inc. Delaware 100% Western Atlas International, Inc. Delaware 100% Wm. S. Barnickel & Company Missouri 100% Baker Petrolite Corporation Delaware 100% (1) Baker Hughes Oilfield Operations, Inc. Western Atlas Inc. - 99.64% Other subsidiaries - .36% (2) Baker Canada Holding, Inc. Baker Hughes International Branches, Inc. - 11.47% Baker Hughes Oilfield Operations, Inc. - 64.10% Baker Hughes World Trade, Inc. - 2.47% Baker Petrolite Corporation - 15.58% Baker Process, Inc. - 6.38% (3) Baker Hughes International Branches, Inc. Baker Hughes Oilfield Operations, Inc. - 94.25% Other subsidiaries - 5.75%
EX-23.1 30 CONSENT OF DELOITTE & TOUCHE LLP 1 EXHIBIT 23.1 INDEPENDENT AUDITORS' CONSENT Baker Hughes Incorporated: We consent to the incorporation by reference in Post-Effective Amendment No. 1 to Registration Statement No. 33-16094 on Form S-4, in Post-Effective Amendment Nos. 1 and 2 to Registration Statement No. 33-14803 on Form S-8, in Registration Statement No. 33-39445 on Form S-8, in Registration Statement No. 33-61304 on Form S-3, in Amendment No. 1 to Registration Statement No. 33-61304 on Form S-3, in Registration Statement No. 33-52195 on Form S-8, in Registration Statement No. 33-57759 on Form S-8, in Registration Statement No. 33-63375 on Form S-3, in Registration Statement No. 333-19771 on Form S-8, in Post-Effective Amendment No. 1 on Form S-8 to Registration Statement No. 333-28123 on Form S-4, in Post-Effective Amendment No. 1 on Form S-8 to Registration Statement No. 333-29027 on Form S-4, in Registration Statement No. 333-49327 on Form S-8, in Registration Statement No. 333-61065 on Form S-8 and in Registration Statement No. 333-62205 on Form S-8 of our report dated February 17, 1999 (which expresses an unqualified opinion and includes an explanatory paragraph relating to the Company's change in its method of accounting for impairment of long-lived assets to be disposed of effective October 1, 1996 to conform with Statement of Financial Accounting Standards No. 121) incorporated by reference in the Annual Report on Form 10-K of Baker Hughes Incorporated for the year ended December 31, 1998. /s/ DELOITTE & TOUCHE LLP Houston, Texas March 15, 1999 EX-27 31 FINANCIAL DATA SCHEDULE
5 1,000 12-MOS DEC-31-1998 DEC-31-1998 16,600 0 1,422,300 50,100 1,065,700 2,724,500 2,292,300 1,852,200 7,810,800 1,309,900 2,726,300 0 0 327,100 2,872,300 7,810,800 6,311,900 6,311,900 4,710,900 4,710,900 1,736,700 14,600 149,000 (281,100) 16,300 (297,400) 0 0 0 (297,400) (0.92) (0.92)
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