-----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, AsBiT1IyQBxmrgDg7hEiuQfYbeYGjcskXJop6pH38sSURRizkDii0ygcezVbsoJ/ uR2ID4gsJOh+kQ2ty+Z+aQ== 0000950129-00-001215.txt : 20000317 0000950129-00-001215.hdr.sgml : 20000317 ACCESSION NUMBER: 0000950129-00-001215 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 11 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000316 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-K405 SEC ACT: SEC FILE NUMBER: 001-09397 FILM NUMBER: 571517 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-K405 1 BAKER HUGHES INCORPORATED - DATED 12/31/1999 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, 1999 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 of 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. [X] ------------------- At March 1, 2000, the registrant has outstanding 329,931,896 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 $8,981,000,000. ------------------- DOCUMENTS INCORPORATED BY REFERENCE Portions of Registrant's 1999 Proxy Statement for the Annual Meeting of Stockholders to be held April 26, 2000 are incorporated by reference into Part III. 2 PART I ITEM 1. BUSINESS Baker Hughes Incorporated ("Baker Hughes" or the "Company") is a Delaware corporation engaged in the oilfield and process industries. In addition, the Company manufactures and sells other products and provides services to industries that are not related to the oilfield or continuous process industries. The Company conducts certain of its operations through joint ventures, partnerships or alliances. The Company was formed in connection with the combination of Baker International Corporation and Hughes Tool Company that was consummated on April 3, 1987. The Company acquired Western Atlas Inc. ("Western Atlas") in a merger (the "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 two years ended December 31, 1999, the three month period ended December 31, 1997 and for the one year in the period ended September 30, 1997, see Note 13 of the Notes to Consolidated Financial Statements in Item 8 herein. 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 divisions, the Company provides equipment, products and services for oil and gas exploration, drilling, completion and production of oil and gas wells. Baker Atlas. The Company, through its Baker Atlas division, is a leading provider of a broad range of well logging and data analysis services for various phases of drilling and production. In well-logging, the Company places an instrumentation package in the oil and gas well bore. This instrumentation equipment measures rock and fluid properties of subsurface geologic formations. From these measurements, the Company produces graphs of the measurements, known as well logs, that are reviewed to determine the extent to which oil and gas may be found in the well. The Company uses new-generation high-resolution logging instruments, coupled with faster data transmission techniques, to provide for the transfer of larger amounts of data from the borehole to the surface in less time. 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, and consequently lowering drilling costs and risks. The Company's largest competitors in this market include Schlumberger Limited ("Schlumberger") and Halliburton Company ("Halliburton"). Baker Atlas and the Company's Baker Oil Tools division also provide wireline and tubing conveyed perforating services, respectively, to provide paths through the casing and cement sheath in wells so that oil and gas can enter the well bore from the formation. Perforating competitors include Schlumberger and Halliburton. Baker Oil Tools. The Company, through its Baker Oil Tools division, is a leading provider of completion, workover and fishing equipment and services. Its product lines include packer systems, fishing services, liner hangers, sand control, service tools and subsurface safety systems. Packers are used in the well hole to seal the space between the production tubing and the casing, to protect the casing from reservoir pressures and corrosive formation fluids, and to maintain the separation of productive zones. Casing is steel pipe used in the outer perimeter inside of the well bore to keep the wall of the hole from caving in, to prevent fluids from moving from one formation to another, and to improve the efficiency of extracting petroleum from productive wells. Production tubing is the pipe through which the oil and gas flows from the producing zone under the ground to the surface of the well. The Company has recently offered its customers new technology, including multi-lateral completion systems and remote actuated, downhole completion tools. The Company believes that it is a leading worldwide producer of packers and that its principal competitors for sale of packers are Halliburton, Schlumberger and Weatherford International Inc. ("Weatherford"). The Company provides fishing services using specialized tools to locate, dislodge and retrieve twisted off, dropped or damaged pipe, tools or other objects from inside the well bore, potentially hundreds or thousands of feet under the ground. The Company's major fishing competitors are Weatherford and Smith International, Inc. ("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. In addition, the Company provides whipstock and milling tools that are used to mill windows in the casing to drill sidetrack wells or multi-lateral wells. 2 3 The Company manufactures and sells liner hangers. The Company's customers use these tools to suspend and set strings of casing pipe in wells. The Company believes that it is a leading worldwide producer of liner hangers and its primary competitor in this area is Weatherford. The Company offers sand control products and services that prevent sand from entering the well bore and reducing productivity. Major sand control competitors include Schlumberger and Halliburton. Certain of the Company's sand control products and services (gravel packing) also compete with frac-pack services that pressure pumping companies, such as BJ Services Company, Schlumberger and Halliburton, 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 and Schlumberger. Baker Petrolite. The Company, through its Baker Petrolite division, is a leading provider of oilfield specialty chemicals and integrated chemical technology solutions for petroleum production, transportation and refining. Chemicals that the Company provides include specialty chemicals that production segments of the petroleum industry use, as well as industrial chemicals that customers use in refining, wastewater treatment, mineral handling and cooling and boiler water processes. The Company also provides chemical technology solutions to other industrial markets throughout the world including petrochemicals, fuel additives, plastics, imaging, adhesives, steel and crop protection. The Company believes that its primary competitor is the Nalco-Exxon joint venture. The Company designs and manufactures systems for the treatment of produced water and its reinjection. Centrilift. The Company, through its Centrilift division, is a leader in technology for oilfield electric submersible pumping ("ESP") systems, which help raise oil to the surface. These pumping systems consist of an electric submersible pump placed inside the oil well near the productive formation, power and control cables between the pump and the surface, and a surface control system. The Company manufactures the critical components of the systems, including variable speed motor controllers and specialty armored power cables designed for oilfield use. The Company has recently offered its customers new technology, including downhole hydrocyclone oil/water separation systems. Its major competition in ESPs is Schlumberger. E&P Solutions. The Company, through its E&P Solutions division, has acquired equity positions in oil and gas properties and functions as the operator of some of these properties. The Company has acquired many of these oil and gas interests, at the request of its customers, in connection with providing its customers products and services. The Company is organized into 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. The Company provides services for project management and the integration of products and services from the Company and other service providers. Halliburton and Schlumberger are the principal competitors with this capability. Hughes Christensen. The Company believes that, through its Hughes Christensen division, it is a leading manufacturer and marketer of Tricone(TM) roller cone drill bits and polycrystalline diamond compact (PDC) fixed cutter bits for the worldwide oil, gas, mining and geothermal industries. The Company believes that its principal competitors in this area are Smith, Halliburton and Schlumberger for oil and gas applications, and Smith and Sandvik for other applications. Baker Hughes INTEQ. The Company, through its Baker Hughes INTEQ division, believes that it is a leading supplier of directional and horizontal drilling services, drilling fluid systems, coring services, subsurface surveying, logging-while-drilling, and measurement-while-drilling services to the oil and gas industry. The Company provides products and services that its customers use to drill oil and gas wells. Many of these wells are not straight into the ground, but rather are guided on planed trajectories towards potential oil and gas reservoirs. These curving well bores are horizontal or directional wells. The Company's specialized positive displacement downhole motors help operators to steer the well bore while drilling into pay zones using conventional directional drilling, measurement-while drilling, logging-while-drilling and directional drilling services. A full range of measurement-while-drilling and logging-while-drilling systems provided by the Company use mud-pulse telemetry to deliver real-time downhole information on the drilling process and physical features down in the hole. Mud-pulse telemetry uses encoded pressure pulses sent from instruments near the drill bit and decoded by a computer at the surface of the well. This information is used to steer the drill bit towards geologic formations that are more likely to produce oil and gas. The systems are available for a wide range of applications, from directional-only drilling through real-time logging-while-drilling. In logging- while-drilling, information from the drilling assembly is conveyed to the surface, measured and graphed on a log for analysis. The Company has recently offered its customers new technology, including the rotary closed-loop drilling system, which combines a downhole guidance system and logging-while-drilling sensors to guide the well bore to programmed targets without using a downhole motor. With regard to these products and services, the Company competes principally with Halliburton and Schlumberger. 3 4 The Company also produces and markets drilling fluids (muds) for oil and gas well drilling, 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 Smith and Halliburton. Western Geophysical. The Company, through its Western Geophysical division, is a leading provider of seismic data acquisition and processing services to assist oil and gas companies in evaluating the producing potential of sedimentary basins and in locating productive zones. Seismic data are acquired by producing a sound wave. The sound wave moves through the ground and is recorded by audio instruments. The sound waves on the recordings are then analyzed to determine the characteristics of the geologic formations through which they moved and the extent that oil and gas may be trapped in or moving through those formations. This analysis is known as a seismic survey. The Company conducts seismic surveys on land, in deep waters and across shallow-water transition zones worldwide. These seismic surveys encompass high-resolution two-dimensional and three-dimensional surveys for delineating exploration targets. They also may integrate seismic data with information derived from the well bore to describe petrophysical properties throughout a reservoir. The Company also conducts time-lapse four-dimensional seismic surveys for monitoring reservoir fluid movement over time. Seismic information can reduce field development and production costs by reducing turnaround time, lowering drilling risks and minimizing the number of wells necessary to explore and develop reservoirs. The Company's major competitors in providing these services are Schlumberger, Compagnie Generale de Geophysique, Veritas DGC, Inc. and Petroleum Geo-Services ASA. Process The Company has announced its intention to sell its Baker Process division. The Company, through its Baker Process division, provides a broad range of separation equipment and systems to concentrate 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 Vivendi 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 Vivendi. The Company manufactures a broad range of continuous and batch centrifuges and specialty filters which are each widely used in the municipal, industrial, chemical, minerals and pharmaceutical markets to dewater or classify process and waste streams. The Company's principal competitors in its continuous centrifuge product line are Alfa-Laval/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 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. 4 5 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, availability and reliability, health, safety and environmental standards, technical proficiency, and price. Further information concerning marketing, competition and economic conditions is contained under the caption "Business Environment" in "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations". INTERNATIONAL OPERATIONS The Company'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 The Company is 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 two years ended December 31, 1999, the three month period ended December 31, 1997 and for the year ended September 30, 1997, see Note 17 of the Notes to Consolidated Financial Statements in Item 8 herein. Research and development expense for Baker Process for the two years ended December 31, 1999, the three month period ended December 31, 1997, and for the year ended September 30, 1997 is $1.5 million, $2.7 million, $2.1 million and $2.0 million, respectively. 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. 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. 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. During 1999, the Company has focused its efforts towards achieving its goals arising from its acquisition of Western Atlas. PROCESS Baker Process provides separation technologies, continuous process solutions and centrifuges and filters for the mineral, industrial, pulp and paper, municipal and petroleum industries. In February 2000, the Company announced its intention to sell Baker Process to focus the Company's attention on its oilfield businesses. 5 6 EMPLOYEES At December 31, 1999, the Company had a total of approximately 27,326 employees, of which approximately 1,653 were attributable to the Baker Process division, as compared to approximately 32,300 employees at December 31, 1998 and a 1998 peak of approximately 36,500 employees in May 1998. Approximately 1,940 employees at December 31, 1999, of which 345 were attributable to the Baker Process division, were represented under collective bargaining agreements that terminate at various times through November 2003. The Company believes that its relations with its employees are satisfactory. EXECUTIVE OFFICERS The following table shows as of March 1, 2000, 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 Joe B. Foster 65 Chairman of the Board, President and Chief Executive Officer since January 2000. Chairman of the Board of Newfield Exploration Company since 1989. President of Newfield Exploration Company from 1989 to January 2000. Employed January 2000. Andrew J. Szescila 52 Senior Vice President of the Company since July 1997 and President, Baker Hughes Oilfield Operations since January 2000. Vice President of the Company from 1995-1997; and President of Hughes Christensen Company from 1989-1997. President, BJ Services International, 1987-1988; and President, Baker Service Tools, 1988-1989. Employed 1973. George S. Finley 49 Senior Vice President since 1995; Chief Financial Officer since May 1999; and Chief Administrative Officer of the Company from 1995-1999. Controller of the Company, 1987-1993; Vice President of the Company, 1990-1995; and Chief Financial Officer of Baker Hughes Oilfield Operations, 1993-1995. Employed 1982. Alan J. Keifer 45 Vice President and Controller of the Company since July 1999; Western Hemisphere Controller of Baker Oil Tools from 1997-1999. Director of Corporate Audit from 1990-1996. Employed 1990. There are no family relationships among the executive officers of the Company. The Company follows the practice of electing its officers annually in December. 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. During the fiscal year ending December 31, 1999, the Company spent approximately $18.0 million 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 is likely to be small when compared to the Company's overall net worth. Based upon current information, the Company does not believe that it will incur material capital expenditures for environmental control equipment during the fiscal years ending December 31, 2000 and 2001. Based upon current information, the Company believes that capital expenditures for environmental control equipment for the 2000 and 2001 fiscal years 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 is expected to be small when compared to the Company's overall net worth. 6 7 "Environmental Matters" contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. The words "will", "believe", "to be", "expected" and similar expressions are intended to identify forward-looking statements. Baker Hughes' expectations regarding its compliance with Environmental Regulations and its expenditures to comply with Environmental Regulations, including (without limitation) its capital expenditures on environmental control equipment, are only its forecasts regarding these matters. These forecasts may be substantially different from actual results, which are affected by the following factors: changes in Environmental Regulations; unexpected, adverse outcomes with respect to sites in which the Company has been named a potentially responsible party ("PRP"), including (without limitation) the sites listed below; the discovery of new sites of which the Company is not aware where additional expenditures must be spent to comply with Environmental Regulations; an unexpected discharge of hazardous materials in the course of the Company's business or operations; an unplanned acquisition of one or more new businesses; a catastrophic event causing discharges into the environment of hydrocarbons; and the allocation to the Company of liability as a PRP with respect to a site differs from the amount of volume of discharge allocated to the Company with respect to the site. The Company and certain of its subsidiaries and divisions have been identified as a PRP as a result of substances which may have been released in the 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, and Hughes Christensen Company ("HC"), Milpark Drilling Fluids ("Milpark") (now known as INTEQ), and Baker Oil Tools ("BOT"), each divisions 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 May 1987, Baker Performance Chemicals Incorporated (now known as BPC) entered into an Agreed Administrative Order with the then Texas 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. (d) 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. (e) 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. 7 8 (f) 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. (g) 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. (h) 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. (i) In June 1999, Hughes Tool Company (now known as Hughes Christensen) was named as a PRP at the Li Tungsten Site in Glen Cove, New York. This site was used to reprocess tungsten, a strategic metal used in the manufacture of drill bits. The Company has responded to the EPA's inquiry and believes that it has contributed only a de minimus amount of hazardous substances to the site. The site is now undergoing investigative studies to determine a suitable remedial action plan as well as a total estimated cost for remediation. 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. 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 77 manufacturing plants, almost all of which are owned, ranging in size from approximately 1,500 square feet to approximately 306,700 square feet of manufacturing space and totaling more than 3,915,861 square feet. Of such total, approximately 2,644,502 square feet (68%) are located in the United States, 269,639 square feet (7%) are located in the Western Hemisphere exclusive of the United States, 832,331 square feet (21%) are located in Europe, and 169,389 square feet (4%) 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 37 8 9 11 65 Process 6 2 3 1 12
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 1999 and 1998, the Company recognized permanent impairments and wrote down to net realizable value certain inventory, property, plant and equipment. For further information regarding these write-downs, see Note 8 of the Notes to Consolidated Financial Statements in Item 8 herein. 8 9 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 ordinary business activities. Many of these policies contain self insured retentions in amounts the Company deems prudent. The Company has been named as a defendant in a number of shareholder class action suits following the Company's announcement on December 8, 1999 regarding the accounting issues it discovered at its INTEQ division. See Note 15 of the Notes to Consolidated Financial Statements in Item 8 herein. These suits will all be consolidated into one lawsuit pursuant to the Private Securities Litigation Reform Act of 1995. The Company believes the allegations in these suits are without merit, and the Company intends to vigorously defend these lawsuits. Even so, an adverse outcome in this class action litigation could have an adverse effect on the Company's results of operations or financial condition. See also "Item 1. Business - Environmental Matters." ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Common Stock, $1.00 par value per share (the "Common Stock"), of the Company is principally traded on The New York Stock Exchange. The Common Stock is also traded on the Pacific Exchange and the Swiss Exchange. At March 1, 2000, there were approximately 90,000 stockholders and approximately 34,000 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, 1999, and information regarding dividends declared on the Common Stock during the two years ended December 31, 1999, see Note 20 of the Notes to Consolidated Financial Statements in Item 8 herein. 9 10 ITEM 6. SELECTED FINANCIAL DATA The Selected Financial Data should be read in conjunction with "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" and with the consolidated financial statements of the Company for the years ended December 31, 1999 and 1998, the three months ended December 31, 1997 and for the year ended September 30, 1997 and the related Notes to Consolidated Financial Statements in Item 8 herein.
Year Ended Year Ended December 31, Three September 30, ------------------------ Months Ended ------------------------------------- (In millions, except per share amounts) 1999 1998 December 31,1997 1997 1996 1995 --------- --------- ---------------- --------- --------- --------- (As Restated - See Note 19 to consolidated financial statements) ------------------------------------------------------------------ Revenues $ 4,546.7 $ 5,820.6 $ 1,449.0 $ 4,957.9 $ 4,093.0 $ 3,600.8 Costs and expenses: Costs of revenues 3,677.7 4,745.7 1,057.4 3,907.7 3,228.1 2,847.8 Selling, general and administrative 655.0 778.0 197.6 466.7 402.0 392.8 Merger related costs (1.6) 217.5 Unusual charge, net 8.8 196.6 51.1 35.9 Acquired in-process research and development 118.0 --------- --------- --------- --------- --------- --------- Total 4,339.9 5,937.8 1,255.0 4,543.5 3,666.0 3,240.6 --------- --------- --------- --------- --------- --------- Operating income (loss) 206.8 (117.2) 194.0 414.4 427.0 360.2 Interest expense (159.0) (142.7) (23.6) (88.0) (84.7) (86.9) Interest income 5.0 3.7 1.2 3.6 4.9 6.6 Spin-off related costs (8.4) Gain on sale of Varco stock 44.3 Unrealized gain on trading securities 31.5 --------- --------- --------- --------- --------- --------- Income (loss) from continuing operations before income taxes and cumulative effect of accounting changes 84.3 (256.2) 171.6 321.6 391.5 279.9 Income tax (provision) benefit (32.0) (24.7) (65.1) (149.8) (159.2) (116.2) --------- --------- --------- --------- --------- --------- Income (loss) from continuing operations before cumulative effect of accounting changes 52.3 (280.9) 106.5 171.8 232.3 163.7 Cumulative effect of accounting changes (12.1) (13.5) --------- --------- --------- --------- --------- --------- Income (loss) from continuing operations 52.3 (280.9) 106.5 159.7 232.3 150.2 Income (loss) from discontinued operations, net of tax (19.0) (15.2) 7.7 (134.3) 71.4 54.4 --------- --------- --------- --------- --------- --------- Net income (loss) $ 33.3 $ (296.1) $ 114.2 $ 25.4 $ 303.7 $ 204.6 ========= ========= ========= ========= ========= ========= Per share of common stock: Income (loss) from continuing operations before cumulative effect of accounting changes: Basic $ .16 $ (.87) $ .34 $ .57 $ .81 $ .49 Diluted .16 (.87) .33 .56 .80 .48 Dividends .46 .46 .12 .46 .46 .46 Financial Position: Working capital $ 1,329.6 $ 1,569.9 $ 1,594.6 $ 1,484.8 $ 1,897.5 $ 1,852.1 Total assets 7,039.8 7,632.9 7,040.3 6,897.1 5,663.9 5,323.5 Long-term debt 2,706.0 2,726.3 1,605.3 1,473.3 1,124.2 1,295.3 Stockholders' equity 3,071.1 3,165.1 3,483.4 3,455.7 3,163.6 2,845.8
NOTES TO SELECTED FINANCIAL DATA 1) On August 27, 1998, the Board of Directors of the Company approved a change in the fiscal year-end of the Company from September 30 to December 31, effective with the calendar year beginning January 1, 1998. A three-month transition period from October 1, 1997 through December 31, 1997 (the "Transition Period") precedes the start of the 1998 fiscal year. "1995", "1996" and "1997" refer to the respective years ended September 30, and "1998" and "1999" refer to the respective years ended December 31. 10 11 2) In December 1999, based on an internal review, the Company became aware of several accounting misstatements at one of its operating divisions, Baker Hughes INTEQ. A subsequent analysis determined that these misstatements amounted to $31.0 million, net of tax. As a result, the Company restated its previously issued consolidated financial statements to reflect the adjustments required to correct these misstatements.As a result of the above, the Company's 1998, Transition Period, 1997, 1996 and 1995 financial statements have been restated from amounts previously reported. The principal effects of these adjustments on the accompanying financial statements are set forth in Note 19 of the Notes to Consolidated Financial Statements in Item 8 herein. 3) On February 16, 2000, the Company's Board of Directors approved, in principle, a plan to sell the Company's Baker Process division, which manufactures and sells process equipment for separating solids from liquids and liquids from liquids through filtration, sedimentation, centrifugation and flotation processes. Accordingly, the Company's consolidated financial statements and related notes thereto have been restated to present the operations of Baker Process as discontinued operations. For further discussion see Note 3 of the Notes to Consolidated Financial Statements in Item 8 herein. On October 31, 1997, Western Atlas distributed all the shares of UNOVA, Inc., its then wholly owned industrial automation systems subsidiary, as a stock dividend to its shareholders. The operations of UNOVA, Inc. for the Transition Period and 1997 are classified as discontinued operations in the Company's consolidated financial statements. 4) On August 10, 1998, Baker Hughes completed its Merger with Western Atlas. 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. Certain amounts have been reclassified to conform the reporting practices of Baker Hughes and Western Atlas. 5) See Note 8 of the Notes to Consolidated Financial Statements in Item 8 herein for a description of the unusual and other nonrecurring charges and gains in the years ended December 31, 1999 and 1998 and the year ended September 30, 1997. The unusual charge in 1996 consisted of the restructuring and reorganization of certain oilfield divisions, write-off of certain oilfield patents and an impairment of a Latin America joint venture. 6) See Note 7 of the Notes to Consolidated Financial Statements in Item 8 herein for a description of acquisitions and dispositions made in the year ended December 31, 1998, the three months ended December 31, 1997 and the year ended September 30, 1997. In 1996, the Company sold 6.3 million shares of Varco International, Inc. common stock and recognized a pretax gain of $44.3 million. 7) In the year ended September 30, 1997, the Company changed its method of accounting for the impairment of long-lived assets and for long-lived assets held for disposal. In the year ended September 30, 1995, the Company adopted a new accounting standard related to accounting for post employment benefits. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") should be read in conjunction with the consolidated financial statements of the Company for the years ended December 31, 1999 and 1998, the three months ended December 31, 1997 and for the year ended September 30, 1997 and the related Notes to Consolidated Financial Statements contained in Item 8 herein. 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. Baker Hughes' expectations about its business outlook, customer spending, oil and gas prices and the business environment for the Company and the industry in general are only its expectations regarding these matters. 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. See "-Business Environment" for a more detailed discussion of certain of these factors. 11 12 Baker Hughes Incorporated MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) 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; the need to replace any unanticipated losses in capital assets; and the factors listed in "Item 1. Business-Environmental Matters". CHANGE IN YEAR-END On August 27, 1998, the Board of Directors of the Company approved a change in the fiscal year end of the Company from September 30 to December 31, effective with the calendar year beginning January 1, 1998. A three-month transition period from October 1, 1997 through December 31, 1997 (the Transition Period) precedes the start of the 1998 fiscal year. "1997" refers to the year ended September 30, the Transition Period refers to the three months ended December 31, 1997, and "1998" and "1999" refer to the respective years ended December 31. RESTATEMENT In December 1999, based on an internal review, the Company became aware of several accounting misstatements at one of its operating divisions, Baker Hughes INTEQ ("INTEQ"). A subsequent analysis determined that these misstatements amounted to $31.0 million, net of taxes. As a result, the Company restated its previously issued consolidated financial statements to reflect the adjustments required to correct these misstatements. The adjustments relate to uncollectible accounts receivable, inventory shortages, the recognition of inventory pricing adjustments, the impairment of various other current and long-lived assets and the recognition of certain previously unrecorded liabilities, including trade accounts payable and employee compensation and benefits payable. Although the amounts were attributable to several of the INTEQ division locations, $24.2 million, net of tax, was related to INTEQ's Venezuela operations. Of the amounts pertaining to locations other than Venezuela, no one location accounted for more than $2.7 million on an after tax basis. As a result of the analysis of these amounts, the Company determined that the specific years affected and the applicable amounts, net of tax, are as follows:
Increase (decrease) (In millions) to Net Income - ------------- ------------------- 1999 Third quarter $ 0.1 Second quarter 1.5 First quarter 1.7 1998 1.3 Transition Period 0.2 1997 (8.5) 1996 (2.8) 1995 (0.6) Periods prior to 1995 (23.9) --------- Total $ (31.0) ---------
As a result of the above, the Company's 1998, Transition Period, 1997, 1996 and 1995 financial statements have been restated from amounts previously reported. The principal effects of these adjustments on the accompanying financial statements are set forth in Note 19 of the Notes to Consolidated Financial Statements in Item 8 herein. Management believes the misstatements were primarily the result of noncompliance with the Company's accounting and operating procedures and that such noncompliance was isolated primarily to INTEQ's operations in Venezuela. The Company is in the process of reviewing the administrative, accounting and operational policies and procedures for its foreign units, and compliance therewith, to identify potential areas where revisions may be warranted. To the extent that changes to current procedures are warranted, they will be implemented as quickly as practicable. 12 13 DISCONTINUED OPERATIONS 1999 On February 16, 2000, the Company's Board of Directors approved, in principle, a plan to sell the Company's Baker Process division, which manufactures and sells process equipment for separating solids from liquids and liquids from liquids through filtration, sedimentation, centrifugation and flotation processes. Accordingly, the Company's consolidated financial statements and related notes thereto have been restated to present the operations of Baker Process (which were separately accounted for as a segment) as discontinued operations. For further discussion see Note 3 of the Notes to Consolidated Financial Statements in Item 8 herein. 1997 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 and 1997 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. MERGER On August 10, 1998, Baker Hughes completed its Merger with Western Atlas. 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. Certain amounts have been reclassified to conform the reporting practices of Baker Hughes and Western Atlas. BUSINESS ENVIRONMENT Oilfield operations consist of eight divisions - Baker Atlas, Baker Hughes INTEQ, Baker Oil Tools, Baker Petrolite, Centrilift, E&P Solutions, Hughes Christensen and Western Geophysical. These companies manufacture and sell equipment and provide related services used in exploring for, developing and producing hydrocarbon reserves. In addition, E&P Solutions explores for, and produces, oil and natural gas. The business environment for the Company and its corresponding operating results can be significantly affected by the level of industry capital expenditures for the exploration and production of oil and gas reserves. These expenditures are influenced strongly by oil company expectations about the supply and demand for crude oil and natural gas products and by the energy price environment that results from supply and demand imbalances. These expenditures are further influenced by a fundamental change in our customer base and in our customers' approaches toward relationships with suppliers. Our largest customers have consolidated and are using their global size and market power to seek economies of scale and pricing concessions. Key factors currently influencing the worldwide crude oil and gas market are: o PRODUCTION RESTRAINT: the degree to which OPEC nations and other large producing countries are willing and able to restrict production and exports of crude oil. o GLOBAL ECONOMIC GROWTH: in particular in Japan, China and South Korea, and the developing areas of Asia where the correlation between energy demand and economic growth is strong. o OIL AND GAS STORAGE INVENTORIES: relative to historic levels. o TECHNOLOGICAL PROGRESS: in the design and application of new products that allow oil and gas companies to drill fewer wells and to drill, complete and produce wells faster and at lower cost. o MATURITY OF THE RESOURCE BASE: of known hydrocarbon reserves in the maturing provinces of the North Sea, U.S., Canada and Latin America. o THE PACE OF NEW INVESTMENT: access to capital and the reinvestment of available cash flow into existing and emerging markets. o PRICE VOLATILITY: the impact of widely fluctuating commodity prices on the stability of the market and subsequent impact on customer spending. 13 14 Baker Hughes Incorporated MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) OIL AND GAS PRICES 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.
Year Ended December 31, --------------------- Three Months Ended Year Ended 1999 1998 December 31, 1997 September 30, 1997 ------ ------ ------------------ ------------------ West Texas Intermediate Crude ($/bbl) 19.37 14.41 20.02 21.83 U.S. Spot Natural Gas ($/mcf) 2.19 2.01 2.72 2.47
Crude oil prices rebounded strongly from the record lows experienced in 1998. Prices averaged $19.37 for the year, ranging from a low of $11.68/bbl in February of the year to $27.36/bbl in November. Oil prices increased due to sustained adherence to production cut agreements in both OPEC and non-OPEC countries coupled with a resurgence of worldwide demand growth led by a recovery of Asian markets and a return to colder winter weather. The resulting decrease in global oil inventories (particularly in North America) provided increased stability in the market and stronger price support. U.S. natural gas prices strengthened in 1999 compared to the prior year, averaging $2.19/mcf and ranging from a low of $1.58/mcf in March to a high of $2.94/mcf in October. The increase is due in part to an apparent reduction in available gas supply brought about by the sustained slow down in gas directed drilling in the U.S. experienced from January 1998 to June 1999. The impact of lower supply coupled with the return of colder winter weather has reduced natural gas storage inventories to historically seasonable levels. ROTARY RIG COUNT The Company is engaged in the oilfield service industry providing products and services that are used in exploring for, developing and producing oil and gas reservoirs. When drilling or workover rigs are active, they consume the products and services produced by the oilfield service industry. The active rig count acts as a leading indicator of consumption of products and services used in drilling, completing, producing and processing hydrocarbons. Rig count trends are governed by the exploration and development spending by oil and gas companies, which in turn is influenced by current and future price expectations for oil and natural gas. Rig counts therefore reflect the relative strength and stability of energy prices.
Year Ended December 31, --------------------- Three Months Ended Year Ended 1999 1998 December 31, 1997 September 30, 1997 ------ ------ ------------------- ------------------ U.S. - Land 519 703 873 788 U.S. - Offshore 106 123 125 118 Canada 245 259 448 340 ----- ----- ----- ----- North America 870 1,085 1,446 1,246 ----- ----- ----- ----- Latin America 186 243 280 277 North Sea 39 52 55 58 Other Europe 42 46 56 57 Africa 42 74 75 80 Middle East 140 166 165 150 Asia Pacific 139 173 173 181 ----- ----- ----- ----- International 588 754 804 803 ----- ----- ----- ----- Worldwide 1,458 1,839 2,250 2,049 ----- ----- ----- ----- U.S. Workover Rigs 835 1,088 1,427 1,412 ----- ----- ----- -----
The extreme volatility experienced in 1999 for oil and gas prices created an uncertain business environment for the Company's customers. Consequently, customer expenditures to explore for and produce oil and gas declined, decreasing the number of active drilling and workover rigs and reducing the need for the Company's products and services, which resulted in decreased revenues. 14 15 Reductions or increases in rig count may or may not have a significant impact on revenues depending on the prevailing market conditions. There is often a lag between increases or decreases in oil and gas prices and changes in rig count and an additional lag between changes in rig count and the impact on the Company's revenues. OUTLOOK Oil prices are expected to remain strong in the first half of 2000 but are expected to moderate throughout the balance of the year as the OPEC production cuts agreed to in 1999 expire and additional oil supply becomes available to the market. Prices for benchmark West Texas Intermediate oil are expected to trade in the range of $20 to $25/bbl by the end of 2000. U. S. natural gas prices are expected to remain strong throughout 2000 averaging between $2.20 and $2.60 per mcf as lower storage levels, increased demand and reduced supply pressure the market in the coming injection season. In response to improved energy prices, customer spending is expected to strengthen in 2000 with current estimates indicating increased global spending in the oil and gas industry of approximately 10% over 1999 levels. North American spending is expected to continue to increase throughout the year with both natural gas and oil as drivers of increased drilling and production activity. Outside North America; customer spending is expected to remain depressed in the first quarter with gradual improvement thereafter. ACQUISITIONS No significant acquisitions were made during 1999. 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 in 1998, the Transition Period and 1997. 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 dates. 1997 In July 1997, the Company completed the acquisition of Petrolite Corporation ("Petrolite"). The Company 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 $34.5 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 INTEQ, provided 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 CONTINUING OPERATIONS REVENUES Revenues for 1999 totaled $4,546.7 million, as compared to $5,820.6 million for 1998, a decrease of 21.9%. The decrease was due to continued depressed activity levels that started in the second half of 1998 and continued throughout 1999. Although oil and gas prices improved during 1999, average rig counts fell 19.8% in North America and 22% outside North America when compared to 1998. Substantially all areas of the world experienced revenue declines in 1999 as compared to 1998. Approximately 58% of the Company's 1999 revenues were derived from sources outside North America. 1999 revenues from production of oil and gas wells increased over 1998 as certain projects previously in development stage began production during 1999. Oil and gas revenues for 1999 and 1998, were $68.2 million and $5.9 million, respectively. 15 16 Baker Hughes Incorporated MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) Revenues for 1998 were $5,820.6 million, an increase of 17.4% over 1997 revenues of $4,957.9 million. The increase was due to various acquisitions made by the Company in 1998 and in the latter part of 1997, offset by activity level declines as rig counts in 1998 fell 12.9% in North America and 6.1% 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 61% of the Company's revenues were derived from activities outside North America in 1998 and 1997. Quarterly revenues peaked in the June 1998 quarter at $1,532.4 million and declined $225.1 million, or 14.7%, to $1,307.3 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. Revenues for the three months ended December 31, 1997 were $1,449.0 million, an increase of 20.1% over revenues in 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% from the three months ended December 31, 1997, when compared to the three months ended December 31, 1996. GROSS MARGIN Gross margins for 1999, 1998, the Transition Period and 1997, were 19.1%, 18.5%, 27.0% and 21.2%, respectively. Gross margins in 1999 and 1998 were adversely impacted by significant activity declines and the resulting pricing pressure on the Company's products and services. In addition, as discussed in "-Unusual and Other Nonrecurring Charges", during 1999 and 1998 nonrecurring charges recorded in costs of revenue totaled $72.1 million and $286.6 million, respectively. Conversely, the higher gross margin percentages in the Transition Period and 1997 result 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 1999, 1998, the Transition Period and 1997, were 14.4%, 13.4%, 13.6% and 9.4%, respectively. Despite significant cost reduction efforts during 1998 and 1999, SG&A did not decline as a percentage of revenue due to several factors. As discussed in "-Unusual and Other Nonrecurring Charges," in 1999 credits totaling $20.3 million and in 1998 charges totaling $68.7 million were recorded in SG&A. In addition, increased spending on Project Renaissance and Year 2000 computer issue preparations during this period and the fact that SG&A expenses are generally more fixed in nature also contributed to the higher percentages in 1998 and 1999. Significantly higher activity and revenue levels in 1997 resulted in lower SG&A expenses as a percentage of revenue during the period. MERGER RELATED COSTS In connection with the Merger, in 1998 the Company recorded merger related costs of $217.5 million. The cash portion of the charge was $159.3 million and the noncash portion was $58.2 million. These costs included: Cash portion: o Transaction costs including banking, legal and printing fees. o Employee related costs consisting of payments made to certain officers of Western Atlas and severance benefits paid to terminated employees whose responsibilities were deemed redundant. o Integration costs including changing legal registrations, terminating a joint venture as a result of the Merger, and changing signs and logos. NONCASH PORTION: o Charges related to the triggering of change in control rights contained in certain Western Atlas and Baker Hughes employee stock option plans. o Charge to record the write-off of the carrying value of a product line that was discontinued as a result of the Merger. During 1999, the Company reviewed the balances of the accruals for cash merger charges and determined that $1.6 million of the remaining balances in the accruals would not be utilized. This amount was included in the fourth quarter as an adjustment to merger related costs. 16 17 The cash spent as of December 31, 1999 was $142.9 million. The Company expects that, of the $14.8 million accrual at December 31, 1999, $2.0 million will be spent by June 2000 and $2.4 million will be spent over a three-year period, with the remaining accrual being spent over the remaining life of the related contractual obligations. Unusual and Other Nonrecurring Charges 1999 As a result of continuing low activity levels, predominantly for the Company's seismic products and services, the Company recorded charges during the fourth quarter of 1999 totaling $122.8 million as summarized below:
Accrued Amounts Balance at Total Paid in December 31, (In millions) Charge 1999 1999 - ------------- --------- -------- ------------ Cash charges Severance for approximately 800 employees $ 12.5 $ 2.2 $ 10.3 Lease termination and other contractual obligations 36.0 1.5 34.5 Other cash charges 2.2 2.2 --------- -------- ------------ Subtotal cash charges 50.7 $ 3.7 $ 47.0 -------- ------------ Noncash charges - write-off or write-down of property and equipment 72.1 --------- Total cash and noncash charges $ 122.8 =========
The employee groups terminated were executive, marketing, field service and support personnel and approximately 200 were terminated as of December 31, 1999. The amount accrued for severance is based upon the positions eliminated and the Company's written severance policy and does not include any portion of the employees' salary through their severance dates. Based upon current estimates, the Company estimates that all of the accrued severance at December 31, 1999 will be paid during 2000 when the employees leave the Company. The Company accrued $36.0 million related to expected costs to settle contractual obligations based upon management's decision to reduce or abandon certain operations and based on the terms of the applicable agreements. These costs consist primarily of the cost of terminating leases on certain marine vessels that are being taken out of service and removed from the fleet. The impairment of property includes the write-off or write-down of certain assets utilized in the Company's seismic business. These assets are being scrapped or otherwise being disposed of and consist of $31.7 million of land and marine recording equipment, $1.6 million of data processing equipment and $19.6 million of marine vessels to be sold or otherwise abandoned. Write-down amounts were generally determined by use of internal appraisal techniques to assess the estimated realizable value to be realized upon disposal. On an annualized basis, the effect of eliminating depreciation on assets written down or written off is approximately $19.4 million. During 1999 the Company realized nonrecurring gains totaling $54.8 million. The Company sold two large excess real estate properties and realized net gains totaling $39.5 million. The Company received net proceeds of $68.1 million. In addition, the Company sold certain assets related to its previous divestiture of a joint venture and realized a net gain of $15.3 million. During 1999 the Company reviewed the remaining balances of the accruals for cash charges and made $7.4 million of adjustments to reflect the current estimates of remaining expenditures. These adjustments included reversals of previously recorded accruals that will not be utilized. The adjustments related primarily to severance accruals and lease obligations. In addition, for accruals related to certain terminated lease obligations, revisions were made to increase previously recorded amounts based on current information and estimates of expected cash flows related to these leases. These items were reflected in the following captions of the consolidated statement of operations:
(In millions) Charges Credits Adjustments Total - ------------- ------- ------- ----------- ----- Cost of revenues $ 72.1 $72.1 Selling, general and administrative $ (15.3) $ (5.0) (20.3) Unusual charge 50.7 (39.5) (2.4) 8.8 ------- ------- ----------- ----- Total $ 122.8 $ (54.8) $ (7.4) $60.6 ======= ======= =========== =====
17 18 Baker Hughes Incorporated MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) 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 $551.9 million as summarized below:
Accrued Amounts Amounts Balance at paid in paid in Adjustments December 31, (In millions) Total 1998 1999 1999 1999 - ------------- --------- ---------- --------- ----------- ------------ Cash charges Severance for approximately 5,200 employees $ 58.0 $ (24.2) $ (31.2) $ (1.3) $ 1.3 Integration costs, abandoned leases and other contractual obligations: Abandoned leases 11.7 (1.8) (4.6) 0.6 5.9 Contractual obligations 13.5 (7.6) (5.3) (0.6) Integration costs 4.6 (2.6) (2.0) Environmental reserves 8.8 (4.3) (3.6) 0.9 Other cash costs (includes litigation reserves) 21.4 (4.7) (5.5) (1.1) 10.1 --------- ---------- --------- -------- -------- Subtotal cash charges 118.0 $ (45.2) $ (52.2) $ (2.4) $ 18.2 --------- ========== ========= ======== ======== Noncash charges - write-off and write-down of: Inventory and rental tools 160.2 Petro Alliance Services Company Limited 83.2 Property and other assets 75.7 Oil and gas properties (ceiling-test) 69.3 Intangible assets 17.8 Real estate held for sale 17.0 Investments in affiliates 10.7 --------- Subtotal noncash charges 433.9 --------- Total cash and noncash charges $ 551.9 =========
The table set forth below is a reconciliation of the above charges in the cash and noncash tables to the following captions of the consolidated statement of operations:
Selling, General Total Cost of and Unusual (In millions) Charge Revenues Administrative Charge - ------------- ------ -------- -------------- ------- Cash charges Severance $ 58.0 $ 58.0 Integration costs, abandoned leases, etc. 29.8 29.8 Environmental reserves 8.8 $ 8.8 Other cash costs 21.4 11.3 $ 10.1 ------ -------- ------- ------- Subtotal cash charges 118.0 20.1 10.1 87.8 ------ -------- ------- ------- Noncash charges Inventory and rental tools 160.2 160.2 Petro Alliance Services Company Limited 83.2 32.7 50.5 Property and other assets 75.7 65.6 10.1 Oil and gas properties (ceiling-test) 69.3 69.3 Intangible assets 17.8 8.0 5.3 4.5 Real estate held for sale 17.0 17.0 Investments in affiliates 10.7 2.8 7.9 ------ -------- ------- ------- Subtotal noncash charges 433.9 266.5 58.6 108.8 ------ -------- ------- ------- Total cash and noncash charges $551.9 $ 286.6 $ 68.7 $ 196.6 ====== ======== ======= =======
18 19 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, 1999, substantially all will be paid during 2000. The Company accrued $29.8 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 remaining accrual of $5.9 million related to abandoned leases will be spent according to the lease terms. The impairment of inventory and rental tool assets of $160.2 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 and tricone and diamond drill bits. 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. In the fourth quarter of 1997, the price of oil began to decline. This decline in connection with deteriorating political and economic conditions in Russia adversely affected PAS' business in Russia. It also adversely affected PAS' business in other areas of the former Soviet Union that are closely aligned with the Russian economy. PAS suffered significant operating losses in the second, third and fourth quarters of 1998. Revenues of approximately $50.0 million and a net operating loss of approximately $11.0 million were included in the Company's consolidated statement of operations. Due to the continued deterioration of the economy in Russia and other former Soviet Union countries, PAS' continued losses and the prospect that this situation would likely continue, the Company's interest in PAS was written down. For this reason, the Company desired to dispose of its interest in this business. 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 $75.7 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 $20.6 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 was taken in the third quarter of 1998 related to the Company's oil and gas properties. This charge consisted of $25.8 million related to properties in the United States and $7.7 million related to properties in Argentina and resulted from depressed oil and gas prices and reduced future exploration capital expenditures. The remaining $35.8 million resulted from the write-off of unproven reserves in other foreign jurisdictions in which management of the Company plans to reduce the amount of future exploration capital. The write-off of intangible assets of $17.8 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 $9.8 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. 19 20 Baker Hughes Incorporated MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) 1997 During 1997, the Company recorded unusual charges of $51.1 million. This included charges in connection with the acquisitions of Petrolite and Drilex of $34.5 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 $18.5 million. The Company spent $5.5 million during 1997, $1.6 million during the Transition Period and substantially all of the remaining $11.4 million in 1998. Such expenditures relate to specific plans and clearly defined actions and were funded from operations and available credit facilities. 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. Management of the Company is responsible for estimating the fair value of the purchased in-process research and development. 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. A total of $126.0 million was allocated to Petrolite's existing technology that had an original estimated useful life of 30 years. This technology, used primarily in energy-related industries, is embedded in various products of Petrolite designed to inhibit corrosion and scale formation, aid in the oil and water separation process and enhance the performance, through the use of chemical additives, of the process industry. The products under development were valued using a discounted cash flow analysis at a 14% 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 products sold by the Company. The 14% 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. As of December 31, 1999, seventeen of these products had generated commercial sales, five had product sales on a trial basis only, and four were determined not to be viable products. During 1999, revenues from these products totaled approximately $7.6 million. There are risks associated with the projects that may prevent them from becoming viable products that generate revenues. These risks include, but are not limited to, the successful development of the underlying technology and the ability to economically produce a product in commercial quantities. In addition, the factors described above in "-Forward-Looking Statements" and "-Business Environment" create uncertainty that demand for the products utilizing this yet to be developed technology will exist. INTEREST EXPENSE Interest expense in 1999 increased $16.3 million compared to 1998. Interest expense in 1998 increased $54.7 million compared to 1997. These increases were due to higher debt levels that funded acquisitions, capital expenditures and working capital. UNREALIZED GAIN ON TRADING SECURITIES The Company currently holds equity securities in Tuboscope, Inc. In 1999, the Company announced its intention to sell its holdings in Tuboscope, Inc. and has reclassified these from available for sale securities to trading securities. As a result of this decision, the Company recognized an unrealized gain of $31.5 million pre-tax in the fourth quarter of 1999. INCOME TAXES The effective income tax rates before merger related costs, spin-off related costs, unusual and other nonrecurring charges were 34.7%, 35.4%, 37.8% and 35.3% for the periods ended December 31, 1999, December 31, 1998, December 31, 1997 and September 30, 1997, respectively. 20 21 The 1999 effective income tax rate is lower than the 1998 rate due primarily to lower taxes from international operations and a settlement of the audit of the Company's 1994 and 1995 U.S. consolidated income tax returns with the Internal Revenue Service. As a result of the settlement, the Company recognized a tax benefit through the reversal of deferred income taxes previously provided of $18.1 million in the quarter ended June 30, 1999. A significant portion of the Merger related costs and the unusual and other nonrecurring charges recorded in 1998 were not deductible for tax purposes in any jurisdiction. In addition, the Company operated in certain jurisdictions that assess tax on a deemed profit or turnover basis. As a result, the Company provided $24.7 million of income taxes on the net loss from continuing operations of $256.2 million in 1998. CAPITAL RESOURCES AND LIQUIDITY OPERATING ACTIVITIES Net cash inflows from operating activities of continuing operations were $541.3 million, $794.2 million, $137.9 million and $710.4 million in 1999, 1998, the Transition Period and 1997, respectively. The reduction in cash flow from 1998 to 1999 is due to lower net income, after including the noncash portion of nonrecurring items, payments on accruals for merger and nonrecurring related items of $73.0 million and decreases in accounts payable and other accrued liabilities caused by lower business levels. This was offset by reductions in receivables and inventory resulting from activity declines and additional management focus. The increase in operating cash flow from 1997 to 1998 resulted from the increasing business levels from period to period. INVESTING ACTIVITIES Net cash outflows from investing activities of continuing operations were $481.9 million in 1999, $1,658.6 million in 1998, $317.8 million in the Transition Period and $970.0 million in 1997. Property additions in 1999 decreased significantly from prior year levels as the Company responded to the depressed market conditions for its products and services. The Company currently expects 2000 capital expenditures to be approximately $600.0 million excluding acquisitions. Funds provided from operations and outstanding lines of credit are expected to be adequate to meet future capital expenditure requirements. 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. Proceeds from the disposal of assets generated $151.9 million in 1999, $100.0 million in 1998, $20.5 million in the Transition Period and $61.7 million in 1997. 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 1998, the Company used short-term borrowings to purchase various businesses including WEDGE for $218.4 million, net of 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 the Environmental Technology Division of Deutz AG for $52.2 million, net of cash acquired. During the June 1997 quarter, the Company began a multi-year initiative designed to redesign certain of its business processes and 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 whole of the Company and is expected to cost in excess of $300 million over a four year period of which $192.9 million has been spent as of December 31, 1999. 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 $(63.1) million, $838.6 million, $173.7 million and $462.3 million in 1999, 1998, the Transition Period and 1997, respectively. 21 22 Baker Hughes Incorporated MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) Total debt outstanding at December 31, 1999 was $2,814.1 million, compared to $2,770.7 million at December 31, 1998, and $1,782.6 million at September 30, 1997. The increase in debt is primarily due to increased borrowings from commercial paper and revolving credit facilities that funded acquisitions, capital expenditures, and working capital needs. The debt to equity ratio was 0.92 at December 31, 1999 compared to 0.88 at December 31, 1998. Cash dividends in 1999 increased due to the increase in the number of shares of common stock outstanding as a result of the Merger. At December 31, 1999, the Company had $1,512.9 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. On January 14, 1999, the Company issued $400 million of 6.875% Notes due January 2029, $325 million of 6.25% Notes due January 2009, $200 million 6.0% Notes due February 2009 and $100 million of 5.8% Notes due February 2003 with effective interest rates of 7.08%, 6.38%, 6.11% and 6.04%, respectively. The net proceeds of $1,010.7 million were used to repay the $150.0 million of the 7.625% Notes due February 1999, commercial paper, and other short-term borrowings. ACCOUNTING STANDARDS DERIVATIVE AND HEDGE ACCOUNTING In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("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 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, as amended, is effective for all quarters of fiscal years beginning after June 15, 2000. Retroactive application to periods prior to adoption is not allowed. The Company will adopt the standard in the first quarter of 2001. The Company has not quantified the impact of the adoption of SFAS No. 133 on its consolidated financial statements. YEAR 2000 ISSUE Many computer hardware and software products were not engineered with internal calendars or date-processing logic capable of accommodating dates after December 31, 1999. In most cases, the problem was 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 date other than 2000. The same error may exist for years later than 2000 because the application cannot distinguish which century the date represents. These problems had the potential of negatively affecting 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 infrastructure. Additionally, Y2K issues impacting suppliers and customers could have had an indirect negative impact on the Company. The Company did not experience any Y2K problems as a result of the change of year from 1999 to 2000, that, in the opinion of the Company's management, materially and adversely affected the consolidated financial condition of the Company. The Company had approximately 100 full time equivalent employees ("FTEs") involved in its effort to address its Y2K issues, which the Company estimates had an associated annual cost of approximately $7.0 million. Generally, these FTEs were full-time employees who devoted some portion of their schedule to the Y2K effort. In addition to the payroll and payroll-related costs, Baker Hughes spent approximately $41.5 million through December 31, 1999 on addressing its Y2K issues. The Company funded these expenditures from cash that it generated from operating activities or existing credit facilities. EURO CONVERSION A single European currency (the "Euro") was introduced on January 1, 1999, at which time the conversion rates between the old, or legacy, currencies and the Euro were set for 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 11 participating countries. 22 23 Most of the Company's products and services are essentially priced with reference to U.S. dollar-denominated prices. Because of this, the Company does not believe that it will be subject to a significant increase in pricing transparency due to the introduction of the Euro. The Company's customers may require billing in two or more currencies. Until the Company's financial computer systems are modified or replaced to handle Euro-denominated transactions, the Company will, in most cases, need to apply a methodology whereby legacy currencies are first converted into Euros according to a legally prescribed fixed exchange ratio and then, when the customer requires, converted from Euros to a second national currency. The Company does not believe that this conversion will materially affect its contracts. Most of the Company's contracts are either bids in response to requests for tenders or purchase orders. These contracts are either priced in purchase and sales orders, which are short term in nature, or in longer term contracts that are sufficiently flexible to permit pricing in multiple currencies. The Euro conversion period is longer than most of the pricing features of these contracts, thus permitting a pricing conversion to the Euro as new orders are issued. The same is true with most of the Company's contracts with vendors. 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. SAP R/3 is programmed to process in Euros for most of the Company's accounting, financial and operational functions, and the Company expects that the implementation of this system will address its Euro issues in these areas. Because the Company has engaged in this implementation for operational purposes and not solely to address Euro issues, the Company has not separately determined the cost of converting these systems for use with the Euro. These Euro conversion costs are embedded in the cost of Project Renaissance and are not susceptible to separate quantification. The Company has scheduled implementation of SAP R/3 in its major European operations prior to January 1, 2002. The Company may make certain modifications to its legacy computer systems, or replace them, to address certain Euro conversion issues, pending full implementation of SAP R/3. The Company is presently assessing these conversion modifications and their costs. In connection with an internal reorganization of the structure of the Company's subsidiaries and cash management procedures, the Company has instituted a new cash management system that the Company believes is able to process transactions in Euros. The Company does not presently have any interest rate or currency swaps that are denominated in Euro legacy currencies. The Company has appointed coordinators to address Euro conversion issues in France, Germany, Italy, The Netherlands, Denmark, Norway and the United Kingdom, the major centers of the Company's European operations that could be affected by the Euro conversion. The Company continues to assess the impact of the Euro on its operations and financial, accounting and operational systems. 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." The Company's anticipation regarding the lack of significance of the Euro introduction on the Company's operations is only its forecast regarding this matter. This forecast may be substantially different from actual results, which are affected by factors such as the following: unforeseen difficulties in remediating specific computer systems to accommodate the Euro due to the complexity of hardware and software, the inability of third parties to adequately address their own Euro systems issues, including vendors, contractors, financial institutions, U.S. and foreign governments and customers, the delay in completion of a phase of the Company's remediation of a computer system to accommodate the Euro necessary to begin a later phase, the discovery of a greater number of hardware and software systems or technologies with material Euro issues than the Company presently anticipates, and the lack of alternatives that the Company previously believed existed. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company is exposed to certain market risks that are inherent in the Company's financial instruments which arise 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 purposes. A discussion of the Company's primary market risk exposure in financial instruments is presented below. LONG-TERM DEBT The Company is subject to interest rate risk on its long-term fixed interest rate debt. Commercial paper borrowings, other short-term borrowings and variable rate long-term debt do not give rise to significant interest rate risk because these borrowings either have maturities of less than three months or have variable interest rates. All other things being equal, the fair market value of the Company's debt with a fixed interest rate will increase, and the amount required to retire that 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 23 24 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 maintains between 50% and 65% of total borrowings at variable interest rates. At December 31, 1999, the Company had fixed rate debt aggregating $2.0 billion and variable rate debt aggregating $0.8 billion. The following table sets forth, as of December 31, 1999 and 1998, the Company's principal cash flows for its long-term debt obligations, which bear a fixed rate of interest and are denominated in U.S. dollars, and the related weighted average effective interest rates by expected maturity dates. Additionally, the table sets forth the notional amounts and weighted average interest rates of the Company's interest rate swaps by expected maturity (dollar amounts in millions).
1999 2000 2001 2002 2003 2004 Thereafter Total ------ ------ ------ ------ ------ ------ ---------- --------- As of December 31, 1999: Long-term debt (4) -- $ 94.5 $ 0.7 $ 1.0 $100.0 $350.0 $ 1,460.1(1) $ 2,006.3 Weighted average interest rates 8.63% 10.31% 8.00% 5.80% 7.91% 5.90% 6.69% Fixed to variable swaps (5) -- $ 93.0 $ 325.0 Pay rate 7.64%(2) 4.69%(3) Receive rate 8.59% 6.25% 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%
(1) Includes the Liquid Yield Option Notes with an accreted value of $285.7 million and $275.5 million at December 31, 1999 and 1998, respectively. (2) Six-month LIBOR plus 2.01% settled semi-annually. This swap matured in January 2000. (3) Average six-month LIBOR for the Japanese Yen, Euro and the Swiss Franc plus 3.16%. (4) Fair market value of long-term debt is $1,796.9 million and $1,114.8 million at December 31, 1999 and 1998, respectively. (5) Fair market value of the interest rate swaps is a $13.8 million payable and a $1.6 million receivable at December 31, 1999 and 1998, 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% decline in the market price of the Company's common stock would not cause the fair value of the LYONS at December 31, 1999 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, 1999 of $21.06 was significantly below the LYONS conversion price of $40.24.) 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. The Company intends to sell its holdings in Tuboscope. Accordingly, securities held by the Company in this investment are classified as trading securities and reported at fair market value, with unrealized gains and losses included in earnings. At December 31, 1999 and 1998, the fair market value of the Company's investment in common stock and common stock warrants of Tuboscope was $58.7 million and $26.9 million, respectively. The Tuboscope common stock was valued at the closing price at December 31, 1999 and 1998, respectively; 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% decline in the market price of Tuboscope common stock would cause the fair market value of the investment in common stock and common stock warrants of Tuboscope to decrease $13.9 million at December 31, 1999. 24 25 FOREIGN CURRENCY The Company's operations are conducted around the world in a number of different currencies. As such, future earnings are subject to change due to changes in foreign currency exchange rates when transactions are denominated in currencies other than the Company's functional currencies - 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, 1999, the Company had Norwegian Krone denominated commitments of $39.3 million related to the purchase of a seismic vessel. At December 31, 1998, the Company had Norwegian Krone denominated commitments of $81.4 million, related to the purchase of two seismic vessels. The Company had entered into forward exchange contracts with notional amounts of $39.5 million at December 31, 1999 and $88.9 million at December 31, 1998, to hedge these commitments. At December 31, 1999 the fair market value of these contracts was $39.3 million, resulting in an unrealized loss of $0.2 million. In addition, at December 31, 1999, the Company had Australian Dollar denominated commitments of $7.5 million primarily related to a long-term equipment purchase commitment for which the Company entered into forward exchange contracts with notional amounts of $7.1 million to hedge substantially all of this commitment. The unrealized gain on these forward exchange contracts at December 31, 1999 was $0.4 million. At December 31, 1999 the Company had Japanese Yen denominated accounts receivable of $0.8 million related to a sales agreement. At December 31, 1999, the Company had entered into a forward exchange contract with a fair market value of $0.7 million as a hedge for this collection. The notional amounts are used to express the volume of these transactions and do not represent exposure to loss. The carrying value of the contracts was not significant. Foreign currency gains and losses for such purchases are deferred and become part of the basis 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, 1999, these nonfunctional currency borrowings totaled $1.9 million where the primary exposure was between the U.S. Dollar and the Danish Krone. A 10% appreciation of the U.S. Dollar against these currencies would not have a significant effect on the future earnings of the Company. 25 26 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA MANAGEMENT REPORT OF FINANCIAL RESPONSIBILITIES The management of Baker Hughes Incorporated is responsible for the preparation and integrity of the accompanying consolidated financial statements and all other information contained in this Annual Report. The consolidated financial statements have been prepared in conformity with generally accepted accounting principles and include amounts that are based on management's informed judgments and estimates. In fulfilling its responsibilities for the integrity of financial information, management maintains and relies on the Company's system of internal control. This system includes written policies, an organizational structure providing division of responsibilities, the selection and training of qualified personnel and a program of financial and operational reviews by a professional staff of corporate auditors. The system is designed to provide reasonable assurance that assets are safeguarded, transactions are executed in accordance with management's authorization and accounting records are reliable as a basis for the preparation of the consolidated financial statements. Management believes that, as of December 31, 1999, the Company's internal control system provides reasonable assurance that material errors or irregularities will be prevented or detected within a timely period and is cost effective. Management recognizes its responsibility for fostering a strong ethical climate so that the Company's affairs are conducted according to the highest standards of personal and corporate conduct. This responsibility is characterized and reflected in the Company's Standards of Conduct which are distributed throughout the Company. Management maintains a systematic program to assess compliance with the policies included in the standards. The Board of Directors, through its Audit/Ethics Committee composed solely of nonemployee directors, reviews the Company's financial reporting, accounting and ethical practices. The Audit/Ethics Committee recommends to the Board of Directors the selection of independent public accountants and reviews their fee arrangements. It meets periodically with the independent public accountants, management and the corporate auditors to review the work of each and the propriety of the discharge of their responsibilities. The independent public accountants and the corporate auditors have full and free access to the Audit/Ethics Committee, without management present, to discuss auditing and financial reporting matters. /s/ JOE B. FOSTER /s/ G. STEPHEN FINLEY /s/ ALAN J. KEIFER Joe B. Foster G. Stephen Finley Alan J. Keifer Chairman, President and Senior Vice President - Vice President and Chief Executive Officer Finance and Administration, Controller and Chief Financial Officer 26 27 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, 1999 and 1998, and the related consolidated statements of operations, stockholders' equity and cash flows for the years ended December 31, 1999 and 1998, the three month period ended December 31, 1997 and the year ended September 30, 1997. Our audits also included the financial statement schedule II, valuation and qualifying accounts. These financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits. We conducted our audits in accordance with 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, 1999 and 1998, and the results of their operations and their cash flows for the years ended December 31, 1999 and 1998, the three month period ended December 31, 1997 and the year ended September 30, 1997 in conformity with generally accepted accounting principles. Also, in our opinion, such financial statement schedule II, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly in all material respects the information set forth therein. As described 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. As described in Note 19, the accompanying consolidated statement of financial position as of December 31, 1998 and the related consolidated statement of operations, stockholders' equity, and cash flows for the year ended December 31, 1998, the three month period ended December 31, 1997, and the year ended September 30, 1997 have been restated. /s/ DELOITTE & TOUCHE LLP Houston, Texas February 16, 2000 27 28 Baker Hughes Incorporated CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended December 31, --------------------- Three Months Ended Year Ended (In millions, except per share amounts) 1999 1998 December 31, 1997 September 30, 1997 - --------------------------------------- --------- --------- ------------------ ------------------ (As Restated - See Note 19) ----------------------------------------------------------- REVENUES $ 4,546.7 $ 5,820.6 $ 1,449.0 $ 4,957.9 --------- --------- --------- --------- COSTS AND EXPENSES: Costs of revenues 3,677.7 4,745.7 1,057.4 3,907.7 Selling, general and administrative 655.0 778.0 197.6 466.7 Merger related costs (1.6) 217.5 Unusual charge, net 8.8 196.6 51.1 Acquired in-process research and development 118.0 --------- --------- --------- --------- Total 4,339.9 5,937.8 1,255.0 4,543.5 --------- --------- --------- --------- Operating income (loss) 206.8 (117.2) 194.0 414.4 Interest expense (159.0) (142.7) (23.6) (88.0) Interest income 5.0 3.7 1.2 3.6 Unrealized gain on trading securities 31.5 Spin-off related costs (8.4) --------- --------- --------- --------- Income (loss) from continuing operations before income taxes and cumulative effect of accounting change 84.3 (256.2) 171.6 321.6 Income taxes (32.0) (24.7) (65.1) (149.8) --------- --------- --------- --------- Income (loss) from continuing operations before cumulative effect of accounting change 52.3 (280.9) 106.5 171.8 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 52.3 (280.9) 106.5 159.7 Income (loss) from discontinued operations, net of tax (19.0) (15.2) 7.7 (134.3) --------- --------- --------- --------- Net income (loss) $ 33.3 $ (296.1) $ 114.2 $ 25.4 ========= ========= ========= ========= Basic earnings per share: Income (loss) from continuing operations before cumulative effect of accounting change $ .16 $ (.87) $ .34 $ .57 Cumulative effect of accounting change (.04) Discontinued operations, net of tax (.06) (.05) .02 (.45) --------- --------- --------- --------- Net income (loss) $ .10 $ (.92) $ .36 $ .08 ========= ========= ========= ========= Diluted earnings per share: Income (loss) from continuing operations before cumulative effect of accounting change $ .16 $ (.87) $ .33 $ .56 Cumulative effect of accounting change (.04) Discontinued operations, net of tax (.06) (.05) .02 (.44) --------- --------- --------- --------- Net income (loss) $ .10 $ (.92) $ .35 $ .08 ========= ========= ========= =========
See Notes to Consolidated Financial Statements 28 29 Baker Hughes Incorporated NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In millions, except par value) December 31, 1999 December 31, 1998 - ------------------------------- ----------------- ----------------- (As Restated - See Note 19) --------------------------- ASSETS CURRENT ASSETS: Cash and cash equivalents $ 16.9 $ 19.5 Accounts receivable - less allowance for doubtful accounts: December 31, 1999, $52.6; December 31, 1998, $46.4 1,011.4 1,258.2 Inventories 800.0 994.3 Net assets of discontinued operations 278.3 267.9 Other current assets 223.2 213.3 ---------- ---------- Total current assets 2,329.8 2,753.2 Property-net 2,010.2 2,240.7 Goodwill and other intangibles - less accumulated amortization: December 31, 1999, $315.4; December 31, 1998, $265.1 1,694.9 1,744.3 Multiclient seismic data and other assets 1,004.9 894.7 ---------- ---------- Total assets $ 7,039.8 $ 7,632.9 ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable $ 380.9 $ 487.9 Short-term borrowings and current portion of long-term debt 108.1 44.4 Accrued employee compensation 165.5 272.2 Other accrued liabilities 345.7 378.8 ---------- ---------- Total current liabilities 1,000.2 1,183.3 ---------- ---------- Long-term debt 2,706.0 2,726.3 ---------- ---------- Deferred income taxes 35.1 152.9 ---------- ---------- Deferred revenue and other long-term liabilities 227.4 405.3 ---------- ---------- Commitments and contingencies Stockholders' equity: Common stock, $1 par value (shares authorized - 750.0; outstanding 329.8 at December 31, 1999 and 327.1 at December 31, 1998) 329.8 327.1 Capital in excess of par value 2,981.1 2,931.8 Retained earnings (deficit) (51.5) 66.1 Accumulated other comprehensive (loss) (188.3) (159.9) ---------- ---------- Total stockholders' equity 3,071.1 3,165.1 ---------- ---------- Total liabilities and stockholders' equity $ 7,039.8 $ 7,632.9 ========== ==========
See Notes to Consolidated Financial Statements 29 30 Baker Hughes Incorporated CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Accumulated Other Comprehensive Income (Loss) ------------------------------------------------ Unrealized Capital Foreign Gain (Loss) In Excess Retained Currency on Securities Pension Common of Earnings Translation Available Liability Treasury (In millions, except per share amounts) Stock Par Value (Deficit) Adjustment for Sale Adjustment Stock Total - --------------------------------------- ------ --------- --------- ----------- ------------- ---------- -------- --------- (As Restated (As Restated See Note 19) See Note 19) BALANCE, SEPTEMBER 30, 1996 $289.5 $ 2,448.4 $ 542.1 $ (106.3) $ 19.3 $ -- $ (2.1) $ 3,190.9 as previously reported Prior period adjustment (See Note 19) (27.3) (27.3) ------ --------- --------- -------- -------- -------- -------- --------- BALANCE, SEPTEMBER 30, 1996 289.5 2,448.4 514.8 (106.3) 19.3 (2.1) 3,163.6 Comprehensive income: Net income (As Restated - See Note 19) 25.4 Other comprehensive income (loss) (net of tax of $1.1, $22.3 and $1.9, respectively) (29.8) 41.4 (3.5) Total comprehensive income 33.5 Drilex pooling of interests 2.7 46.9 5.7 55.3 Spin-off of UNOVA (See Note 3) (513.1) (77.9) (8.8) (599.8) Cash dividends ($.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 2,828.5 398.4 (144.9) 60.7 (3.5) -- 3,455.7 Comprehensive income: Net income (As Restated - See Note 19) 114.2 Other comprehensive income (loss) (net of tax of $1.6 and $10.3, respectively) (15.6) (22.6) Total comprehensive income 76.0 Cash dividends ($.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 2,834.0 458.5 (160.5) 38.1 (3.5) -- 3,483.4 Comprehensive income: Net loss (As Restated - See Note 19) (296.1) Other comprehensive income (loss) (net of tax of $0.5, $22.5 and $0.5, respectively) 5.1 (38.2) (0.9) Total comprehensive loss (330.1) Cash dividends ($.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 66.1 (155.4) (0.1) (4.4) -- 3,165.1 Comprehensive income: Net income 33.3 Other comprehensive income (loss) (net of tax of $2.0, $0.04 and $0.9, respectively) (30.2) 0.1 1.7 Total comprehensive income 4.9 Cash dividends ($.46 per share) (150.9) (150.9) Stock issued pursuant to employee stock plans 2.7 49.3 52.0 ------ --------- --------- -------- -------- -------- -------- --------- BALANCE, DECEMBER 31, 1999 $329.8 $ 2,981.1 $ (51.5) $ (185.6) $ -- $ (2.7) $ -- $ 3,071.1 ====== ========= ========= ======== ======== ======== ======== =========
See Notes to Consolidated Financial Statements 30 31 Baker Hughes Incorporated NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Year Ended December 31, --------------------------- Three Months Ended Year Ended (In millions) 1999 1998 December 31, 1997 September 30, 1997 - ------------- ----------- ----------- ----------------- ------------------ (As Restated - See Note 19) -------------------------------------------------------- Cash flows from operating activities: Income (loss) from continuing operations $ 52.3 $ (280.9) $ 106.5 $ 159.7 Adjustments to reconcile income (loss) from continuing operations to net cash flows from operating activities: Depreciation, depletion and amortization 778.4 745.4 139.0 546.3 Benefit for deferred income taxes (47.2) (107.0) (4.2) (3.9) Noncash portion of nonrecurring charges 70.3 492.1 32.5 Acquired in-process research and development 118.0 Unrealized gain on trading securities (31.5) Gain on disposal of assets (47.0) (32.0) (12.0) (19.5) Cumulative effect of accounting change 12.1 Change in assets and liabilities (234.0) (23.4) (91.4) (134.8) ----------- ----------- ---------- ----------- Net cash flows from continuing operations 541.3 794.2 137.9 710.4 Net cash flows from discontinued operations (0.2) 17.2 11.9 13.9 ----------- ----------- ---------- ----------- Net cash flows from operating activities 541.1 811.4 149.8 724.3 ----------- ----------- ---------- ----------- Cash flows from investing activities: Expenditures for capital assets and multiclient seismic data (633.8) (1,301.0) (295.2) (1,041.3) Proceeds from disposal of assets 151.9 100.0 20.5 61.7 Acquisition of businesses, net of cash acquired (457.6) (43.1) (107.6) Cash obtained in stock acquisitions 68.7 Proceeds from sale of investments 48.5 ----------- ----------- ---------- ----------- Net cash flows from continuing operations (481.9) (1,658.6) (317.8) (970.0) Net cash flows from discontinued operations (4.3) (17.2) (2.0) (408.1) ----------- ----------- ---------- ----------- Net cash flows from investing activities (486.2) (1,675.8) (319.8) (1,378.1) ----------- ----------- ---------- ----------- Cash flows from financing activities: Net borrowings (payments) from commercial paper and revolving credit facilities (820.5) 1,282.3 (29.0) 471.0 Repayment of indebtedness (150.0) (374.5) (21.4) (128.7) Borrowings of long-term debt 1,010.7 Proceeds from issuance of common stock 47.6 27.1 13.6 80.0 Dividends (150.9) (96.3) (19.5) (69.6) Payment from UNOVA, Inc. 230.0 109.6 ----------- ----------- ---------- ----------- Net cash flows from continuing operations (63.1) 838.6 173.7 462.3 Net cash flows from discontinued operations 4.5 13.1 210.4 ----------- ----------- ---------- ----------- Net cash flows from financing activities (58.6) 838.6 186.8 672.7 ----------- ----------- ---------- ----------- Adjustment for change in year end (17.3) Effect of foreign exchange rate changes on cash 1.1 2.2 (1.5) (2.1) ----------- ----------- ---------- ----------- Increase (decrease) in cash and cash equivalents (2.6) (23.6) (2.0) 16.8 Cash and cash equivalents, beginning of year 19.5 43.1 45.1 28.3 ----------- ----------- ---------- ----------- Cash and cash equivalents, end of year $ 16.9 $ 19.5 $ 43.1 $ 45.1 =========== =========== ========== ===========
See Notes to Consolidated Financial Statements 31 32 Baker Hughes Incorporated NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) NOTE 1. BASIS OF PRESENTATION AND RESTATEMENT 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" refers to the year ended September 30, the Transition Period refers to the three months ended December 31, 1997, and "1998" and "1999" refers to the twelve months ended December 31, 1998 and 1999, respectively. RESTATEMENT As more fully described in Note 19 "Restatement", the financial statements and related disclosures as of and for the periods ended December 31, 1998, the Transition Period and the year ended September 30, 1997 have been restated to correct accounting errors identified in the Company's accounting records. DISCONTINUED OPERATIONS On February 16, 2000, the Company's Board of Directors approved, in principle, a plan to sell the Company's Baker Process division. Accordingly, all prior period consolidated financial statements and related notes thereto have been restated to present the operations of Baker Process (which were separately accounted for as a segment) as a discontinued operation. See Note 3 for further discussion of discontinued operations. MERGER On August 10, 1998, Baker Hughes completed a merger (the "Merger") with Western Atlas Inc. ("Western Atlas"). 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. Certain amounts have been reclassified to conform the reporting practices of Baker Hughes and Western Atlas. In connection with the Merger, in 1998 the Company recorded merger related costs as summarized below:
Accrued Amounts Amounts Balance at Total paid in paid in Adjustments December 31, Charge 1998 1999 1999 1999 --------- --------- -------- ----------- ------------ Cash costs Transaction costs $ 51.5 $ (46.9) $ (3.3) $ 1.3 Employee costs 87.2 (66.2) (10.0) $ (0.2) 10.8 Other merger integration costs 20.6 (9.0) (7.5) (1.4) 2.7 --------- --------- -------- ----------- ------------ Subtotal cash cost 159.3 $ (122.1) $ (20.8) $ (1.6) $ 14.8 ========= ======== =========== ============ Noncash 58.2 --------- Total $ 217.5 =========
Transaction costs of $51.5 million include banking, legal and printing fees and other costs directly related to the Merger. Employee related costs of $87.2 million primarily consist of payments made to certain officers of Western Atlas and Baker Hughes pursuant to change in control provisions, $60.3 million, and severance benefits paid to terminated employees whose responsibilities were deemed redundant as a result of the Merger, $15.4 million. The remaining accrued employee costs represent retirement benefits of certain employees that will be paid, in accordance with the terms of their agreements, over the lives of the covered employees. 32 33 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 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. During 1999 the Company reviewed the remaining balances of the accruals for cash merger charges and made $1.6 million of adjustments to reflect the current estimates of remaining expenditures. These adjustments included reversals of previously recorded accruals that will not be utilized. The adjustments related primarily to other integration costs. The Company expects that, of the $14.8 million accrual at December 31, 1999, $2.0 million will be spent by June 2000 and $2.4 million will be spent by December 31, 2001, with the remaining accrual being spent over the remaining life of the related contractual obligations. 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% to 50% 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 consulting 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 and $12.5 million during 1998 and 1997, 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 33 34 Baker Hughes Incorporated NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 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 principle. At December 31, 1999, the Company had long-lived assets held for disposal of approximately 50 real properties with a carrying value of $37.5 million, ranging in size from a few hundred square feet to 200,000 square feet and located primarily in the United States. This portfolio of real property includes land and offices, manufacturing, repair and warehouse space in various locations where oilfield activity takes place. The makeup of the portfolio changes over time as properties are sold and as properties that are surplus to operation's needs are added. Baker Hughes employs two full-time real estate professionals whose responsibilities include the marketing, leasing, management and sale of these facilities. The methodology used in determining the fair market value of the properties includes comparison to recent sales and listing of similarly situated facilities and discussions with real estate brokers and agents concerning expectations about current and future real property prices and rental rates. INVESTMENTS: Investments in debt and equity securities, other than those accounted for by the equity method, are classified as either trading securities and reported at fair value with unrealized gains or losses included in earnings or as available for sale and reported at fair value with unrealized gains and losses, net of tax, recorded as a separate component of accumulated other comprehensive income within stockholders' equity. The Company currently holds equity securities in Tuboscope, Inc. In 1999, the Company announced its intention to dispose of its holdings in Tuboscope, Inc. and has reclassified it accordingly. As a result of this decision, the Company recognized a pre-tax unusual gain of $31.5 million in 1999. GOODWILL AND OTHER INTANGIBLES: Goodwill arising from acquisitions is amortized using the straight-line method over the lesser of its expected useful life or 40 years. Other intangibles are stated at cost and are amortized on a straight-line basis over the asset's estimated useful life. The carrying amount of unamortized goodwill and other intangibles is reviewed for potential impairment loss when events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recorded in the period in which it is determined that the carrying amount is not recoverable. The determination of recoverability is made based upon the estimated undiscounted future net cash flows, excluding interest expense, of the business unit to which the goodwill or other intangibles relate. 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 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. 34 35 NOTE 3. DISCONTINUED OPERATIONS 1999 On February 16, 2000, the Company's Board of Directors approved, in principle, a plan to sell the Company's Baker Process division. Baker Process manufacturers and sells process equipment for separating solids from liquids and liquids from liquids through filtration, sedimentation, centrifugation and flotation processes. Accordingly, the Company's consolidated financial statements and related notes thereto have been restated to present the operations of Baker Process (which were separately accounted for as a segment) as a discontinued operation. The Company has retained an investment-banking firm to manage the sale process. Income (loss) from discontinued operations for the year ended December 31, 1999, includes the estimated results of operations of Baker Process for 2000 of $(1.4) million, net of $.7 tax, including allocated interest expense. Income (loss) from discontinued operations for all respective periods presented includes interest expense allocated on the basis of the net assets of Baker Process compared to the Company's stockholders' equity and consolidated debt. Corporate, general and administrative costs of the Company were not allocated to Baker Process for any of the periods presented. Certain information with respect to discontinued operations of Baker Process is as follows:
Year Ended December 31, ------------------------- Three Months Ended Year Ended 1999 1998 December 31, 1997 September 30, 1997 -------- -------- ------------------ ------------------ Revenue $ 389.8 $ 490.1 $ 123.9 $ 385.7 -------- -------- -------- -------- Allocated interest expense 7.6 6.2 0.9 3.2 -------- -------- -------- -------- Income (loss) before income taxes (26.2) (21.5) 7.8 31.5 Provision for income taxes 7.2 6.3 (2.9) (10.9) -------- -------- -------- -------- Income (loss) from discontinued operations of Baker Process $ (19.0) $ (15.2) $ 4.9 $ 20.6 -------- -------- -------- --------
Income (loss) before income taxes from discontinued operations includes merger, unusual and nonrecurring charges of $(4.0) million in 1999 and $39.2 million in 1998. The 1999 amount results from adjustments to the remaining accrual balances for items that will not be utilized. The adjustments relate primarily to terminated leases and severance costs. The 1998 amount consists of integration costs of $10.2 million, severance of $6.3 million, impairment of inventory of $13.0 million, impairment of property, equipment and other assets of $8.1 million and merger related costs of $1.6 million. Net assets of Baker Process are as follows:
As of December 31, --------------------------- 1999 1998 --------- --------- Current assets $ 234.9 $ 221.3 Noncurrent assets 185.8 202.1 --------- --------- Total assets 420.7 423.4 --------- --------- Current liabilities 132.0 142.0 Noncurrent liabilities 10.4 13.5 --------- --------- Total liabilities 142.4 155.5 --------- --------- Net assets of Baker Process $ 278.3 $ 267.9 ========= =========
1997 In May 1997, the Western Atlas Board of Directors approved, in principal, 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 Spin-off. 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. 35 36 Baker Hughes Incorporated NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Discontinued operations of UNOVA are as follows:
Three Months Ended Year Ended December 31, 1997 September 30, 1997 ------------------ ------------------ Revenue $ 107.0 $ 1,201.1 Allocated interest expense 1.7 17.2 --------- ----------- Allocated interest income 2.7 ----------- Income (loss) before income taxes $ 4.7 $ (122.7) Provision for income taxes (1.9) (32.2) --------- ----------- Income (loss) from discontinued operations of UNOVA $ 2.8 $ (154.9) ========= ===========
NOTE 4. EARNINGS PER SHARE A reconciliation of the numerators and denominators of the basic and diluted earnings per share ("EPS") computations for income (loss) from continuing operations is as follows:
Year Ended December 31, -------------------------- Three Months Ended Year Ended 1999 1998 December 31, 1997 September 30, 1997 ----------- ---------- ------------------ ------------------ (As Restated - See Note 19) --------------------------------------------------------- Numerator: Income (loss) from continuing operations $ 52.3 $ (280.9) $ 106.5 $ 171.8 Effect of dilutive securities, net of tax: Liquid Yield Option Notes 1.7 ----------- ---------- --------- --------- Adjusted income (loss) from continuing operations for diluted EPS $ 52.3 $ (280.9) $ 108.2 $ 171.8 =========== ========== ========= ========= Denominator: Weighted average common shares outstanding 328.2 321.7 316.2 299.5 Effect of dilutive securities, net of tax: Stock plans 1.7 6.2 5.2 Liquid Yield Option Notes 7.2 ----------- ---------- --------- --------- Adjusted weighted average common shares outstanding for diluted EPS 329.9 321.7 329.6 304.7 =========== ========== ========= =========
Securities excluded from the computation of diluted EPS for the year ended December 31, 1999 that could potentially dilute basic EPS in the future were options to purchase 10.2 million shares and Liquid Yield Option Notes convertible into 7.2 million shares. 36 37 NOTE 5. INVENTORIES Inventories are comprised of the following:
December 31, 1999 December 31, 1998 ----------------- ----------------- (As Restated - See Note 19) Finished goods $ 651.0 $ 808.6 Work in process 62.3 67.9 Raw materials 86.7 117.8 --------- --------- Total $ 800.0 $ 994.3 ========= =========
NOTE 6. PROPERTY, GOODWILL AND OTHER INTANGIBLES Property, plant and equipment is comprised of the following:
Amortization Period December 31, 1999 December 31, 1998 ------------------- ----------------- ----------------- (As Restated - See Note 19) Land $ 67.2 $ 81.8 Buildings and improvements 5 - 40 years 533.6 580.2 Machinery and equipment 2 - 15 years 2,079.8 2,247.9 Rental tools and equipment 1 - 10 years 838.1 895.0 Oil and gas properties, full cost method 270.3 225.1 ----------------- ----------------- Total property 3,789.0 4,030.0 Accumulated depreciation and depletion (1,778.8) (1,789.3) ----------------- ----------------- Property - net $ 2,010.2 $ 2,240.7 ================= =================
Goodwill and other intangibles are as follows:
Amortization Period December 31, 1999 December 31, 1998 ------------------- ----------------- ----------------- (As Restated - See Note 19) Goodwill 5 - 40 years $ 1,696.0 $ 1,688.3 Other intangible assets 3 - 30 years 314.3 321.1 ----------------- ----------------- Total goodwill and other intangibles 2,010.3 2,009.4 Accumulated amortization (315.4) (265.1) ----------------- ----------------- Goodwill and other intagibles - net $ 1,694.9 $ 1,744.3 ================= =================
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 and $98.4 million in 1997. No significant acquisitions were made during 1999. 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 specialized 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 was 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. 37 38 Baker Hughes Incorporated NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 1997 PETROLITE In July 1997, the Company acquired Petrolite Corporation ("Petrolite") and Wm. S. Barnickel & Company ("Barnickel"), the holder of 47.1% 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, was 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 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 twenty-six 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% 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 products sold by the Company. The 14% 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. As of December 31, 1999, seventeen of these products had generated commercial sales, five had product sales on a trial basis only, and four were determined not to be viable products. During 1999, revenues from these products totaled approximately $7.6 million. 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 1999, 1998, the Transition Period and 1997 totaled $6.0 million, $12.9 million, $2.1 million and $7.7 million, respectively. Of the remaining accrual of $7.4 million, $6.8 million relates to environmental remediation and will be spent as the properties are remediated. 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 basis 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. 38 39 Baker Hughes Incorporated NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) NOTE 8. UNUSUAL AND OTHER CHARGES 1999 As a result of continuing low activity levels, predominantly for the Company's seismic products and services, the Company recorded charges during the fourth quarter of 1999 totaling $122.8 million as summarized below:
Accrued Amounts Balance at Total Paid in December 31, Charge 1999 1999 ---------- -------- ------------ Cash charges Severance for approximately 800 employees $ 12.5 $ 2.2 $ 10.3 Lease termination and other contractual obligations 36.0 1.5 34.5 Other cash charges 2.2 2.2 ---------- -------- --------- Subtotal cash charges 50.7 $ 3.7 $ 47.0 -------- --------- Noncash charges - write-off and write-down of property and equipment 72.1 ---------- Total cash and noncash charges $ 122.8 ==========
The employee groups terminated were executive, marketing, field service and support personnel of which approximately 200 were terminated as of December 31, 1999. The amount accrued for severance is based upon the positions eliminated and the Company's written severance policy and does not include any portion of the employees' salary through their severance dates. Based upon current estimates, the Company estimates that all of the accrued severance at December 31, 1999 will be paid during 2000 when the employees leave the Company. The Company accrued $36.0 million related to expected costs to settle contractual obligations based upon management's decision to reduce or abandon certain operations and based on the terms of the applicable agreements. These costs consist primarily of the cost of terminating leases on certain marine vessels that are being taken out of service and removed from the fleet. The impairment of property includes the write-off or write-down of certain assets utilized in the Company's seismic business. These assets are being scrapped or otherwise being disposed of and consist of $31.7 million of land and marine recording equipment, $1.6 million of data processing equipment and $19.6 million of marine vessels to be sold or otherwise abandoned. Write down amounts were generally determined by use of internal appraisal techniques to assess the estimated fair value to be realized upon disposal. On an annualized basis, the effect of eliminating depreciation on assets written down or written off is approximately $19.4 million. During 1999 the Company realized nonrecurring gains totaling $54.8 million. The Company sold two large excess real estate properties and realized net gains totaling $39.5 million. The Company received net proceeds of $68.1 million. In addition, the Company sold certain assets related to its previous divestiture of a joint venture and realized a net gain of $15.3 million. During 1999 the Company reviewed the remaining balances of the accruals for cash charges and made $7.4 million of adjustments to reflect the current estimates of remaining expenditures. These adjustments included reversals of previously recorded accruals that will not be utilized. The adjustments related primarily to severance accruals and lease obligations. In addition, for accruals related to certain terminated lease obligations, revisions were made to increase previously recorded amounts based on current information and estimates of expected cash flows related to these leases. These items were reflected in the following captions of the consolidated statement of operations:
Charges Credits Adjustments Total --------- --------- ----------- -------- Cost of revenues $ 72.1 $ 72.1 Selling, general and administrative $ (15.3) $ (5.0) (20.3) Unusual charge 50.7 (39.5) (2.4) 8.8 --------- --------- ----------- -------- Total $ 122.8 $ (54.8) $ (7.4) $ 60.6 ========= ========= =========== ========
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. 39 40 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 $551.9 million as summarized below. Substantially all of the charges originate from the Company's oilfield operating segment.
Accrued Amounts Amounts Balance at Total paid in paid in Adjustments December 31, Charge 1998 1999 1999 1999 --------- ---------- --------- ----------- ------------ Cash charges Severance for approximately 5,200 employees $ 58.0 $ (24.2) $ (31.2) $ (1.3) $ 1.3 Integration costs, abandoned leases and other contractual obligations: Abandoned leases 11.7 (1.8) (4.6) 0.6 5.9 Contractual obligations 13.5 (7.6) (5.3) (0.6) Integration costs 4.6 (2.6) (2.0) Environmental reserves 8.8 (4.3) (3.6) 0.9 Other cash costs (includes litigation reserves) 21.4 (4.7) (5.5) (1.1) 10.1 --------- ---------- --------- -------- -------- Subtotal cash charges 118.0 $ (45.2) $ (52.2) $ (2.4) $ 18.2 --------- ========== ========= ======== ======= Noncash charges - write-off and write-down of: Inventory and rental tools 160.2 Petro Alliance Services Company Limited 83.2 Property and other assets 75.7 Oil and gas properties (ceiling-test) 69.3 Intangible assets 17.8 Real estate held for sale 17.0 Investments in affiliates 10.7 --------- Subtotal noncash charges 433.9 --------- Total cash and noncash charges $ 551.9 =========
The above charges were reflected in the following captions of the consolidated statement of operations: Cost of revenues $ 286.6 Selling, general and administrative 68.7 Unusual charge 196.6 ---------- Total $ 551.9 ==========
The employee groups terminated were marketing, manufacturing, field service personnel, engineering and administrative support. Substantially all employees were terminated as of December 31, 1999. 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, 1999, substantially all will be paid during 2000. The Company accrued $29.8 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 remaining accrual of $5.9 million related to abandoned leases will be spent according to the lease terms. The accrual for environmental reserves relates to additional costs to remediate properties obtained in the July 1997 Petrolite acquisition. The Company completed a thorough review of substantially all the Petrolite properties in September 1998 and determined that additional costs would be incurred in remediating the properties. The Company started the remediation in 1999 and expects it to be substantially completed during 2000. Other cash costs of $21.4 million include costs to settle certain litigation, $10.9 million, costs to settle contractual obligations, $2.9 million, and costs to dispose of obsolete inventory, $2.9 million. The remaining accrual of $10.1 million relates to contractual obligations and anticipated legal settlements. The Company expects to spend the majority of the remaining accrual by the end of 2000. 40 41 The impairment of inventory and rental tool assets of $160.2 million 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. Virtually all operating divisions recorded an impairment charge. The product lines most affected were completion products, drilling and evaluation systems and tools and tricone and diamond drill bits. Substantially all the obsolete and slow-moving inventory and rental tools were completely written-off and will be scrapped. 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 PASassets 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 $75.7 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 $20.6 million of assets written down to fair market value. The charges described as write-offs resulted in the carrying value of the items being written down to zero. Charges described as write-downs resulted in the carrying value of the items being written down to estimated fair value. Estimated fair value was generally determined by discounting the estimated future cash flows at a rate of 12% and by appraisal techniques. On an annualized basis, the effect of eliminating depreciation for properties and assets written down and written off is approximately $12 million. The write-off of intangible assets of $17.8 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 $9.8 million for goodwill associated with a discontinued business and a subsidiary held for sale. The goodwill resulted from small acquisitions, the businesses of which had suffered from the downturn in the market conditions resulting in the Company's decision to discontinue the business and sell the subsidiary. The write-off represented the entirety of the goodwill for these acquisitions. In the case of the subsidiary held for sale, the write-down was based on discussions with potential buyers. The impact of the results of operations of the businesses in 1999 is not significant. 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. In September 1998, following the Merger, the Company decided to sell the facility in order to generate cash to pay down debt. Prior to the decision to sell the property, the expected future rental income from a long-term lease was expected to recover the carrying value of the property. During 1999 the Company sold the property. The $10.7 million charge is to write-off investments in joint ventures in both Russia and Indonesia and due to the deteriorating market and economic conditions in these two countries. The write-off represents the entire amount of the Company's investment in these two joint ventures. The charge also includes a $2.8 million loss on the sale of Tracor Europa, a discontinued subsidiary. 1997 During the year ended September 30, 1997, the Company recognized a $51.1 million unusual charge consisting of the following: Baker Petrolite: Severance for 140 employees $ 2.1 Relocation of people and equipment 3.1 Environmental 5.0 Abandoned leases 1.4 Integration costs 2.5 Inventory write-down 11.3 Write-down of other assets 9.1 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 $ 51.1 ========
41 42 Baker Hughes Incorporated NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 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 $34.5 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 $18.5 million. The Company spent $5.5 million during 1997, $1.6 million during the Transition Period, and substantially all of the remaining $11.4 million in 1998. 42 43 NOTE 9. INDEBTEDNESS Total debt consisted of the following:
December 31, 1999 December 31, 1998 ----------------- ----------------- Short-term debt with an average interest rate of 6.29% at December 31, 1999 $ 166.5 $ 943.3 Commercial Paper with an average interest rate of 5.81% at December 31, 1999 760.0 759.1 7.625% Notes due February 1999 with an effective interest rate of 7.73% -- 150.0 Debentures with an effective interest rate of 8.59%, due January 2000 93.0 93.0 5.8% Notes due February 2003 with an effective interest rate of 6.04%, net of unamortized discount of $.7 at December 31, 1999 99.3 8% Notes due May 2004 with an effective interest rate of 8.08%, net of unamortized discount of $.6 at December 31, 1999 ($.8 at December 31, 1998) 99.4 99.2 7.875% Notes due June 2004 with an effective interest rate of 8.13%, net of unamortized discount of $1.8 at December 31, 1999 ($2.2 at December 31, 1998) 248.2 247.8 Liquid Yield Option Notes due May 2008 with a yield to maturity of 3.5% per annum, net of unamortized discount of $99.4 at December 31, 1999 ($109.6 at December 31, 1998) 285.7 275.5 6.25% Notes due January 2009 with an effective interest rate of 6.38%, net of unamortized discount of $2.8 at December 31, 1999 322.2 6% Notes due February 2009 with an effective interest rate of 6.11%, net of unamortized discount of $1.5 at December 31, 1999 198.5 8.55% Debentures due June 2024 with an effective interest rate of 8.80%, net of unamortized discount of $2.7 at December 31, 1999 ($2.8 at December 31, 1998) 147.3 147.2 6.875% Notes due January 2029 with an effective interest rate of 7.08%, net of unamortized discount of $9.9 at December 31, 1999 390.1 Other debt with an effective interest rate of 9.59% 3.9 55.6 -------- -------- Total debt 2,814.1 2,770.7 Less short-term debt and current maturities 108.1 44.4 -------- -------- Long-term debt $2,706.0 $2,726.3 ======== ========
At December 31, 1999, the Company had $1,512.9 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 2001 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. 43 44 Baker Hughes Incorporated NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) The Liquid Yield Option Notes ("LYONS") are convertible into the Company's common stock at a conversion price of $40.24 per share, calculated as of December 31, 1999, which increases at an annual rate of 3.5%. 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. On January 14, 1999, the Company issued $400 million of 6.875% Notes due January 2029 and $325 million of 6.25% Notes due January 2009 with effective interest rates of 7.08%, 6.38%, respectively. On February 4, 1999, the Company issued $200 million of 6.0% Notes due February 2009, and on February 10, 1999 the Company issued $100 million of 5.8% Notes due 2003, with effective interest rates of 6.11% and 6.04%, respectively. The proceeds were used to repay the 7.625% Notes due February 1999, commercial paper and other short-term borrowings. Accordingly, such amounts are presented as long-term in the accompanying consolidated statements of financial position. Maturities of debt at December 31, 1999 are as follows: 2000-$108.1 million; 2001-$164.2 million, 2002-$1.0 million, 2003-$849.4 million; 2004-$347.6 million and $1,343.8 million thereafter. NOTE 10. FINANCIAL INSTRUMENTS INTEREST RATE SWAPS At December 31, 1999, the Company was party to an interest rate swap agreement for a notional amount of $93.0 million on which the Company paid interest at a rate of LIBOR plus 2.01% and received interest at a rate of 8.59%. The interest rate swap settled semi-annually and terminated on January 27, 2000. On February 4, 1999, the Company entered into an interest rate swap with a notional amount of $325.0 million. The Company receives interest at a rate of 6.25% and pays interest at a rate equal to the average of 6 month LIBOR for the Yen, Euro and Swiss Franc plus a 3.16% spread. The interest rate swap settles semi-annually and terminates in January 2009. 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, 1999, the Company had entered into foreign currency forward contracts with notional amounts of $39.5 million to hedge the commitment to purchase a seismic vessel, $7.1 million to hedge equipment purchases under a long-term purchase agreement and $0.7 million to hedge an expected collection under a long term sales agreement. The fair value of these forward contracts, based on year-end quoted market prices for contracts with similar terms and maturity dates, was $39.3 million, $7.5 million and $0.8 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, investments, payables, debt and interest rate and foreign currency contracts. Except as described below, the estimated fair value of such financial instruments at December 31, 1999 and 1998 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. The estimated fair value of the Company's debt at December 31, 1999 and 1998 was $2,723.9 million and $2,818.7 million, respectively, which differs from the carrying amounts of $2,814.1 million and $2,770.7 million, respectively, included in the consolidated statements of financial position. The fair value of the Company's interest rate swap contracts at December 31, 1999 and 1998 was a $13.8 million payable and a $1.6 million receivable, respectively. 44 45 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 minimal risk since the majority of its business is conducted with major companies within the industry. The Company performs periodic credit evaluations of its customers' financial condition and generally does not require collateral for its accounts 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 the risk of any loss is minimal. 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 ten 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, 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 --------- --------- Granted 557 22.07 Exercised (1,096) 17.42 Forfeited (1,058) 33.03 --------- --------- Outstanding at December 31, 1999 11,735 $ 27.39 --------- ---------
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. 45 46 Baker Hughes Incorporated NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) The following table summarizes information for stock options outstanding at December 31, 1999 (shares in thousands):
Outstanding Exercisable ----------------------------------------------------- -------------------------- Weighted Weighted Weighted Range of Average Remaining Average Average Exercise Prices Shares Contractual Life (Years) Exercise Price Shares Exercise Price - ------------------- -------- -------------------------- -------------- -------- -------------- $ 0.61 $ 13.68 523 5.81 $ 10.32 363 $ 10.53 $ 16.74 $ 20.50 1,158 5.41 19.20 1,138 19.23 $ 21.00 $ 26.07 6,522 8.34 21.15 2,274 21.40 $ 28.25 $ 40.25 1,010 6.41 34.98 922 35.27 $ 43.63 $ 47.81 2,522 7.78 47.81 2,522 47.81 -------- ------ ------- -------- -------- Total 11,735 7.65 $ 27.39 7,219 $ 31.51 ======== ====== ======= ======== ========
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, 1999, 5.2 million shares were available for future option grants. The fair market value of the options granted in 1999, 1998, the Transition Period and 1997 was $11.77 per option, $7.79 per option, $14.47 per option and $11.18 per option, respectively, using the following assumptions for those respective years in the Black-Scholes option-pricing model: dividend yield of 2.2%, 2.2%, 0.96% and 1.5%; expected volatility of 55.4%, 49.4%, 36.4% and 33.5%; risk-free interest rate of 6.5%, 4.2%, 5.6% and 6.2%; and expected life of each option of 5.0 years, 4.3 years, 3.2 years and 4.6 years. The following table summarizes pro forma disclosures assuming the Company had used the fair value method of accounting for its stock based compensation plans.
Year Ended December 31, ------------------------- Three Months Ended Year Ended 1999 1998 December 31, 1997 September 30, 1997 ---------- --------------------------------------------------------- (As Restated - See Note 19) --------------------------------------------------------- Pro forma net income (loss) $ 6.2 $ (316.7) $ 99.3 $ 7.7 Pro forma EPS - basic .02 (.98) .31 .03 Pro forma EPS - diluted .02 (.98) .31 .03
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 December 31, ------------------------- Three Months Ended Year Ended 1999 1998 December 31, 1997 September 30, 1997 ---------- --------------------------------------------------------- (As Restated - See Note 19) --------------------------------------------------------- United States $ 74.1 $ (271.6) $ 36.1 $ 39.0 Foreign 10.2 15.4 135.5 282.6 ---------- ---------- ---------- --------- Total $ 84.3 $ (256.2) $ 171.6 $ 321.6 ========== ========== ========== =========
46 47 The provision for income taxes is comprised of:
Year Ended December 31, ------------------------- Three Months Ended Year Ended 1999 1998 December 31, 1997 September 30, 1997 ---------- --------------------------------------------------------- (As Restated - See Note 19) --------------------------------------------------------- Current: United States $ 3.0 $ 31.1 $ 30.3 $ 47.3 Foreign 78.2 87.4 38.8 108.5 ---------- --------- ---------- ---------- Total current 81.2 118.5 69.1 155.8 ---------- --------- ---------- ---------- Deferred: United States (29.7) (73.6) (14.5) 1.3 Foreign (19.5) (20.2) 10.5 (7.3) ---------- --------- ---------- ---------- Total deferred (49.2) (93.8) (4.0) (6.0) ---------- --------- ---------- ---------- Provision for income taxes $ 32.0 $ 24.7 $ 65.1 $ 149.8 ========== ========= ========== ==========
Tax benefits of $4.2 million, $16.1 million, $1.4 million and $11.0 million, associated with the exercise of employee stock options were allocated to equity in the years ended December 31, 1999 and December 31, 1998, the Transition Period and the year ended September 30, 1997, 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 December 31, ------------------------- Three Months Ended Year Ended 1999 1998 December 31, 1997 September 30, 1997 ---------- --------------------------------------------------------- (As Restated - See Note 19) --------------------------------------------------------- Statutory income tax at 35% $ 29.5 $ (89.6) $ 60.1 $ 112.6 Merger and acquisition related costs 55.8 41.3 IRS audit agreement and refund claims (18.1) (18.4) (11.4) Nondeductible goodwill amortization 9.3 12.4 2.0 6.1 State income taxes - net of U.S. tax benefit 2.0 4.0 2.1 4.6 Incremental effect of foreign operations (41.4) 24.0 6.2 (5.4) Foreign losses with no tax benefit 52.0 36.0 1.7 Utilization of operating loss carryforwards (0.6) (4.2) Other-net (1.3) 0.5 (4.7) 4.5 ---------- --------- ---------- ---------- Provision for income taxes $ 32.0 $ 24.7 $ 65.1 $ 149.8 ========== ========= ========== ==========
The effective tax rates before merger related costs, spin-off related costs, unusual and other nonrecurring charges were 34.7%, 35.4%, 37.8% and 35.3% for the periods ended December 31, 1999, December 31, 1998, December 31, 1997 and September 30, 1997, respectively. 47 48 Baker Hughes Incorporated NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 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:
December 31, 1999 December 31, 1998 ----------------- ----------------- (As Restated - See Note 19) Deferred tax liabilities: Property $ 141.0 $ 90.4 Other assets 110.3 55.6 Excess costs arising from acquisitions 122.9 72.5 Undistributed earnings of foreign subsidiaries 39.3 39.3 Other 36.4 37.6 ---------- ---------- Total 449.9 295.4 Deferred tax assets: Receivables 15.9 12.4 Inventory 101.3 126.7 Employee benefits 17.6 26.1 Other accrued expenses 71.1 75.6 Operating loss carryforwards 258.0 19.1 Tax credit carryforwards 145.0 55.3 Other 30.5 8.6 ---------- ---------- Subtotal 639.4 323.8 Valuation allowances (81.7) (32.3) ---------- ---------- Total 557.7 291.5 ---------- ---------- Net deferred tax liability $ (107.8) $ 3.9 ========== ==========
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 provided a valuation allowance for operating loss carryforwards in certain non-U.S. jurisdictions where its operations have decreased, currently ceased or the Company has withdrawn entirely. Provision has been made for U.S. and additional foreign taxes for the anticipated repatriation of certain earnings of foreign subsidiaries of the Company. The Company considers the undistributed earnings of its foreign subsidiaries above the amount already provided to be 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, 1999, the Company had approximately $94.4 million of foreign tax credits, $40.9 million of general business credits, and $9.7 million of alternative minimum tax credits available to offset future payments of federal income taxes, expiring in varying amounts between 2004 and 2020. The alternative minimum tax credits may be carried forward indefinitely under current U.S. law. NOTE 13. SEGMENT AND RELATED INFORMATION The Company's eight business units have separate management teams and infrastructures that offer different products and services. The business units have been aggregated into one reportable segment (oilfield) since the long-term financial performance of these eight business units is affected by similar economic conditions and the oilfield segment consolidated results are evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance. The oilfield segment consists of the following 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 multi-national, independent and national or state-owned oil companies. 48 49 The accounting policies of the oilfield segment are the same as those described in Note 2 of Notes to Consolidated Financial Statements. The Company evaluates the performance of its oilfield segment based on income before income taxes, accounting changes, nonrecurring items and interest income and expense. Summarized financial information is shown in the following table. The "Other" column includes corporate related items, results of insignificant operations and, as it relates to segment profit (loss), income and expense not allocated to reportable segments.
Oilfield Other Total ------------ ------------ ------------ (As Restated - See Note 19) ---------------------------------------- 1999 Revenues $ 4,546.7 $ -- $ 4,546.7 Segment profit (loss) 360.8 (276.5) 84.3 Total assets 6,297.7 463.8 6,761.5 Capital expenditures 572.1 61.7 633.8 Depreciation, depletion and amortization 769.5 8.9 778.4 1998 Revenues $ 5,800.6 $ 20.0 $ 5,820.6 Segment profit (loss) 741.0 (997.2) (256.2) Total assets 6,946.8 418.2 7,365.0 Capital expenditures 1,258.5 42.5 1,301.0 Depreciation, depletion and amortization 729.7 15.7 745.4 Transition Period Revenues $ 1,441.6 $ 7.4 $ 1,449.0 Segment profit (loss) 215.3 (43.7) 171.6 Total assets 6,292.6 542.7 6,835.3 Capital expenditures 279.0 16.2 295.2 Depreciation, depletion and amortization 135.7 3.3 139.0 1997 Revenues $ 4,942.3 $ 15.6 $ 4,957.9 Segment profit (loss) 665.6 (344.0) 321.6 Total assets 6,200.1 506.6 6,706.7 Capital expenditures 1,013.0 28.3 1,041.3 Depreciation, depletion and amortization 529.9 16.4 546.3
Net assets of discontinued operations, which are excluded from total assets in the table above, totaled $278.3 million, $267.9 million, $205.0 million and $190.4 million for 1999, 1998, the Transition Period and 1997, respectively. For the year ended December 31, 1998, oilfield revenues attributable to one customer totaled $629.8 million or 10.9%. The following table presents the details of "Other" segment profit (loss).
Transition 1999 1998 Period 1997 --------- -------- ---------- --------- Corporate expenses $ (95.0) $ (88.9) $ (21.6) $ (61.8) Interest - net (154.0) (139.0) (22.4) (84.4) Unusual charge (8.8) (196.6) (51.1) Acquired in-process research and development (118.0) Nonrecurring charges to costs of revenues and SG&A (51.8) (355.3) (21.9) Unrealized gain on Tuboscope securities 31.5 Merger related costs 1.6 (217.5) Spin-off related costs (8.4) Other 0.1 0.3 1.6 --------- -------- ---------- -------- Total $ (276.5) $ (997.2) $ (43.7) $ (344.0) ========= ======== ========== ========
49 50 The following table presents consolidated revenues by country based on the location of the use of the product or service.
Year Ended December 31, ---------------------------- Three Months Ended Year Ended 1999 1998 December 31, 1997 September 30, 1997 ------------ ------------- ------------------ ------------------ (As Restated See Note 19) ------------ United States $ 1,698.4 $ 2,034.1 $ 509.0 $ 1,701.6 United Kingdom 390.0 542.3 109.8 405.5 Venezuela 227.2 342.7 105.9 376.7 Norway 273.6 266.5 60.8 217.0 Canada 224.1 237.8 82.1 243.3 Other countries (approximately 65 countries) 1,733.4 2,397.2 581.4 2,013.8 ------------ ------------- ----------- ----------- Total $ 4,546.7 $ 5,820.6 $ 1,449.0 $ 4,957.9 ============ ============= =========== ===========
The following table presents long-lived assets by country based on the location of the asset.
December 31, ---------------------------------------------- 1999 1998 1997 September 30, 1997 ----------- ------------ ----------- ------------------ (As Restated - See Note 19) ------------------------------------------------------- United States $ 914.4 $ 890.0 $ 849.4 $ 794.4 United Kingdom 177.8 235.5 198.1 186.3 Nigeria 91.9 86.9 41.4 38.9 Venezuela 53.6 69.5 70.2 54.2 Norway 43.0 50.0 37.2 32.0 Other countries 360.5 362.4 313.3 334.2 Western Geophysical mobile assets * 369.0 546.4 426.6 426.6 ----------- ------------ ----------- ----------- Total $ 2,010.2 $ 2,240.7 $ 1,936.2 $ 1,866.6 =========== ============ =========== ===========
* 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 revised the required disclosures about pensions and postretirement benefit plans. The Company has several noncontributory defined benefit pension plans covering various domestic and foreign employees. Generally, the Company makes annual contributions to the plans in amounts necessary to meet minimum governmental funding requirements. 50 51 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 Year Ended Year Ended Year Ended December 31, 1999 December 31, 1998 December 31, 1999 December 31, 1998 ----------------- ----------------- ----------------- ----------------- Change in benefit obligation: Benefit obligation at beginning of year $ 217.8 $ 184.6 $ 113.9 $ 106.9 Service cost 6.2 5.0 1.8 1.5 Interest cost 13.7 13.3 7.5 7.8 Plan participants' contributions 1.3 1.1 Amendments 0.5 (1.6) (1.9) Actuarial (gain)/loss (13.3) 24.5 (8.3) 5.6 Curtailment (gain) loss (1.0) 2.5 2.1 Settlement gain (6.7) Benefits paid (10.3) (9.0) (9.2) (8.1) Exchange rate adjustment (4.9) 2.5 --------- ---------- ---------- ---------- Benefits obligation at end of year 210.0 217.8 104.1 113.9 --------- ---------- ---------- ---------- Change in plan assets: Fair value of plan assets at beginning of year 262.2 269.3 Actual return on plan assets 45.9 2.0 Employer contribution 3.4 3.6 Settlement (1.0) (6.7) Plan participants' contributions 1.3 1.1 Benefits paid (10.3) (9.0) Exchange rate adjustment (2.5) 1.9 --------- ---------- ---------- ---------- Fair value of plan assets at end of year 299.0 262.2 -- -- --------- ---------- ---------- ---------- Funded status 89.0 44.4 (104.1) (113.9) Unrecognized actuarial (gain)/loss (2.2) 23.0 (14.1) (6.4) Unrecognized prior service cost .7 .7 (3.3) (1.9) --------- ---------- ---------- ---------- Net amount recognized 87.5 68.1 (121.5) (122.2) Benefits paid - October to December .1 0.5 2.3 2.6 --------- ---------- ---------- ---------- Net amount recognized $ 87.6 $ 68.6 $ (119.2) $ (119.6) ========= ========== ========== ==========
Postretirement Benefits Pension Benefits Other Than Pensions -------------------------------------- -------------------------------------- Year Ended Year Ended Year Ended Year Ended December 31, 1999 December 31, 1998 December 31, 1999 December 31, 1998 ----------------- ----------------- ----------------- ----------------- Amounts recognized in the statement of financial position consist of: Prepaid benefit cost $ 115.9 $ 96.2 Accrued benefit liability (32.7) (34.9) $ (119.2) $ (119.6) Intangible asset .3 .5 Accumulated other comprehensive income 4.1 6.8 --------- ---------- ---------- ---------- Net amount recognized $ 87.6 $ 68.6 $ (119.2) $ (119.6) ========= ========== ========== ==========
51 52 Baker Hughes Incorporated NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Year Ended December 31, -------------------------- Three Months Ended Year Ended Pension Benefits 1999 1998 December 31, 1997 September 30, 1997 - ---------------- ----------- ----------- ------------------ ------------------ WEIGHTED-AVERAGE ASSUMPTIONS: Discount rate 6.95% 6.54% 7.51% 7.56% Expected return on plan assets 8.68% 8.68% 8.92% 8.92% Rate of compensation increase 3.92% 3.95% 3.89% 3.73% COMPONENTS OF NET PERIODIC BENEFIT COST: Service cost $ 6.2 $ 5.0 $ 1.2 $ 3.9 Interest cost 13.7 13.3 3.3 7.7 Expected return on plan assets (22.5) (22.5) (5.4) (9.9) Amortization of transition (asset)/obligation (.1) Recognized actuarial (gain)/loss .5 (.1) (.2) .3 ----------- ----------- --------- -------- Net periodic benefit cost (2.1) (4.3) (1.1) 1.9 Curtailment effect recognized (.2) 2.5 ----------- ----------- --------- -------- Total net periodic benefit cost $ (2.3) $ (1.8) $ (1.1) $ 1.9 =========== =========== ========= ========
Year Ended December 31, Postretirement Benefits -------------------------- Three Months Ended Year Ended Other Than Pensions 1999 1998 December 31, 1997 September 30, 1997 - ----------------------- ----------- ---------- ------------------ ------------------ WEIGHTED-AVERAGE ASSUMPTIONS: Discount rate 7.50% 6.75% 7.50% 7.48% COMPONENTS OF NET PERIODIC BENEFIT COST: Service cost $ 1.8 $ 1.5 $ .3 $ 1.2 Interest cost 7.4 7.8 1.8 7.0 Amortization of prior service cost (.3) Recognized actuarial (gain)/loss .3 .1 ----------- ----------- --------- -------- Net periodic benefit cost $ 8.9 $ 9.6 $ 2.1 $ 8.3 =========== =========== ========= ========
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 $36.6 million, $32.3 million and $7.5 million as of December 31, 1999, and $43.8 million, $39.0 million and $11.0 million as of December 31, 1998. Assumed health care cost trend rates have a significant effect on the amounts reported for the health care plan. The assumed health care cost trend rate used in measuring the accumulated benefit obligation for postretirement benefits other than pensions as of December 31, 1999 was 6.0% for 2000 declining gradually each successive year until it reaches 5% in 2003. 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 $ .3 $ (.4) Effect on postretirement benefit obligation 4.1 (4.2)
DEFINED CONTRIBUTION PLANS During the periods reported, generally all Baker Hughes' U.S. employees (other than (1) those employees that Western Atlas employed prior to the Merger and (2) those who were covered under one of Baker Hughes' pension plans) were eligible to participate in the Baker Hughes sponsored Thrift Plan. Prior to 1999, those employees that Western Atlas employed prior to the Merger were eligible to participate in a separate Western Atlas defined contribution plan. In 1999, those employees that Western Atlas employed prior to the Merger who worked for any of the Company's divisions, other than Western Geophysical, became eligible to participate in the Baker Hughes sponsored Thrift Plan rather than the Western Atlas defined contribution plan. The Baker Hughes sponsored Thrift Plan allows eligible employees to elect to contribute from 2% to 15% 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% and $.50 per $1.00 employee contribution for the next 4% of the employee's salary. In addition, the Company contributes for all eligible employees between 2% and 5% 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 52 53 and other defined contribution plans amounted to $57.5 million, $51.0 million, $10.6 million and $35.9 million in 1999, 1998, the Transition Period and 1997, respectively. With respect to the Western Atlas defined contribution plan, Baker Hughes contributed an amount based on its consolidated pretax earnings of the participating businesses 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, Baker Hughes matches up to 67% of a certain portion of participants' contributions. There were no employer contributions to this plan in 1999. The contributions to this plan in 1998, the Transition Period and 1997 were $31.4 million, $10.5 million and $39.0 million, 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. Starting on January 1, 1999, these same benefits were provided to substantially all qualified and former and active Western Atlas employees. Disability income benefits ("Disability Benefits"), available at the date of hire, are provided through a qualified plan which has been funded by contributions from the Company and employees. The primary asset of the plan is a guaranteed insurance contract with an insurance company which currently earns interest at 6.5%. The actuarially determined obligation is calculated at a discount rate of 7.25%. Disability Benefits expense was $1.3 million, $2.9 million, $.5 million and $1.1 million in 1999, 1998, the Transition Period and 1997, respectively. 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, which is primarily interest cost on the projected benefit obligation, was $5.7 million, $3.6 million, $.6 million and $3.1 million for 1999, 1998, the Transition Period and 1997, 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, 1999 December 31, 1998 ----------------- ----------------- Actuarial present value of accumulated benefit obligation $ (39.0) $ (44.7) Plan assets at fair value 14.9 15.1 ---------- ---------- Accumulated benefit obligation in excess of plan assets (24.1) (29.6) Prior service costs (1.8) .1 Unrecognized net (gain) loss (.8) 9.3 ---------- ---------- Postemployment liability $ (26.7) $ (20.2) ========== ==========
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 7.25% in 1999, 6.5% in 1998, and increases in compensation of 5% 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. The Company has been named as a defendant in a number of shareholder class action securities fraud suits following the Company's announcement on December 8, 1999 regarding the accounting issues it discovered at its INTEQ division. See Note 19. These suits will be consolidated into one lawsuit pursuant to the Private Securities Litigation Reform Act of 1995. The Company believes the allegations in these suits are without merit, and the Company intends to vigorously defend the suits. Even so, an adverse outcome in this class action litigation could have an adverse effect on the Company's results of operations or financial condition. NOTE 16. ENVIRONMENTAL MATTERS The Company's past and present operations include activities which are subject to extensive federal and state environmental regulations. 53 54 Baker Hughes Incorporated NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 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, 1999 and 1998, the Company had accrued $22.8 million and $26.4 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. NOTE 17. OTHER SUPPLEMENTAL INFORMATION Supplemental consolidated statement of operations information is as follows:
Year Ended December 31, -------------------------- Three Months Ended Year Ended 1999 1998 December 31, 1997 September 30, 1997 ----------- --------- ------------------ ------------------ Rental expense (generally transportation equipment and warehouse facilities) $ 167.0 $ 189.4 $ 39.7 $ 151.4 Research and development 98.3 125.7 29.7 116.7
Supplemental consolidated statement of cash flows information is as follows:
Year Ended December 31, -------------------------- Three Months Ended Year Ended 1999 1998 December 31, 1997 September 30, 1997 ----------- --------- ------------------ ------------------ (As Restated - See Note 19) -------------------------------------------------------- Change in accounts receivable $ 227.2 $ 106.2 $ (79.9) $ (185.0) Change in inventories 191.8 (36.0) (57.4) (84.4) Change in accounts payable (94.5) (39.2) 11.0 45.9 Change in accrued employee compensation and other current liabilities (155.6) 26.6 (27.9) 11.6 Change in deferred revenue and other long-term liabilities (172.2) 13.9 (5.9) 125.0 Changes in other assets and liabilities (230.7) (94.9) 68.7 (47.9) ----------- ---------- ---------- ----------- Total changes in assets and liabilities $ (234.0) $ (23.4) $ (91.4) $ (134.8) =========== ========== ========== =========== Income taxes paid $ 118.7 $ 134.5 $ 64.7 $ 148.7 Interest paid 148.8 150.2 33.1 92.2
NOTE 18. COMMITMENTS AND CONTINGENCIES At December 31, 1999, the Company had commitments outstanding for capital expenditures under purchase orders and contracts of approximately $124.1 million. Of this amount, $95.2 million related primarily to construction of a seismic vessel. The cost of the vessel and related equipment is currently estimated to be $98.8 million, excluding capitalized interest. Final completion of the vessel, including the installation of all related seismic equipment, is not expected until the Company determines market conditions allow for the opportunity to achieve an acceptable utilization rate. In the normal course of business with customers, vendors and others, the Company is contingently liable for performance under letters of credit and other financial guarantees totaling approximately $136.8 million at December 31, 1999. In addition, at December 31, 1999, the Company has guaranteed debt of third parties totaling $89.2 million. It is not practicable to estimate the fair value of these financial instruments and management does not expect any material losses from these financial instruments. 54 55 At December 31, 1999, 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, 2004 are $68.6 million, $56.5 million, $44.0 million, $34.4 million and $108.1 million, respectively, and $38.3 million in the aggregate thereafter. The Company has not entered into any significant capital leases. NOTE 19. RESTATEMENT In December 1999, based on an internal review, the Company became aware of several accounting misstatements at one of its operating divisions. A subsequent analysis determined these misstatements amounted to $31.0 million, net of taxes. As a result, the Company restated its previously issued consolidated financial statements to reflect the adjustments required to correct these misstatements. The adjustments relate to uncollectible accounts receivable, inventory shortages, the recognition of inventory pricing adjustments, the impairment of various other current and long-lived assets and the recognition of certain previously unrecorded liabilities, including trade accounts payable and employee compensation and benefits payable. As a result of the above, the Company's 1998, Transition Period and 1997 financial statements and related disclosures have been restated from amounts previously reported. In addition, a prior period adjustment of $27.3 million related to operating results for periods prior to 1997 decreased retained earnings at September 30, 1996. As described in Note 1, Basis of Presentation and Restatement, the Company plans to dispose of Baker Process which is presented in the consolidated financial statements as "Discontinued Operations." The caption "As Previously Reported" in the following summarized financial information reflects Baker Process as a discontinued operation for all periods presented. The principal effects of these adjustments on the accompanying financial statements are set forth below:
Consolidated Statements of Operations --------------------------------------------------------------------------- 1998 Transition Period 1997 --------------------------------------------------------------------------- As As As As Previously As Previously As Previously (In millions, except per share amounts) Restated Reported Restated Reported Restated Reported - --------------------------------------- ---------- ----------- ----------- ----------- ----------- ----------- Revenues $ 5,820.6 $ 5,821.8 $ 1,449.0 $ 1,449.0 $ 4,957.9 $ 4,957.9 ---------- ----------- ----------- ----------- ----------- ----------- Costs and expenses: Costs of revenues 4,745.7 4,749.5 1,057.4 1,057.2 3,907.7 3,890.4 Selling, general and administrative 778.0 778.7 197.6 197.9 466.7 472.8 Merger related costs 217.5 217.5 Unusual charge, net 196.6 196.6 51.1 51.1 Acquired in-process research and development 118.0 118.0 ---------- ----------- ----------- ----------- ----------- ----------- Total 5,937.8 5,942.3 1,255.0 1,255.1 4,543.5 4,532.3 ---------- ----------- ----------- ----------- ----------- ----------- Operating income (loss) (117.2) (120.5) 194.0 193.9 414.4 425.6 Interest expense (142.7) (142.7) (23.6) (23.6) (88.0) (88.0) Interest income 3.7 3.7 1.2 1.2 3.6 3.6 Spin-off related costs (8.4) (8.4) ---------- ----------- ----------- ----------- ----------- ----------- Income (loss) from continuing operations before income taxes and cumulative effect of accounting change (256.2) (259.5) 171.6 171.5 321.6 332.8 Income taxes (24.7) (22.7) (65.1) (65.2) (149.8) (152.5) ---------- ----------- ----------- ----------- ----------- ----------- Income (loss) from continuing operations before cumulative effect of accounting change (280.9) (282.2) 106.5 106.3 171.8 180.3 Cumulative effect of accounting change: Impairment of long-lived assets to be disposed of (net of $6.0 income tax benefit) (12.1) (12.1) ---------- ----------- ----------- ----------- ----------- ----------- Income (loss) from continuing operations (280.9) (282.2) 106.5 106.3 159.7 168.2 Income (loss) from discontinued operations, net of tax (15.2) (15.2) 7.7 7.7 (134.3) (134.3) ---------- ----------- ----------- ----------- ----------- ----------- Net income (loss) $ (296.1) $ (297.4) $ 114.2 $ 114.0 $ 25.4 $ 33.9 ========== =========== =========== =========== =========== ===========
55 56 Baker Hughes Incorporated NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Consolidated Statements of Operations --------------------------------------------------------------------------- 1998 Transition Period 1997 --------------------------------------------------------------------------- As As As As Previously As Previously As Previously (In millions, except per share amounts) Restated Reported Restated Reported Restated Reported - --------------------------------------- ---------- ----------- ----------- ----------- ----------- ----------- Basic earnings per share: Income (loss) from continuing operations before cumulative effect of accounting change $ (.87) $ (.88) $ .34 $ .34 $ .57 $ .60 Cumulative effect of accounting change (.04) (.04) Discontinued operations, net of tax (.05) (.05) .02 .02 (.45) (.45) ---------- ----------- ----------- ----------- ----------- ----------- Net income (loss) $ (.92) $ (.93) $ .36 $ .36 $ .08 $ .11 ========== =========== =========== =========== =========== =========== Diluted earnings per share: Income (loss) from continuing operations before cumulative effect of accounting change $ (.87) $ (.88) $ .33 $ .33 $ .56 $ .59 Cumulative effect of accounting change (.04) (.04) Discontinued operations, net of tax (.05) (.05) .02 .02 (.44) (.44) ---------- ----------- ----------- ----------- ----------- ----------- Net income (loss) $ (.92) $ (.93) $ .35 $ .35 $ .08 $ .11 ========== =========== =========== =========== =========== ===========
56 57
Consolidated Statements of Financial Position ----------------------------------------------- December 31, 1998 ----------------------------------------------- As As Previously (In millions, except par value) Restated Reported - ------------------------------- ----------- ------------ Assets Current Assets: Cash and cash equivalents $ 19.5 $ 20.0 Accounts receivable - less allowance for doubtful accounts: December 31, 1998, $46.4 1,258.2 1,260.9 Inventories 994.3 1,005.7 Net assets of discontinued operations 267.9 267.9 Other current assets 213.3 216.7 ----------- ------------ Total current assets 2,753.2 2,771.2 Property-net 2,240.7 2,244.8 Goodwill and other intangibles - less accumulated amortization: December 31, 1998, $265.1 1,744.3 1,744.3 Multiclient seismic data and other assets 894.7 895.0 ----------- ------------ Total assets $ 7,632.9 $ 7,655.3 =========== ============ Liabilities and Stockholders' Equity Current Liabilities: Accounts payable $ 487.9 $ 476.8 Short-term borrowings and current portion of long-term debt 44.4 44.4 Accrued employee compensation 272.2 268.6 Other accrued liabilities 378.8 378.1 ----------- ------------ Total current liabilities 1,183.3 1,167.9 ----------- ------------ Long-term debt 2,726.3 2,726.3 ----------- ------------ Deferred income taxes 152.9 156.4 ----------- ------------ Deferred revenue and other long-term liabilities 405.3 405.3 ----------- ------------ Commitments and contingencies Stockholders' equity: Common stock, $1 par value (shares authorized - 400.0; outstanding - 327.1 at December 31, 1998) 327.1 327.1 Capital in excess of par value 2,931.8 2,931.8 Retained earnings 66.1 100.4 Accumulated other comprehensive loss (159.9) (159.9) ----------- ------------ Total stockholders' equity 3,165.1 3,199.4 ----------- ------------ Total liabilities and stockholders' equity $ 7,632.9 $ 7,655.3 =========== ============
57 58 NOTE 20. QUARTERLY DATA (UNAUDITED) The caption "As Previously Reported" in the following summarized financial information reflects Baker Process as a discontinued operation for all periods presented.
First Quarter Second Quarter Third Quarter ----------------------------------------------------------------------- As As As As Previously As Previously As Previously Fourth (Per share amounts in dollars) Restated Reported Restated Reported Restated Reported Quarter - ------------------------------ ---------- ---------- ---------- ---------- ----------- ---------- --------- Fiscal Year 1999 * Revenues $ 1,214.4 $ 1,214.4 $ 1,110.8 $ 1,110.8 $ 1,117.6 $ 1,117.9 $ 1,103.9 Gross profit ** 277.3 275.7 240.5 237.0 221.2 220.5 129.9 Income (loss) from continuing operations 45.8 44.1 71.4 69.9 16.6 16.5 (81.5) Net income (loss) 44.4 42.7 68.5 67.0 13.2 13.1 (92.8) Basic earnings (loss) per share from: Continuing operations .14 .13 .22 .21 .05 .05 (.25) Discontinued operations (.01) (.01) (.01) (.01) (.03) ---------- ---------- ---------- ---------- ----------- ---------- --------- Net income (loss) $ .14 $ .13 $ .21 $ .20 $ .04 $ .04 $ (.28) ========== ========== ========== ========== =========== ========== ========= Diluted earnings (loss) per share from: Continuing operations .14 .13 .22 .21 .05 .05 (.25) Discontinued operations (.01) (.01) (.01) (.01) (.03) ---------- ---------- ---------- ---------- ----------- ---------- --------- Net income (loss) $ .14 $ .13 $ .21 $ .20 $ .04 $ .04 $ (.28) ========== ========== ========== ========== =========== ========== ========= Dividends per share $ .11 $ .11 $ .12 $ .12 $ .11 $ .11 $ .12 Common stock market prices: High $ 25.50 $ 25.50 $ 35.00 $ 35.00 $ 36.25 $ 36.25 $ 30.00 Low $ 15.75 $ 15.75 $ 22.00 $ 22.00 $ 27.00 $ 27.00 $ 15.00
First Quarter Second Quarter Third Quarter Fourth Quarter ------------------------------------------------------------------------------------------ As As As As As Previously As Previously As Previously As Previously Restated Reported Restated Reported Restated Reported Restated Reported ---------- ---------- ---------- ---------- ----------- ---------- ----------- ---------- Fiscal Year 1998 * Revenues $ 1,523.9 $ 1,524.6 $ 1,532.4 $ 1,532.4 $ 1,457.0 $ 1,457.3 $ 1,307.3 $ 1,307.5 Gross profit ** 378.9 380.0 373.6 373.4 46.1 45.1 276.3 273.8 Income (loss) from continuing operations 105.8 106.8 113.3 113.1 (507.9) (508.8) 7.9 6.7 Net income (loss) 111.9 112.9 118.3 118.1 (533.6) (534.5) 7.3 6.1 Basic earnings (loss) per share from: Continuing operations .33 .34 .36 .36 (1.57) (1.58) .02 .02 Discontinued operations .02 .02 .01 .01 (.08) (.08) ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- Net income (loss) $ .35 $ .36 $ .37 $ .37 $ (1.65) $ (1.66) $ .02 $ .02 ========== ========== ========== ========== ========== ========== ========== ========== Diluted earnings (loss) per share from: Continuing operations .33 .33 .35 .35 (1.57) (1.58) .02 .02 Discontinued operations .02 .02 .02 .02 (.08) (.08) ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- Net income (loss) $ .35 $ .35 $ .37 $ .37 $ (1.65) $ (1.66) $ .02 $ .02 ========== ========== ========== ========== ========== ========== ========== ========== Dividends per share $ .11 $ .11 $ .12 $ .12 $ .11 $ .11 $ .12 $ .12 Common stock market prices: High $ 44.13 $ 44.13 $ 44.00 $ 44.00 $ 34.94 $ 34.94 $ 23.88 $ 23.88 Low $ 34.88 $ 34.88 $ 33.13 $ 33.13 $ 17.75 $ 17.75 $ 15.00 $ 15.00
* See Note 1 for Merger; 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; see Note 19 for restatements. ** Represents revenues less costs of revenues. 58 59 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Information concerning the directors of the Company is set forth in the section entitled "Election of Directors" in the Proxy Statement of the Company for the Annual Meeting of Stockholders to be held April 26, 2000, 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 26, 2000, 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 26, 2000, 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 26, 2000, which sections are incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Information concerning certain relationships and related transactions with management is set forth in the section entitled "Certain Relationships and Related Transactions" in the Proxy Statement of the Company for the Annual Meeting of Stockholders to be held April 26, 2000, which section is incorporated herein by reference. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) List of Documents filed as part of this Report (1) Financial Statements All financial statements of the Registrant as set forth under Item 8 of this Annual Report on Form 10-K. (2) Financial Statement Schedules: Schedule II Valuation and Qualifying Accounts (3) Exhibits: 3.1 Restated Certificate of Incorporation (filed as Exhibit 3.1 to Annual Report of Baker Hughes Incorporated on Form 10-K for the year ended December 31, 1998 and incorporated herein by reference). 3.2 By-Laws. 59 60 3.3 Certificate of Amendment to Restated Certificate of Incorporation (filed as Exhibit 4.2 to Baker Hughes Incorporated Registration Statement on Form S-3 dated September 27, 1999 and incorporated herein by reference). 3.4 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 to Annual Report of Baker Hughes Incorporated on Form 10-K for the year ended December 31, 1998 and incorporated herein by reference). 4.3 By-Laws (filed as Exhibit 3.2 hereto). 4.4 Certificate of Amendment to Restated Certificate of Incorporation (filed as Exhibit 4.2 to Baker Hughes Incorporated Registration Statement on Form S-3 dated September 27, 1999 and incorporated herein by reference). 4.5 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). 4.6 Indenture dated as of May 15, 1994 between Western Atlas Inc. and The Bank of New York, Trustee, providing for the issuance of securities in series. 10.1 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). 10.2 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). 10.3 Form of Amendment 1 to Severance Agreement between Baker Hughes Incorporated and each of G. Stephen Finley and Andrew J. Szescila effective November 11, 1998 (filed as Exhibit 10.7 to Annual Report of Baker Hughes Incorporated on Form 10-K for the year ended December 31, 1998 and incorporated herein by reference). 10.4 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). 10.5 Amendment No. 1997-1 to the Amended and Restated 1991 Employee Stock Bonus Plan (filed as Exhibit 10.16 to Annual Report of Baker Hughes Incorporated on Form 10-K for the year ended September 30, 1997 and incorporated herein by reference). 10.6 Amendment No. 1999-1 to the Amended and Restated 1991 Employee Stock Bonus Plan (filed as Exhibit 10.11 to Annual Report of Baker Hughes Incorporated on Form 10-K for the year ended December 31, 1998 and incorporated herein by reference). 10.7 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). 10.8 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). 10.9 Baker Hughes Incorporated Supplemental Retirement Plan (filed as Exhibit 10.14 to Annual Report of Baker Hughes Incorporated on Form 10-K for the year ended September 30, 1997 and incorporated herein by reference). 60 61 10.10 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). 10.11 Amendment No. 1999-1 to the Baker Hughes Incorporated Supplemental Retirement Plan (filed as Exhibit 10.16 to Annual Report of Baker Hughes Incorporated on Form 10-K for the year ended December 31, 1998 and incorporated herein by reference). 10.12 Executive Severance Policy. 10.13 1993 Stock Option Plan (filed as Exhibit 10.18 to Annual Report of Baker Hughes Incorporated on Form 10-K for the year ended December 31, 1998 and incorporated herein by reference). 10.14 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). 10.15 Amendment No. 1999-1 to the 1993 Stock Option Plan (filed as Exhibit 10.20 to Annual Report of Baker Hughes Incorporated on Form 10-K for the year ended December 31, 1998 and incorporated herein by reference). 10.16 1993 Employee Stock Bonus Plan (filed as Exhibit 10.21 to Annual Report of Baker Hughes Incorporated on Form 10-K for the year ended December 31, 1998 and incorporated herein by reference). 10.17 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). 10.18 Amendment No. 1999-1 to the 1993 Employee Stock Bonus Plan (filed as Exhibit 10.23 to Annual Report of Baker Hughes Incorporated on Form 10-K for the year ended December 31, 1998 and incorporated herein by reference). 10.19 Amended and Restated Director Compensation Deferral Plan (filed as Exhibit 10.24 to Annual Report of Baker Hughes Incorporated on Form 10-K for the year ended December 31, 1998 and incorporated herein by reference). 10.20 1995 Employee Annual Incentive Compensation Plan. 10.21 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). 10.22 Amendment No. 1999-1 to the 1995 Employee Annual Incentive Compensation Plan (filed as Exhibit 10.27 to Annual Report of Baker Hughes Incorporated on Form 10-K for the year ended December 31, 1998 and incorporated herein by reference). 10.23 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 and incorporated herein by reference). 10.24 Amendment No. 1999-1 to Long Term Incentive Plan (filed as Exhibit 10.32 to Annual Report of Baker Hughes Incorporated on Form 10-K for the year ended December 31, 1998 and incorporated herein by reference). 10.25 1998 Employee Stock Option Plan (filed as Exhibit 10.33 to Annual Report of Baker Hughes Incorporated on Form 10-K for the year ended December 31, 1998 and incorporated herein by reference). 10.26 Amendment No. 1999-1 to 1998 Employee Stock Option Plan (filed as Exhibit 10.34 to Annual Report of Baker Hughes Incorporated on Form 10-K for the year ended December 31, 1998 and incorporated herein by reference). 10.27 Form of Credit Agreement, dated as of October 1, 1998, among Baker Hughes Incorporated and fourteen banks for $750,000,000, in the aggregate for all banks (filed as Exhibit 10.35 to Annual Report of Baker Hughes Incorporated on Form 10-K for the year ended December 31, 1998 and incorporated herein by reference). 10.28 Form of Credit Agreement dated as of October 1, 1998 among Baker Hughes Incorporated and fourteen banks for $250,000,000, in the aggregate for all banks (filed as Exhibit 10.36 to Annual Report of Baker Hughes Incorporated on Form 10-K for the year ended December 31, 1998 and incorporated herein by reference). 61 62 10.29 Form of First Amendment of Credit Agreement dated as of September 29, 1999 among Baker Hughes Incorporated and fourteen banks for $250,000,000, in the aggregate for all banks. 10.30 Form of Nonqualified Stock Option Agreement for employees effective February 3, 2000. 10.31 Form of Nonqualified Stock Option Agreement for employees effective January 26, 2000. 10.32 Form of Nonqualified Stock Option Agreement for executive officers effective October 1, 1998 (filed as Exhibit 10.37 to Annual Report of Baker Hughes Incorporated on Form 10-K for the year ended December 31, 1998 and incorporated herein by reference). 10.33 Form of Nonqualified Stock Option Agreement for employees effective October 1, 1998 (filed as Exhibit 10.38 to Annual Report of Baker Hughes Incorporated on Form 10-K for the year ended December 31, 1998 and incorporated herein by reference). 10.34 Form of Nonqualified Stock Option Agreement for executive officers effective October 1, 1998 (filed as Exhibit 10.39 to Annual Report of Baker Hughes Incorporated on Form 10-K for the year ended December 31, 1998 and incorporated herein by reference). 10.35 Form of Incentive Stock Option Agreement for executive officers effective October 1, 1998 (filed as Exhibit 10.40 to Annual Report of Baker Hughes Incorporated on Form 10-K for the year ended December 31, 1998 and incorporated herein by reference). 10.36 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). 10.37 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). 10.38 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). 10.39 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). 10.40 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). 10.41 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). 10.42 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). 10.43 Corporate Executive Loan Program (filed as Exhibit 10.50 to Annual Report of Baker Hughes Incorporated on Form 10-K for the year ended December 31, 1998 and incorporated herein by reference). 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: None. 62 63 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 16th day of March, 2000. BAKER HUGHES INCORPORATED By /s/ JOE B. FOSTER ---------------------------------------- (Joe B. Foster, 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/ JOE B. FOSTER Chairman of the Board, President March 16, 2000 - ------------------------------- and Chief Executive Officer (Joe B. Foster) (principal executive officer) /s/ G. S. FINLEY Senior Vice President - March 16, 2000 - ------------------------------- Finance and Administration (G. S. Finley) and Chief Financial Officer (principal financial officer) /s/ ALAN J. KEIFER Vice President and Controller March 16, 2000 - ------------------------------- (principal accounting officer) (Alan J. Keifer) /s/ LESTER M. ALBERTHAL, JR. Director March 16, 2000 - ------------------------------- Lester M. Alberthal, Jr.) /s/ VICTOR G. BEGHINI Director March 16, 2000 - ------------------------------- (Victor G. Beghini) /s/ JOSEPH T. CASEY Director March 16, 2000 - ------------------------------- (Joseph T. Casey)
63 64 /s/ EUNICE M. FILTER Director March 16, 2000 - ------------------------------- (Eunice M. Filter) /s/ CLAIRE W. GARGALLI Director March 16, 2000 - ------------------------------- (Claire W. Gargalli) /s/ RICHARD D. KINDER Director March 16, 2000 - ------------------------------- (Richard D. Kinder) /s/ JAMES F. MCCALL Director March 16, 2000 - ------------------------------- (James F. McCall) /s/ H. JOHN RILEY, JR. Director March 16, 2000 - ------------------------------- (H. John Riley, Jr.) /s/ CHARLES L. WATSON Director March 16, 2000 - ------------------------------- (Charles L. Watson) /s/ MAX P. WATSON, JR. Director March 16, 2000 - ------------------------------- (Max P. Watson, Jr.)
64 65 BAKER HUGHES INCORPORATED SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
Balance at Charged to Charged to Balance at Beginning of Cost and Other End of (In millions) Period Expenses Accounts Deductions Period - ------------- ------------ ---------- ---------- ---------- ---------- Year ended December 31, 1999: Reserve for doubtful accounts receivable $ 46.4 $ 22.4 $ -- $ (16.2) $ 52.6 Reserve for inventories 216.0 30.3 (77.6) 168.7 Year ended December 31, 1998: Reserve for doubtful accounts receivable 50.1 14.4 -- (18.1) 46.4 Reserve for inventories 140.9 153.1 (78.0) 216.0 Three months ended December 31, 1997: Reserve for doubtful accounts receivable 48.7 2.0 1.6 (2.2) 50.1 Reserve for inventories 132.7 10.6 4.6 (7.0) 140.9 Year ended September 30, 1997: Reserve for doubtful accounts receivable 40.1 22.9 1.9 (16.2) 48.7 Reserve for inventories 120.5 39.3 1.7 (28.8) 132.7
65 66 INDEX TO EXHIBITS
EXHIBIT NUMBER DESCRIPTION - ------- ----------- 3.1 Restated Certificate of Incorporation (filed as Exhibit 3.1 to Annual Report of Baker Hughes Incorporated on Form 10-K for the year ended December 31, 1998 and incorporated herein by reference). 3.2 By-Laws. 3.3 Certificate of Amendment to Restated Certificate of Incorporation (filed as Exhibit 4.2 to Baker Hughes Incorporated Registration Statement on Form S-3 dated September 27, 1999 and incorporated herein by reference). 3.4 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 to Annual Report of Baker Hughes Incorporated on Form 10-K for the year ended December 31, 1998 and incorporated herein by reference). 4.3 By-Laws (filed as Exhibit 3.2 hereto). 4.4 Certificate of Amendment to Restated Certificate of Incorporation (filed as Exhibit 4.2 to Baker Hughes Incorporated Registration Statement on Form S-3 dated September 27, 1999 and incorporated herein by reference). 4.5 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). 4.6 Indenture dated as of May 15, 1994 between Western Atlas Inc. and The Bank of New York, Trustee, providing for the issuance of securities in series. 10.1 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). 10.2 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). 10.3 Form of Amendment 1 to Severance Agreement between Baker Hughes Incorporated and each of G. Stephen Finley and Andrew J. Szescila effective November 11, 1998 (filed as Exhibit 10.7 to Annual Report of Baker Hughes Incorporated on Form 10-K for the year ended December 31, 1998 and incorporated herein by reference). 10.4 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). 10.5 Amendment No. 1997-1 to the Amended and Restated 1991 Employee Stock Bonus Plan (filed as Exhibit 10.16 to Annual Report of Baker Hughes Incorporated on Form 10-K for the year ended September 30, 1997 and incorporated herein by reference). 10.6 Amendment No. 1999-1 to the Amended and Restated 1991 Employee Stock Bonus Plan (filed as Exhibit 10.11 to Annual Report of Baker Hughes Incorporated on Form 10-K for the year ended December 31, 1998 and incorporated herein by reference). 10.7 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). 10.8 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).
67 10.9 Baker Hughes Incorporated Supplemental Retirement Plan (filed as Exhibit 10.14 to Annual Report of Baker Hughes Incorporated on Form 10-K for the year ended September 30, 1997 and incorporated herein by reference). 10.10 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). 10.11 Amendment No. 1999-1 to the Baker Hughes Incorporated Supplemental Retirement Plan (filed as Exhibit 10.16 to Annual Report of Baker Hughes Incorporated on Form 10-K for the year ended December 31, 1998 and incorporated herein by reference). 10.12 Executive Severance Policy. 10.13 1993 Stock Option Plan (filed as Exhibit 10.18 to Annual Report of Baker Hughes Incorporated on Form 10-K for the year ended December 31, 1998 and incorporated herein by reference). 10.14 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). 10.15 Amendment No. 1999-1 to the 1993 Stock Option Plan (filed as Exhibit 10.20 to Annual Report of Baker Hughes Incorporated on Form 10-K for the year ended December 31, 1998 and incorporated herein by reference). 10.16 1993 Employee Stock Bonus Plan (filed as Exhibit 10.21 to Annual Report of Baker Hughes Incorporated on Form 10-K for the year ended December 31, 1998 and incorporated herein by reference). 10.17 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). 10.18 Amendment No. 1999-1 to the 1993 Employee Stock Bonus Plan (filed as Exhibit 10.23 to Annual Report of Baker Hughes Incorporated on Form 10-K for the year ended December 31, 1998 and incorporated herein by reference). 10.19 Amended and Restated Director Compensation Deferral Plan (filed as Exhibit 10.24 to Annual Report of Baker Hughes Incorporated on Form 10-K for the year ended December 31, 1998 and incorporated herein by reference). 10.20 1995 Employee Annual Incentive Compensation Plan. 10.21 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). 10.22 Amendment No. 1999-1 to the 1995 Employee Annual Incentive Compensation Plan (filed as Exhibit 10.27 to Annual Report of Baker Hughes Incorporated on Form 10-K for the year ended December 31, 1998 and incorporated herein by reference). 10.23 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 and incorporated herein by reference). 10.24 Amendment No. 1999-1 to Long Term Incentive Plan (filed as Exhibit 10.32 to Annual Report of Baker Hughes Incorporated on Form 10-K for the year ended December 31, 1998 and incorporated herein by reference). 10.25 1998 Employee Stock Option Plan (filed as Exhibit 10.33 to Annual Report of Baker Hughes Incorporated on Form 10-K for the year ended December 31, 1998 and incorporated herein by reference). 10.26 Amendment No. 1999-1 to 1998 Employee Stock Option Plan (filed as Exhibit 10.34 to Annual Report of Baker Hughes Incorporated on Form 10-K for the year ended December 31, 1998 and incorporated herein by reference). 10.27 Form of Credit Agreement, dated as of October 1, 1998, among Baker Hughes Incorporated and fourteen banks for $750,000,000, in the aggregate for all banks (filed as Exhibit 10.35 to Annual Report of Baker Hughes Incorporated on Form 10-K for the year ended December 31, 1998 and incorporated herein by reference).
68 10.28 Form of Credit Agreement dated as of October 1, 1998 among Baker Hughes Incorporated and fourteen banks for $250,000,000, in the aggregate for all banks (filed as Exhibit 10.36 to Annual Report of Baker Hughes Incorporated on Form 10-K for the year ended December 31, 1998 and incorporated herein by reference). 10.29 Form of First Amendment of Credit Agreement dated as of September 29, 1999 among Baker Hughes Incorporated and fourteen banks for $250,000,000, in the aggregate for all banks. 10.30 Form of Nonqualified Stock Option Agreement for employees effective February 3, 2000. 10.31 Form of Nonqualified Stock Option Agreement for employees effective January 26, 2000. 10.32 Form of Nonqualified Stock Option Agreement for executive officers effective October 1, 1998 (filed as Exhibit 10.37 to Annual Report of Baker Hughes Incorporated on Form 10-K for the year ended December 31, 1998 and incorporated herein by reference). 10.33 Form of Nonqualified Stock Option Agreement for employees effective October 1, 1998 (filed as Exhibit 10.38 to Annual Report of Baker Hughes Incorporated on Form 10-K for the year ended December 31, 1998 and incorporated herein by reference). 10.34 Form of Nonqualified Stock Option Agreement for executive officers effective October 1, 1998 (filed as Exhibit 10.39 to Annual Report of Baker Hughes Incorporated on Form 10-K for the year ended December 31, 1998 and incorporated herein by reference). 10.35 Form of Incentive Stock Option Agreement for executive officers effective October 1, 1998 (filed as Exhibit 10.40 to Annual Report of Baker Hughes Incorporated on Form 10-K for the year ended December 31, 1998 and incorporated herein by reference). 10.36 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). 10.37 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). 10.38 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). 10.39 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). 10.40 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). 10.41 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). 10.42 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). 10.43 Corporate Executive Loan Program (filed as Exhibit 10.50 to Annual Report of Baker Hughes Incorporated on Form 10-K for the year ended December 31, 1998 and incorporated herein by reference). 21.1 Subsidiaries of Registrant. 23.1 Consent of Deloitte & Touche LLP. 27.1 Financial Data Schedule (for SEC purposes only).
EX-3.2 2 BY-LAWS 1 EXHIBIT 3.2 BYLAWS OF BAKER HUGHES INCORPORATED As Amended January 26, 2000 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 April in each year, if not a legal holiday, and if a legal holiday, then on the next business day following, at 11:00 a.m. or at such other date and time as may be determined from time to time by resolution adopted by the Board of Directors, for the purpose of electing, subject to Article III, Section 2 hereof, one class of the directors of the Corporation, and transacting such other business as may properly be brought before the meeting. Section 3. 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 nine (9) and a maximum of twelve (12) directors. The number of directors shall be fixed from time to time within the minimum and the maximum number established by the then elected Board of Directors. The number of directors until changed by the Board shall be twelve (12). 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 twenty-four (24) hours' notice, or such shorter period as the person calling deems appropriate, to each member. Alternate members shall have the right to attend all meetings of the committee. The Board of Directors may adopt rules of the government of any committee not inconsistent with the provisions of these Bylaws. If a committee is comprised of an odd number of members, a quorum shall consist of a majority of that number. If the committee is comprised of an even number of members, a quorum shall consist of 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 9 13 majority of the Board of Directors of the Corporation shall have previously approved the bringing of such action, suit or proceeding, and provided further that the Corporation shall not be obligated to indemnify any such person against any action, suit or proceeding arising out of any adjudicated criminal, dishonest or fraudulent acts, errors or omissions of such person or any adjudicated willful, intentional or malicious acts, errors or omissions of such person. (b) The Corporation shall indemnify every person who is or was a party or is or was threatened to be made a party to any threatened, pending or completed action, suit, or proceeding, whether civil, criminal, administrative or investigative, by reason of the fact that he is or was licensed to practice law and an employee (including an employee who is or was an officer) of the Corporation or any of its direct or indirect wholly-owned subsidiaries and, while acting in the course of such employment committed or is alleged to have committed any negligent acts, errors or omissions in rendering professional legal services at the request of the Corporation or pursuant to his employment (including, without limitation, rendering written or oral legal opinions to third parties) against expenses (including counsel fees), judgments, fines, and amounts paid in settlement actually and reasonably incurred by him in connection with such action, suit or proceeding, to the full extent permitted by applicable law; provided that the Corporation shall not be obligated to indemnify any such person against any action, suit or proceeding arising out of any adjudicated criminal, dishonest or fraudulent acts, errors or omissions of such person or any adjudicated willful, intentional or malicious acts, errors or omissions of such person. (c) The Corporation shall indemnify every person who was or is a party or is threatened to be made a party to any threatened, pending or completed action or suit by or in the right of the Corporation to procure a judgment in its favor by reason of the fact that he is or was a director, officer, or employee of the Corporation, or any of its direct or indirect wholly-owned subsidiaries or, while a director, officer, or employee of the Corporation or any of its direct or indirect wholly-owned subsidiaries, is or was serving at the request of the Corporation or any of its direct or 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 10 14 specific case upon a determination that indemnification of the director, officer, or employee is proper in the circumstances because he has met the applicable standard of conduct set forth in subsections (a), (b) and (c) of this section. Such determination shall be made (1) by 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-4.6 3 INDENTURE - DATED MAY 15, 1994 1 EXHIBIT 4.6 - -------------------------------------------------------------------------------- Western Atlas Inc. and The Bank of New York Trustee -------------------- INDENTURE Dated as of May 15, 1994 -------------------- Providing for Issuance of Securities in Series - -------------------------------------------------------------------------------- 2 TABLE OF CONTENTS -----------------
Page ---- Recitals of the Company.................................................... 1 Agreements of the Parties.................................................. 1 ARTICLE ONE Definitions and Other Provisions of General Application Section 101. Definitions ................................................ 1 Act ........................................................ 2 Affiliate .................................................. 2 Authenticating Agent ....................................... 2 Board of Directors ......................................... 2 Board Resolution ........................................... 2 Business Day ............................................... 3 Capital Stock .............................................. 3 Commission ................................................. 3 Company .................................................... 3 Company Request, Company Order and Company Consent ......... 3 Consolidated Net Assets .................................... 3 Corporate Trust Office ..................................... 3 Debt ....................................................... 4 Defaulted Interest ......................................... 4 Depositary ................................................. 4 Event of Default ........................................... 4 Funded Debt ................................................ 4 Global Security ............................................ 4 Holder ..................................................... 5 Indenture or this Indenture ................................ 5 Independent ................................................ 5 Interest ................................................... 5 Interest Payment Date ...................................... 5 Lien ....................................................... 5 Maturity ................................................... 5 Officers' Certificate ...................................... 6 Opinion of Counsel ......................................... 6 Original Issue Discount Security............................ 6 Outstanding ................................................ 6 Paying Agent ............................................... 7 Person ..................................................... 7 Place of Payment ........................................... 7 Predecessor Securities ..................................... 7 Preferred Stock ............................................ 8 Redemption Date ............................................ 8 Redemption Price ........................................... 8
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Page ---- Regular Record Date ........................................ 8 Repayment Date ............................................. 8 Repayment Price ............................................ 8 Responsible Officer ........................................ 8 Restricted Subsidiary ...................................... 8 Sale and Leaseback Transaction.............................. 9 Security or Securities ..................................... 9 Security Register .......................................... 9 Security Registrar ......................................... 9 Securityholder ............................................. 9 Special Record Date ........................................ 9 Stated Maturity ............................................ 9 Subsidiary ................................................. 10 Trust Indenture Act or TIA ................................. 10 Trustee .................................................... 10 Value ...................................................... 10 Vice President ............................................. 10 Section 102. Compliance Certificates and Opinions ....................... 10 Section 103. Form of Documents Delivered to Trustee ..................... 11 Section 104. Acts of Securityholders .................................... 12 Section 105. Notices, etc., to Trustee and Company ...................... 13 Section 106. Notices to Securityholders; Waiver ......................... 14 Section 107. Conflict with Trust Indenture Act .......................... 15 Section 108. Effect of Headings and Table of Contents ................... 15 Section 109. Successors and Assigns ..................................... 15 Section 110. Separability Clause ........................................ 15 Section 111. Benefits of Indenture ...................................... 15 Section 112. Governing Law .............................................. 15 Section 113. Counterparts ............................................... 15 Section 114. Legal Holidays ............................................. 15 ARTICLE TWO Security Forms Section 201. Forms Generally ............................................ 16 Section 202. Forms of Securities ........................................ 16
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Page ---- Section 203. Form of Trustee's Certificate of Authentication ............ 16 Section 204. Securities Issuable in the Form of a Global Security ....... 17 ARTICLE THREE The Securities Section 301. General Title; General Limitations; Issuable in Series; Terms of Particular Series ..................... 19 Section 302. Denominations .............................................. 22 Section 303. Execution, Authentication and Delivery and Dating .......... 22 Section 304. Temporary Securities ....................................... 24 Section 305. Registration, Transfer and Exchange ........................ 25 Section 306. Mutilated, Destroyed, Lost and Stolen Securities ........... 26 Section 307. Payment of Interest; Interest Rights Preserved ............. 27 Section 308. Persons Deemed Owners ...................................... 29 Section 309. Cancellation ............................................... 29 Section 310. Computation of Interest .................................... 29 Section 311. Medium-Term Securities ..................................... 29 Section 312. CUSIP Numbers .............................................. 30 ARTICLE FOUR Satisfaction and Discharge Section 401. Satisfaction and Discharge of Indenture .................... 30 Section 402. Application of Trust Money ................................. 32 Section 403. Defeasance Upon Deposit of Funds or Government Obligations ............................................ 32 ARTICLE FIVE Remedies Section 501. Events of Default .......................................... 34 Section 502. Acceleration of Maturity; Rescission and Annulment ......... 35
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Page ---- Section 503. Collection of Indebtedness and Suits for Enforcement by Trustee ................................................ 37 Section 504. Trustee May File Proofs of Claim ........................... 38 Section 505. Trustee May Enforce Claims Without Possession of Securities ............................................. 39 Section 506. Application of Money Collected ............................. 39 Section 507. Limitation on Suits ........................................ 40 Section 508. Unconditional Right of Securityholders To Receive Principal, Premium and Interest ........................ 41 Section 509. Restoration of Rights and Remedies ......................... 41 Section 510. Rights and Remedies Cumulative ............................. 41 Section 511. Delay or Omission Not Waiver................................ 41 Section 512. Control by Securityholders ................................. 42 Section 513. Waiver of Past Defaults .................................... 42 Section 514. Undertaking for Costs ...................................... 43 Section 515. Waiver of Stay or Extension Laws ........................... 43 ARTICLE SIX The Trustee Section 601. Certain Duties and Responsibilities ........................ 43 Section 602. Notice of Defaults ......................................... 45 Section 603. Certain Rights of Trustee .................................. 45 Section 604. Not Responsible for Recitals or Issuance of Securities ..... 47 Section 605. May Hold Securities ........................................ 47 Section 606. Money Held in Trust ........................................ 47 Section 607. Compensation and Reimbursement ............................. 47 Section 608. Disqualification; Conflicting Interests .................... 48 Section 609. Corporate Trustee Recruited; Eligibility ................... 48 Section 610. Resignation and Removal; Appointment of Successor .......... 49 Section 611. Acceptance of Appointment by Successor ..................... 51 Section 612. Merger, Conversion, Consolidation or Succession to Business ............................................ 52 Section 613. Preferential Collection of Claims Against Company .......... 52 Section 614. Appointment of Authenticating Agent ........................ 57
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Page ---- ARTICLE SEVEN Securityholders' Lists and Reports by Trustee and Company Section 701. Company To Furnish Trustee Names and Addresses of Securityholders ....................................... 59 Section 702. Preservation of Information; Communications to Securityholders ....................................... 59 Section 703. Reports by Trustee ......................................... 61 Section 704. Reports by Company ......................................... 63 Section 705. Delivery of Certain Information ............................ 63 Section 706. Calculation of Original Issue Discount ..................... 64 ARTICLE EIGHT Consolidation, Merger, Conveyance or Transfer Section 801. When Company May Merge or Transfer Assets .................. 64 ARTICLE NINE Supplemental Indentures Section 901. Supplemental Indentures Without Consent of Securityholders ....................................... 65 Section 902. Supplemental Indentures with Consent of Securityholders ....................................... 67 Section 903. Execution of Supplemental Indentures ....................... 68 Section 904. Effect of Supplemental Indentures .......................... 68 Section 905. Conformity with Trust Indenture Act ........................ 69 Section 906. Reference in Securities to Supplemental Indentures ......... 69 ARTICLE TEN Covenants Section 1001. Payment of Principal, Premium and Interest ................ 69 Section 1002. Maintenance of Office or Agency ........................... 69 Section 1003. Money for Security Payments to be Held in Trust ........... 69
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Page ---- Section 1004. Statement as to Compliance ................................ 71 Section 1005. Legal Existence ........................................... 72 Section 1006. Limitation on Liens ....................................... 72 Section 1007. Limitation on Sale and Leasebacks ......................... 73 Section 1008. Limitation on Funded Debt of Restricted Subsidiaries ...... 74 Section 1009. Repurchase of Securities at Option of the Holder .......... 75 Section 1010. Waiver of Certain Covenants ............................... 84 ARTICLE ELEVEN Redemption of Securities Section 1101. Applicability of Article .................................. 84 Section 1102. Election To Redeem; Notice to Trustee ..................... 84 Section 1103. Selection by Trustee of Securities To Be Redeemed ......... 85 Section 1104. Notice of Redemption ...................................... 85 Section 1105. Deposit of Redemption Price ............................... 86 Section 1106. Securities Payable on Redemption Date ..................... 86 Section 1107. Securities Redeemed in Part .............................. 87 Section 1108. Provisions with Respect to any Sinking Funds .............. 87
vi 8 Table Showing Reflection in Indenture of Certain Provisions of Trust Indenture Act of 1939, as amended by the Trust Indenture Reform Act of 1990 --------------------------------
Reflected in Indenture ---------------------- TIA Section Section 310(a)(1) ............................................................ 609 (a)(2) ............................................................ 609 (a)(3) ............................................................ Not Applicable (a)(4) ............................................................ Not Applicable (a)(5) ............................................................ 609 (b) ............................................................ 608 Section 311(a) ............................................................ 613(a) (b) ............................................................ 613(b) (b)(2) ............................................................ 703(a)(2) ............................................................ 703(b) Section 312(a) ............................................................... 701 ............................................................... 702(a) (b) ............................................................... 702(b) (c) ............................................................... 702(c) Section 313(a) ............................................................... 703(a) (b) ............................................................... 703(b) (c) ............................................................... 703(a) ............................................................... 703(b) Section 314(a)(1) ............................................................ 704 (a)(2) ............................................................ 704 (a)(3) ............................................................ 704 (a)(4) ............................................................ 1004 (b) ............................................................ Not Applicable (c)(1) ............................................................ 102 (c)(2) ............................................................ 102 (c)(3) ............................................................ Not Applicable (d) ............................................................ Not Applicable (e) ............................................................ 102 Section 315(a) ............................................................... 601(a) ............................................................... 601(c) (b) ............................................................... 602 ............................................................... 703(a)(6) (c) ............................................................... 601(b) (d) ............................................................... 601
9 (d)(1) ............................................................ 601(a) (d)(2) ............................................................ 601(c)(2) (d)(3) ............................................................ 601(c)(3) (e) ............................................................ 514 Section 316(a) ............................................................ 101 (a)(1)(A).......................................................... 502 .......................................................... 512 (a)(1)(B).......................................................... 513 (a)(2) ............................................................ Not Applicable (b) ............................................................... 508 (c) ............................................................... 104(d) Section 317(a)(1)............................................................. 503 (a)(2)............................................................. 504 (b) ............................................................... 1003 Section 318(a) ............................................................... 107
-2- 10 THIS INDENTURE between WESTERN ATLAS INC., a Delaware corporation (hereinafter called the "Company") having its principal office at 360 North Crescent Drive, Beverly Hills, California 90210, and THE BANK OF NEW YORK, a New York banking corporation, as trustee (hereinafter called the "Trustee") is made and entered into as of the 15th day of May, 1994. Recitals of the Company The Company has duly authorized the execution and delivery of this Indenture to provide for the issuance of its unsecured and unsubordinated debentures, notes, bonds or other evidences of indebtedness, to be issued in one or more fully registered series. All things necessary to make this Indenture a valid agreement of the Company, in accordance with its terms, have been done. Agreements of the Parties To set forth or to provide for the establishment of the terms and conditions upon which the Securities are and are to be authenticated, issued and delivered, and in consideration of the premises and the purchase of Securities by the Holders thereof, it is mutually covenanted and agreed as follows, for the equal and proportionate benefit of all Holders of the Securities or of a series thereof, as the case may be: ARTICLE ONE Definitions and Other Provisions of General Application Section 101. Definitions. For all purposes of this Indenture and of any indenture supplemental hereto, except as otherwise expressly provided or unless the context otherwise requires: (1) the terms defined in this Article have the meanings assigned to them in this Article, and include the plural as well as the singular; (2) all other terms used herein which are defined in the Trust Indenture Act or by Commission rule under the 11 Trust Indenture Act, either directly or by reference therein, have the meanings assigned to them therein; (3) all accounting terms not otherwise defined herein have the meanings assigned to them in accordance with generally accepted accounting principles and, except as otherwise herein expressly provided, the term "generally accepted accounting principles" or "GAAP" with respect to any computation required or permitted hereunder shall mean such accounting principles as are generally accepted in the United States of America on May 15, 1994; and (4) all references in this instrument to designated "Articles", "Sections" and other subdivisions are to the designated Articles, Sections and other subdivisions of this instrument as originally executed. The words "herein", "hereof" and "hereunder" and other words of similar import refer to this Indenture as a whole and not to any particular Article, Section or other subdivision. Certain terms, used principally in Article Six and Section 1009, are defined in that Article and Section, respectively. "Act", when used with respect to any Securityholder, has the meaning specified in Section 104. "Affiliate" of any specified Person means any other Person directly or indirectly controlling or controlled by or under direct or indirect common control with such specified Person. For the purposes of this definition, "control" when used with respect to any specified Person means the power to direct the management and policies of such Person, directly or indirectly, whether through the ownership of voting securities, by contract or otherwise; and the terms "controlling" and "controlled" have meanings correlative to the foregoing. "Authenticating Agent" means any Person authorized by the Trustee to authenticate Securities under Section 614. "Board of Directors" means either the board of directors of the Company or any duly authorized committee of that board. "Board Resolution" means a copy of a resolution certified by the Secretary or an Assistant Secretary of the Company to have been duly adopted by the Board of Directors and to be in full force and effect on the date of such certification, and delivered to the Trustee. -2- 12 "Business Day" means, with respect to any series of Securities, each day which is neither a Saturday, Sunday or other day on which banking institutions in the pertinent Place or Places of Payment are authorized or required by law or executive order to be closed. "Capital Stock" means, with respect to any corporation, any and all shares, interests, rights to purchase, warrants, options, participations or other equivalents of or interests (however designated) in stock issued by that corporation. "Commission" means the Securities and Exchange Commission, as from time to time constituted, created under the Securities Exchange Act of 1934, or, if at any time after the execution of this instrument such Commission is not existing and performing the duties now assigned to it under the Trust Indenture Act, then the body performing such duties at such time. "Company" means the Person named as the "Company" in the first paragraph of this instrument until a successor shall have become such pursuant to the applicable provisions of this Indenture, and thereafter "Company" shall mean such successor. "Company Request", "Company Order" and "Company Consent" mean a written request, order or consent, respectively, signed in the name of the Company by its Chairman of the Board, a Vice Chairman, its President or a Vice President, and by its Treasurer, an Assistant Treasurer, its Secretary or an Assistant Secretary, and delivered to the Trustee. "Consolidated Net Assets" means the total amount of assets (less applicable reserves and other properly deductible items) after deducting all current liabilities (excluding the amount of those which are by their terms extendable or renewable at the option of the obligor to a date more than 12 months after the date as of which the amount is being determined), all as set forth on the most recent balance sheet of the Company and its consolidated subsidiaries and determined in accordance with generally accepted accounting principles. "Corporate Trust Office" means the office of the Trustee in New York, New York at which at any particular time its corporate trust business shall be principally administered, which office at the date hereof is located at 101 Barclay Street-21W, New York, New York 10286. -3- 13 "Debt" of any Person means at any date, without duplication, (1) all obligations of such Person for borrowed money, (2) all obligations of such Person evidenced by bonds, debentures, notes or other similar instruments, (3) all obligations of such Person to pay the deferred purchase price of property or services, except trade accounts payable and deferred employee compensation obligations arising in the ordinary course of business, (4) all obligations of such Person as lessee which are capitalized in accordance with GAAP, (5) all unpaid reimbursement obligations of such Person in respect of letters of credit or similar instruments but only to the extent that either (x) the issuer has honored a drawing thereunder or (y) payment of such obligation is otherwise due under the terms thereof, (6) all obligations secured by a Lien on any asset or property of such Person, whether or not such obligations are otherwise obligations of such Person, and (7) all Debt of others guaranteed by such Person. "Defaulted Interest" has the meaning specified in Section 307. "Depositary" means, unless otherwise specified by the Company pursuant to either Section 204 or 301, with respect to Securities of any series issuable or issued as a Global Security, The Depository Trust Company, New York, New York, or any successor thereto registered as a clearing agency under the Securities Exchange Act of 1934, as amended, or other applicable statute or regulation. "Event of Default" has the meaning specified in Article Five. "Funded Debt" of any Person means Debt of such Person that (i) matures by its terms more than one year after its creation or (ii) is classified as long-term debt under generally accepted accounting principles and, in the case of Debt of the Company described in either clause (i) or clause (ii), ranking at least pari passu with the Securities. "Global Security", when used with respect to any series of Securities issued hereunder, means a Security which is executed by the Company and authenticated and delivered by the Trustee to the Depositary or pursuant to the Depositary's instruction, all in accordance with this Indenture and an indenture supplemental hereto, if any, or Board Resolution and pursuant to a Company Request, which shall be registered in the name of the Depositary or its nominee and which shall represent, and shall be denominated in an amount equal to the aggregate principal amount of, all of the Outstanding Securities of -4- 14 such series or any portion thereof, in either case having the same terms, including, without limitation, the same original issue date, date or dates on which principal is due, and interest rate or method of determining interest. "Holder", when used with respect to any Security, means a Securityholder. "Indenture" or "this Indenture" means this instrument as originally executed or as it may from time to time be supplemented or amended by one or more indentures supplemental hereto entered into pursuant to the applicable provisions hereof and shall include the terms of particular series of Securities established as contemplated by Section 301. "Independent", when used with respect to any specified Person, means such a Person who (1) is in fact independent, (2) does not have any direct financial interest or any material indirect financial interest in the Company or in any other obligor upon the Securities or in any Affiliate of the Company or of such other obligor, and (3) is not connected with the Company or such other obligor or any Affiliate of the Company or of such other obligor, as an officer, employee, promoter, underwriter, trustee, partner, director or person performing similar functions. Whenever it is herein provided that any Independent Person's opinion or certificate shall be furnished to the Trustee, such Person shall be appointed by a Company Order and approved by the Trustee in the exercise of reasonable care, and such opinion or certificate shall state that the signer has read this definition and that the signer is independent within the meaning hereof. "Interest", when used with respect to an Original Issue Discount Security which by its terms bears interest only after Maturity, means interest payable after Maturity. "Interest Payment Date", when used with respect to any series of Securities, means the Stated Maturity of any installment of interest on those Securities. "Lien" means any mortgage, pledge, lien, encumbrance, charge or security interest. "Maturity", when used with respect to any Securities, means the date on which the principal of any such Security becomes due and payable as therein or herein provided, whether on a Repayment Date, at the Stated Maturity or by declaration of acceleration, call for redemption or otherwise. -5- 15 "Officers' Certificate" means a certificate signed by the Chairman of the Board, a Vice Chairman, the President or a Vice President, and by the Treasurer, an Assistant Treasurer, the Secretary or an Assistant Secretary of the Company, and delivered to the Trustee. Wherever this Indenture requires that an Officers' Certificate be signed also by an engineer or an accountant or other expert, such engineer, accountant or other expert (except as otherwise expressly provided in this Indenture) may be in the employ of the Company. "Opinion of Counsel" means a written opinion of counsel, who may (except as otherwise expressly provided in this Indenture) be an employee of or of counsel to the Company. Such counsel shall be acceptable to the Trustee, whose acceptance shall not be unreasonably withheld. "Original Issue Discount Security" means (i) any Security which provides for an amount less than the principal amount thereof to be due and payable upon a declaration of acceleration of the Maturity thereof, and (ii) any other Security deemed an Original Issue Discount Security for United States Federal income tax purposes. "Outstanding", when used with respect to Securities or Securities of any series, means, as of the date of determination, all such Securities theretofore authenticated and delivered under this Indenture, except: (i) such Securities theretofore canceled by the Trustee or delivered to the Trustee for cancellation; (ii) such Securities for whose payment or redemption money in the necessary amount has been theretofore deposited with the Trustee or any Paying Agent in trust for the Holders of such Securities; provided that, if such Securities are to be redeemed, notice of such redemption has been duly given pursuant to this Indenture or provision therefor satisfactory to the Trustee has been made; and (iii) such Securities in exchange for or in lieu of which other Securities have been authenticated and delivered pursuant to this Indenture, or which shall have been paid pursuant to the terms of Section 306 (except with respect to any such Security as to which proof satisfactory to the Trustee is presented that such Security is held by a person in whose hands such Security is a legal, valid and binding obligation of the Company). In determining whether the Holders of the requisite principal amount of such Securities Outstanding have given any request, -6- 16 demand, authorization, direction, notice, consent or waiver hereunder, (i) the principal amount of any Original Issue Discount Security that shall be deemed to be Outstanding shall be the amount of the principal thereof that would be due and payable as of the date of the taking of such action upon a declaration of acceleration of the Maturity thereof and (ii) Securities owned by the Company or any other obligor upon the Securities or any Affiliate of the Company or of such other obligor shall be disregarded and deemed not to be Outstanding. In determining whether the Trustee shall be protected in relying upon any such request, demand, authorization, direction, notice, consent or waiver, only Securities which a Responsible Officer assigned to the corporate trust department of the Trustee actually knows to be owned by the Company or any other obligor upon the Securities or any Affiliate of the Company or such other obligor shall be so disregarded. Securities so owned which have been pledged in good faith may be regarded as Outstanding if the pledgee establishes to the satisfaction of the Trustee the pledgee's right to act as owner with respect to such Securities and that the pledgee is not the Company or any other obligor upon the Securities or any Affiliate of the Company or such other obligor. "Paying Agent" means any Person authorized by the Company to pay the principal of (and premium, if any) or interest on any Securities on behalf of the Company. The Company initially authorizes the Trustee to act as Paying Agent for the Securities on its behalf. The Company may at any time and from time to time authorize one or more Persons, including the Company, to act as Paying Agent in addition to or in place of the Trustee with respect to any series of Securities issued under this Indenture. "Person" means any individual, corporation, partnership, joint venture, association, joint-stock company, trust, unincorporated organization or government or any agency or political subdivision thereof. "Place of Payment" means with respect to any series of Securities issued hereunder the city or political subdivision so designated with respect to the series of Securities in question in accordance with the provisions of Section 301. "Predecessor Securities" of any particular Security means every previous Security evidencing all or a portion of the same debt as that evidenced by such particular Security; and, for the purposes of this definition, any Security authenticated and delivered under Section 306 in lieu of a lost, destroyed or stolen Security shall be deemed to evidence the same debt as the lost, destroyed or stolen Security. -7- 17 "Preferred Stock" means, as to any Person, capital stock of such Person that has a preference as to dividends or upon liquidation over the common stock of such Person. "Redemption Date", when used with respect to any Security to be redeemed, means the date fixed for such redemption by or pursuant to this Indenture. "Redemption Price", when used with respect to any Security to be redeemed, means the price specified in the Security at which it is to be redeemed pursuant to this Indenture. "Regular Record Date" for the interest payable on any security on any Interest Payment Date means the date specified in such Security as the Regular Record Date. "Repayment Date", when used with respect to any Security to be repaid, means the date fixed for such repayment pursuant to such Security. "Repayment Price", when used with respect to any Security to be repaid, means the price at which it is to be repaid pursuant to such Security. "Responsible Officer", when used with respect to the Trustee, means the chairman or vice-chairman of the board of directors, the chairman or vice-chairman of the executive committee of the board of directors, the president, any Vice President, the secretary, any assistant secretary, the treasurer, any assistant treasurer, the cashier, any assistant cashier, any senior trust officer or trust officer, the controller and any assistant controller or any other officer of the Trustee customarily performing functions similar to those performed by any of the above designated officers and also means, with respect to a particular corporate trust matter, any other officer to whom such matter is referred because of his knowledge of and familiarity with the particular subject. "Restricted Subsidiary" means (i) each of Intermec Corporation, a Washington corporation, and Western Atlas International, Inc., a Delaware corporation, so long as it remains a Subsidiary, or any Subsidiary that is a successor of such Restricted Subsidiary, or (ii) any Subsidiary that owns, directly or indirectly, any single service or manufacturing facility, or portion thereof, the book value of which (after deducting accumulated depreciation) as of the date the determination is being made is greater than 1% of Consolidated Net Assets. As used in this definition, "service or manufacturing facility" means property, plant and equipment (including ships) -8- 18 used for actual performance of services, such as acquisition or processing of geophysical data, or manufacturing, such as quality assurance, engineering, maintenance, staging areas for work in process materials and manufacturing administration, and it excludes sales offices and facilities used only for general administration. "Sale and Leaseback Transaction" means any arrangement with any Person pursuant to which the Company or any Subsidiary leases any asset or property that has been or is to be sold or transferred by the Company or the Subsidiary to such Person, other than (1) temporary leases for a term, including renewals at the option of the lessee, of not more than three years, (2) leases between the Company and a Subsidiary or between Subsidiaries, (3) leases of assets or property executed by the time of, or within 12 months after the latest of, the acquisition the completion of construction or improvement, or the commencement of commercial operation of such assets or property, and (4) arrangements pursuant to any provision of law with an effect similar to the former Section 168(f)(8) of the Internal Revenue Code of 1954. "Security" or "Securities" means any note or notes, bond or bonds, debenture or debentures, or any other evidences of indebtedness, as the case may be, of any series authenticated and delivered from time to time under this Indenture. "Security Register" shall have the meaning specified in Section 305. "Security Registrar" means the Person who keeps the Security Register specified in Section 305. The Company initially appoints the Trustee to act as Security Registrar for the Securities on its behalf. The Company may at any time and from time to time authorize any Person, including the Company, to act as Security Registrar in place of the Trustee with respect to any series of Securities issued under this Indenture. "Securityholder" means a Person in whose name a Security is registered in the Security Register. "Special Record Date" for the payment of any Defaulted Interest (as defined in Section 307) means a date fixed by the Trustee pursuant to Section 307. "Stated Maturity" when used with respect to any Security or any installment of principal thereof or interest thereon means the date specified in such Security as the fixed date on which the principal of such Security or such installment of principal or interest is due and payable. -9- 19 "Subsidiary" of any specified corporation means (i) a corporation, a majority of whose Capital Stock with voting power, under ordinary circumstances, to elect directors is, at the date of determination, directly or indirectly owned by the Company, by one or more Subsidiaries of the Company or by the Company and one or more Subsidiaries of the Company or (ii) a partnership in which the Company or a Subsidiary of the Company is at the date of determination, a general partner of such partnership, or (iii) any other Person (other than a corporation or a partnership) in which the Company, a Subsidiary of the Company or the Company and one or more Subsidiaries of the Company, directly or indirectly, at the date of determination, has (x) at least a majority ownership interest or (y) the power to elect or direct the election of a majority of the directors or other governing body of such Person. "Trust Indenture Act" or "TIA" means the Trust Indenture Act of 1939, as amended by the Trust Indenture Reform Act of 1990, and as in force at the date as of which this instrument was executed except as provided in Section 905. "Trustee" means the Person named as the Trustee in the first paragraph of this instrument until a successor Trustee shall have become such pursuant to the applicable provisions of this Indenture, and thereafter "Trustee" shall mean and include each Person who is then a Trustee hereunder. If at any time there is more than one such Person, "Trustee" as used with respect to the Securities of any series shall mean the Trustee with respect to Securities of that series. "Value" means, with respect to a Sale and Leaseback Transaction, an amount equal to the present value of the lease payments with respect to the term of the lease remaining on the date as of which the amount is being determined, without regard to any renewal or extension options contained in the lease, discounted at the weighted average interest rate on the Securities of all series (including the effective interest rate on any Original Issue Discount Securities) which are outstanding on the effective date of such Sale and Leaseback Transaction and which have the benefit of Section 1007. "Vice President" when used with respect to the Company or the Trustee means any vice president, whether or not designated by a number or a word or words added before or after the title "vice president", including, without limitation, an assistant vice president. Section 102. Compliance Certificates and Opinions. Upon any application or request by the Company to the Trustee to take any action under any provision of this Indenture, the -10- 20 Company shall furnish to the Trustee an Officers' Certificate stating that all conditions precedent, if any (including any covenants compliance with which constitutes a condition precedent), provided for in this Indenture relating to the proposed action have been complied with and an Opinion of Counsel stating that in the opinion of such Counsel all such conditions precedent, if any (including any covenants compliance with which constitutes a condition precedent), have been complied with, except that in the case of any such application or request as to which the furnishing of such documents is specifically required by any provision of this Indenture relating to such particular application or request, no additional certificate or opinion need be furnished. Every certificate or opinion with respect to compliance with a condition or covenant provided for in this Indenture (other than annual statements of compliance provided pursuant to Section 1004) shall include (1) a statement that each individual signing such certificate or opinion has read such covenant or condition and the definitions herein relating thereto; (2) a brief statement as to the nature and scope of the examination or investigation upon which the statements or opinions contained in such certificate or opinion are based; (3) a statement that, in the opinion of each such individual, he has made such examination or investigation as is necessary to enable him to express an informed opinion as to whether or not such covenant or condition has been complied with; and (4) a statement as to whether, in the opinion of each such individual, such condition or covenant has been complied with. Section 103. Form of Documents Delivered to Trustee. In any case where several matters are required to be certified by, or covered by an opinion of, any specified Person, it is not necessary that all such matters be certified by, or covered by the opinion of, only one such Person, or that they be so certified or covered by only one document, but one such Person may certify or give an opinion with respect to some matters and one or more other such Persons may certify or give an opinion as to the other matters, and any such Person may certify or give an opinion as to such matters in one or several documents. -11- 21 Any certificate or opinion of an officer of the Company may be based, insofar as it relates to legal matters, upon a certificate or opinion of, or representations by, counsel, unless such officer knows, or in the exercise of reasonable care should know, that the certificate or opinion or representations with respect to the matters upon which his certificate or opinion is based are erroneous. Any such certificate or Opinion of Counsel may be based, insofar as it relates to factual matters, upon a certificate or opinion of, or representations by, an officer or officers of the Company stating that the information with respect to such factual matters is in the possession of the Company, unless such counsel knows, or in the exercise of reasonable care should know, that the certificate or opinion or representations with respect to such matters are erroneous. Where any Person is required to make, give or execute two or more applications, requests, consents, certificates, statements, opinions or other instruments under this Indenture, they may, but need not, be consolidated and form one instrument. Section 104. Acts of Securityholders. (a) Any request, demand, authorization, direction, notice, consent, waiver or other action provided by this Indenture to be given or taken by Securityholders or Securityholders of any series may be embodied in and evidenced by one or more instruments of substantially similar tenor signed by such Securityholders in person or by an agent duly appointed in writing; and, except as herein otherwise expressly provided, such action shall become effective when such instrument or instruments are delivered to the Trustee, and, where it is hereby expressly required, to the Company. Such instrument or instruments (and the action embodied therein and evidenced thereby) are herein sometimes referred to as the "Act" of the Securityholders signing such instrument or instruments. Proof of execution of any such instrument or of a writing appointing any such agent shall be sufficient for any purpose of this Indenture and (subject to Section 601) conclusive in favor of the Trustee and the Company, if made in the manner provided in this Section. (b) The fact and date of the execution by any Person of any such instrument or writing may be proved by the affidavit of a witness to such execution or by the certificate of any notary public or other officer authorized by law to take acknowledgments of deeds, certifying that the individual signing such instrument or writing acknowledged to him the execution thereof. Where such execution is by an officer of a corporation or a member of a partnership, on behalf of such corporation or partnership, such certificate or affidavit shall also -12- 22 constitute sufficient proof of his authority. The fact and date of the execution of any such instrument or writing, or the authority of the person executing the same, may also be proved in any other manner which the Trustee deems sufficient. (c) The ownership of Securities shall be proved by the Security Register. (d) If the Company shall solicit from the Holders any request, demand, authorization, direction, notice, consent, waiver or other action, the Company may, at its option, by Board Resolution, fix in advance a record date for the determination of Holders entitled to give such request, demand, authorization, direction, notice, consent, waiver or other action, but the Company shall have no obligation to do so. Such record date shall be the later of 10 days prior to the first solicitation of such action or the date of the most recent list of Holders furnished to the Trustee pursuant to Section 701. If such a record date is fixed, such request, demand, authorization, direction, notice, consent, waiver or other action may be given before or after the record date, but only the Holders of record at the close of business on the record date shall be deemed to be Holders for the purposes of determining whether Holders of the requisite proportion of Securities Outstanding have authorized or agreed or consented to such request, demand, authorization, direction, notice, consent, waiver or other action, and for that purpose the Securities Outstanding shall be computed as of the record date; provided that no such authorization, agreement or consent by the Holders on the record date shall be deemed effective unless it shall become effective pursuant to the provisions of this Indenture not later than six months after the record date, and that no such authorization, agreement or consent may be amended, withdrawn or revoked once given by a Holder, unless the Company shall provide for such amendment, withdrawal or revocation in conjunction with such solicitation of authorizations, agreements or consents or unless and to the extent required by applicable law. (e) Any request, demand, authorization, direction, notice, consent, waiver or other action by the Holder of any Security shall bind the Holder of every Security issued upon the transfer thereof or in exchange therefor or in lieu thereof, in respect of anything done or suffered to be done by the Trustee or the Company in reliance thereon whether or not notation of such action is made upon such Security. Section 105. Notices. etc., to Trustee and Company. Any request, demand, authorization, direction, notice, consent, waiver or Act of Securityholders or other document provided or -13- 23 permitted by this Indenture to be made upon, given or furnished to, or filed with, (1) the Trustee by any Securityholder or by the Company shall be sufficient for every purpose hereunder if made, given, furnished or filed in writing to or with the Trustee at its Corporate Trust Office, Attention: Corporate Trust Trustee Administration, or (2) the Company by the Trustee or by any Securityholder shall be sufficient for every purpose hereunder (except as provided in Section 501(4) or, in the case of a request for repayment, as specified in the Security carrying the right to repayment) if in writing and mailed, first-class postage prepaid, to the Company addressed to it at the address of its principal office specified in the first paragraph of this instrument, Attention: Treasurer, or at any other address previously furnished in writing to the Trustee by the Company. Section 106. Notices to Securityholders; Waiver. Where this Indenture or any Security provides for notice to Securityholders of any event, such notice shall be sufficiently given (unless otherwise herein or in such Security expressly provided) if in writing and mailed, first-class postage prepaid, to each Securityholder affected by such event, at his address as it appears in the Security Register, not later than the latest date, and not earlier than the earliest date, prescribed for the giving of such notice. In any case where notice to Securityholders is given by mail, neither the failure to mail such notice, nor any defect in any notice so mailed, to any particular Securityholder shall affect the sufficiency of such notice with respect to other Securityholders. Where this Indenture or any Security provides for notice in any manner, such notice may be waived in writing by the Person entitled to receive such notice, either before or after the event, and such waiver shall be the equivalent of such notice. Waivers of notice by Securityholders shall be filed with the Trustee, but such filing shall not be a condition precedent to the validity of any action taken in reliance upon such waiver. In case, by reason of the suspension of regular mail service as a result of a strike, work stoppage or otherwise, it shall be impractical to mail notice of any event to any Securityholder when such notice is required to be given pursuant to any provision of this Indenture, then any method of notification as shall be satisfactory to the Trustee and the Company shall be deemed to be a sufficient giving of such notice. -14- 24 Section 107. Conflict with Trust Indenture Act. If any provision hereof limits, qualifies or conflicts with the duties imposed by any of Sections 310 to 317, inclusive, of the Trust Indenture Act through operation of Section 318(c) thereof, such imposed duties shall control. Section 108. Effect of Heading and Table of Contents. The Article and Section headings herein and the Table of Contents are for convenience only and shall not affect the construction hereof. Section 109. Successors and Assigns. All covenants and agreements in this Indenture by the Company shall bind its successors and assigns, whether so expressed or not. Section 110. Separability Clause. In case any provision in this Indenture or in the Securities shall be invalid, illegal or unenforceable, the validity, legality and enforceability of the remaining provisions shall not in any way be affected or impaired thereby. Section 111. Benefits of Indenture. Nothing in this Indenture or in any Securities, express or implied, shall give to any Person, other than the parties hereto and their successors hereunder, any Authenticating Agent or Paying Agent, the Security Registrar and the Holders of Securities (or such of them as may be affected thereby), any benefit or any legal or equitable right, remedy or claim under this Indenture. Section 112. Governing Law. This Indenture shall be construed in accordance with and governed by the laws of the State of New York, without regard to conflicts of laws principles thereof. Section 113. Counterparts. This instrument may be executed in any number of counterparts, each of which so executed shall be deemed to be an original, but all such counterparts shall together constitute but one and the same instrument. Section 114. Legal Holidays. In any case where any Interest Payment Date, Redemption Date or Stated Maturity of any Security shall not be a Business Day, then (notwithstanding any other provision of this Indenture or of the Securities) payment of interest or principal (and premium, if any) need not be made on such date, but may be made on the next succeeding Business Day with the same force and effect (including with respect to the accrual of interest) as if made on the Interest Payment Date, Redemption Date or at the Stated Maturity. -15- 25 ARTICLE TWO Security Forms Section 201. Forms Generally. The Securities shall have such appropriate insertions, omissions, substitutions and other variations as are required or permitted by this Indenture and may have such letters, numbers or other marks of identification and such legends or endorsements placed thereon, as may be required to comply with the rules of any securities exchange, or as may, consistently herewith, be determined by the officer executing such Securities, as evidenced by such officer's execution of the Securities. Any portion of the text of any Security may be set forth on the reverse thereof, with an appropriate reference thereto on the face of the Security. The definitive Securities shall be printed, lithographed or engraved or produced by any combination of these methods on steel engraved borders or may be produced in any other manner, all as determined by the officer executing such Securities, as evidenced by such officer's execution of such Securities, subject, with respect to the Securities of any series, to the rules of any securities exchange on which such Securities are listed. Section 202. Forms of Securities. Each Security shall be in one of the forms approved from time to time by or pursuant to a Board Resolution, or established in one or more indentures supplemental hereto. Prior to the delivery of a Security to the Trustee for authentication in any form approved by or pursuant to a Board Resolution, the Company shall deliver to the Trustee the Board Resolution by or pursuant to which such form of Security has been approved, which Board Resolution shall have attached thereto a true and correct copy of the form of Security which has been approved thereby or, if a Board Resolution authorizes a specific officer or officers to approve a form of Security, a certificate of such officer or officers approving the form of Security attached thereto. Any form of Security approved by or pursuant to a Board Resolution must be acceptable as to form to the Trustee, such acceptance to be evidenced by the Trustee's authentication of Securities in that form or a certificate signed by a Responsible Officer of the Trustee and delivered to the Company. Section 203. Form of Trustee's Certificate of Authentication. The form of Trustee's Certificate of Authentication for any Security issued pursuant to this Indenture shall be substantially as follows: -16- 26 TRUSTEE'S CERTIFICATE OF AUTHENTICATION Dated: ------------ This is one of the Securities referred to in the within-mentioned Indenture. The Bank of New York, as Trustee, By: ------------------------------ Authorized Signatory Section 204. Securities Issuable in the Form of a Global Security. (a) If the Company shall establish pursuant to Sections 202 and 301 that the Securities of a particular series are to be issued in whole or in part in the form of one or more Global Securities, then the Company shall execute and the Trustee or its agent shall, in accordance with Section 303 and the Company Order delivered to the Trustee or its agent thereunder, authenticate and make available for delivery, such Global Security or Securities, which (i) shall represent, and shall be denominated in an amount equal to the aggregate principal amount of, the Outstanding Securities of such series to be represented by such Global Security or Securities, or such portion thereof as the Company shall specify in a Company Order, (ii) shall be registered in the name of the Depositary for such Global Security or Securities or its nominee, (iii) shall be delivered by the Trustee or its agent to the Depositary or pursuant to the Depositary's instruction and (iv) shall bear a legend substantially to the following effect: "Unless this certificate is presented by an authorized representative of the Depositary to Issuer or its agent for registration of transfer, exchange, or payment, and any certificate issued is registered in the name of the nominee of the Depositary or in such other name as is requested by an authorized representative of the Depositary (and any payment is made to the nominee of the Depositary or to such other entity as is requested by an authorized representative of the Depositary), ANY TRANSFER, PLEDGE, OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL inasmuch as the registered owner hereof, the nominee of the Depositary, has an interest herein." (b) Notwithstanding any other provision of this Section 204 or of Section 305, and subject to the provisions of paragraph (c) below, unless the terms of a Global Security expressly permit such Global Security to be exchanged in whole or in part for individual Securities, a Global Security may be -17- 27 transferred, in whole but not in part and in the manner provided in Section 305, only to a nominee of the Depositary for such Global Security, or to the Depositary, or a successor Depositary for such Global Security selected or approved by the Company, or to a nominee of such successor Depositary. (c) (i) If at any time the Depositary for a Global Security notifies the Company that it is unwilling or unable to continue as Depositary for such Global Security or if at any time the Depositary for the Securities for such series shall no longer be eligible or in good standing under the Securities Exchange Act of 1934, as amended, or other applicable statute or regulation, the Company shall appoint a successor Depositary with respect to such Global Security. If a successor Depositary for such Global Security is not appointed by the Company within 90 days after the Company receives such notice or becomes aware of such ineligibility, the Company will execute, and the Trustee or its agent, upon receipt of a Company Request for the authentication and delivery of individual Securities of such series in exchange for such Global Security, will authenticate and make available for delivery individual Securities of such series of like tenor and terms in an aggregate principal amount equal to the principal amount of the Global Security in exchange for such Global Security. (ii) The Company may at any time and in its sole discretion determine that the Securities of any series or portion thereof issued or issuable in the form of one or more Global Securities shall no longer be represented by such Global Security or Securities. In such event the Company will execute, and the Trustee, upon receipt of a Company Request for the authentication and delivery of individual Securities of such series in exchange in whole or in part for such Global Security, will authenticate and make available for delivery individual Securities of such series of like tenor and terms in definitive form in an aggregate principal amount equal to the principal amount of such Global Security or Securities representing such series or portion thereof in exchange for such Global Security or Securities. (iii) If specified by the Company pursuant to Sections 202 and 301 with respect to Securities issued or issuable in the form of a Global Security, the Depositary for such Global Security may surrender such Global Security in exchange in whole or in part for individual Securities of such series of like tenor and terms in definitive form on such terms as are acceptable to the Company and such Depositary. Thereupon the Company shall execute, and the Trustee or its agent shall authenticate and make available for delivery, without service charge, (1) to each Person specified by such Depositary a new -18- 28 Security or Securities of the same series of like tenor and terms and of any authorized denomination as requested by such Person in aggregate principal amount equal to and in exchange for such Person's beneficial interest as specified by such Depositary in the Global Security; and (2) to such Depositary a new Global Security of like tenor and terms and in an authorized denomination equal to the difference, if any, between the principal amount of the surrendered Global Security and the aggregate principal amount of Securities delivered to Holders thereof. (iv) In any exchange provided for in any of the preceding three paragraphs, the Company will execute and the Trustee or its agent will authenticate and make available for delivery individual Securities in definitive registered form in authorized denominations. Upon the exchange of the entire principal amount of a Global Security for individual Securities, such Global Security shall be cancelled by the Trustee or its agent. Except as provided in the preceding paragraph, Securities issued in exchange for a Global Security pursuant to this Section shall be registered in such names and in such authorized denominations as the Depositary for such Global Security, pursuant to instructions from its direct or indirect participants or otherwise, shall instruct the Trustee or the Security Registrar. The Trustee shall deliver at its Corporate Trust Office such Securities to the Persons in whose names such Securities are so registered. ARTICLE THREE The Securities Section 301. General Title; General Limitations; Issuable in Series; Terms of Particular Series. The aggregate principal amount of Securities which may be authenticated and delivered and Outstanding under this Indenture is not limited. The Securities may be issued in one or more series up to an aggregate principal amount of Securities as from time to time may be authorized by the Board of Directors. All Securities of each series under this Indenture shall in all respects be equally and ratably entitled to the benefits hereof with respect to such series without preference, priority or distinction on account of the actual time of the authentication and delivery or Stated Maturity of the Securities of such series. Each series of Securities shall be created either by or pursuant to a Board Resolution or by an indenture supplemental hereto. The Securities of each such series may bear such -19- 29 date or dates, be payable at such place or places, have such Stated Maturity or Maturities, be issuable at such premium over or discount from their principal amount, bear interest at such rate or rates, from such date or dates, payable in such installments and on such dates and at such place or places to the Holders of Securities registered as such on such Regular Record Dates, or may bear no interest, and may be redeemable or repayable at such Redemption Price or Prices or Repayment Price or Prices, as the case may be, whether at the option of the Holder or otherwise, and upon such terms, all as shall be provided for in or pursuant to the Board Resolution or in the supplemental indenture creating that series. There may also be established in or pursuant to a Board Resolution or in a supplemental indenture prior to the issuance of Securities of each such series, provision for: (1) the exchange or conversion of the Securities of that series, at the option of the Holders thereof, for or into new Securities of a different series or other securities except shares of capital stock of the Company or any subsidiary of the Company or securities directly or indirectly convertible into or exchangeable for any such shares; (2) a sinking or purchase fund or other analogous obligation; (3) a limitation on the aggregate principal amount of the Securities of that series; (4) the appointment by the Trustee of an Authenticating Agent in one or more places other than the location of the office of the Trustee with power to act on behalf of the Trustee and subject to its direction in the authentication and delivery of the Securities of any one or more series in connection with such transactions as shall be specified in the provisions of this Indenture or in or pursuant to the Board Resolution or the supplemental indenture creating such series; (5) the portion of the principal amount of Securities of the series, if other than the principal amount thereof, which shall be payable upon declaration of acceleration of the Maturity thereof pursuant to Section 502 or provable in bankruptcy pursuant to Section 504; -20- 30 (6) any Event of Default with respect to the Securities of such series, if not set forth herein, and any additions, deletions or other changes to the Events of Default set forth herein that shall be applicable to the Securities of such series; (7) any covenant solely for the benefit of the Securities of such series and any additions, deletions or other changes to the provisions of Sections 1006, 1007, 1008 and 1009 that shall be applicable to the Securities of that series; (8) the inapplicability of section 403 of this Indenture to the Securities of such series and any covenant with respect to Section 403(b) established in or pursuant to a Board Resolution or in a supplemental indenture as described above that has not already been established herein; (9) if the Securities of the series shall be issued in whole or in part in the form of a Global Security or Securities, the terms and conditions, if any, upon which such Global Security or Securities may be exchanged in whole or in part for other individual Securities; and the Depositary for such Global Security or Securities; and (10) any other terms of the series, all upon such terms as may be determined in or pursuant to a Board Resolution or in a supplemental indenture with respect to such series. All Securities of the same series shall be substantially identical in tenor and effect except as to denomination and except if issued pursuant to Section 311. The form of the Securities of each series shall be established pursuant to the provisions of this Indenture in or pursuant to the Board Resolution or in the supplemental indenture creating such series. The Securities of each series shall be distinguished from the Securities of each other series in such manner, reasonably satisfactory to the Trustee, as the Board of Directors may determine. Unless otherwise provided with respect to Securities of a particular series, the Securities of any series may only be issuable in registered form, without coupons. Any terms or provisions in respect of the Securities of any series issued under this Indenture may be determined pursuant to this Section by providing for the method by which such terms or provisions shall be determined. -21- 31 Section 302. Denominations. The Securities of each series shall be issuable in such denominations as shall be provided in the provisions of this Indenture or in or pursuant to the Board Resolution or the supplemental indenture creating such series. In the absence of any such provisions with respect to the Securities of any series, the Securities of that series shall be issuable only in fully registered form in denominations of $1,000 and any integral multiple thereof. Section 303. Execution, Authentication and Delivery and Dating. The Securities shall be executed on behalf of the Company by its Chairman of the Board, its Vice Chairman, its President or one of its Vice Presidents. The signature of any of these officers on the Securities may be manual or facsimile. Securities bearing the manual or facsimile signatures of individuals who were at any time the proper officers of the Company shall bind the Company, notwithstanding that such individuals or any of them have ceased to hold such offices prior to the authentication and delivery of such Securities or did not hold such offices at the date of such Securities. At any time and from time to time after the execution and delivery of this Indenture, the Company may deliver Securities executed by the Company to the Trustee for authentication; and the Trustee shall, upon Company Order, authenticate and make available for delivery such Securities as in this Indenture provided and not otherwise. Prior to any such authentication and delivery, the Trustee shall be entitled to receive, in addition to any Officers' Certificate and Opinion of Counsel required to be furnished to the Trustee pursuant to Section 102, and the Board Resolution and any certificate relating to the issuance of the series of Securities required to be furnished pursuant to Section 202, an Opinion of Counsel stating that: (1) all instruments furnished to the Trustee conform to the requirements of the Indenture and constitute sufficient authority hereunder for the Trustee to authenticate and deliver such Securities; (2) the form and terms of such Securities have been established in conformity with the provisions of this Indenture; (3) all laws and requirements with respect to the execution and delivery by the Company of such Securities have been complied with, the Company has the corporate power to issue such Securities and such Securities have -22- 32 been duly authorized and delivered by the Company and, assuming due authentication and delivery by the Trustee, constitute legal, valid and binding obligations of the Company enforceable in accordance with their terms (subject, as to enforcement of remedies, to applicable bankruptcy, reorganization, insolvency, moratorium or other laws and legal principles affecting creditors' rights generally from time to time in effect and to general equitable principles, whether applied in an action at law or in equity) and entitled to the benefits of this Indenture, equally and ratably with all other Securities, if any, of such series Outstanding; (4) the Indenture is qualified under the Trust Indenture Act; and (5) such other matters as the Trustee may reasonably request; and, if the authentication and delivery relates to a new series of Securities created by an indenture supplemental hereto, also stating that all laws and requirements with respect to the form and execution by the Company of the supplemental indenture with respect to that series of Securities have been complied with, the Company has corporate power to execute and deliver any such supplemental indenture and has taken all necessary corporate action for those purposes and any such supplemental indenture has been executed and delivered and constitutes the legal, valid and binding obligation of the Company enforceable in accordance with its terms (subject, as to enforcement of remedies, to applicable bankruptcy, reorganization, insolvency, moratorium or other laws and legal principles affecting creditors' rights generally from time to time in effect and to general equitable principles, whether applied in an action at law or in equity) and, if the authentication and delivery relates to Securities of a series issued pursuant to Section 311, paragraphs (2) and (3) of the foregoing opinion shall read as follows: "(2) the form of such Securities and the procedures for determining the terms of such Securities as set forth in the procedures relating thereto referred to in Section 311 have been established in conformity with the provisions of this Indenture; and (3) all laws and requirements with respect to the execution and delivery by the Company of such Securities have been complied with, the Company has the corporate power to issue such Securities and such Securities have been duly authorized by the Company and when duly executed -23- 33 by the Company and completed and authenticated in accordance with the Indenture and issued, delivered and paid for in accordance with the applicable selling agency or distribution agreement, will have been duly issued under the Indenture and will constitute the legal, valid and binding obligations of the Company enforceable in accordance with their terms (subject, as to enforcement of remedies, to applicable bankruptcy, reorganization, insolvency, moratorium or other laws and legal principles affecting creditors' rights generally from time to time in effect and to general equitable principles, whether applied in an action at law or in equity) and entitled to the benefits of this Indenture, equally and ratably with all other Securities, if any, of such series Outstanding." The Trustee shall not be required to authenticate such Securities if the issue thereof will adversely affect the Trustee's own rights, duties or immunities under the Securities and this Indenture. Unless otherwise provided in the form of Security for any series, all Securities shall be dated the date of their authentication. No Security shall be entitled to any benefit under this Indenture or be valid or obligatory for any purpose unless there appears on such Security a certificate of authentication substantially in the form provided for herein executed by the Trustee by manual signature, and such certificate upon any Security shall be conclusive evidence, and the only evidence, that such Security has been duly authenticated and delivered hereunder. Section 304. Temporary Securities. Pending the preparation of definitive Securities of any series, the Company may execute, and, upon receipt of the documents required by Section 303, together with a Company Order, the Trustee shall authenticate and make available for delivery, temporary Securities which are printed, lithographed, typewritten, mimeographed or otherwise produced, in any authorized denomination, substantially of the tenor of the definitive Securities in lieu of which they are issued and with such appropriate insertions, omissions, substitutions and other variations as the officers executing such Securities may determine, as evidenced by their execution of such Securities. If temporary Securities of any series are issued, the Company will cause definitive Securities of such series to be prepared without unreasonable delay. After the preparation of definitive Securities, the temporary Securities of such series -24- 34 shall be exchangeable for definitive Securities of such series upon surrender of the temporary Securities of such series at the office or agency of the Company in a Place of Payment, without charge to the Holder; and upon surrender for cancellation of any one or more temporary Securities the Company shall execute and the Trustee shall authenticate and make available for delivery in exchange therefor a like principal amount of definitive Securities of such series of authorized denominations and of like tenor and terms. Until so exchanged the temporary Securities of such series shall in all respects be entitled to the same benefits under this Indenture as definitive Securities of such series. Section 305. Registration, Transfer and Exchange. The Company shall keep or cause to be kept a register or registers (herein sometimes referred to as the "Security Register") in which, subject to such reasonable regulations as it may prescribe, the Company shall provide for the registration of Securities, or of Securities of a particular series, and for transfers of Securities or of Securities of such series. Any such register shall be in written form or in any other form capable of being converted into written form within a reasonable time. At all reasonable times the information contained in such register or registers shall be available for inspection by the Trustee at the office or agency to be maintained by the Company as provided in Section 1002. There shall be only one Security Register per series of Securities. Subject to Section 204, upon surrender for transfer of any Security of any series at the office or agency of the Company in a Place of Payment, the Company shall execute, and the Trustee shall authenticate and deliver, in the name of the designated transferee or transferees, one or more new Securities of such series of any authorized denominations, of a like aggregate principal amount and Stated Maturity and of like tenor and terms. Subject to Section 204, at the option of the Holder, Securities of any series may be exchanged for other Securities of such series of any authorized denominations, of a like aggregate principal amount and Stated Maturity and of like tenor and terms, upon surrender of the Securities to be exchanged at such office or agency. Whenever any Securities are so surrendered for exchange, the Company shall execute, and the Trustee shall authenticate and make available for delivery, the Securities which the Securityholder making the exchange is entitled to receive. All Securities issued upon any transfer or exchange of Securities shall be the valid obligations of the Company, -25- 35 evidencing the same debt, and entitled to the same benefits under this Indenture, as the Securities surrendered upon such transfer or exchange. Every Security presented or surrendered for transfer or exchange shall (if so required by the Company or the Trustee) be duly endorsed, or be accompanied by a written instrument of transfer in form satisfactory to the Company and the Security Registrar duly executed, by the Holder thereof or his attorney duly authorized in writing. Unless otherwise provided in the Security to be transferred or exchanged, no service charge shall be made on any Securityholder for any transfer or exchange of Securities, but the Company may (unless otherwise provided in such Security) require payment of a sum sufficient to cover any tax or other governmental charge that may be imposed in connection with any transfer or exchange of Securities, other than exchanges pursuant to Section 304 or 906 not involving any transfer. The Company shall not be required (i) to issue, transfer or exchange any Security of any series during a period beginning at the opening of business 15 days before the day of the mailing of a notice of redemption of Securities of such series selected for redemption under Section 1103 and ending at the close of business on the date of such mailing, or (ii) to transfer or exchange any Security so selected for redemption in whole or in part. None of the Company, the Trustee, any agent of the Trustee, any Paying Agent or the Security Registrar will have any responsibility or liability for any aspect of the records relating to or payments made on account of beneficial ownership interests of a Global Security or for maintaining, supervising or reviewing any records relating to such beneficial ownership interests. Section 306. Mutilated, Destroyed, Lost and Stolen Securities. If (i) any mutilated Security is surrendered to the Trustee, or the Company and the Trustee receive evidence to their satisfaction of the destruction, loss or theft of any Security, and (ii) there is delivered to the Company and the Trustee such security or indemnity as may be required by them to save each of them harmless, then, in the absence of notice to the Company or the Trustee that such Security has been acquired by a bona fide purchaser, the Company shall execute and upon its request the Trustee shall authenticate and make available for delivery, in exchange for or in lieu of any such mutilated, destroyed, lost or stolen Security, a new Security of -26- 36 like tenor, series, stated maturity and principal amount, bearing a number not contemporaneously outstanding. In case any such mutilated, destroyed, lost or stolen Security has become or is about to become due and payable, the Company in its discretion may, instead of issuing a new Security, pay such Security. Upon the issuance of any new Security under this Section, the Company may require the payment of a sum sufficient to cover any tax or other governmental charge that may be imposed in relation thereto and any other expenses (including the fees and expenses of the Trustee) connected therewith. Every new Security issued pursuant to this Section in lieu of any destroyed, lost or stolen Security shall constitute an original additional contractual obligation of the Company, whether or not the destroyed, lost or stolen Security shall be at any time enforceable by anyone, and shall be entitled to all the benefits of this Indenture equally and proportionately with any and all other Securities of the same series duly issued hereunder. The provisions of this Section are exclusive and shall preclude (to the extent lawful) all other rights and remedies with respect to the replacement or payment of mutilated, destroyed, lost or stolen Securities. Section 307. Payment of Interest; Interest Rights Preserved. Unless otherwise provided with respect to such Security pursuant to Section 301, interest on any Security which is payable, and is punctually paid or duly provided for, on any Interest Payment Date shall be paid to the Person in whose name that Security (or one or more Predecessor Securities) is registered at the close of business on the Regular Record Date for such interest. Any interest on any Security which is payable, but is not punctually paid or duly provided for, on any Interest Payment Date (herein called "Defaulted Interest") shall forthwith cease to be payable to the registered Holder on the relevant Regular Record Date by virtue of his having been such Holder; and, except as hereinafter provided, such Defaulted Interest may be paid by the Company, at its election in each case, as provided in Clause (1) or Clause (2) below: (1) The Company may elect to make payment of any Defaulted Interest to the Persons in whose names any such Securities (or their respective Predecessor Securities) are registered at the close of business on a Special -27- 37 Record Date for the payment of such Defaulted Interest, which shall be fixed in the following manner. The Company shall notify the Trustee in writing of the amount of Defaulted Interest proposed to be paid on each such Security and the date of the proposed payment, and at the same time the Company shall deposit with the Trustee an amount of money equal to the aggregate amount proposed to be paid in respect of such Defaulted Interest or shall make arrangements satisfactory to the Trustee for such deposit prior to the date of the proposed payment, such money when deposited to be held in trust for the benefit of the Persons entitled to such Defaulted Interest as in this Clause provided. Thereupon the Trustee shall fix a Special Record Date for the payment of such Defaulted Interest which shall be not more than 15 nor less than 10 days prior to the date of the proposed payment and not less than 10 days after the receipt by the Trustee of the notice of the proposed payment. The Trustee shall promptly notify the Company of such Special Record Date and, in the name and at the expense of the Company, shall cause notice of the proposed payment of such Defaulted Interest and the Special Record Date therefor to be mailed, first-class postage prepaid, to the Holder of each such Security at such Holder's address as it appears in the Security Register, not less than 10 days prior to such Special Record Date. Notice of the proposed payment of such Defaulted Interest and the Special Record Date therefor having been mailed as aforesaid, such Defaulted Interest shall be paid to the Persons in whose names such Securities (or their respective Predecessor Securities) are registered on such Special Record Date and shall no longer be payable pursuant to the following Clause (2). (2) The Company may make payment of any Defaulted Interest in any other lawful manner not inconsistent with the requirements of any securities exchange on which such Securities may be listed, and upon such notice as may be required by such exchange, if, after notice given by the Company to the Trustee of the proposed payment pursuant to this Clause, such manner of payment shall be deemed practicable by the Trustee. If any installment of interest the Stated Maturity of which is on or prior to the Redemption Date for any Security called for redemption pursuant to Article Eleven is not paid or duly provided for on or prior to the Redemption Date in accordance with the foregoing provisions of this Section, such interest shall be payable as part of the Redemption Price of such Securities. -28- 38 Subject to the foregoing provisions of this Section, each Security delivered under this Indenture upon transfer of or in exchange for or in lieu of any other Security shall carry the rights to interest accrued and unpaid, and to accrue, which were carried by such other Security. Section 308. Persons Deemed Owners. The Company, the Trustee and any agent of the Company or the Trustee may treat the Person in whose name any Security is registered as the owner of such Security for the purpose of receiving payment of principal of (and premium, if any), and (subject to Section 307) interest on, such Security and for all other purposes whatsoever, whether or not such Security be overdue, and neither the Company, the Trustee nor any agent of the Company or the Trustee shall be affected by notice to the contrary. Section 309. Cancellation. All Securities surrendered for payment, redemption, transfer, or exchange or credit against a sinking fund shall, if surrendered to any Person other than the Trustee, be delivered to the Trustee and, if not already cancelled, shall be promptly cancelled by it. The Company may at any time deliver to the Trustee for cancellation any Securities previously authenticated and delivered hereunder which the Company may have acquired in any manner whatsoever, and all Securities so delivered shall be promptly cancelled by the Trustee. No Security shall be authenticated in lieu of or in exchange for any Securities cancelled as provided in this Section, except as expressly permitted by this Indenture. The Trustee shall deliver all cancelled Securities to the Company. Section 310. Computation of Interest. Unless otherwise provided as contemplated in Section 301, interest on the Securities shall be calculated on the basis of a 360-day year of twelve 30-day months. Section 311. Medium-Term Securities. Notwithstanding any contrary provision herein, if all Securities of a series are not to be originally issued at one time, it shall not be necessary for the Company to deliver to the Trustee an Officers' Certificate, Board Resolution, supplemental indenture, Opinion of Counsel or Company Order otherwise required pursuant to Sections 102, 202, 301 and 303 at or prior to the time of authentication of each Security of such series if such documents are delivered to the Trustee or its agent at or prior to the authentication upon original issuance of the first Security of such series to be issued; provided that any subsequent request by the Company to the Trustee to authenticate Securities of such series upon original issuance shall constitute a representation and warranty by the Company that as of the date of such request, the statements made in the Officers' Certificate -29- 39 or other certificates delivered pursuant to Sections 102 and 202 shall be true and correct as if made on such date. A Company Order, Officers' Certificate or Board Resolution or supplemental indenture delivered by the Company to the Trustee in the circumstances set forth in the preceding paragraph may provide that Securities which are the subject thereof will be authenticated and delivered by the Trustee or its agent on original issue from time to time in the aggregate principal amount established for such series pursuant to such procedures acceptable to the Trustee as may be specified from time to time by Company Order upon the telephonic, electronic or written order of persons designated in such Company Order, Officers' Certificate, supplemental indenture or Board Resolution (any such telephonic or electronic instructions to be promptly confirmed in writing by such persons) and that such persons are authorized to determine, consistent with such Company Order, Officers' Certificate, supplemental indenture or Board Resolution, such terms and conditions of said Securities as are specified in such Company Order, Officers' Certificate, supplemental indenture or Board Resolution. Section 312. CUSIP Numbers. The Company in issuing the Securities may use "CUSIP" numbers (if then generally in use), and, if so, the Trustee shall use "CUSIP" numbers in notices of redemption as a convenience to Holders; provided that any such notice may state that no representation is made as to the correctness of such numbers either as printed on the Securities or as contained in any notice of a redemption and that reliance may be placed only on the other identification numbers printed on the Securities, and any such redemption shall not be affected by any defect in or omission of such numbers. ARTICLE FOUR Satisfaction and Discharge Section 401. Satisfaction and Discharge of Indenture. This Indenture shall cease to be of further effect with respect to any series of Securities (except as to any surviving rights of conversion or transfer or exchange of Securities of such series expressly provided for herein or in the form of Security for such series), and the Trustee, on demand of and at the expense of the Company, shall execute proper instruments acknowledging satisfaction and discharge of this Indenture as to such series, when -30- 40 (1) either (A) all Securities of that series theretofore authenticated and delivered (other than (i) Securities of such series which have been destroyed, lost or stolen and which have been replaced or paid as provided in Section 306, and (ii) Securities of such series for whose payment money has theretofore been deposited in trust or segregated and held in trust by the Company and thereafter repaid to the Company or discharged from such trust, as provided in Section 1003) have been delivered to the Trustee cancelled or for cancellation; or (B) all such Securities of that series not theretofore delivered to the Trustee cancelled or for cancellation (i) have become due and payable, or (ii) will become due and payable at their Stated Maturity within one year, or (iii) are to be called for redemption within one year under arrangements satisfactory to the Trustee for the giving of notice of redemption by the Trustee in the name, and at the expense, of the Company, and the Company, in the case of (i), (ii) or (iii) above, has deposited or caused to be deposited with the Trustee as trust funds in trust for the purpose an amount, which shall be immediately due and payable, sufficient to pay and discharge the entire indebtedness on such Securities not theretofore delivered to the Trustee cancelled or for cancellation, for principal (and premium, if any) and interest to the date of such deposit (in the case of Securities which have become due and payable), or to the Stated Maturity or Redemption Date, as the case may be; (2) the Company has paid or caused to be paid all other sums payable hereunder by the Company with respect to the Securities of such series; and (3) the Company has delivered to the Trustee an Officers' Certificate and an Opinion of Counsel each stating that all conditions precedent herein provided for relating to the satisfaction and discharge of this Indenture with respect to the Securities of such series have been complied with. -31- 41 Notwithstanding the satisfaction and discharge of this Indenture with respect to any series of Securities, the obligations of the Company to the Trustee with respect to that series under Section 607 shall survive and the obligations of the Trustee under Sections 402 and 1003 shall survive. Section 402. Application of Trust Money. All money deposited with the Trustee pursuant to Section 401 or Section 403 shall be held in trust and applied by it, in accordance with the provisions of the series of Securities in respect of which it was deposited and this Indenture, to the payment, either directly or through any Paying Agent (including the Company acting as its own Paying Agent) as the Trustee may determine, to the Persons entitled thereto, of the principal (and premium, if any) and interest for whose payment such money has been deposited with the Trustee; but such money need not be segregated from other funds except to the extent required by law. Section 403. Defeasance Upon Deposit of Funds or Government Obligations. Unless pursuant to Section 301 provision is made that this Section shall not be applicable to the Securities of any series, at the Company's option, either (a) the Company shall be deemed to have been Discharged (as defined below) from its obligations with respect to any series of Securities after the applicable conditions set forth below have been satisfied or (b) the Company shall cease to be under any obligation to comply with any term, provision or condition set forth in Sections 1006, 1007, 1008 and 1009 (and any other provisions applicable to such Securities that are determined pursuant to Section 301 to be subject to this provision) with respect to any series of Securities at any time after the applicable conditions set forth below have been satisfied: (1) the Company shall have deposited or caused to be deposited irrevocably with the Trustee as trust funds in trust, specifically pledged as security for, and dedicated solely to, the benefit of the Holders of the Securities of such series (i) money in an amount, or (ii) the equivalent in direct obligations of, or obligations the principal of and interest on which are fully guaranteed by, the United States of America which through the payment of interest and principal in respect thereof in accordance with their terms will provide, not later than one day before the due date of any payment, money in an amount, or (iii) a combination of (i) and (ii), sufficient, in the opinion (with respect to (ii) and (iii)) of a nationally recognized firm of independent public accountants expressed in a written certification thereof delivered to the Trustee, to pay and discharge each installment of principal (including manda- -32- 42 tory sinking fund payments) and any premium of, interest on and any repurchase obligations with respect to the outstanding Securities of such series on the dates such installments of interest or principal or repurchase obligations are due; (2) no Event of Default or event (including such deposit) which with notice or lapse of time would become an Event of Default with respect to the Securities of such series shall have occurred and be continuing on the date of such deposit; and (3) the Company shall have delivered to the Trustee an Opinion of Counsel to the effect that Holders of the Securities of such series will not recognize income, gain or loss for Federal income tax purposes as a result of the Company's exercise of its option under this Section 403 and will be subject to Federal income tax on the same amount and in the same manner and at the same times as would have been the case if such option had not been exercised, and, in the case of Securities being Discharged, such opinion shall be based upon at least one of the following authorities (issued, enacted or promulgated after the date of this Indenture), substantially on point and to the foregoing effect: (i) a public ruling of the Internal Revenue Service, (ii) a private ruling of the Internal Revenue Service issued to the Company with respect to the Securities, (iii) a provision of the Internal Revenue Code, or (iv) a final regulation promulgated by the Department of the Treasury. "Discharged" means that the Company shall be deemed to have paid and discharged the entire indebtedness represented by, and obligations under, the Securities of such series and to have satisfied all the obligations under this Indenture relating to the Securities of such series (and the Trustee, at the expense of the Company, shall execute proper instruments acknowledging the same), except (A) the rights of Holders of Securities to receive, from the trust fund described in clause (1) above, payment of the principal and any premium of and any interest on such Securities when such payments are due; (B) the Company's obligations with respect to such Securities under Sections 305, 306, 402, 1002 and 1003; and (C) the rights, powers, trusts, duties and immunities of the Trustee hereunder. The Company shall pay and indemnify the Trustee against any tax, fee or other charge imposed on or assessed against the direct obligations of, or obligations the principal -33- 43 of and interest on which are fully guaranteed by, the United States of America, deposited pursuant to Section 403 or the principal and interest received in respect thereof other than any such tax, fee or other charge which by law is for the account of the Holders of outstanding Securities. ARTICLE FIVE Remedies Section 501. Events of Default. "Event of Default", wherever used herein, means with respect to any series of Securities any one of the following events (whatever the reason for such Event of Default and whether it shall be voluntary or involuntary or be effected by operation of law or pursuant to any judgment, decree or order of any court or any order, rule or regulation of any administrative or governmental body), unless such event is either inapplicable to a particular series or it is specifically deleted or modified in or pursuant to the supplemental indenture or Board Resolution creating such series of securities or in the form of Security for such series: (1) default in the payment of any interest upon any Security of that series when it becomes due and payable, and continuance of such default for a period of 30 days; or (2) default in the payment of the principal of (or premium, if any, on) any Security of that series at its Maturity; or (3) default in the payment of any sinking or purchase fund or analogous obligation when the same becomes due by the terms of the Securities of such series; or (4) default in the performance, or breach, of any covenant or warranty of the Company in this Indenture in respect of the Securities of such series (other than a covenant or warranty in respect of the Securities of such series a default in the performance of which or the breach of which is elsewhere in this Section specifically dealt with), all of such covenants and warranties in the Indenture which are not expressly stated to be for the benefit of a particular series of Securities being deemed in respect of the Securities of all series for this purpose, and continuance of such default or breach for a period of 90 days after receipt by the Company from the Trustee or by the Company and the Trustee from the Holders of at -34- 44 least 25% in principal amount of the Outstanding Securities of such series, a written notice, by registered or certified mail, specifying such default or breach and requiring it to be remedied and stating that such notice is a "Notice of Default" hereunder; or (5) the entry of an order for relief against the Company under the Federal Bankruptcy Code by a court having jurisdiction in the premises or a decree or order by a court having jurisdiction in the premises adjudging the Company a bankrupt or insolvent under any other applicable Federal or State law, or the entry of a decree or order approving as properly filed a petition seeking reorganization, arrangement, adjustment or composition of or in respect of the Company under the Federal Bankruptcy Code or any other applicable Federal or State law, or appointing a receiver, liquidator, assignee, trustee, sequestrator (or other similar official) of the Company or of any substantial part of its property, or ordering the winding up or liquidation of its affairs, and the continuance of any such decree or order unstayed and in effect for a period of 90 consecutive days; or (6) the consent by the Company to the institution of bankruptcy or insolvency proceedings against it, or the filing by it of a petition or answer or consent seeking reorganization or relief under the Federal Bankruptcy Code or any other applicable Federal or State law, or the consent by it to the filing of any such petition or to the appointment of a receiver, liquidator, assignee, trustee, sequestrator (or other similar official) of the Company or of any substantial part of its property, or the making by it of an assignment for the benefit of creditors, or the admission by it in writing of its inability to pay its debts generally as they become due, or the taking of corporate action by the Company in furtherance of any such action; or (7) any other Event of Default provided in the supplemental indenture or Board Resolution under which such series of Securities is issued or in the form of Security for such series. Section 502. Acceleration of Maturity; Rescission and Annulment. If an Event of Default described in paragraph (1), (2), (3), (4) or (7) (if the Event of Default under paragraph (4) or (7) is with respect to less than all series of Securities then Outstanding) of Section 501 occurs and is continuing with respect to any series, then and in each and every such case, unless the principal of all the Securities of such -35- 45 series shall have already become due and payable, either the Trustee or the Holders of not less than 25% in aggregate principal amount of the Securities of such series then Outstanding hereunder (each such series acting as a separate class), by notice in writing to the Company (and to the Trustee if given by Holders), may declare the principal amount (or, if the Securities of such series are Original Issue Discount Securities, such portion of the principal amount as may be specified in the terms of that series) of all the Securities of such series and all accrued interest thereon to be due and payable immediately, and upon any such declaration the same shall become and shall be immediately due and payable, anything in this Indenture or in the Securities of such series contained to the contrary notwithstanding. If an Event of Default described in paragraph (4) or (7) (if the Event of Default under paragraph (4) or (7) is with respect to all series of Securities then Outstanding), (5) or (6) of Section 501 occurs and is continuing, then and in each and every such case, unless the principal of all the Securities shall have already become due and payable, either the Trustee or the Holders of not less than 25% in aggregate principal amount of all the Securities then Outstanding hereunder (treated as one class), by notice in writing to the Company (and to the Trustee if given by Holders), may declare the principal amount (or, if any Securities are Original Issue Discount Securities, such portion of the principal amount as may be specified in the terms thereof) of all the Securities then Outstanding and all accrued interest thereon to be due and payable immediately, and upon any such declaration the same shall become and shall be immediately due and payable, anything in this Indenture or in the Securities contained to the contrary notwithstanding. At any time after such a declaration of acceleration has been made with respect to the Securities of any or all series, as the case may be, and before a judgment or decree for payment of the money due has been obtained by the Trustee as hereinafter in this Article provided, the Holders of a majority in principal amount of the Outstanding Securities of such series, by written notice to the Company and the Trustee, may rescind and annul such declaration and its consequences if (1) the Company has paid or deposited with the Trustee a sum sufficient to pay (A) all overdue installments of interest on the Securities of such series, (B) the principal of (and premium, if any, on) any Securities of such series which have become -36- 46 due otherwise than by such declaration of acceleration, and interest thereon at the rate or rates prescribed therefor by the terms of the Securities of such series, to the extent that payment of such interest is lawful, (C) interest upon overdue installments of interest at the rate or rates prescribed therefor by the terms of the Securities of such series to the extent that payment of such interest is lawful, and (D) all sums paid or advanced by the Trustee hereunder and the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel and all other amounts due the Trustee under Section 607; and (2) all Events of Default with respect to such series of Securities, other than the nonpayment of the principal of the Securities of such series which have become due solely by such acceleration, have been cured or waived as provided in Section 513. No such rescission shall affect any subsequent default or impair any right consequent thereon. Section 503. Collection of Indebtedness and Suits for Enforcement by Trustee. The Company covenants that if (1) default is made in the payment of any installment of interest on any Security of any series when such interest becomes due and payable, or (2) default is made in the payment of the principal of (or premium, if any, on) any Security at the Maturity thereof, or (3) default is made in the payment of any sinking or purchase fund or analogous obligation when the same becomes due by the terms of the Securities of any series, and any such default continues for any period of grace provided with respect to the Securities of such series, the Company will, upon demand of the Trustee, pay to it, for the benefit of the Holder of any such Security (or the Holders of any such series in the case of Clause (3) above), the whole amount then due and payable on any such Security (or on the Securities of any such series in the case of Clause (3) above) for principal -37- 47 (and premium, if any) and interest, with interest, to the extent that payment of such interest shall be legally enforceable, upon the overdue principal (and premium, if any) and upon overdue installments of interest, at such rate or rates as may be prescribed therefor by the terms of any such Security (or of Securities of any such series in the case of Clause (3) above); and, in addition thereto, such further amount as shall be sufficient to cover the costs and expenses of collection, including the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel and all other amounts due the Trustee under Section 607. If the Company fails to pay such amounts forthwith upon such demand, the Trustee, in its own name and as trustee of an express trust, may institute a judicial proceeding for the collection of the sums so due and unpaid, and may prosecute such proceeding to judgment or final decree, and may enforce the same against the Company or any other obligor upon the Securities of such series and collect the money adjudged or decreed to be payable in the manner provided by law out of the property of the Company or any other obligor upon such Securities, wherever situated. If an Event of Default with respect to any series of Securities occurs and is continuing, the Trustee may in its discretion proceed to protect and enforce its rights and the rights of the Holders of Securities of such series by such appropriate judicial proceedings as the Trustee shall deem most effectual to protect and enforce any such rights, whether for the specific enforcement of any covenant or agreement in this Indenture or in aid of the exercise of any power granted herein, or to enforce any other proper remedy. Section 504. Trustee May File Proofs of Claim. In case of the pendency of any receivership, insolvency, liquidation, bankruptcy, reorganization, arrangement, adjustment, composition or other judicial proceeding relative to the Company or any other obligor upon the Securities or the property of the Company or of such other obligor or their creditors, the Trustee (irrespective of whether the principal of the Securities shall then be due and payable as therein expressed or by declaration or otherwise and irrespective of whether the Trustee shall have made any demand on the Company for the payment of overdue principal or interest) shall be entitled and empowered, by intervention in such proceedings or otherwise, (i) to file and prove a claim for the whole amount of principal (and premium, if any) and interest owing and unpaid in respect of the Securities and to file such other papers or documents as may be necessary and advisable in -38- 48 order to have the claims of the Trustee (including any claim for the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel and all other amounts due the Trustee under Section 607) and of the Securityholders allowed in such judicial proceeding, and (ii) to collect and receive any moneys or other property payable or deliverable on any such claims and to distribute the same; and any receiver, assignee, trustee, liquidator, sequestrator (or other similar official) in any such judicial proceeding is hereby authorized by each Securityholder to make such payment to the Trustee and in the event that the Trustee shall consent to the making of such payments directly to the Securityholders, to pay to the Trustee any amount due to it for the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel, and any other amounts due the Trustee under Section 607. Nothing herein contained shall be deemed to authorize the Trustee to authorize or consent to or accept or adopt on behalf of any Securityholder any plan of reorganization, arrangement, adjustment or composition affecting the Securities or the rights of any Holder thereof, or to authorize the Trustee to vote in respect of the claim of any Securityholder in any such proceeding. Section 505. Trustee May Enforce Claims Without Possession of Securities. All rights of action and claims under this Indenture or the Securities of any series may be prosecuted and enforced by the Trustee without the possession of any of the Securities of such series or the production thereof in any proceeding relating thereto, and any such proceeding instituted by the Trustee shall be brought in its own name as trustee of an express trust, and any recovery of judgment shall, after provision, for the payment of the reasonable compensation, expenses, disbursements and advances of the Trustee, its agent and counsel and any other amounts due the Trustee under Section 607, be for the ratable benefit of the Holders of the Securities of the series in respect of which such judgment has been recovered. Section 506. Application of Money Collected. Any money collected by the Trustee with respect to a series of Securities pursuant to this Article shall be applied in the following order, at the date or dates fixed by the Trustee and, in case of the distribution of such money on account of principal -39- 49 (or premium, if any) or interest, upon presentation of the Securities of such series and the notation thereon of the payment if only partially paid and upon surrender thereof if fully paid: FIRST: To the payment of all amounts due the Trustee under Section 607. SECOND: To the payment of the amounts then due and unpaid upon the Securities of that series for principal (and premium, if any) and interest, in respect of which or for the benefit of which such money has been collected, ratably, without preference or priority of any kind, according to the amounts due and payable on such Securities for principal (and premium, if any) and interest, respectively. THIRD: Any remaining money shall be returned to the Company. Section 507. Limitation on Suits. No Holder of any Security of any series shall have any right to institute any proceeding, judicial or otherwise, with respect to this Indenture, or for the appointment of a receiver or trustee, or for any other remedy hereunder, unless (1) such Holder has previously given written notice to the Trustee of a continuing Event of Default with respect to Securities of such series; (2) the Holders of not less than 25% in principal amount of the Outstanding Securities of such series shall have made written request to the Trustee to institute proceedings in respect of such Event of Default in its own name as Trustee hereunder; (3) such Holder or Holders have offered to the Trustee reasonable indemnity against the costs, expenses and liabilities to be incurred in compliance with such request; (4) the Trustee for 60 days after its receipt of such notice, request and offer of indemnity has failed to institute any such proceeding; and (5) no direction inconsistent with such written request has been given to the Trustee during such 60-day period by the Holders of a majority in principal amount of the Outstanding Securities of such series; -40- 50 it being understood and intended that no one or more Holders of Securities of such series shall have any right in any manner whatever by virtue of, or by availing of, any provision of this indenture to affect, disturb or prejudice the rights of any other Holders of Securities of such series, or to obtain or to seek to obtain priority or preference over any other such Holders or to enforce any right under this Indenture, except in the manner herein provided and for the equal and proportionate benefit of all the Holders of all Securities of such series. Section 508. Unconditional Right of Securityholders To Receive Principal, Premium and Interest. Notwithstanding any other provisions in this Indenture, the Holder of any Security shall have the right, which is absolute and unconditional, to receive payment of the principal of (and premium, if any) and (subject to Section 307) interest on such Security on the respective Stated Maturities expressed in such Security (or, in the case of redemption or repayment, on the Redemption Date or Repayment Date, as the case may be) and to institute suit for the enforcement of any such payment, and such right shall not be impaired without the consent of such Holder. Section 509. Restoration of Rights and Remedies. If the Trustee or any Securityholder has instituted any proceeding to enforce any right or remedy under this Indenture and such proceeding has been discontinued or abandoned for any reason, then and in every such case the Company, the Trustee and the Securityholders shall, subject to any determination in such proceeding, be restored severally and respectively to their former positions hereunder, and thereafter all rights and remedies of the Trustee and the Securityholders shall continue as though no such proceeding had been instituted. Section 510. Rights and Remedies Cumulative. No right or remedy herein conferred upon or reserved to the Trustee or to the Securityholders is intended to be exclusive of any other right or remedy, and every right and remedy shall, to the extent permitted by law, be cumulative and in addition to every other right and remedy given hereunder or now or hereafter existing at law or in equity or otherwise. The assertion or employment of any right or remedy hereunder, or otherwise, shall not prevent the concurrent assertion or employment of any other appropriate right or remedy, except as otherwise provided with respect to the replacement or payment of mutilated, destroyed, lost or stolen Securities in the last paragraph of Section 306 hereof. Section 511. Delay or Omission Not Waiver. No delay or omission of the Trustee or of any Holder of any Security to exercise any right or remedy accruing upon any Event of Default -41- 51 shall impair any such right or remedy or constitute a waiver of any such Event of Default or an acquiescence therein. Every right and remedy given by this Article or by law to the Trustee or to the Securityholders may be exercised from time to time, and as often as may be deemed expedient, by the Trustee or by the Securityholders, as the case may be. Section 512. Control by Securityholders. The Holders of a majority in principal amount of the Outstanding Securities of any series shall have the right to direct the time, method and place of conducting any proceeding for any remedy available to the Trustee or exercising any trust or power conferred on the Trustee with respect to the Securities of such series, provided that (1) the Trustee shall have the right to decline to follow any such direction if the Trustee, being advised by counsel, determines that the action so directed may not lawfully be taken or would conflict with this Indenture or if the Trustee in good faith shall, by a Responsible Officer, determine that the proceedings so directed would involve it in personal liability or be unjustly prejudicial to the Holders not taking part in such direction, and (2) the Trustee may take any other action deemed proper by the Trustee which is not inconsistent with such direction. Section 513. Waiver of Past Defaults. The Holders of not less than a majority in principal amount of the Outstanding Securities of any series may on behalf of the Holders of all the Securities of such series waive any past default hereunder with respect to such series and its consequences, except a default not theretofore cured (1) in the payment of the principal of (or premium, if any) or interest on any Security of such series, or in the payment of any sinking or purchase fund or analogous obligation with respect to the Securities of such series, or (2) in respect of a covenant or provision hereof which under Article Nine cannot be modified or amended without the consent of the Holder of each Outstanding Security of such series. Upon any such waiver, such default shall cease to exist, and any Event of Default arising therefrom shall be deemed to have been cured, for every purpose of this Indenture; -42- 52 but no such waiver shall extend to any subsequent or other default or impair any right consequent thereon. Section 514. Undertaking for Costs. All parties to this Indenture agree, and each Holder of any Security by his acceptance thereof shall be deemed to have agreed, that any court may in its discretion require, in any suit for the enforcement of any right or remedy under this Indenture, or in any suit against the Trustee for any action taken or omitted by it as Trustee, the filing by any party litigant in such suit of an undertaking to pay the costs of such suit, and that such court may in its discretion assess reasonable costs, including reasonable attorneys' fees, against any party litigant in such suit, having due regard to the merits and good faith of the claims or defenses made by such party litigant; but the provisions of this Section shall not apply to any suit instituted by the Trustee, to any suit instituted by any Securityholder, or group of Securityholders, holding in the aggregate more than 10% in principal amount of the Outstanding Securities of any series to which the suit relates, or to any suit instituted by any Securityholder for the enforcement of the payment of the principal of (or premium, if any) or interest on any Security on or after the respective Stated Maturities expressed in such Security (or, in the case of redemption or repayment, on or after the Redemption Date or Repayment Date, as the case may be). Section 515. Waiver of Stay or Extension Laws. The Company covenants (to the extent that it may lawfully do so) that it will not at any time insist upon, or plead, or in any manner whatsoever claim or take the benefit or advantage of, any stay or extension law wherever enacted, now or at any time hereafter in force, which may affect the covenants or the performance of this Indenture; and the Company (to the extent that it may lawfully do so) hereby expressly waives all benefit or advantage of any such law, and covenants that it will not hinder, delay or impede the execution of any power herein granted to the Trustee, but will suffer and permit the execution of every such power as though no such law had been enacted. ARTICLE SIX The Trustee Section 601. Certain Duties and Responsibilities. (a) Except during the continuance of an Event of Default with respect to any series of Securities, -43- 53 (1) the Trustee undertakes to perform such duties and only such duties as are specifically set forth in this Indenture with respect to the Securities of such series, and no implied covenants or obligations shall be read into this Indenture against the Trustee; and (2) in the absence of bad faith on its part, the Trustee may, with respect to Securities of such series, conclusively rely, as to the truth of the statements and the correctness of the opinions expressed therein, upon certificates or opinions furnished to the Trustee and conforming to the requirements of this Indenture; but in the case of any such certificates or opinions which by any provision hereof are specifically required to be furnished to the Trustee, the Trustee shall be under a duty to examine the same to determine whether or not they conform to the requirements of this Indenture. (b) In case an Event of Default with respect to any series of Securities has occurred and is continuing, the Trustee shall exercise with respect to the Securities of such series such of the rights and powers vested in it by this Indenture, and use the same degree of care and skill in their exercise, as a prudent man would exercise or use under the circumstances in the conduct of his own affairs. (c) No provision of this Indenture shall be construed to relieve the Trustee from liability for its own negligent action, its own negligent failure to act, or its own willful misconduct, except that (1) this Subsection shall not be construed to limit the effect of Subsection (a) of this Section; (2) the Trustee shall not be liable for any error of judgment made in good faith by a Responsible Officer, unless it shall be proved that the Trustee was negligent in ascertaining the pertinent facts; (3) the Trustee shall not be liable with respect to any action taken or omitted to be taken by it in good faith in accordance with the direction of the Holders of a majority in principal amount of the Outstanding Securities of any series pursuant to the provisions of Section 5.12 relating to the time, method and place of conducting any proceeding for any remedy available to the Trustee, or exercising any trust or power conferred upon the Trustee, under this Indenture with respect to the Securities of such series; and -44- 54 (4) no provision of this Indenture shall require the Trustee to expend or risk its own funds or otherwise incur any financial liability in the performance of any of its duties hereunder, or in the exercise of any of its rights or powers, if it shall have reasonable grounds for believing that repayment of such funds or adequate indemnity against such risk or liability is not reasonably assured to it. (d) Whether or not therein expressly so provided, every provision of this Indenture relating to the conduct or affecting the liability of or affording protection to the Trustee shall be subject to the provisions of this Section. Section 602. Notice of Defaults. Within 90 days after the occurrence of any default hereunder with respect to Securities of any series, the Trustee shall transmit by mail to all Securityholders of such series, as their names and addresses appear in the Security Register, notice of such default hereunder known to the Trustee, unless such default shall have been cured or waived; provided, however, that, except in the case of a default in the payment of the principal of (or premium, if any) or interest on any Security of such series or in the payment of any sinking or purchase fund installment or analogous obligation with respect to Securities of such series, the Trustee shall be protected in withholding such notice if and so long as the board of directors, the executive committee or a trust committee of directors and/or Responsible Officers of the Trustee in good faith determine that the withholding of such notice is in the interests of the Securityholders of such series; and provided, further, that in the case of any default of the character specified in Section 501(4) with respect to Securities of such series no such notice to Securityholders of such series shall be given until at least 90 days after the occurrence thereof. For the purpose of this Section, the term "default", with respect to Securities of any series, means any event which is, or after notice or lapse of time or both would become, an Event of Default with respect to Securities of such series. Section 603. Certain Rights of Trustee. Except as otherwise provided in Section 601: (a) the Trustee may rely and shall be protected in acting or refraining from acting upon any resolution, certificate, statement, instrument, opinion, report, notice, request, direction, consent, order, bond, debenture, note, other evidence of indebtedness or other paper or document believed by it to be genuine and to have been signed or presented by the proper party or parties; -45- 55 (b) any request or direction of the Company mentioned herein shall be sufficiently evidenced by a Company Request or Company Order and any resolution of the Board of Directors may be sufficiently evidenced by a Board Resolution; (c) whenever in the administration of this Indenture the Trustee shall deem it desirable that a matter be proved or established prior to taking, suffering or omitting any action hereunder, the Trustee (unless other evidence be herein specifically prescribed) may, in the absence of bad faith on its part, rely upon an Officers' Certificate; (d) the Trustee may consult with counsel of its selection and the advice of such counsel or any Opinion of Counsel shall be full and complete authorization and protection in respect of any action taken, suffered or omitted by it hereunder in good faith and in reliance thereon; (e) the Trustee shall be under no obligation to exercise any of the rights or powers vested in it by this Indenture at the request or direction of any of the Securityholders pursuant to this Indenture, unless such Securityholders shall have offered to the Trustee reasonable security or indemnity against the costs, expenses and liabilities which might be incurred by it in compliance with such request or direction; (f) the Trustee shall not be bound to make any investigation into the facts or matters stated in any resolution, certificate, statement, instrument, opinion, report, notice, request, direction, consent, order, bond, debenture, note, other evidence of indebtedness or other paper or document, but the Trustee, in its discretion, may make such further inquiry or investigation into such facts or matters as it may see fit, and, if the Trustee shall determine to make such further inquiry or investigation, it shall be entitled to examine the books, records and premises of the Company, personally or by agent or attorney; (g) the Trustee may execute any of the trusts or powers hereunder or perform any duties hereunder either directly or by or through agents or attorneys and the Trustee shall not be responsible for any misconduct or negligence on the part of any agent or attorney appointed with due care by it hereunder; and (h) the Trustee shall not be liable for any action taken, suffered, or omitted to be taken by it in good faith and reasonably believed by it to be authorized or within the discretion or rights or powers conferred upon it by this Indenture. -46- 56 Section 604. Not Responsible for Recitals or Issuance of Securities. The recitals contained herein and in the Securities, except the certificates of authentication, shall be taken as the statements of the Company, and the Trustee assumes no responsibility for their correctness. The Trustee makes no representations as to the validity or sufficiency of this Indenture or of the Securities. The Trustee shall not be accountable for the use or application by the Company of Securities or the proceeds thereof. Section 605. May Hold Securities. The Trustee, any Paying Agent, the Security Registrar or any other agent of the Company, in its individual or any other capacity, may become the owner or pledgee of Securities and, subject to Sections 608 and 613, may otherwise deal with the Company with the same rights it would have if it were not Trustee, Paying Agent, Security Registrar or such other agent. Section 606. Money Held in Trust. Subject to the provisions of Section 1003 hereof, all moneys received by the Trustee shall, until used or applied as herein provided, be held in trust for the purposes for which they were received, but need not be segregated from other funds except to the extent required by law. The Trustee shall be under no liability for interest on any money received by it hereunder except as otherwise agreed in writing with the Company. Section 607. Compensation and Reimbursement. The Company agrees (1) to pay to the Trustee from time to time such compensation as the Company and the Trustee shall from time to time agree in writing for all services rendered by it hereunder (which compensation shall not be limited by any provision of law in regard to the compensation of a trustee of an express trust); (2) except as otherwise expressly provided herein, to reimburse the Trustee upon its request for all reasonable expenses, disbursements and advances incurred or made by the Trustee in accordance with any provision of this Indenture (including the reasonable compensation and the expenses and disbursements of its agents and counsel), except any such expense, disbursement or advance as may be attributable to its negligence or bad faith; and (3) to indemnify each of the Trustee or any predecessor Trustee for, and to hold it harmless against, any and all losses, damages, claims, liabilities or expenses, -47- 57 including taxes (other than taxes based upon, measured by, or determined by the income of the Trustee), incurred without negligence or bad faith on its part, arising out of or in connection with the acceptance or administration of this trust, including the costs and expenses of defending itself against any claim or liability in connection with the exercise or performance of any of its powers or duties hereunder. As security for the performance of the obligations of the Company under this Section the Trustee shall have a lien prior to the Securities upon all property and funds held or collected by the Trustee as such, except funds held in trust for the payment of principal of (and premium, if any) or interest on particular Securities. When the Trustee incurs expenses or renders services in connection with an Event of Default specified in Section 501(5) or Section 501(6), the expenses (including the reasonable charges and expenses of its counsel) and the compensation for the services are intended to constitute expenses of administration under any applicable Federal or State bankruptcy, insolvency or other similar law. The provisions of this Section shall survive the termination of this Indenture. Section 608. Disqualification; Conflicting Interests. The Trustee for the Securities of any series issued hereunder shall be subject to the provisions of Section 310(b) of the Trust Indenture Act during the period of time provided for therein. In determining whether the Trustee has a conflicting interest as defined in Section 310(b) of the Trust Indenture Act with respect to the Securities of any series, there shall be excluded this Indenture with respect to Securities of any particular series of Securities other than that series. Nothing herein shall prevent the Trustee from filing with the Commission the application referred to in the second to last paragraph of Section 310(b) of the Trust Indenture Act. Section 609. Corporate Trustee Required; Eligibility. There shall at all times be a Trustee hereunder with respect to each series of Securities, which shall be either (i) a corporation organized and doing business under the laws of the United States of America or of any State, authorized under such laws to exercise corporate trust powers and subject to supervision or examination by Federal or State authority, or -48- 58 (ii) a corporation or other Person organized and doing business under the laws of a foreign government that is permitted to act as Trustee pursuant to a rule, regulation or order of the Commission, authorized under such laws to exercise corporate trust powers, and subject to supervision or examination by authority of such foreign government or a political subdivision thereof substantially equivalent to supervision or examination applicable to United States institutional trustees, in either case having a combined capital and surplus of at least $50,000,000. If such corporation publishes reports of condition at least annually, pursuant to law or to the requirements of the aforesaid supervising or examining authority, then for the purposes of this Section, the combined capital and surplus of such corporation shall be deemed to be its combined capital and surplus as set forth in its most recent report of condition so published. Neither the Company nor any person directly or indirectly controlling, controlled by, or under common control with the Company shall serve as trustee for the Securities of any series issued hereunder. If at any time the Trustee with respect to any series of Securities shall cease to be eligible in accordance with the provisions of this Section, it shall resign immediately in the manner and with the effect specified in Section 610. Section 610. Resignation and Removal; Appointment of Successor. (a) No resignation or removal of the Trustee and no appointment of a successor Trustee pursuant to this Article shall become effective until the acceptance of appointment by the successor Trustee under Section 611. (b) The Trustee may resign with respect to any series of Securities at any time by giving written notice thereof to the Company. If an instrument of acceptance by a successor Trustee shall not have been delivered to the Trustee within 30 days after the giving of such notice of resignation, the resigning Trustee may petition any court of competent jurisdiction for the appointment of a successor Trustee. (c) The Trustee may be removed with respect to any series of Securities at any time by Act of the Holders of a majority in principal amount of the Outstanding Securities of that series, delivered to the Trustee and to the Company. If an instrument of acceptance by a successor Trustee shall not have been delivered to the Trustee within 30 days after the giving of such notice of removal, the Trustee subject to removal may petition any court of competent jurisdiction for the appointment of a successor Trustee. -49- 59 (d) If at any time: (1) the Trustee shall fail to comply with Section 310(b) of the Trust Indenture Act pursuant to Section 608 with respect to any series of Securities after written request therefor by the Company or by any Securityholder who has been a bona fide Holder of a Security of that series for at least 6 months, or (2) the Trustee shall cease to be eligible under Section 609 with respect to any series of Securities and shall fail to resign after written request therefor by the Company or by any such Securityholder, or (3) the Trustee shall become incapable of acting with respect to any series of Securities, or (4) the Trustee shall be adjudged a bankrupt or insolvent or a receiver of the Trustee or of its property shall be appointed or any public officer shall take charge or control of the Trustee or of its property or affairs for the purpose of rehabilitation, conservation or liquidation, then, in any such case, (i) the Company by a Board Resolution may remove the Trustee, with respect to the series, or in the case of Clause (4), with respect to all series, or (ii) subject to Section 514, any Securityholder who has been a bona fide Holder of a Security of such series for at least 6 months may, on behalf of himself and all others similarly situated, petition any court of competent jurisdiction for the removal of the Trustee and the appointment of a successor Trustee with respect to the series, or, in the case of Clause (4), with respect to all series. (e) If the Trustee shall resign, be removed or become incapable of acting with respect to any series of Securities, or if a vacancy shall occur in the office of the Trustee with respect to any series of Securities for any cause, the Company, by a Board Resolution, shall promptly appoint a successor Trustee for that series of Securities. If, within one year after such resignation, removal or incapacity, or the occurrence of such vacancy, a successor Trustee with respect to such series of Securities shall be appointed by Act of the Holders of a majority in principal amount of the Outstanding Securities of such series delivered to the Company and the retiring Trustee, the successor Trustee so appointed shall, forthwith upon its acceptance of such appointment, become the successor Trustee with respect to such series and supersede the successor Trustee appointed by the Company with respect to such series. -50- 60 If no successor Trustee with respect to such series shall have been so appointed by the Company or the Securityholders of such series and accepted appointment in the manner hereinafter provided, subject to Section 514, any Securityholder who has been a bona fide Holder of a Security of that series for at least 6 months may, on behalf of himself and all others similarly situated, petition any court of competent jurisdiction for the appointment of a successor Trustee with respect to such series. (f) The Company shall give notice of each resignation and each removal of the Trustee with respect to any series and each appointment of a successor Trustee with respect to any series by mailing written notice of such event by first-class mail, postage prepaid, to the Holders of Securities of that series as their names and addresses appear in the Security Register. Each notice shall include the name of the successor Trustee and the address of its principal Corporate Trust Office. Section 611. Acceptance of Appointment by Successor. Every successor Trustee appointed hereunder shall execute, acknowledge and deliver to the Company and to the predecessor Trustee an instrument accepting such appointment, and thereupon the resignation or removal of the predecessor Trustee shall become effective with respect to any series as to which it is resigning or being removed as Trustee, and such successor Trustee, without any further act, deed or conveyance, shall become vested with all the rights, powers, trusts and duties of the predecessor Trustee with respect to any such series; but, on request of the Company or the successor Trustee, such predecessor Trustee shall, upon payment of its reasonable charges, if any, execute and deliver an instrument transferring to such successor Trustee all the rights, powers and trusts of the predecessor Trustee, and shall duly assign, transfer and deliver to such successor Trustee all property and money held by such predecessor Trustee hereunder with respect to all or any such series, subject nevertheless to its lien, if any, provided for in Section 607. Upon request of any such successor Trustee, the Company shall execute any and all instruments for more fully and certainly vesting in and confirming to such successor Trustee all such rights, powers and trusts. In case of the appointment hereunder of a successor Trustee with respect to the Securities of one or more (but not all) series, the Company, the predecessor Trustee and each successor Trustee with respect to the Securities of any applicable series shall execute and deliver an indenture supplemental hereto which shall contain such provisions as shall be deemed necessary or desirable to confirm that all the rights, powers, trusts and duties of the predecessor Trustee with respect to -51- 61 the Securities of any series as to which the predecessor Trustee is not being succeeded shall continue to be vested in the predecessor Trustee, and shall add to or change any of the provisions of this Indenture as shall be necessary to provide for or facilitate the administration of the trusts hereunder by more than one Trustee, it being understood that nothing herein or in such supplemental indenture shall constitute such Trustees co-trustees of the same trust and that each such Trustee shall be Trustee of a trust or trusts hereunder separate and apart from any trust or trusts hereunder administered by any other such Trustee. No successor Trustee with respect to any series of Securities shall accept its appointment unless at the time of such acceptance such successor Trustee shall be qualified and eligible with respect to that series under this Article. Section 612. Merger, Conversion, Consolidation or Succession to Business. Any corporation into which the Trustee may be merged or converted or with which it may be consolidated, or any corporation resulting from any merger, conversion or consolidation to which the Trustee shall be a party, or any corporation succeeding to all or substantially all of the corporate trust business of the Trustee, shall be the successor of the Trustee hereunder, provided such corporation shall be otherwise qualified and eligible under this Article, without the execution or filing of any paper or any further act on the part of any of the parties hereto. In case any Securities shall have been authenticated, but not delivered, by the Trustee then in office, any successor by merger, conversion or consolidation to such authenticating Trustee may adopt such authentication and deliver the Securities so authenticated with the same effect as if such successor Trustee had itself authenticated such Securities. Section 613. Preferential Collection of Claims Against Company. (a) Subject to Subsection (b) of this Section, if the Trustee shall be or shall become a creditor, directly or indirectly, secured or unsecured, of the Company within 3 months prior to a default, as defined in Subsection (c) of this Section, or subsequent to such a default, then, unless and until such default shall be cured, the Trustee shall set apart and hold in a special account for the benefit of the Trustee individually, the Holders of the Securities and the holders of other indenture securities (as defined in Subsection (c) of this Section): (1) an amount equal to any and all reduction in the amount due and owing upon any claim as such creditor in -52- 62 respect of principal or interest, effected after the beginning of such 3-month period and valid as against the Company and its other creditors, except any such reduction resulting from the receipt or disposition of any property described in paragraph (2) of this Subsection, or from the exercise of any right of set-off which the Trustee could have exercised if a petition in bankruptcy had been filed by or against the Company upon the date of such default; and (2) all property received by the Trustee in respect of any claim as such creditor, either as security therefor, or in satisfaction or composition thereof, or otherwise, after the beginning of such 3-month period, or an amount equal to the proceeds of any such property, if disposed of, subject, however, to the rights, if any, of the Company and its other creditors in such property or such proceeds. Nothing herein contained, however, shall affect the right of the Trustee (A) to retain for its own account (i) payments made on account of any such claim by any Person (other than the Company) who is liable thereon, and (ii) the proceeds of the bona fide sale of any such claim by the Trustee to a third person, and (iii) distributions made in cash, securities or other property in respect of claims filed against the Company in bankruptcy or receivership or in proceedings for reorganization pursuant to the Federal Bankruptcy Code or applicable State law; (B) to realize, for its own account, upon any property held by it as security for any such claim, if such property was so held prior to the beginning of such 3-month period; (C) to realize, for its own account, but only to the extent of the claim hereinafter mentioned, upon any property held by it as security for any such claim, if such claim was created after the beginning of such 3-month period and such property was received as security therefor simultaneously with the creation thereof, and if the Trustee shall sustain the burden of proving that at the time such property was so received the Trustee had no reasonable cause to believe that a default as defined in Subsection (c) of this Section would occur within 3 months; or -53- 63 (D) to receive payment on any claim referred to in paragraph (B) or against the release of any property held as security for such claim as provided in paragraph (B) or (C), as the case may be, to the extent of the fair value of such property. For the purposes of paragraphs (B), (C) and (D), property substituted after the beginning of such 3-month period for property held as security at the time of such substitution shall, to the extent of the fair value of the property released, have the same status as the property released, and, to the extent that any claim referred to in any of such paragraphs is created in renewal of or in substitution for or for the purpose of repaying or refunding any pre-existing claim of the Trustee as such creditor, such claim shall have the same status as such pre-existing claim. If the Trustee shall be required to account, the funds and property held in such special account and the proceeds thereof shall be apportioned between the Trustee, the Securityholders and the holders of other indenture securities in such manner that the Trustee, the Securityholders and the holders of other indenture securities realize, as a result of payments from such special account and payments of dividends on claims filed against the Company in bankruptcy or receivership or in proceedings for reorganization pursuant to the Federal Bankruptcy Code or applicable State law, the same percentage of their respective claims, figured before crediting to the claim of the Trustee anything on account of the receipt by it from the Company of the funds and property in such special account and before crediting to the respective claims of the Trustee and the Securityholders and the holders of other indenture securities dividends on claims filed against the Company in bankruptcy or receivership or in proceedings for reorganization pursuant to the Federal Bankruptcy Code or applicable State law, but after crediting thereon receipts on account of the indebtedness represented by their respective claims from all sources other than from such dividends and from the funds and property so held in such special account. As used in this paragraph, with respect to any claim, the term "dividends" shall include any distribution with respect to such claim, in bankruptcy or receivership or proceedings for reorganization pursuant to the Federal Bankruptcy Code or applicable State law, whether such distribution is made in cash, securities, or other property, but shall not include any such distribution with respect to the secured portion, if any, of such claim. The court in which such bankruptcy, receivership or proceedings for reorganization is pending shall have jurisdiction (i) to apportion between the Trustee and the Securityholders and the holders of other indenture securities, in accordance with the -54- 64 provisions of this paragraph, the funds and property held in such special account and proceeds thereof, or (ii) in lieu of such apportionment, in whole or in part, to give to the provisions of this paragraph due consideration in determining the fairness of the distributions to be made to the Trustee and the Securityholders and the holders of other indenture securities with respect to their respective claims, in which event it shall not be necessary to liquidate or to appraise the value of any securities or other property held in such special account or as security for any such claim, or to make a specific allocation of such distributions as between the secured and unsecured portions of such claims, or otherwise to apply the provisions of this paragraph as a mathematical formula. Any Trustee which has resigned or been removed after the beginning of such 3-month period shall be subject to the provisions of this Subsection as though such resignation or removal had not occurred. If any Trustee has resigned or been removed prior to the beginning of such 3-month period, it shall be subject to the provisions of this Subsection if and only if the following conditions exist: (i) the receipt of property or reduction of claim, which would have given rise to the obligation to account, if such Trustee had continued as Trustee, occurred after the beginning of such 3-month period; and (ii) such receipt of property or reduction of claim occurred within 3 months after such resignation or removal. (b) There shall be excluded from the operation of Subsection (a) of this Section a creditor relationship arising from (1) the ownership or acquisition of securities issued under any indenture, or any security or securities having a maturity of one year or more at the time of acquisition by the Trustee; (2) advances authorized by a receivership or bankruptcy court of competent jurisdiction, or by this Indenture, for the purpose of preserving any property which shall at any time be subject to the lien of this Indenture or of discharging tax liens or other prior liens or encumbrances thereon, if notice of such advances and of the circumstances surrounding the making thereof is given to the Securityholders at the time and in the manner provided in this Indenture; -55- 65 (3) disbursements made in the ordinary course of business in the capacity of trustee under an indenture, transfer agent, registrar, custodian, paying agent, fiscal agent or depository, or other similar capacity; (4) an indebtedness created as a result of services rendered or premises rented; or an indebtedness created as a result of goods or securities sold in a cash transaction as defined in Subsection (c) of this Section; (5) the ownership of stock or of other securities of a corporation organized under the provisions of Section 25(a) of the Federal Reserve Act, as amended, which is directly or indirectly a creditor of the Company; or (6) the acquisition, ownership, acceptance or negotiation of any drafts, bills of exchange, acceptances or obligations which fall within the classification of self-liquidating paper as defined in Subsection (c) of this Section. (c) For the purposes of this Section only: (1) The term "default" means any failure to make payment in full of the principal of or interest on any of the Securities or upon the other indenture securities when and as such principal or interest becomes due and payable. (2) The term "other indenture securities" means securities upon which the Company is an obligor outstanding under any other indenture (i) under which the Trustee is also trustee, (ii) which contains provisions substantially similar to the provisions of this Section, and (iii) under which a default exists at the time of the apportionment of the funds and property held in such special account. (3) The term "cash transaction" means any transaction in which full payment for goods or securities sold is made within 7 days after delivery of the goods or securities in currency or in checks or other orders drawn upon banks or bankers and payable upon demand. (4) The term "self-liquidating paper" means any draft, bill of exchange, acceptance or obligation which is made, drawn, negotiated or incurred by the Company for the purpose of financing the purchase, processing, manufacturing, shipment, storage or sale of goods, wares or merchandise and which is secured by documents evidencing title to, possession of, or a lien upon, the goods, wares or merchandise or the receivables or proceeds arising from -56- 66 the sale of the goods, wares or merchandise previously constituting the security, provided the security is received by the Trustee simultaneously with the creation of the creditor relationship with the Company arising from the making, drawing, negotiating or incurring of the draft, bill of exchange, acceptance or obligation. (5) The term "Company" means any obligor upon the Securities. Section 614. Appointment of Authenticating Agent. At any time when any of the Securities remain Outstanding the Trustee, with the approval of the Company, may appoint an Authenticating Agent or Agents with respect to one or more series of Securities which shall be authorized to act on behalf of the Trustee to authenticate Securities of such series issued upon exchange, registration of transfer or partial redemption thereof or pursuant to Section 306, and Securities so authenticated shall be entitled to the benefits of this Indenture and shall be valid and obligatory for all purposes as if authenticated by the Trustee hereunder. Wherever reference is made in this Indenture to the authentication and delivery of Securities by the Trustee or the Trustee's certificate of authentication, such reference shall be deemed to include authentication and delivery on behalf of the Trustee by an Authenticating Agent and a certificate of authentication executed on behalf of the Trustee by an Authenticating Agent. Each Authenticating Agent shall be acceptable to the Company and shall at all times be a corporation organized and doing business under the laws of the United States of America, any State thereof or the District of Columbia, authorized under such laws to act as an Authenticating Agent, having a combined capital and surplus of not less than $50,000,000 and, if other than the Company itself, subject to supervision or examination by Federal or State authority. If such Authenticating Agent publishes reports of condition at least annually, pursuant to law or to the requirements of said supervising or examining authority, then for the purposes of this Section, the combined capital and surplus of such Authenticating Agent shall be deemed to be its combined capital and surplus as set forth in its most recent report of condition so published. If at any time an Authenticating Agent shall cease to be eligible in accordance with the provisions of this Section, such Authenticating Agent shall resign immediately in the manner and with the effect specified in this Section. Any corporation into which an Authenticating Agent may be merged or converted or with which it may be consolidated, or any corporation resulting from any merger, conversion or consolidation to which such Authenticating Agent shall be a party, or any corporation succeeding to the corporate agency or -57- 67 corporate trust business of an Authenticating Agent, shall continue to be an Authenticating Agent, provided such corporation shall be otherwise eligible under this Section, without the execution or filing of any paper or any further act on the part of the Trustee or the Authenticating Agent. An Authenticating Agent may resign at any time by giving written notice thereof to the Trustee and, if other than the Company, to the Company. The Trustee may at any time terminate the agency of an Authenticating Agent by giving written notice thereof to such Authenticating Agent and, if other than the Company, to the Company. Upon receiving such a notice of resignation or upon such a termination, or in case at any time such Authenticating Agent shall cease to be eligible in accordance with the provisions of this Section, the Trustee, with the approval of the Company, may appoint a successor Authenticating Agent which shall be acceptable to the Company and shall mail written notice of such appointment by first-class mail, postage prepaid, to all Holders of Securities of the series with respect to which such Authenticating Agent, will serve, as their names and addresses appear in the Security Register. Any successor Authenticating Agent upon acceptance of its appointment hereunder shall become vested with all the rights, powers and duties of its predecessor hereunder, with like effect as if originally named as an Authenticating Agent. No successor Authenticating Agent shall be appointed unless eligible under the provisions of this Section. The Company agrees to pay to each Authenticating Agent from time to time reasonable compensation for its services under this Section. If an appointment with respect to one or more series is made pursuant to this Section, the Securities of such series may have endorsed thereon, in addition to the Trustee's certificate of authentication, an alternate certificate of authentication in the following form: -58- 68 Dated:__________ This is one of the Securities referred to in the within-mentioned Indenture. The Bank of New York, as Trustee, By: --------------------------- As Authenticating Agent By: --------------------------- Authorized Signatory ARTICLE SEVEN Securityholders' Lists and Reports by Trustee and Company Section 701. Company To Furnish Trustee Names and Addresses of Securityholders. The Company will furnish or cause to be furnished to the Trustee (1) semi-annually, not later than December 1 and June 1 in each year in such form as the Trustee may reasonably require, a list of the names and addresses of the Holders of Securities of each series as of a date not more than 15 days prior to the date such list is furnished, and (2) at such other times as the Trustee may request in writing, within 30 days after the receipt by the Company of any such request, a list of similar form and content as of a date not more than 15 days prior to the date such list is furnished, excluding from any such list names and addresses received by the Trustee in its capacity as Security Registrar. Section 702. Preservation of Information; Communications to Securityholders. (a) The Trustee shall preserve, in as current a form as is reasonably practicable, the names and addresses of Holders of Securities contained in the most recent list furnished to the Trustee as provided in Section 701 and the names and addresses of Holders of Securities received by the Trustee in its capacity as Security Registrar. The Trustee may destroy any list furnished to it as provided in Section 701 upon receipt of a new list so furnished. -59- 69 (b) If 3 or more Holders of Securities of any series (hereinafter referred to as "applicants") apply in writing to the Trustee, and furnish to the Trustee reasonable proof that each such applicant has owned a Security of such series for a period of at least 6 months preceding the date of such application, and such application states that the applicants desire to communicate with other Holders of Securities of such series or with the Holders of all Securities with respect to their rights under this Indenture or under such Securities and is accompanied by a copy of the form of proxy or other communication which such applicants propose to transmit, then the Trustee shall, within 5 Business Days after the receipt of such application, at its election, either (i) afford such applicants access to the information preserved at the time by the Trustee in accordance with Section 702(a), or (ii) inform such applicants as to the approximate number of Holders of Securities of such series or all Securities, as the case may be, whose names and addresses appear in the information preserved at the time by the Trustee in accordance with Section 702 (a), and as to the approximate cost of mailing to such Securityholders the form of proxy or other communication, if any, specified in such application. If the Trustee shall elect not to afford such applicants access to such information, the Trustee shall, upon the written request of such applicants, mail to each Holder of a Security of such series or to all Securityholders, as the case may be, whose names and addresses appear in the information preserved at the time by the Trustee in accordance with Section 702 (a), a copy of the form of proxy or other communication which is specified in such request, with reasonable promptness after a tender to the Trustee of the material to be mailed and of payment, or provision for the payment, of the reasonable expenses of mailing, unless, within 5 days after such tender, the Trustee shall mail to such applicants and file with the Commission, together with a copy of the material to be mailed, a written statement to the effect that, in the opinion of the Trustee, such mailing would be contrary to the best interests of the Holders of Securities of such series or all Security-holders, as the case may be, or would be in violation of applicable law. Such written statement shall specify the basis of such opinion. If the Commission, after opportunity for a hearing upon the objections specified in the written statement so filed, shall enter an order refusing to sustain any of such objections or if, after the entry of an order sustaining one or -60- 70 more of such objections, the Commission shall find, after notice and opportunity for hearing, that all the objections so sustained have been met and shall enter an order so declaring, the Trustee shall mail copies of such material to all Securityholders of such series or all Securityholders, as the case may be, with reasonable promptness after the entry of such order and the renewal of such tender; otherwise the Trustee shall be relieved of any obligation or duty to such applicants respecting their application. (c) Every Holder of Securities, by receiving and holding the same, agrees with the Company and the Trustee that neither the Company nor the Trustee shall be held accountable by reason of the disclosure of any such information as to the names and addresses of the Holders of Securities in accordance with Section 702(b), regardless of the source from which such information was derived, and that the Trustee shall not be held accountable by reason of mailing any material pursuant to a request made under Section 702(b). Section 703. Reports by Trustee. (a) The term "reporting date" as used in this Section means May 15. Within 60 days after the reporting date in each year, beginning in 1995, the Trustee shall transmit by mail to all Securityholders, as their names and addresses appear in the Security Register, a brief report dated as of such reporting date with respect to any of the following events which may have occurred during the twelve months preceding the date of such report (but if no such event has occurred within such period, no report need be transmitted): (1) any change to its eligibility under Section 609 and its qualifications under Section 608; (2) the creation of or any material change to a relationship specified in Section 310(b)(1) through Section 310(b)(10) of the Trust Indenture Act; (3) the character and amount of any advances (and if the Trustee elects so to state, the circumstances surrounding the making thereof) made by the Trustee (as such) which remain unpaid on the date of such report, and for the reimbursement of which it claims or may claim a lien or charge, prior to that of Securities of any series, on any property or funds held or collected by it as Trustee, except that the Trustee shall not be required (but may elect) to report such advances if such advances so remaining unpaid aggregate not more than 1/2 of 1% of the principal amount of the Securities of such series Outstanding on the date of such report; -61- 71 (4) any change to the amount, interest rate and maturity date of all other indebtedness owing by the Company (or by any other obligor on the Securities) to the Trustee in its individual capacity, on the date of such report, with a brief description of any property held as collateral security therefor, except an indebtedness based upon a creditor relationship arising in any manner described in Section 613(b)(2), (3), (4), or (6); (5) any change to the property and funds, if any, physically in the possession of the Trustee as such on the date of such report; (6) any additional issue of Securities which the Trustee has not previously reported; and (7) any action taken by the Trustee in the performance of its duties hereunder which it has not previously reported and which in its opinion materially affects the Securities, except action in respect of a default, notice of which has been or is to be withheld by the Trustee in accordance with Section 602. (b) The Trustee shall transmit by mail to all Securityholders, as their names and addresses appear in the Security Register, a brief report with respect to the character and amount of any advances (and if the Trustee elects so to state, the circumstances surrounding the making thereof) made by the Trustee (as such) since the date of the last report transmitted pursuant to Subsection (a) of this Section (or if no such report has yet been so transmitted, since the date of execution of this instrument) for the reimbursement of which it claims or may claim a lien or charge, prior to that of the Securities of any series, on property or funds held or collected by it as Trustee, and which it has not previously reported pursuant to this Subsection, except that the Trustee shall not be required (but may elect) to report such advances if such advances remaining unpaid at any time aggregate 10% or less of the principal amount of the Securities outstanding of such series at such time, such report to be transmitted within 90 days after such time. (c) A copy of each such report shall, at the time of such transmission to securityholders, be furnished to the Company and be filed by the Trustee with each stock exchange upon which the Securities are listed, and also with the Commission. The Company will promptly notify the Trustee when the Securities are listed on any stock exchange. -62- 72 Section 704. Reports by Company. The Company will (1) file with the Trustee, within 15 days after the company is required to file the same with the Commission, copies of the annual reports and of the information, documents and other reports (or copies of such portions of any of the foregoing as the Commission may from time to time by rules and regulations prescribe) which the Company may be required to file with the Commission pursuant to Section 13 or Section 15(d) of the Securities Exchange Act of 1934; or, if the Company is not required to file information, documents or reports pursuant to either of said Sections, then it will file with the Trustee and the Commission, in accordance with rules and regulations prescribed from time to time by the Commission, such of the supplementary and periodic information, documents and reports which may be required pursuant to Section 13 of the Securities Exchange Act of 1934 in respect of a security listed and registered on a national securities exchange as may be prescribed from time to time in such rules and regulations; (2) file with the Trustee and the Commission, in accordance with rules and regulations prescribed from time to time by the Commission, such additional information, documents and reports with respect to compliance by the Company with the conditions and covenants of this Indenture as may be required from time to time by such rules and regulations; and (3) transmit by mail to all Securityholders, as their names and addresses appear in the Security Register, within 30 days after the filing thereof with the Trustee, such summaries of any information, documents and reports required to be filed by the Company pursuant to paragraphs (1) and (2) of this Section as may be required by rules and regulations prescribed from time to time by the Commission. Section 705. Delivery of Certain Information. If specified as contemplated by Section 301 with respect to a series of Securities, at any time when the Company is not subject to Section 13 or 15(d) of the Securities Exchange Act of 1934, upon the request of a holder of a Security, the Company will promptly furnish or cause to be furnished Rule 144A Information (as defined below) to such Holder, to a prospective purchaser who is a "qualified institutional buyer", within the meaning of Rule 144A under the Securities Act of 1933, of such Security designated by such Holder in order to permit compliance by such Holder with Rule 144A in connection with the resale of such -63- 73 Security by such Holder; provided, however, that unless otherwise specified as contemplated by Section 301, the Company shall not be required to furnish such information in connection with any request made on or after the date which is three years from the later of (i) the date such Security (or any predecessor Security) was acquired from the Company or (ii) the date such Security (or any predecessor Security) was last acquired from an "affiliate" of the Company within the meaning of Rule 144 under the Securities Act of 1933. "Rule 144A Information" shall be such information as is specified pursuant to Rule 144A(d)(4) under the Securities Act of 1933 as in effect on the date hereof. Section 706. Calculation of Original Issue Discount. In the event that there are Outstanding Original Issue Discount Securities during any calendar year, the Company shall file with the Trustee promptly at the end of such calendar year a written notice specifying the amount of original issue discount (including daily rates and accrual periods) accrued on such Securities as of the end of such year. ARTICLE EIGHT Consolidation, Merger, Conveyance or Transfer Section 801. When Company May Merge or Transfer Assets. The Company, in a single transaction or through a series of related transactions, shall not consolidate with or merge with or into any other Person or transfer (by lease, assignment, sale or otherwise) all or substantially all of its properties and assets to another Person or group of affiliated Persons, unless: (a) either (1) the Company shall be the continuing corporation or (2) the Person (if other than the Company) formed by such consolidation or into which the Company is merged or to which all or substantially all of the properties and assets of the Company are transferred (i) shall be a corporation, partnership or trust organized and validly existing under the laws of the United States or any State thereof or the District of Columbia and (ii) shall expressly assume, by an indenture supplemental hereto, executed and delivered to the Trustee, in form satisfactory to the Trustee, all of the obligations of the Company under the Securities and this Indenture and the performance of every covenant of this Indenture on the part of the Company to be performed or observed; -64- 74 (b) immediately after giving effect to such transaction, and the assumption contemplated by clause (a) above, no Event of Default, and no event which, after notice or lapse of time, or both, would become an Event of Default, shall have occurred and be continuing; and (c) the Company shall have delivered to the Trustee an Officers' Certificate and an Opinion of Counsel, each stating that such consolidation, merger or transfer and, if a supplemental indenture is required in connection with such transaction, such supplemental indenture, comply with this Article 8 and that all conditions precedent herein provided for relating to such transaction have been satisfied. For purposes of the foregoing, the transfer (by lease, assignment, sale or otherwise) of the properties and assets of one or more Subsidiaries (other than to the Company or another wholly owned Subsidiary), which, if such assets were owned by the Company, would constitute all or substantially all of the properties and assets of the Company, shall be deemed to be the transfer of all or substantially all of the properties and assets of the Company. The successor Person formed by such consolidation or into which the Company is merged or the successor Person to which such conveyance, transfer or lease is made shall succeed to, and be substituted for, and may exercise every right and power of, the Company under this Indenture with the same effect as if such successor had been named as the Company herein, and thereafter, except in the case of a lease of its properties and assets substantially as an entirety, the Company shall be discharged and released from all obligations and covenants under this Indenture and the Securities. The Trustee shall enter into a supplemental indenture to evidence the succession and substitution of such successor Person and such discharge and release of the Company. ARTICLE NINE Supplemental Indentures Section 901. Supplemental Indentures Without Consent of Securityholders. Without the consent of the Holders of any Securities, the Company, when authorized by a Board Resolution, and the Trustee, at any time and from time to time, may enter into one or more indentures supplemental hereto, in form satisfactory to the Trustee, for any of the following purposes: -65- 75 (1) to evidence the succession of another corporation to the Company, and the assumption by any such successor of the covenants of the Company herein and in the Securities contained; or (2) to add to the covenants of the Company, or to surrender any right or power herein conferred upon the Company, for the benefit of the Holders of the Securities of any or all series (and if such covenants or the surrender of such right or power are to be for the benefit of less than all series of Securities, stating that such covenants are expressly being included or such surrenders are expressly being made solely for the benefit of one or more specified series); or (3) to cure any ambiguity, to correct or supplement any provision herein which may be inconsistent with any other provision herein, or to make any other provisions with respect to matters or questions arising under this Indenture; or (4) to add to this Indenture such provisions as may be expressly permitted by the TIA, excluding, however, the provisions referred to in Section 316(a)(2) of the TIA as in effect at the date as of which this instrument was executed or any corresponding provision in any similar Federal statute hereafter enacted; or (5) to establish any form of Security, as provided in Article Two, and to provide for the issuance of any series of securities as provided in Article Three and to set forth the terms thereof, and/or to add to the rights of the Holders of the Securities of any series; or (6) to evidence and provide for the acceptance of appointment by another corporation as a successor Trustee hereunder with respect to one or more series of Securities and to add to or change any of the provisions of this Indenture as shall be necessary to provide for or facilitate the administration of the trusts hereunder by more than one Trustee, pursuant to Section 611; or (7) to add any additional Events of Default in respect of the Securities of any or all series (and if such additional Events of Default are to be in respect of less than all series of Securities, stating that such Events of Default are expressly being included solely for the benefit of one or more specified series); or -66- 76 (8) to provide for the issuance of Securities in coupon as well as fully registered form. No supplemental indenture for the purposes identified in Clauses (2), (3), (5) or (7) above may be entered into if to do so would adversely affect the interest of the Holders of Securities of any series. Section 902. Supplemental Indentures with Consent of Securityholders. With the consent of the Holders of not less than a majority in principal amount of the Outstanding Securities of each series affected by such supplemental indenture or indentures, by Act of said Holders delivered to the Company and the Trustee, the Company, when authorized by a Board Resolution, and the Trustee may enter into an indenture or indentures supplemental hereto for the purpose of adding any provisions to or changing in any manner or eliminating any of the provisions of this Indenture or of modifying in any manner the rights of the Holders of the Securities of each such series under this Indenture; provided, however, that no such supplemental indenture shall, without the consent of the Holder of each Outstanding Security affected thereby, (1) change the Maturity of the principal of, or the Stated Maturity of any premium on, or any installment of interest on, any Security, or reduce the principal amount thereof or the interest or any premium thereon, or change the method of computing the amount of principal thereof or interest thereon on any date or change any Place of Payment where any Security or any premium or interest thereon is payable, or impair the right to institute suit for the enforcement of any such payment on or after the Maturity or the Stated Maturity, as the case may be, thereof (or, in the case of redemption or repayment, on or after the Redemption Date or the Repayment Date, as the case may be); or (2) reduce the percentage in principal amount of the Outstanding Securities of any series, the consent of whose Holders is required for any such supplemental indenture, or the consent of whose Holders is required for any waiver of compliance with certain provisions of this Indenture or certain defaults hereunder and their consequences, provided for in this Indenture; or (3) modify any of the provisions of this Section, Section 513 or Section 1008, except to increase any such percentage or to provide that certain other provisions of this Indenture cannot be modified or waived without the -67- 77 consent of the Holder of each Outstanding Security affected thereby. A supplemental indenture which changes or eliminates any covenant or other provision of this Indenture which has expressly been included solely for the benefit of one or more particular series of Securities, or which modifies the rights of the Holders of Securities of such series with respect to such covenant or other provision, shall be deemed not to affect the rights under this Indenture of the Holders of Securities of any other series. It shall not be necessary for any Act of Securityholders under this Section to approve the particular form of any proposed supplemental indenture, but it shall be sufficient if such Act shall approve the substance thereof. The Company may, but shall not be obligated to, fix a record date for the purpose of determining the Persons entitled to consent to any indenture supplemental hereto. If a record date is fixed, the Holders on such record date, or their duly designated proxies, and only such Persons, shall be entitled to consent to such supplemental indenture, whether or not such Holders remain Holders after such record date; provided, that unless such consent shall have become effective by virtue of the requisite percentage having been obtained prior to the date which is 90 days after such record date, any such consent previously given shall automatically and without further action by any Holder be cancelled and of no further effect. Section 903. Execution of Supplemental Indentures. In executing, or accepting the additional trusts created by, any supplemental indenture permitted by this Article or the modifications thereby of the trusts created by this Indenture, the Trustee shall be entitled to receive, and (subject to Section 601) shall be fully protected in relying upon, an Opinion of Counsel stating that the execution of such supplemental indenture is authorized or permitted by this Indenture. The Trustee may, but shall not be obligated to, enter into any such supplemental indenture which affects the Trustee's own rights, duties or immunities under this Indenture or otherwise. Section 904. Effect of Supplemental Indentures. Upon the execution of any supplemental indenture under this Article, this Indenture shall be modified in accordance therewith, and such supplemental indenture shall form a part of this Indenture for all purposes; and every Holder of Securities theretofore or thereafter authenticated and delivered hereunder shall be bound thereby to the extent provided therein. -68- 78 Section 905. Conformity with Trust Indenture Act. Every supplemental indenture executed pursuant to this Article shall conform to the requirements of TIA as then in effect. Section 906. Reference in Securities to Supplemental Indentures. Securities authenticated and delivered after the execution of any supplemental indenture pursuant to this Artide may, and shall if required by the Trustee, bear a notation in form approved by the Trustee as to any matter provided for in such supplemental indenture. If the Company shall so determine, new Securities so modified as to conform, in the opinion of the Trustee and the Board of Directors, to any such supplemental indenture may be prepared and executed by the Company and authenticated and delivered by the Trustee in exchange for Outstanding Securities. ARTICLE TEN Covenants Section 1001. Payment of Principal, Premium and Interest. With respect to each series of Securities, the Company will duly and punctually pay the principal of (and premium, if any) and interest on such Securities in accordance with their terms and this Indenture, and will duly comply with all the other terms, agreements and conditions contained in, or made in the Indenture for the benefit of, the Securities of such series. Section 1002. Maintenance of Office or Agency. The Company will maintain an office or agency in each Place of Payment where Securities may be presented or surrendered for payment, where Securities may be surrendered for transfer or exchange and where notices and demands to or upon the Company in respect of the Securities and this Indenture may be served. The Company will give prompt written notice to the Trustee of the location, and of any change in the location, of such office or agency. If at any time the Company shall fail to maintain such office or agency or shall fail to furnish the Trustee with the address thereof, such presentations, surrenders, notices and demands may be made or served at the principal Corporate Trust Office of the Trustee, Attention: Corporate Trust Trustee Administration, and the Company hereby appoints the Trustee its agent to receive all such presentations, surrenders, notices and demands. Section 1003. Money for Security Payments to be Held in Trust. If the Company shall at any time act as its own Paying Agent for any series of Securities, it will, on or before -69- 79 each due date of the principal of (and premium, if any) or interest on, any of the Securities of such series, segregate and hold in trust for the benefit of the Persons entitled thereto a sum sufficient to pay the principal (and premium, if any) or interest so becoming due until such sums shall be paid to such Persons or otherwise disposed of as herein provided, and will promptly notify the Trustee of its action or failure to act. Whenever the Company shall have one or more Paying Agents for any series of securities, it will, prior to each due date of the principal of (and premium, if any) or interest on, any Securities of such series, deposit with a Paying Agent a sum sufficient to pay the principal (and premium, if any) or interest so becoming due, such sum to be held in trust for the benefit of the Persons entitled to such principal (and premium, if any) or interest, and (unless such Paying Agent is the Trustee) the Company will promptly notify the Trustee of its action or failure so to act. The Company will cause each Paying Agent other than the Trustee for any series of Securities to execute and deliver to the Trustee an instrument in which such Paying Agent shall agree with the Trustee, subject to the provisions of this Section, that such Paying Agent will (1) hold all sums held by it for the payment of principal of (and premium, if any) or interest on Securities of such series in trust for the benefit of the Persons entitled thereto until such sums shall be paid to such Persons or otherwise disposed of as herein provided; (2) give the Trustee notice of any default by the Company (or any other obligor upon the Securities of such series) in the making of any such payment of principal (and premium, if any) or interest on the Securities of such series; and (3) at any time during the continuance of any such default, upon the written request of the Trustee, forthwith pay to the Trustee all sums so held in trust by such Paying Agent. The Company may at any time, for the purpose of obtaining the satisfaction and discharge of this Indenture with respect to any series of Securities or for any other purpose, pay, or by Company Order direct any Paying Agent to pay, to the Trustee all sums held in trust by the Company or such Paying Agent in respect of each and every series of Securities as to which it seeks to discharge this Indenture or, if for any other purpose, all sums so held in trust by the Company in respect of -70- 80 all Securities, such sums to be held by the Trustee upon the same trusts as those upon which such sums were held by the Company or such Paying Agent; and, upon such payment by any Paying Agent to the Trustee, such Paying Agent shall be released from all further liability with respect to such money. Any money deposited with the Trustee or any Paying Agent, or then held by the Company, in trust for the payment of the principal of (and premium, if any) or interest on any Security of any series and remaining unclaimed for two years after such principal (and premium, if any) or interest has become due and payable shall be paid to the Company on Company Request, or (if then held by the Company) shall be discharged from such trust; and the Holder of such Security shall thereafter, as an unsecured general creditor, look only to the Company for payment thereof, and all liability of the Trustee or such Paying Agent with respect to such trust money, and all liability of the Company as trustee thereof, shall thereupon cease. The Trustee or such Paying Agent, before being required to make any such repayment, may at the expense of the Company mail to the Holders of the Securities as to which the money to be repaid was held in trust, as their names and addresses appear in the Security Register, a notice that such moneys remain unclaimed and that, after a date specified in the notice, which shall not be less than 30 days from the date on which the notice was first mailed to the Holders of the Securities as to which the money to be repaid was held in trust, any unclaimed balance of such moneys then remaining will be paid to the Company free of the trust formerly impressed upon it. Section 1004. Statement as to Compliance. The Company will deliver to the Trustee, within 120 days after the end of each fiscal year, a written statement signed by the principal executive officer, principal financial officer or principal accounting officer of the Company stating that (1) a review of the activities of the Company during such year and of performance under this Indenture and under the terms of the Securities has been made under his supervision; and (2) to the best of his knowledge, based on such review, the Company has fulfilled all its obligations under this Indenture and has complied with all conditions and covenants on its part contained in this Indenture through such year, or, if there has been a default in the fulfillment of any such obligation, covenant or condition, specifying each such default known to him and the nature and status thereof. -71- 81 For the purpose of this Section 1004, default and compliance shall be determined without regard to any grace period or requirement of notice provided pursuant to the terms of this Indenture. Section 1005. Legal Existence. Subject to Article Eight the Company will do or cause to be done all things necessary to preserve and keep in full force and effect its legal existence. Section 1006. Limitation on Liens. The Company shall not create, assume or suffer to exist, or permit any Restricted Subsidiary to create, assume or suffer to exist, any Lien upon assets or property of the Company or any Restricted Subsidiary to secure any Debt of any Person, without making effective provision whereby the Securities then Outstanding and having the benefit of this Section shall be secured by the Lien equally and ratably with such Debt for so long as such Debt shall be so secured, except that the foregoing shall not prevent the Company or any Restricted Subsidiary from creating, assuming or suffering to exist Liens of the following character: (1) with respect to any series of Securities, any Lien existing on the date of issuance of the series; (2) any Lien existing on assets or property owned or leased by a corporation at the time it becomes a Restricted Subsidiary; (3) any Lien existing on assets or property at the time of the acquisition thereof by the Company or a Restricted Subsidiary; (4) any Lien to secure any Debt incurred prior to, at the time of, or within 12 months after the acquisition of any assets or property for the purpose of financing all or any part of the purchase price thereof and any Lien to the extent that it secures Debt which is in excess of such purchase price and for the payment of which recourse may be had only against such assets or property; (5) any Lien to secure any Debt incurred prior to, at the time of, or within 12 months after the completion of the construction and commencement of commercial operation, alteration, repair or improvement of any assets or property for the purpose of financing all or any part of the cost thereof and any Lien to the extent that it secures Debt which is in excess of such cost and for the payment of which recourse may be had only against such assets or property; -72- 82 (6) any Lien securing Debt of a Subsidiary owing to the Company or to another Subsidiary; (7) any Lien in favor of the United States of America or any State thereof or any other country, or any agency, instrumentality or political subdivision of any of the foregoing, to secure partial, progress, advance or other payments or performance pursuant to the provisions of any contract or statute, or any Liens securing industrial development, pollution control, or similar revenue bonds; (8) any extension, renewal or replacement (or successive extensions, renewals or replacements) in whole or in part of any Lien referred to in clauses (1) through (7) above, so long as the principal amount of the Debt secured thereby does not, exceed the principal amount of Debt so secured at the time of the extension, renewal or replacement (except that, where an additional principal amount of Debt is incurred to provide funds for the completion of a specific project, the additional principal amount, and any related financing costs, may be secured by the Lien as well) and the Lien is limited to the same property subject to the Lien so extended, renewed or replaced (plus improvements on the property); and (9) any Lien not permitted by clauses (1) through (8) above securing Debt which, together with (i) the aggregate outstanding principal amount of all other Debt which would otherwise be subject to the foregoing restrictions, (ii) the aggregate Value of existing Sale and Leaseback Transactions which would be subject to the restrictions of Section 1007 but for this clause (9) and (iii) the aggregate outstanding principal amount of Funded Debt of Restricted Subsidiaries which would not be permitted under Section 1008 but for the second sentence of Section 1008, does not at any time exceed 15% of Consolidated Net Assets. Section 1007. Limitation on Sale and Leasebacks. The Company shall not enter into any Sale and Leaseback Transaction, nor permit any Restricted Subsidiary so to do, unless either: (1) the Company or such Restricted Subsidiary would be entitled to incur Debt, in a principal amount at least equal to the Value of such Sale and Leaseback Transaction, which is secured by Liens on the property to be leased (without equally and ratably securing the Outstanding Securities) because such Liens would be of such character that no violation of any of the provisions of Section 1006 would result; or -73- 83 (2) the Company during the six months immediately following the effective date of such Sale and Leaseback Transaction causes to be applied to the voluntary retirement of Funded Debt (whether by redemption, defeasance, repurchase, or otherwise) an amount equal to the Value of such Sale and Leaseback Transaction. Section 1008. Limitation on Funded Debt of Restricted Subsidiaries. The Company will not permit any Restricted Subsidiary to create, incur, issue, assume or guarantee any Funded Debt, unless: (1) with respect to any series of Securities, such Funded Debt existed on the date of the original issuance of such series; or (2) such Funded Debt is owed to the Company or any Subsidiary; or (3) such Funded Debt existed at the time the corporation that issued such Funded Debt was merged with or into or consolidated with a Restricted Subsidiary, or at the time of a sale, lease or other disposition of the properties of such corporation as an entirety to such Restricted Subsidiary, or such Funded Debt was created thereafter (i) otherwise than in connection with the borrowing of money arranged thereafter and (ii) pursuant to contractual commitments entered into prior to and not in contemplation of any such merger or consolidation or any such sale, lease or other disposition; or (4) such Funded Debt is guaranteed by the Company; or (5) such Funded Debt is guaranteed by a governmental agency; or (6) such Funded Debt is issued, assumed or guaranteed in connection with, or with a view to, compliance by such Restricted Subsidiary with the requirements of any program adopted by any federal, state or local governmental authority and applicable to such Restricted Subsidiary and providing financial or tax benefits to such Restricted Subsidiary which are not available directly to the Company; or (7) such Funded Debt is issued, assumed or guaranteed prior to, at the time of, or within 12 months after the acquisition of any assets or property for the purpose of financing all or any part of the purchase price thereof or, to the extent that the amount of such Funded Debt is in excess of -74- 84 such purchase price, recourse may be had only against such assets or property for the payment of such Funded Debt; (8) such Funded Debt is issued, assumed or guaranteed prior to, at the time of, or within 12 months after the completion of the construction and commencement of commercial operation, alteration, repair or improvement of any assets or property for the purpose of financing all or any part of the cost thereof or, to the extent that the amount of such Funded Debt is in excess of such cost, recourse may be had only against such assets or property for the payment of such Funded Debt; (9) such Funded Debt is nonrecourse; or (10) such Funded Debt is incurred for the purpose of extending, renewing, substituting, replacing or refunding Funded Debt permitted by the foregoing. Notwithstanding the foregoing, any Restricted Subsidiary may create, incur, issue, assume or guarantee Funded Debt which would otherwise be subject to the foregoing restriction in an aggregate principal amount which, together with (i) the aggregate outstanding principal amount of all other Funded Debt of the Company's Restricted Subsidiaries which would otherwise be subject to the foregoing restriction (not including Funded Debt permitted to be incurred pursuant to clauses (1) through (10) above) but for this sentence, (ii) the aggregate outstanding principal amount of all Debt secured by Liens which would not be permitted pursuant to Section 1006 but for clause (9) thereof and (iii) the aggregate Value of existing Sale and Leaseback Transactions which would not be permitted by Section 1007 but for clause (9) of Section 1006, does not at the time such Funded Debt is incurred exceed an amount equal to 15% of Consolidated Net Assets. Section 1009. Repurchase of Securities at Option of the Holder. (a) If (i) the Company incurs any New Debt and, as of the last day of the fiscal quarter in which such New Debt is incurred, the Ratio of Debt to Consolidated Capitalization is greater than .65 and the Cash Flow Coverage Ratio is less than 1.75 and (ii) as of the last day of the second full fiscal quarter commencing after the date of such incurrence (the "Leverage Measurement Date"), the Ratio of Debt to Consolidated Capitalization is greater than .65 and the Cash Flow Coverage Ratio is less than 1.75, a Special Repurchase Event shall be deemed to have occurred on such Leverage Measurement Date. (b) If (i) the Consolidated Tangible Net Worth of the Company is less than the Minimum Tangible Net Worth as of -75- 85 the end of any fiscal year and (ii) as of the last day of the second succeeding fiscal quarter (the "Net Worth Measurement Date"), the Consolidated Tangible Net Worth is less than the Minimum Tangible Net Worth, a Special Repurchase Event shall be deemed to have occurred on such Net Worth Measurement Date. (c) (i) Subject to paragraph (e) of this Section 1009, in the event that a Special Repurchase Event is deemed to have occurred, each Holder of the Securities then outstanding shall have the right to require the Company to repurchase all or any part of such Holder's Securities on the date (the "Repurchase Date") that is 35 Business Days after the date such Special Purchase Event is deemed to have occurred, at a price equal to 100% of the principal amount thereof plus accrued interest to, but excluding, the date of repurchase (the "Repurchase Price"). (ii) Within 15 Business Days after the occurrence of a Special Repurchase Event, the Company shall mail a written notice of such occurrence by first-class mail to the Trustee, the Paying Agent and to each Holder (and to beneficial owners as required by applicable law) and shall cause a copy of such notice to be published in The Wall Street Journal or another daily newspaper of national circulation. The notice shall state: (1) the date of such Special Repurchase Event and, briefly, the events causing such Special Repurchase Event; (2) the date by which the notice required by this paragraph (ii) must be given; (3) the Repurchase Date; (4) the Repurchase Price; (5) the name and address of the Paying Agent; (6) the procedures the Holder must follow to exercise rights under this Section 1009; and (7) the procedures for withdrawing a Repurchase Election Notice (as defined below). (iii) A Holder may exercise its rights specified in Section 1009(c)(i) upon delivery of a written notice of repurchase (a "Repurchase Election Notice") to the Paying Agent at any time prior to the close of business on the Repurchase Date, stating: -76- 86 (1) the certificate number of the Security which the Holder will deliver to be repurchased; (2) the portion of the principal amount of the Security which the Holder will deliver to be repurchased, which portion must be $1,000 or an integral multiple thereof; and (3) that such Security shall be repurchased pursuant to the terms and conditions specified in this Section 1009. The delivery of such Security to the Paying Agent prior to, on or after the Repurchase Date (together with all necessary endorsements) at the offices of the Paying Agent shall be a condition to the receipt by the Holder of the Repurchase Price therefor; provided, however, that such Repurchase Price shall be so paid pursuant to this Section 1009 only if the Security so delivered to the Paying Agent shall conform in all respects to the description thereof set forth in the related Repurchase Election Notice. The Company shall repurchase from the Holder thereof, pursuant to this Section 1009, a portion of a Security if the principal amount of such portion is $1,000 or an integral multiple of $1,000. Provisions of this Indenture that apply to the repurchase of all of a Security also apply to the repurchase of such portion of such Security. Any repurchase by the Company contemplated pursuant to the provisions of this Section 1009 shall be consummated by the delivery of the consideration to be received by the Holder promptly following the later of the Repurchase Date and the time of delivery of the Security. Notwithstanding anything herein to the contrary, any Holder delivering to the Paying Agent the Repurchase Election Notice contemplated by this Section 1009(c)(iii) shall have the right to withdraw such Repurchase Election Notice at any time prior to the close of business on the Repurchase Date by delivery of a written notice of withdrawal to the Paying Agent in accordance with paragraph (c)(iv). (iv) A Repurchase Election Notice may be withdrawn by means of a written notice of withdrawal delivered to the office of the Paying Agent at any time prior to the close of business on the Repurchase Date to which it relates specifying: -77- 87 (1) the certificate number of the Security in respect of which such notice of withdrawal is being submitted, (2) the principal amount of the Security with respect to which such notice of withdrawal is being submitted, and (3) the principal amount, if any, of such Security which remains subject to the original Repurchase Election Notice and which has been or will be delivered for repurchase by the Company. (v) On or before the Business Day following a Repurchase Date, the Company shall deposit with the Trustee or with the Paying Agent (or, if the Company or a Subsidiary or an Affiliate of either of them is acting as the Paying Agent, shall segregate and hold in trust as provided in Section 1003) an amount of money or, if permitted by the terms hereof, securities sufficient to pay the aggregate Repurchase Price of all the Securities or portions thereof which are to be repurchased as of such Repurchase Date. (vi) Any Security which is to be repurchased only in part shall be surrendered at the office of the Paying Agent (with, if the Company or the Trustee so requires, due endorsement by, or a written instrument of transfer in form satisfactory to the Company and the Trustee duly executed by, the Holder thereof or such Holder's attorney duly authorized in writing) and the Company shall execute and the Trustee shall authenticate and deliver to the Holder of such Security, without service charge, a new Security or Securities, of any authorized denomination as requested by such Holder in aggregate principal amount equal to, and in exchange for, the portion of the principal amount of the Security so surrendered which is not repurchased. (vii) In connection with any offer to repurchase or repurchase of Securities under this Section 1009, the Company shall comply with all applicable federal and state securities laws so as to permit the rights and obligations under this Section 1009 to be exercised in the time and in the manner specified in this Section 1009. (viii) The Trustee and the Paying Agent shall return to the Company any cash, together with interest on such cash, if any, held by them for the payment of a Repurchase Price in respect of cash that remains unclaimed as provided in Section 1003. -78- 88 (ix) Upon receipt by the Paying Agent of the Repurchase Election Notice specified in Section 1009 (c)(ii), the Holder of the Security in respect of which such Repurchase Election Notice was given shall (unless such Repurchase Election Notice is withdrawn as specified in paragraph (c) (iv)) thereafter be entitled to receive solely the Repurchase Price with respect to such Security. Such Repurchase Price shall be paid to such Holder promptly following the later of (x) the Repurchase Date with respect to such Security (provided the conditions in Section 1009(c)(iii) have been satisfied) and (y) the time of delivery of such Security to the Paying Agent by the Holder thereof in the manner required by Section 1009 (c) (iii). (d) For purposes of this Section 1009, the following terms shall have the meanings set forth below: (i) "Acquired Debt" means Debt of a Person (1) assumed in connection with an Asset Acquisition from such Person or (2) existing at the time such Person becomes a Subsidiary of any other Person (other than any Debt incurred in connection with, or in contemplation of, such Asset Acquisition or such Person becoming such a Subsidiary). (ii) "Asset Acquisition" means (1) an investment by the Company or any Subsidiary of the Company in any other Person pursuant to which such Person shall become a Subsidiary of the Company or any Subsidiary of the Company or a merger of such Person with the Company or any Subsidiary of the Company in which the surviving corporation is the Company or a Subsidiary of the Company or (2) the acquisition by the Company or any Subsidiary of the Company of the assets of any Person which constitute all or substantially all of the assets of such Person or any division or line of business of such Person. (iii) "Asset Sale" means any direct or indirect sale, issuance, conveyance, transfer, lease or other disposition to any Person other than the Company or a wholly-owned Subsidiary of the Company, in one transaction or a series of related transactions, of (1) any capital stock of any Subsidiary of the Company; (2) all or substantially all of the properties and assets of any division or line of business of the Company or any Subsidiary of the Company; or (3) any other properties or assets of the Company or any Subsidiary of the Company other than in the ordinary course of business. -79- 89 (iv) "Cash Flow Coverage Ratio" means, with respect to any Person, the ratio of the aggregate amount of Consolidated Cash Flow Available for Fixed Charges of such Person for the four full fiscal quarters immediately preceding the date of measurement (the "Measurement Date") (such four full fiscal quarter period being referred to herein as the "Four Quarter Period") to the aggregate amount of Consolidated Interest Expense of such Person for the Four Quarter Period. For purposes of this definition, if the Measurement Date occurs prior to the first anniversary of the Issue Date, "Consolidated Cash Flow Available for Fixed Charges" and "Consolidated Interest Expense" shall be calculated, in the case of the Company, after giving effect on a pro forma basis as if the distribution of the Company's common stock as a dividend to the stockholders of Litton Industries, Inc. on March 17, 1994 and the concurrent financial transactions to which the Company was a party on the first day of the Four Quarter Period. In addition to and without limitation of the foregoing, for purposes of this definition, "Consolidated Cash Flow Available for Fixed Charges" and "Consolidated Interest Expense" shall be calculated after giving effect on a pro forma basis for the period of such calculation to (1) the incurrence of any Debt of such Person or any of its Subsidiaries giving rise to the need to make such calculation and any incurrence of other Debt at any time subsequent to the last day of the Four Quarter Period and on or prior to the Measurement Date, as if such incurrence occurred on the first day of the Four Quarter Period and (2) any Asset Sales or Asset Acquisitions (including, without limitation, any Asset Acquisition giving rise to the need to make such calculation as a result of such Person or one of its Subsidiaries (including any Person who becomes a Subsidiary as a result of the Asset Acquisition) incurring, assuming or otherwise being liable for Acquired Debt) occurring during the Four Quarter Period or at any time subsequent to the last day of the Four Quarter Period and on or prior to the Measurement Date, as if such Asset Sale or Asset Acquisition occurred on the first day of the Four Quarter Period. If such Person or any of its Subsidiaries directly or indirectly guarantees Debt of a third Person, the preceding sentence shall give effect to the incurrence of such guaranteed Debt as if such Person or any Subsidiary of such Person had directly incurred or otherwise assumed such guaranteed Debt. Furthermore, in calculating "Consolidated Interest Expense" for purposes of determining the denominator (but not the numerator) of this "Cash Flow Coverage Ratio," (1) interest on Debt determined on a fluctuating basis as of the Measurement Date and which will continue to be so determined thereafter -80- 90 shall be deemed to accrue at a fixed rate per annum equal to the rate of interest on such Debt in effect on the Measurement Date; (2) if interest on any Debt actually incurred on the Measurement Date may optionally be determined at an interest rate based upon a factor of a prime or similar rate, a eurocurrency interbank offered rate, or other rates, then the interest rate in effect on the Measurement Date will be deemed to have been in effect during the Four Quarter Period; and (3) notwithstanding clause (1) above, interest on Debt determined on a fluctuating basis, to the extent such interest is covered by agreements relating to Interest Rate Protection Obligations, shall be deemed to accrue at the rate per annum resulting after giving effect to the operation of such agreements. (v) "Consolidated Capitalization" means without duplication, the sum of Total Debt of the Company and its subsidiaries at the time outstanding, plus shareholders' equity and minority interests, all as shown on a consolidated balance sheet of the Company and its subsidiaries prepared in accordance with GAAP consistently applied. (vi) "Consolidated Cash Flow Available for Fixed Charges" means, with respect to any Person for any period, the sum of, without duplication, the amounts for such period, taken as a single accounting period, of (a) Consolidated Net Income, (b) Consolidated Interest Expense and (c) Consolidated Income Tax Expense; provided, however, that if, during such period, such Person or any of its Subsidiaries shall have made any Asset Sales or Asset Acquisitions, Consolidated Cash Flow Available for Fixed Charges for such Person and its Subsidiaries for such period shall be reduced (in the case of an Asset Sale) or increased (in the case of an Asset Acquisition) by an amount equal to the Consolidated Cash Flow Available for Fixed Charges directly attributable to the assets which are the subject of such Asset Sales or Asset Acquisitions during such period. (vii) "Consolidated Income Tax Expense" means, with respect to any Person for any period, the provision for federal, state, local and foreign income taxes of such Person and its Subsidiaries for such period as determined on a consolidated basis in accordance with GAAP consistently applied. (viii) "Consolidated Interest Expense" means, with respect to any Person for any period, without duplication, the sum of (i) the interest expense of such Person and its -81- 91 Subsidiaries for such period as determined on a consolidated basis in accordance with GAAP consistently applied, including, without limitation, any amortization of debt discount, plus, without duplication, (ii) all capitalized interest of the Company and its Subsidiaries for such period; provided, however, that if, during such period, such Person or any of its Subsidiaries shall have made any Asset Sales or Asset Acquisitions, Consolidated Interest Expense for such Person and its Subsidiaries for such period shall be reduced (in the case of an Asset Sale) or increased (in the case of an Asset Acquisition) by an amount equal to the Consolidated Interest Expense directly attributable to the assets which are the subject of such Asset Sales or Asset Acquisitions during such period. (ix) "Consolidated Net Income" means, with respect to any Person for any period, the consolidated net income (or loss) of such Person and its Subsidiaries for such period as determined in accordance with GAAP, adjusted, to the extent included in calculating such net income, by excluding, without duplication, (i) all extraordinary gains or losses (net of fees and expenses relating to the transaction giving rise thereto), (ii) the portion of net income (or loss) of such Person and its Subsidiaries allocable to minority interests in unconsolidated Persons to the extent that cash dividends or distributions have not actually been received by such Person or one of its Subsidiaries, (iii) net income (or loss) of any Person combined with such Person or one of its Subsidiaries on a "pooling of interests" basis attributable to any period prior to the date of combination, (iv) any gain or loss, net of taxes, realized upon the termination of any employee pension benefit plan, (v) gains or losses in respect of any Asset Sales by such Person or one of its Subsidiaries (net of fees and expenses relating to the transaction giving rise thereto) and (vi) the net income of any Subsidiary of such Person to the extent that the declaration of dividends or similar distributions by that Subsidiary of that income is not at the time permitted, directly or indirectly, by operation of the terms of its charter or any agreement, instrument, judgment, decree, order, statute, rule or governmental regulations applicable to that Subsidiary or its stockholders. (x) "Consolidated Tangible Net Worth" means, with respect to any Person at any date, the consolidated stockholders' equity of such Person, less the amount of such stockholders' equity attributable to redeemable capital stock of such Person and its Subsidiaries, and less -82- 92 amounts representing licenses, patents, patent applications, copyrights, trademarks, trade names, good will, experimental or organizational expense and other like intangibles, treasury stock and unamortized debt discount and expense, as determined in accordance with GAAP consistently applied. (xi) "Interest Rate Protection Obligations" means the obligations of any Person pursuant to any arrangement with any other Person whereby, directly or indirectly, such Person is entitled to receive from time to time periodic payments calculated by applying either a floating or a fixed rate of interest on a stated notional amount in exchange for periodic payments made by such Person calculated by applying a fixed or a floating rate of interest on the same notional amount and shall include without limitation, interest rate swaps, caps, floors, collars and similar agreements. (xii) "Minimum Tangible Net Worth" means at any date, $312,140,000 increased by 50% of cumulative Consolidated Net Income of the Company (but without any decrease in the event such cumulative Consolidated Net Income is a loss) for the period commencing April 1, 1994 and ending on the last day of the most recently completed fiscal year. (xiii) "New Debt" of any Person means any Debt of such Person other than Debt that is incurred for the purpose of extending, renewing, substituting, replacing or refunding Debt of such Person that was an obligation of such Person on the last day of the most recent fiscal quarter ended prior to the date of such incurrence. (xiv) "Ratio of Debt to Consolidated Capitalization" means the quotient obtained by dividing Total Debt by Consolidated Capitalization. (xv) "Total Debt" means the total consolidated Debt of the Company and its subsidiaries as shown on a consolidated balance sheet of the Company and its subsidiaries prepared in accordance with GAAP consistently applied. (e) In the event that the Ratio of Debt to Consolidated Capitalization is less than .40 and the Cash Flow Coverage Ratio is greater than 2.5, in each case on the last day of each of six consecutive fiscal quarters of the Company, the provisions of this Section 1009 shall no longer apply to the -83- 93 Securities and shall have no force or effect for any purpose of this Indenture. Section 1010. Waiver of Certain Covenants. The Company may omit in respect of any series of Securities, in any particular instance, to comply with any covenant or condition set forth in Sections 1006, 1007, 1008 and 1009, if before or after the time for such compliance the Holders of at least a majority in principal amount of the Securities at the time Outstanding of such series shall, by Act of such Securityholders, either waive such compliance in such instance or generally waive compliance with such covenant or condition, but no such waiver shall extend to or affect such covenant or condition except to the extent so expressly waived, and, until such waiver shall become effective, the obligations of the Company and the duties of the Trustee in respect of any such covenant or condition shall remain in full force and effect. ARTICLE ELEVEN Redemption of Securities Section 1101. Applicability of Article. The Company may reserve the right to redeem and pay before Stated Maturity all or any part of the Securities of any series, either by optional redemption, sinking or purchase fund or analogous obligation or otherwise, by provision therefor in the form of Security for such series established and approved pursuant to Section 202 and on such terms as are specified in such form or in the indenture supplemental hereto with respect to Securities of such series as provided in Section 301. Redemption of Securities of any series shall be made in accordance with the terms of such Securities and, to the extent that this Article does not conflict with such terms, the succeeding Sections of this Article. Section 1102. Election To Redeem; Notice to Trustee. The election of the Company to redeem any Securities redeemable at the election of the Company shall be evidenced by, or pursuant to authority granted by, a Board Resolution. In case of any redemption at the election of the Company, the Company shall, at least 45 days (60 days in the case of a redemption of less than all of the Securities of any series) prior to the Redemption Date fixed by the Company (unless a shorter notice shall be satisfactory to the Trustee), notify the Trustee of such Redemption Date and of the principal amount of Securities of such series and the Tranche (as defined in Section 1103) to be redeemed. -84- 94 In the case of any redemption of Securities (i) prior to the expiration of any restriction on such redemption provided in the terms of such Securities or elsewhere in this Indenture, or (ii) pursuant to an election of the Company which is subject to a condition specified in the terms of such Securities, the Company shall furnish the Trustee with an Officers' Certificate evidencing compliance with such restriction or condition. Section 1103. Selection by Trustee of Securities To Be Redeemed. If less than all the Securities of like tenor and terms of any series (a "Tranche") are to be redeemed, the particular securities to be redeemed shall be selected not more than 60 days prior to the Redemption Date by the Trustee, from the outstanding Securities of such Tranche not previously called for redemption, by such method as the Trustee shall deem fair and appropriate and which may include provision for the election for redemption of portions of the principal of Securities of such Tranche of a denomination larger than the minimum authorized denomination for Securities of that series. Unless otherwise provided in the terms of a particular series of Securities, the portions of the principal of Securities so selected for partial redemption shall be equal to the minimum authorized denomination of the Securities of such series, or an integral multiple thereof, and the principal amount which remains outstanding shall not be less than the minimum authorized denomination for Securities of such series. If less than all the Securities of unlike tenor and terms of a series are to be redeemed, the particular Tranche of Securities to be redeemed shall be selected by the Company. In the case of any Security selected for partial redemption, the Trustee shall promptly notify the Company in writing of the Securities selected for redemption and the principal amount thereof to be redeemed. For all purposes of this Indenture, unless the context otherwise requires, all provisions relating to the redemption of Securities shall relate, in the case of any Security redeemed or to be redeemed only in part, to the portion of the principal of such Security which has been or is to be redeemed. Section 1104. Notice of Redemption. Notice of redemption shall be given by first-class mail, postage prepaid, mailed not less than 30 nor more than 60 days prior to the Redemption Date, to each holder of Securities to be redeemed, at his address appearing in the Security Register. -85- 95 All notices of redemption shall state: (l) the Redemption Date; (2) the Redemption Price; (3) the CUSIP number; (4) if less than all outstanding Securities of any series are to be redeemed, the identification (and, in the case of partial redemption, the respective principal amounts) of the Securities to be redeemed, from the Holder to whom the notice is given; (5) that on the Redemption Date the Redemption Price will become due and payable upon each such Security, and that interest, if any, thereon shall cease to accrue from and after said date; (6) the place where such Securities are to be surrendered for payment of the Redemption Price, which shall be the office or agency of the Company in the Place of Payment; and (7) that the redemption is on account of a sinking or purchase fund, or other analogous obligation, if that be the case. Notice of redemption of Securities to be redeemed at the election of the Company shall be given by the Company or, at the Company's request, by the Trustee in the name and at the expense of the Company. Section 1105. Deposit of Redemption Price. On or prior to any Redemption Date, the Company shall deposit with the Trustee or with a Paying Agent (or, if the Company is acting as its own Paying Agent, segregate and hold in trust as provided in Section 1003) an amount of money sufficient to pay the Redemption Price of all the Securities which are to be redeemed on that date; provided that such amount shall be so deposited with the Trustee or Paying Agent in time for the Trustee or Paying Agent, as the case may be, to pay such Redemption Price in accordance with its normal procedures. Section 1106. Securities Payable on Redemption Date. Notice of Redemption having been given as aforesaid, the Securities so to be redeemed shall, on the Redemption Date, become due and payable at the Redemption Price therein specified and from and after such date (unless the Company shall default in the payment of the Redemption Price) such Securities shall -86- 96 cease to bear interest. Upon surrender of such Securities for redemption in accordance with the notice, such Securities shall be paid by the Company at the Redemption Price. Unless otherwise provided with respect to such Securities pursuant to Section 301, installments of interest the Stated Maturity of which is on or prior to the Redemption Date shall be payable to the Holders of such Securities registered as such on the relevant Regular Record Dates according to their terms and the provisions of Section 307. If any Security called for redemption shall not be so paid upon surrender thereof for redemption, the principal shall, until paid, bear interest from the Redemption Date at the rate borne by the Security, or as otherwise provided in such Security. Section 1107. Securities Redeemed in Part. Any Security which is to be redeemed only in part shall be surrendered at the office or agency of the Company in the Place of Payment with respect to that series (with, if the Company or the Trustee so requires, due endorsement by, or a written instrument of transfer in form satisfactory to the Company and the Trustee duly executed by, the Holder thereof or his attorney duly authorized in writing) and the Company shall execute and the Trustee shall authenticate and make available for delivery to the Holder of such Security without service charge, a new Security or Securities of the same series and Stated Maturity and of like tenor and terms, of any authorized denomination as requested by such Holder in aggregate principal amount equal to and in exchange for the unredeemed portion of the principal of the Security so surrendered. Section 1108. Provisions with Respect to any Sinking Funds. Unless the form or terms of any series of Securities shall provide otherwise, in lieu of making all or any part of any mandatory sinking fund payment with respect to such series of Securities in cash, the Company may at its option (1) deliver to the Trustee for cancellation any Securities of such series theretofore acquired by the Company, or (2) receive credit for any Securities of such series (not previously so credited) acquired by the Company (including by way of optional redemption (pursuant to the sinking fund or otherwise) but not by way of mandatory sinking fund redemption) and theretofore delivered to the Trustee for cancellation, and if it does so then (i) Securities so delivered or credited shall be credited at the applicable sinking fund Redemption Price with respect to Securities of such series, and (ii) on or before the 60th day next preceding each sinking fund Redemption Date with respect to such series of Securities, the Company will deliver to the Trustee (A) an Officers' Certificate specifying the portions of -87- 97 such sinking fund payment to be satisfied by payment of cash and by delivery or credit of Securities of such series acquired by the Company, and (B) such Securities, to the extent not previously surrendered. Such Officers' Certificate shall also state the basis for such credit and that the Securities for which the Company elects to receive credit have not been previously so credited and were not acquired by the Company through operation of the mandatory sinking fund, if any, provided with respect to such Securities and shall also state that no Event of Default with respect to Securities of such series has occurred and is continuing. All Securities so delivered to the Trustee shall be cancelled by the Trustee and no Securities shall be authenticated in lieu thereof. If the sinking fund payment or payments (mandatory or optional) with respect to any series of Securities made in cash plus any unused balance of any preceding sinking fund payments with respect to Securities of such series made in cash shall exceed $50,000 (or a lesser sum if the Company shall so request), unless otherwise provided by the terms of such series of Securities, that cash shall be applied by the Trustee on the sinking fund Redemption Date with respect to Securities of such series next following the date of such payment to the redemption of Securities of such series at the applicable sinking fund Redemption Price with respect to Securities of such series, together with accrued interest, if any, to the date fixed for redemption, with the effect provided in Section 1106. The Trustee shall select, in the manner provided in Section 1103, for redemption on such sinking fund Redemption Date a sufficient principal amount of Securities of such series to utilize that cash and shall thereupon cause notice of redemption of the Securities of such series for the sinking fund to be given in the manner provided in Section 1104 (and with the effect provided in Section 1106) for the redemption of Securities in part at the option of the Company. Any sinking fund moneys not so applied or allocated by the Trustee to the redemption of Securities of such series shall be added to the next cash sinking fund payment with respect to Securities of such series received by the Trustee and, together with such payment, shall be applied in accordance with the provisions of this Section 1108. Any and all sinking fund moneys with respect to Securities of any series held by the Trustee at the Maturity of Securities of such series, and not held for the payment or redemption of particular Securities of such series, shall be applied by the Trustee, together with other moneys, if necessary, to be deposited sufficient for the purpose, to the payment of the principal of the Securities of such series at Maturity. On or before each sinking fund Redemption Date provided with respect to Securities of any series, the Company -88- 98 shall deposit with the Trustee cash in a sum equal to all accrued interest, if any, to the date fixed for redemption on Securities to be redeemed on such sinking fund Redemption Date pursuant to this Section 1108; provided that such cash shall be so deposited with the Trustee in time for the Trustee to make the payment of such accrued interest in accordance with its normal procedures. -89- 99 IN WITNESS WHEREOF, the parties hereto have caused this Indenture to be duly executed as of the day and year first above written. WESTERN ATLAS INC., by /s/ MICHAEL E. KEANE ------------------------------ Name: Michael E. Keane Title: Vice President and Treasurer [SEAL] Attest: /s/ VIRGINIA S. YOUNG - ------------------------------ Name: Virginia S. Young Title: Secretary THE BANK OF NEW YORK, as Trustee, CALIFORNIA ALL-PURPOSE ACKNOWLEDGEMENT No. 5193 =============================================================================== State of California ) --------------------------) County of Los Angeles ) --------------------------) On 6/10/94 before me, Linda J. Sandoval, Notary Public ------- -------------------------------------------------------, DATE NAME, TITLE OF OFFICER-E.G., "JANE DOE,NOTARY PUBLIC" personally appeared Michael E. Keane -------------------------------------------------------, NAME(S) OF SIGNER(S) [X] personally known to me -OR- [ ] proved to me on the basis of satisfactory evidence to be the person(s) whose name(s) is/are subscribed to the within instrument and acknowledged to me that he/she/they executed the same in his/her/their authorized capacity(ies), and that by his/her/their signature(s) on the instrument the person(s), or the entity upon behalf of which the person(s) acted, executed the instrument. WITNESS my hand and official seal. [SEAL] /s/ LINDA J. SANDOVAL ---------------------------------- SIGNATURE OF NOTARY ======OPTIONAL SECTION====== CAPACITY CLAIMED BY SIGNER Though statute does not require the Notary to fill in the data below, doing so may prove invaluable to persons relying on the document. [ ] INDIVIDUAL [X] CORPORATE OFFICER(S) Vice President & Treasurer -------------------------- TITLE(S) [ ] PARTNER(S) [ ] LIMITED [ ] GENERAL [ ] ATTORNEY-IN-FACT [ ] TRUSTEE(S) [ ] GUARDIAN/CONSERVATOR [ ] OTHER: -------------------- -------------------------- -------------------------- SIGNER IS REPRESENTING: NAME OF PERSON(S) OR ENTITY(IES) - ----------------------------- - ----------------------------- ================================OPTIONAL SECTION================================ THIS CERTIFICATE MUST BE TITLE OR TYPE OF DOCUMENT Trust Indenture ATTACHED TO THE DOCUMENT --------------------- DESCRIBED AT RIGHT: - ------------------------- NUMBER OF PAGES 90 DATE OF DOCUMENT 5/15/94 ---- ----------- Though the data requested SIGNER(S) OTHER THAN NAMED ABOVE here is not required by law, -------------- it could prevent fraudulent reattachment of this form. 100 STATE OF NEW YORK ) ) ss.: COUNTY OF NEW YORK ) On the 14th day of June, 1994, before me personally came W. J. Cunningham, to me known, who, being by me duly sworn, did depose and say that he resides at Denville, N.J.; is Vice President of The Bank of New York, one of the parties described in and which executed the above instrument; and that he signed his name thereto by authority of the board of directors of The Bank of New York. /s/ TIMOTHY J. SHEA ------------------------------ Name - ---------------------------------------- [Notarial Seal] Timothy J. Shea Notary Public, State of New York No. 01SH5027547 Qualified in New York County Commission Expires May 5, 199[ILLEGIBLE] 101 WESTERN ATLAS INC. 8.55% Debenture due 2024 If this Security is registered in the name of The Depository Trust Company (the Depositary") (55 Water Street, New York, New York) or its nominee, this Security may not be transferred except as a whole by the Depositary or by a nominee of the Depositary to the Depositary or another nominee of the Depositary or by the Depositary or any such nominee to a successor Depositary or a nominee of such successor Depositary unless and until this Security is exchanged in whole or in part for Securities in definitive form. Unless this certificate is presented by an authorized representative of the Depositary to the Company or its agent for registration of transfer, exchange or payment, and any certificate issued is registered in the name of Cede & Co. or such other name as requested by an authorized representative of the Depositary and any payment is made to Cede & Co. or such other entity as is requested by such authorized representative, ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL inasmuch as the registered owner hereof, Cede & Co., has an interest herein. CUSIP NO: 957674 AD 6 No. D-1 $150,000,000 WESTERN ATLAS INC., a corporation duly organized and existing under the laws of the State of Delaware (herein called the "Company", which term includes any successor corporation under the Indenture hereinafter referred to), for value received, hereby promises to pay to CEDE & CO., or registered assigns, the principal sum of One Hundred Fifty Million Dollars on June 15, 2024, and to pay interest thereon from June 15, 1994 or from the most recent Interest Payment Date to which interest has been paid or duly provided for, semi-annually on 102 June 15 and December 15 in each year, commencing December 15, 1994, at the rate of 8.55% per annum, until the principal hereof is paid or made available for payment. The interest so payable, and punctually paid or duly provided for on any Interest Payment Date will, as provided in such Indenture, be paid to the Person in whose name this Security or one or more Predecessor Securities) is registered at the close of business on the Regular Record Date for such interest, which shall be the June 1 or December 1 (whether or not a Business Day), as the case may be, next preceding such Interest Payment Date. Any such interest not so punctually paid or duly provided for will forthwith cease to be payable to the Holder on such Regular Record Date and may either be paid to the Person in whose name this Security (or one or more Predecessor Securities) is registered at the close of business on a Special Record Date for the payment of such Defaulted Interest to be fixed by the Trustee, notice whereof shall be given to Holders of Securities of this series not less than 10 days prior to such Special Record Date, or be paid at any time in any other lawful manner not inconsistent with the requirements of any securities exchange on which the Securities of this series may be listed, and upon such notice as may be required by such exchange, all as more fully provided in said Indenture. Payment of the principal of and any such interest on this Security will be made at the office or agency of the Company maintained for that purpose in The City of New York, in such coin or currency of the United States of America as at the time of payment is legal tender for payment of public and private debts; provided, however, that at the option of the Company payment of interest may be made by check mailed to the address of the Person entitled thereto as such address shall appear in the Security Register. Reference is hereby made to the further provisions of this Security set forth on the reverse hereof, which further provisions shall for all purposes have the same effect as if set forth at this place. Unless the certificate of authentication hereon has been executed by the Trustee referred to on the reverse hereof by manual signature, this Security shall not be entitled to any benefit under the Indenture or be valid or obligatory for any purpose. -2- 103 IN WITNESS WHEREOF, the Company has caused this instrument to be duly executed under its corporate seal. WESTERN ATLAS INC. By /s/ ALTON J. BRAUN -------------------------------- [Seal] Attest: By /s/ VIRGINIA S. YOUNG ----------------------------------- TRUSTEE'S CERTIFICATE OF AUTHENTICATION Dated: This is one of the Securities referred to in the within-mentioned Indenture. The Bank of New York, as Trustee, By: ------------------------------------ Authorized Signatory -3- 104 [Reverse of Security] This Security is one of a duly authorized issue of securities of the Company (herein called the "Securities"), issued and to be issued in one or more series under an Indenture, dated as of May 15, 1994 (herein called the "Indenture"), between the Company and The Bank of New York, as Trustee (herein called the "Trustee", which term includes any successor trustee under the Indenture), to which Indenture and all indentures supplemental thereto reference is hereby made for a statement of the respective rights, limitations of rights, duties and immunities thereunder of the Company, the Trustee and the Holders of the Securities and the terms upon which the Securities are, and are to be, authenticated and delivered. This Security is one of the series designated on the face hereof, limited in aggregate principal amount to $150,000,000. The Securities of this series may not be redeemed prior to maturity. If an Event of Default with respect to Securities of this series shall occur and be continuing, the principal of, and all accrued and unpaid interest on, the Securities of this series may be declared due and payable in the manner and with the effect provided in the Indenture. The Indenture permits, with certain exceptions as therein provided, the amendment thereof and the modification of the rights and obligations of the Company and the rights of the Holders of the Securities of each series to be affected under the Indenture at any time by the Company and the Trustee with the consent of the Holders of a majority in principal amount of the Securities at the time Outstanding of each series to be affected. The Indenture also contains provisions permitting the Holders of specified percentages in principal amount of the Securities of each series at the time Outstanding, on behalf of the Holders of all Securities of such series, to waive compliance by the Company with certain provisions of the Indenture and certain past defaults under the Indenture and their consequences. Any such consent or waiver by the Holder of this Security shall be conclusive and binding upon such Holder and upon all future Holders of this Security and of any Security issued upon the registration of transfer hereof or in exchange herefor or in lieu hereof, whether or not notation of such consent or waiver is made upon this Security. No reference herein to the Indenture and no provision of this Security or of the Indenture shall alter or impair the obligation of the Company, which is absolute and unconditional, to pay the principal of and interest on this Security at the -4- 105 times, place and rate, and in the coin or currency, herein prescribed. Interest on this Security shall be calculated on the basis of a 360-day year of twelve 30-day months. As provided in the Indenture and subject to certain limitations therein set forth, the transfer of this Security is registrable in the Security Register, upon surrender of this Security for registration of transfer at the office or agency of the Company in any place where the principal of and interest on this Security are payable, duly endorsed by, or accompanied by a written instrument of transfer in form satisfactory to the Company and the Security Registrar duly executed by, the Holder hereof or his attorney duly authorized in writing, and thereupon one or more new Securities of this series, of authorized denominations and for the same aggregate principal amount, will be issued to the designated transferee or transferees. The Securities of this series are issuable only in registered form without coupons in denominations of $1,000 and any integral multiple thereof. As provided in the Indenture and subject to certain limitations therein and herein set forth, Securities of this series are exchangeable for a like aggregate principal amount of Securities of this series of a different authorized denomination, as requested by the Holder surrendering the same. This Security is exchangeable only if (x) the Depository notifies the Company that it is unwilling or unable to continue as Depository for this global Debenture or if at any time the Depository ceases to be a clearing agency registered under the Securities Exchange Act of 1934, as amended, or (y) the Company in its sole discretion determines that this Debenture shall be exchangeable for certificated Debentures in registered form, provided that the certificated Debentures so issued by the Company in exchange for this permanent global Debenture shall be in denominations of $1,000 and any integral multiple of $1,000 in excess thereof and be of like aggregate principal amount and tenor as the portion of this permanent global Debenture to be exchanged, and provided further that, unless the Company agrees otherwise, Debentures of this series in certificated registered form will be issued in exchange for this permanent global Debenture, or any portion hereof, only if such Debentures in certificated registered form were requested by written notice to the Trustee or the Security Registrar by or on behalf of a Person who is the beneficial owner of an interest herein given through the Holder hereof. Except as provided above, owners of beneficial interests in this permanent -5- 106 global Debenture will not be entitled to receive physical delivery of Debentures in certificated registered form and will not be considered the Holders thereof for any purpose under the Indenture. No service charge shall be made for any such registration of transfer or exchange, but the Company may require payment of a sum sufficient to cover any tax or other governmental charge payable in connection therewith. The Company, the Trustee and any agent of the Company or the Trustee may treat the Person in whose name this Security is registered as the owner hereof for all purposes, whether or not this Security be overdue, and neither the Company, the Trustee nor any such agent shall be affected by notice to the contrary. This Security shall be construed in accordance with and governed by the laws of the State of New York, without regard to conflicts of laws principles thereof. All terms used in this Security which are defined in the Indenture shall have the meanings assigned to them in the Indenture. -6- 107 ASSIGNMENT FORM ------------------------ FOR VALUE RECEIVED, the undersigned hereby sell(s), assign(s) and transfer(s) unto Please Insert Social Security or ---------------------------------------- Other Identifying Number of Assignee ---------------------------------------- PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS INCLUDING POSTAL ZIP CODE OF ASSIGNEE - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- the within Debenture of WESTERN ATLAS INC. and does hereby irrevocably constitute and appoint - -------------------------------------------------------------------------------- attorney to transfer the said Debenture on the books of the Company, with full power of substitution in the premises. Dated: Your Signature: --------------------------- ------------------------- NOTICE: The signature of this assignment must correspond with the name as written upon the within instrument in every particular, without alteration or enlargement or any change whatever. -7- 108 WESTERN ATLAS INC. 7-7/8% Note due 2004 If this Security is registered in the name of The Depository Trust Company (the "Depositary") (55 Water Street, New York, New York) or its nominee, this Security may not be transferred except as a whole by the Depositary or by a nominee of the Depositary to the Depositary or another nominee of the Depositary or by the Depositary or any such nominee to a successor Depositary or a nominee of such successor Depositary unless and until this Security is exchanged in whole or in part for Securities in definitive form. Unless this certificate is presented by an authorized representative of the Depositary to the Company or its agent for registration of transfer, exchange or payment, and any certificate issued is registered in the name of Cede & Co. or such other name as requested by an authorized representative of the Depositary and any payment is made to Cede & Co. or such other entity as is requested by such authorized representative, ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL inasmuch as the registered owner hereof, Cede & Co., has an interest herein. CUSIP No.: 957674 AC 8 No. N-1 $150,000,000 WESTERN ATLAS INC., a corporation duly organized and existing under the laws of the State of Delaware (herein called the "Company", which term includes any successor corporation under the Indenture hereinafter referred to), for value received, hereby promises to pay to CEDE & CO., or registered assigns, the principal sum of One Hundred Fifty Million Dollars on June 15, 2004, and to pay interest thereon from June 15, 1994 or from the most recent Interest Payment Date to which interest has been paid or duly provided for, semi-annually on 109 June 15 and December 15 in each year, commencing December 15, 1994, at the rate of 7-7/8% per annum, until the principal hereof is paid or made available for payment. The interest so payable, and punctually paid or duly provided for on any Interest Payment Date will, as provided in such Indenture, be paid to the Person in whose name this Security (or one or more Predecessor Securities) is registered at the close of business on the Regular Record Date for such interest, which shall be the June 1 or December 1 (whether or not a Business Day), as the case may be, next preceding such Interest Payment Date. Any such interest not so punctually paid or duly provided for will forthwith cease to be payable to the Holder on such Regular Record Date and may either be paid to the Person in whose name this Security (or one or more Predecessor Securities) is registered at the close of business on a Special Record Date for the payment of such Defaulted Interest to be fixed by the Trustee, notice whereof shall be given to Holders of Securities of this series not less than 10 days prior to such Special Record Date, or be paid at any time in any other lawful manner not inconsistent with the requirements of any securities exchange on which the Securities of this series may be listed, and upon such notice as may be required by such exchange, all as more fully provided in said Indenture. Payment of the principal of and any such interest on this Security will be made at the office or agency of the Company maintained for that purpose in The City of New York, in such coin or currency of the United States of America as at the time of payment is legal tender for payment of public and private debts; provided, however, that at the option of the Company payment of interest may be made by check mailed to the address of the Person entitled thereto as such address shall appear in the Security Register. Reference is hereby made to the further provisions of this Security set forth on the reverse hereof, which further provisions shall for all purposes have the same effect as if set forth at this place. Unless the certificate of authentication hereon has been executed by the Trustee referred to on the reverse hereof by manual signature, this Security shall not be entitled to any benefit under the Indenture or be valid or obligatory for any purpose. -2- 110 IN WITNESS WHEREOF, the Company has caused this instrument to be duly executed under its corporate seal. WESTERN ATLAS INC. By /s/ ALTON J. BRAUN -------------------------------- (Seal] Attest: By /s/ VIRGINIA S. YOUNG --------------------------- TRUSTEE'S CERTIFICATE OF AUTHENTICATION Dated: This is one of the Securities referred to in the within-mentioned Indenture. The Bank of New York, as Trustee, By: -------------------------------- Authorized Signatory -3- 111 [Reverse of Security) This Security is one of a duly authorized issue of securities of the Company (herein called the "Securities") issued and to be issued in one or more series under an Indenture, dated as of May 15, 1994 (herein called the "Indenture"), between the Company and The Bank of New York, as Trustee (herein called the "Trustee", which term includes any successor trustee under the Indenture), to which Indenture and all indentures supplemental thereto reference is hereby made for a statement of the respective rights, limitations of rights, duties and immunities thereunder of the Company, the Trustee and the Holders of the Securities and the terms upon which the Securities are, and are to be, authenticated and delivered. This Security is one of the series designated on the face hereof, limited in aggregate principal amount to $250,000,000. The Securities of this series may not be redeemed prior to maturity. If an Event of Default with respect to Securities of this series shall occur and be continuing, the principal of, and all accrued and unpaid interest on, the Securities of this series may be declared due and payable in the manner and with the effect provided in the Indenture. The Indenture permits, with certain exceptions as therein provided, the amendment thereof and the modification of the rights and obligations of the Company and the rights of the Holders of the Securities of each series to be affected under the Indenture at any time by the Company and the Trustee with the consent of the Holders of a majority in principal amount of the Securities at the time Outstanding of each series to be affected. The Indenture also contains provisions permitting the Holders of specified percentages in principal amount of the Securities of each series at the time Outstanding, on behalf of the Holders of all Securities of such series, to waive compliance by the Company with certain provisions of the Indenture and certain past defaults under the Indenture and their consequences. Any such consent or waiver by the Holder of this Security shall be conclusive and binding upon such Holder and upon all future Holders of this Security and of any Security issued upon the registration of transfer hereof or in exchange herefor or in lieu hereof, whether or not notation of such consent or waiver is made upon this Security. No reference herein to the Indenture and no provision of this Security or of the Indenture shall alter or impair the obligation of the Company, which is absolute and unconditional, to pay the principal of and interest on this Security at the -4- 112 times, place and rate, and in the coin or currency, herein prescribed. Interest on this Security shall be calculated on the basis of a 360-day year of twelve 30-day months. As provided in the Indenture and subject to certain limitations therein set forth, the transfer of this Security is registrable in the Security Register, upon surrender of this Security for registration of transfer at the office or agency of the Company in any place where the principal of and interest on this Security are payable, duly endorsed by, or accompanied by a written instrument of transfer in form satisfactory to the Company and the Security Registrar duly executed by, the Holder hereof or his attorney duly authorized in writing, and thereupon one or more new Securities of this series, of authorized denominations and for the same aggregate principal amount, will be issued to the designated transferee or transferees. The Securities of this series are issuable only in registered form without coupons in denominations of $1,000 and any integral multiple thereof. As provided in the Indenture and subject to certain limitations therein and herein set forth, Securities of this series are exchangeable for a like aggregate principal amount of Securities of this series of a different authorized denomination, as requested by the Holder surrendering the same. This Security is exchangeable only if (x) the Depository notifies the Company that it is unwilling or unable to continue as Depository for this global Note or if at any time the Depository ceases to be a clearing agency registered under the Securities Exchange Act of 1934, as amended, or (y) the Company in its sole discretion determines that this Note shall, be exchangeable for certificated Notes in registered form, provided that the certificated Notes so issued by the Company in exchange for this permanent global Note shall be in denominations of $1,000 and any integral multiple of $1,000 in excess thereof and be of like aggregate principal amount and tenor as the portion of this permanent global Note to be exchanged, and provided further that, unless the Company agrees otherwise, Notes of this series in certificated registered form will be issued in exchange for this permanent global Note, or any portion hereof, only if such Notes in certificated registered form were requested by written notice to the Trustee or the Security Registrar by or on behalf of a Person who is the beneficial owner of an interest herein given through the Holder hereof. Except as provided above, owners of beneficial interests in this permanent global Note will not be entitled to receive physical delivery of Notes in certificated registered form and -5- 113 will not be considered the Holders thereof for any purpose under the Indenture. No service charge shall be made for any such registration of transfer or exchange, but the Company may require payment of a sum sufficient to cover any tax or other governmental charge payable in connection therewith. The Company, the Trustee and any agent of the Company or the Trustee may treat the Person in whose name this Security is registered as the owner hereof for all purposes, whether or not this Security be overdue, and neither the Company, the Trustee nor any such agent shall be affected by notice to the contrary. This Security shall be construed in accordance with and governed by the laws of the State of New York, without regard to conflicts of laws principles thereof. All terms used in this Security which are defined in the Indenture shall have the meanings assigned to them in the Indenture. -6- 114 ASSIGNMENT FORM ------------------- FOR VALUE RECEIVED, the undersigned hereby sell(s), assign(s) and transfer(s) unto Please Insert Social Security or -------------------------------------- Other Identifying Number of Assignee -------------------------------------- PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS INCLUDING POSTAL ZIP CODE OF ASSIGNEE - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- the within Note of WESTERN ATLAS INC. and does hereby irrevocably constitute and appoint - -------------------------------------------------------------------------------- attorney to transfer the said Note on the books of the Company, with full power of substitution in the premises. Dated: Your Signature: ------------------------- ----------------------- NOTICE: The signature of this assignment must correspond with the name as written upon the within instrument in every particular, without alteration or enlargement or any change whatever. -7- 115 WESTERN ATLAS INC. 7-7/8% Note due 2004 If this Security is registered in the name of The Depository Trust Company (the "Depositary") (55 Water Street, New York, New York) or its nominee, this Security may not be transferred except as a whole by the Depositary or by a nominee of the Depositary to the Depositary or another nominee of the Depositary or by the Depositary or any such nominee to a successor Depositary or a nominee of such successor Depositary unless and until this Security is exchanged in whole or in part for Securities in definitive form. Unless this certificate is presented by an authorized representative of the Depositary to the Company or its agent for registration of transfer, exchange or payment, and any certificate issued is registered in the name of Cede & Co. or such other name as requested by an authorized representative of the Depositary and any payment is made to Cede & Co. or such other entity as is requested by such authorized representative, ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL inasmuch as the registered owner hereof, Cede & Co., has an interest herein. CUSIP No.: 957674 AC 8 No. N-2 $100,000,000 WESTERN ATLAS INC., a corporation duly organized and existing under the laws of the State of Delaware (herein called the "Company", which term includes any successor corporation under the Indenture hereinafter referred to), for value received, hereby promises to pay to CEDE & CO., or registered assigns, the principal sum of One Hundred Million Dollars on June 15, 2004, and to pay interest thereon from June 15, 1994 or from the most recent Interest Payment Date to which interest has been paid or duly provided for, semi-annually on June 15 116 and December 15 in each year, commencing December 15, 1994, at the rate of 7-7/8% per annum, until the principal hereof is paid or made available for payment. The interest so payable, and punctually paid or duly provided for on any Interest Payment Date will, as provided in such Indenture, be paid to the Person in whose name this Security (or one or more Predecessor Securities) is registered at the close of business on the Regular Record Date for such interest, which shall be the June 1 or December 1 (whether or not a Business Day), as the case may be, next preceding such Interest Payment Date. Any such interest not so punctually paid or duly provided for will forthwith cease to be payable to the Holder on such Regular Record Date and may either be paid to the Person in whose name this Security (or one or more Predecessor Securities) is registered at the close of business on a Special Record Date for the payment of such Defaulted Interest to be fixed by the Trustee, notice whereof shall be given to Holders of Securities of this series not less than 10 days prior to such Special Record Date, or be paid at any time in any other lawful manner not inconsistent with the requirements of any securities exchange on which the Securities of this series may be listed, and upon such notice as may be required by such exchange, all as more fully provided in said Indenture. Payment of the principal of and any such interest on this Security will be made at the office or agency of the Company maintained for that purpose in The City of New York, in such coin or currency of the United States of America as at the time of payment is legal tender for payment of public and private debts; provided, however, that at the option of the Company payment of interest may be made by check mailed to the address of the Person entitled thereto as such address shall appear in the Security Register. Reference is hereby made to the further provisions of this Security set forth on the reverse hereof, which further provisions shall for all purposes have the same effect as if set forth at this place. Unless the certificate of authentication hereon has been executed by the Trustee referred to on the reverse hereof by manual signature, this Security shall not be entitled to any benefit under the Indenture or be valid or obligatory for any purpose. -2- 117 IN WITNESS WHEREOF, the Company has caused this instrument to be duly executed under its corporate seal. WESTERN ATLAS INC. By /s/ ALTON J. BRAUN ----------------------------------- [Seal] Attest: By /s/ VIRGINIA S. YOUNG ----------------------------- TRUSTEE'S CERTIFICATE OF AUTHENTICATION Dated: This is one of the Securities referred to in the within-mentioned Indenture. The Bank of New York, as Trustee, By: --------------------------------- Authorized Signatory -3- 118 [Reverse of Security] This Security is one of a duly authorized issue of securities of the Company (herein called the "Securities"), issued and to be issued in one or more series under an Indenture, dated as of May 15, 1994 (herein called the "Indenture"), between the Company and The Bank of New York, as Trustee (herein called the "Trustee", which term any successor trustee under the Indenture), to which Indenture and all indentures supplemental thereto reference is hereby made for a statement of the respective rights, limitations of rights, duties and immunities thereunder of the Company, the Trustee and the Holders of the Securities and the terms upon which the Securities are, and are to be, authenticated and delivered. This Security is one of the series designated on the face hereof, limited in aggregate principal amount to $250,000,000. The Securities of this series may not be redeemed prior to maturity. If an Event of Default with respect to Securities of this series shall occur and be continuing, the principal of, and all accrued and unpaid interest on, the Securities of this series may be declared due and payable in the manner and with the effect provided in the Indenture. The Indenture permits, with certain exceptions as therein provided, the amendment thereof and the modification of the rights and obligations of the Company and the rights of the Holders of the Securities of each series to be affected under the Indenture at any time by the Company and the Trustee with the consent of the Holders of a majority in principal amount of the Securities at the time Outstanding of each series to be affected. The Indenture also contains provisions permitting the Holders of specified percentages in principal amount of the Securities of each series at the time Outstanding, on behalf of the Holders of all Securities of such series, to waive compliance by the Company with certain provisions of the Indenture and certain past defaults under the Indenture and their consequences. Any such consent or waiver by the Holder of this Security shall be conclusive and binding upon such Holder and upon all future Holders of this Security and of any Security issued upon the registration of transfer hereof or in exchange herefor or in lieu hereof, whether or not notation of such consent or waiver is made upon this Security. No reference herein to the Indenture and no provision of this Security or of the Indenture shall alter or impair the obligation of the Company, which is absolute and unconditional, to pay the principal of and interest on this Security at the -4- 119 times, place and rate, and in the coin or currency, herein prescribed. Interest on this Security shall be calculated on the basis of a 360-day year of twelve 30-day months. As provided in the Indenture and subject to certain limitations therein set forth, the transfer of this Security is registrable in the Security Register, upon surrender of this Security for registration of transfer at the office or agency of the Company in any place where the principal of and interest on this Security are payable, duly endorsed by, or accompanied by a written instrument of transfer in form satisfactory to the Company and the Security Registrar duly executed by, the Holder hereof or his attorney duly authorized in writing, and thereupon one or more new Securities of this series, of authorized denominations and for the same aggregate principal amount, will be issued to the designated transferee or transferees. The Securities of this series are issuable only in registered form without coupons in denominations of $1,000 and any integral multiple thereof. As provided in the Indenture and subject to certain limitations therein and herein set forth, Securities of this series are exchangeable for a like aggregate principal amount of Securities of this series of a different authorized denomination, as requested by the Holder surrendering the same. This Security is exchangeable only if (x) the Depository notifies the Company that it is unwilling or unable to continue as Depository for this global Note or if at any time the Depository ceases to be a clearing agency registered under the Securities Exchange Act of 1934, as amended, or (y) the Company in its sole discretion determines that this Note shall be exchangeable for certificated Notes in registered form, provided that the certificated Notes so issued by the Company in exchange for this permanent global Note shall be in denominations of $1,000 and any integral multiple of $1,000 in excess thereof and be of like aggregate principal amount and tenor as the portion of this permanent global Note to be exchanged, and provided further that, unless the Company agrees otherwise, Notes of this series in certificated registered form will be issued in exchange for this permanent global Note, or any portion hereof, only if such Notes in certificated registered form were requested by written notice to the Trustee or the Security Registrar by or on behalf of a Person who is the beneficial owner of an interest herein given through the Holder hereof. Except as provided above, owners of beneficial interests in this permanent global Note will not be entitled to receive physical delivery of Notes in certificated registered form and -5- 120 will not be considered the Holders thereof for any purpose under the Indenture. No service charge shall be made for any such registration of transfer or exchange, but the Company may require payment of a sum sufficient to cover any tax or other governmental charge payable in connection therewith. The Company, the Trustee and any agent of the Company or the Trustee may treat the Person in whose name this Security is registered as the owner hereof for all purposes, whether or not this Security be overdue, and neither the Company, the Trustee nor any such agent shall be affected by notice to the contrary. This security shall be construed in accordance with and governed by the laws of the State of New York, without regard to conflicts of laws principles thereof. All terms used in this Security which are defined in the Indenture shall have the meanings assigned to them in the Indenture. -6- 121 ASSIGNMENT FORM ---------------------- FOR VALUE RECEIVED, the undersigned hereby sell(s), assign(s) and transfer(s) unto Please Insert Social Security or ---------------------------------------------- Other Identifying Number of Assignee ------------------------------------------- PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS INCLUDING POSTAL ZIP CODE OF ASSIGNEE - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- the within Note of WESTERN ATLAS INC. and does hereby irrevocably constitute and appoint - -------------------------------------------------------------------------------- attorney to transfer the said Note on the books of the Company, with full power of substitution in the premises. Dated: Your Signature: ------------------- ------------------------------- NOTICE: The signature of this assignment must correspond with the name as written upon the within instrument in every particular, without alteration or enlargement or any change whatever. -7- EX-10.12 4 EXECUTIVE SEVERANCE POLICY 1 EXHIBIT 10.12 [BAKER HUGHES LOGO] POLICY: BAKER HUGHES INCORPORATED EXECUTIVE SEVERANCE POLICY APPROVED: PRESIDENT EFFECTIVE: 01-01-2000 - -------------------------------------------------------------------------------- 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 (1) their employment is terminated because their position is eliminated, or (2) their employment is terminated in conjunction with an acquisition, merger, spin-off, reorganization (either business or personnel), facility closing or a discontinuance of operations of the divisions 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 benefits as described in the "Settlement Agreement and General Release". The duration of these benefits is dependent upon the Executive's salary band as shown below: Salary Band No. of Months ----------- --------- 1 9 2 12 3 - 5 15 6 - 8 18 2 [BAKER HUGHES LOGO] POLICY: BAKER HUGHES INCORPORATED EXECUTIVE SEVERANCE POLICY APPROVED: PRESIDENT EFFECTIVE: 01-01-2000 - -------------------------------------------------------------------------------- REQUIREMENTS: In order to receive the benefits described in the Settlement Agreement and General Release, an Executive must agree to the terms and conditions of that document with the execution of their signature. 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 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. The benefits outlined in this Policy 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 may be amended, expanded or discontinued at any time at the sole discretion of BHI with or without notice. Page 2 3 [BAKER HUGHES LOGO] POLICY: BAKER HUGHES INCORPORATED EXECUTIVE SEVERANCE POLICY APPROVED: PRESIDENT EFFECTIVE: 01-01-2000 - -------------------------------------------------------------------------------- SETTLEMENT AGREEMENT AND GENERAL RELEASE FIRST: Employee's active employment with the Company will terminate on _____________, 20____ ("Effective Date"). At that time, Employee will be placed on a paid Leave of Absence for ___________ months. During this period, Employee will receive a salary of $_________ per month. Employee will receive this salary amount until the expiration of the period or until Employee obtains employment or becomes self employed ("Subsequent Employment Date"), whichever occurs first. If Employee obtains employment or becomes self employed during the paid Leave of Absence period and earns less than $___________ per month, Employee will continue to receive the difference between the amount earned and $___________per month until the expiration of the period. SECOND: During the paid Leave of Absence period, Employee will continue to be eligible for the group insurance programs on which Employee is currently enrolled as of the Effective Date. Such benefits will cease as of the expiration of the paid Leave of Absence period or as of the date other medical, dental, and life insurance becomes available following Employee's Subsequent Employment Date, whichever occurs first. Upon the termination of coverage under the Company's programs, Employee may be eligible to buy continuation coverage under the terms and for the period mandated by federal law. Coverage for short-term and long-term disability will not be extended to Employee after the Effective Date. THIRD: Employee may elect to continue to participate in the BHI Employee Thrift Plan and the BHI Employee Stock Purchase Plan until the expiration of the paid Leave of Absence period or until the Subsequent Employment Date, whichever comes first. All benefits, contributions or disbursements, if any, under such Plans will be paid to Employee in accordance with such Plans upon the expiration of the period or Subsequent Employment Date, whichever occurs first. FOURTH: If Employee was participating in the BHI Employee Stock Option Plan and/or the BHI Convertible Debenture Plan as of the Effective Date, such participation may continue until the expiration of the paid Leave of Absence period. No new options or debenture grants will be awarded to Employee after the Effective Date. Employee will be permitted to exercise or convert any option rights or convertible debenture rights awarded prior to the Effective Date for a period of up to three (3) months from the expiration of the paid Leave of Absence period, or the normal expiration date of these rights, whichever occurs first, but only to the extent that such rights are vested or convertible by the date of exercise. If any of Employee's convertible debentures remain unconverted at the end of the period in which they can be exercised, Company will prepay the debentures in accordance with the terms of such Plan. Page 3 4 [BAKER HUGHES LOGO] POLICY: BAKER HUGHES INCORPORATED EXECUTIVE SEVERANCE POLICY APPROVED: PRESIDENT EFFECTIVE: 01-01-2000 - -------------------------------------------------------------------------------- FIFTH: Employee's bonus for 20____ will be determined with reference to formal written objectives and paid in __________________, 20____. The bonus will be determined at the Company's sole discretion based on fiscal 20_____ audited results. SIXTH: All payments by Company for Employee's club memberships or other perquisites will cease on the Effective Date. Employee has the option of purchasing Employee's club membership for the fair market value of such membership as determined by Company. SEVENTH: Employee will return to company all Company property in Employee's possession as of the Effective Date including but not limited to credit cards and documents of any kind. Employee will prepare and submit a final expense account reimbursement request for expenses incurred prior to the Effective Date. Such expense account reimbursement request will be reviewed and paid in accordance with company policy. Employee agrees and consents to allow Company to deduct from the paid Leave of Absence salary payments any amounts of money that Employee owes to Company. EIGHTH: Outplacement services will be provided to Employee at Company expense in accordance with Company policy. NINTH: The benefits described above supersede, negate and replace any other benefits offered by Company to Employee. This Agreement will be administered by BHI's Chief Administrative Officer who will also resolve any issues regarding the interpretation, implementation or administration of the benefits described above. TENTH: By executing this Agreement, Employee accepts the fact that Employee's relationship with the Company was "at-will employment" meaning that either Employee or Company could terminate the relationship with or without notice and with or without cause, at any time. ELEVENTH: Payment of the above described benefits is contingent upon the Employee executing and returning this Settlement Agreement and General Release to Company. Employee may take up to _________________ (___) days to consider this Agreement prior to executing it. Furthermore, Employee has a seven (7) day period after executing this Agreement during which time Employee may revoke Employee's consent to the Agreement, and this Agreement will not become effective or enforceable until such revocation period has expired. Page 4 5 [BAKER HUGHES LOGO] POLICY: BAKER HUGHES INCORPORATED EXECUTIVE SEVERANCE POLICY APPROVED: PRESIDENT EFFECTIVE: 01-01-2000 - -------------------------------------------------------------------------------- TWELFTH: This Agreement shall not in any way be construed as an admission by Company that it has acted wrongfully with respect to Employee or any other person, or that Employee has any rights whatsoever against Company, and Company specifically disclaims any liability to wrongful acts against Employee or any other person, on the part of itself, its employees or its agents. THIRTEENTH: Employee represents, understands and agrees that Employee's active employment with the Company has or will soon terminate and that Employee will not apply for or otherwise seek active employment or extended inactive employment with Company at any time. FOURTEENTH: Employee further agrees that during any period in which Employee is receiving benefits under this Agreement, Employee 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. In view of the nature of Employee's employment and the information and trade secrets which Employee has received during the course of Employee's employment with ____________________, Employee likewise agrees that Company would be irreparably harmed by any violation or threatened violation of this Agreement and that Company shall be entitled to injunctive relief prohibiting Employee from any violation or threatened violation of this Agreement. FIFTEENTH: As a material inducement for Company to enter into this Agreement, Employee hereby irrevocably and unconditionally releases, acquits and forever discharges 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 Employee claims to have against any of the Releasees. In addition, 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 favor at the time of executing the release which, if known by him, must have materially affected employee'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 Agreement. SIXTEENTH: Employee represents and acknowledges that in executing this Agreement Employee 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. Page 5 6 [BAKER HUGHES LOGO] POLICY: BAKER HUGHES INCORPORATED EXECUTIVE SEVERANCE POLICY APPROVED: PRESIDENT EFFECTIVE: 01-01-2000 - -------------------------------------------------------------------------------- SEVENTEENTH: This Agreement 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. EIGHTEENTH: This Agreement shall be construed and interpreted in accordance with the laws of the State of Texas with venue for litigation being in Houston, Texas. NINETEENTH: The invalidity or unenforceability of a term or provision of this Agreement shall not affect the validity or enforceability of any other term or provision of this Agreement, which shall remain in full force and effect. TWENTIETH: Employee represents and agrees that Employee fully understands Employee's right to discuss all aspects of this Agreement with Employee's private attorney, that to the extent, if any, that employee desires, Employee has availed___________________________ of this right, that Employee has carefully read and fully understands all of the provisions of this Agreement and that Employee is voluntarily entering into this Agreement. TWENTY - FIRST: Employee acknowledges, by Employee's signature below, that Employee was given this Agreement on the ________day of _____________________, 20_____. PLEASE READ CAREFULLY. THIS AGREEMENT INCLUDES A RELEASE OF ALL KNOWN AND UNKNOWN CLAIMS. YOU MAY TAKE UP TO ________________ (____) DAYS FROM RECEIPT OF THIS AGREEMENT TO CONSIDER ITS TERMS BEFORE SIGNING IT. YOU ARE ENCOURAGED TO CONSULT AN ATTORNEY BEFORE EXECUTING THIS AGREEMENT IF THAT IS YOUR DESIRE. EXECUTED at _________________________ (city), ___________________ (state), this __________day of ______________________, 20______. BAKER HUGHES INCORPORATED By: Page 6 EX-10.20 5 1995 EMPLOYEE ANNUAL INCENTIVE COMPENSATION PLAN 1 EXHIBIT 10.20 BAKER HUGHES INCORPORATED 1995 EMPLOYEE ANNUAL INCENTIVE COMPENSATION PLAN 2 CONTENTS - --------------------------------------------------------------------------------
PAGE ARTICLE 1. ESTABLISHMENT AND PURPOSE 1 ARTICLE 2. DEFINITIONS 1 ARTICLE 3. ADMINISTRATION 2 ARTICLE 4. ELIGIBILITY AND PARTICIPATION 3 ARTICLE 5. AWARD DETERMINATION 4 ARTICLE 6. PAYMENT OF FINAL AWARDS 5 ARTICLE 7. TERMINATION OF EMPLOYMENT 5 ARTICLE 8. RIGHTS OF PARTICIPANTS 6 ARTICLE 9. BENEFICIARY DESIGNATION 7 ARTICLE 10. AMENDMENT AND TERMINATION 7 ARTICLE 11. GOVERNING LAW AND WITHHOLDING 7
3 BAKER HUGHES INCORPORATED 1995 EMPLOYEE ANNUAL INCENTIVE COMPENSATION PLAN ARTICLE 1. ESTABLISHMENT AND PURPOSE 1.1 ESTABLISHMENT OF THE PLAN. Baker Hughes Incorporated (hereinafter referred to as the "Company"), a Delaware corporation, hereby establishes an annual incentive compensation plan to be known as the "Baker Hughes Incorporated 1995 Employee Annual Incentive Compensation Plan" (hereinafter referred to as the "Plan") as set forth in this document. The Plan permits the awarding of annual cash bonuses to key employees of the Company and its subsidiaries, based on the achievement of preestablished performance goals. The Plan shall become effective as of October 1, 1994, and shall remain in effect until terminated by the Board of Directors of the Company. Notwithstanding any provision herein to the contrary, no amounts shall be paid under the Plan unless and until the stockholders of the Company approve the Plan prior to September 30, 1995. 1.2 PURPOSE. The purpose of the Plan is to provide Key Employees with a meaningful annual incentive opportunity geared toward the achievement of specific corporate and/or individual goals. ARTICLE 2. DEFINITIONS 2.1 DEFINITIONS. Whenever used in the Plan, the following terms shall have the meanings set forth below and, when the defined meaning is intended, the term is capitalized: (a) "Board" or "Board of Directors" means the Board of Directors of the Company. (b) "Cause" means the occurrence of any one of the following: (i) The willful and continued failure by a Participant to substantially perform his/her duties (other than any such failure resulting from the Participant's disability), after a written demand for substantial performance is delivered to the Participant that specifically identifies the manner in which the Company believes that the Participant has not substantially performed his/her duties, and the Participant has failed to remedy the situation within ten (10) business days of receiving such notice; or (ii) The Participant's conviction for an act of fraud, embezzlement, theft, or other criminal act constituting a felony; or (iii) The willful engaging by the Participant in gross misconduct or malfeasance. However, no act, or failure to act, on the Participant's part shall be considered "willful" unless done, or omitted to be done, by the Participant not in good faith and without reasonable belief that his/her action or omission was in the best interest of the Company; or 1 4 (iv) The violation of the Company's Standards of Conduct, which violation is determined to be material by the Committee. (c) "Committee" means the Compensation Committee of the Board or any other committee appointed by the Board to administer the Plan. The membership of the Committee shall in all cases be comprised solely of two or more outside directors (within the meaning of Section 162(m)). (d) "Company" means Baker Hughes Incorporated, a Delaware corporation, and any successor thereto. (e) "Final Award" means the actual award earned for a Plan Year by a Participant as determined by the Committee (see Article 5.4 herein). (f) "Key Employee" means an employee of the Company, or any of its subsidiaries, who, in the opinion of the Chief Executive Officer of the Company, is in a position to significantly contribute to the growth and profitability of the Company (see Article 4 herein). (g) "Participant" means a Key Employee who is nominated for participation by the Chief Executive Officer of the Company and then is selected by the Committee to participate in the Plan (see Article 4 herein). (h) "Plan Year" means the Company's fiscal year commencing October 1 and ending September 30. (i) "Section 162(m)" means section 162(m) (or any successor provision) of the Internal Revenue Code of 1986, as amended, and applicable interpretive authority thereunder. 2.2 GENDER AND NUMBER. Except where otherwise indicated by the context, any masculine term used herein also shall include the feminine, the plural shall include the singular, and the singular shall include the plural. 2.3 SEVERABILITY. In the event any provision of the Plan shall be held to be illegal or invalid for any reason, the illegality or invalidity shall not affect the remaining parts of the Plan, and the Plan shall be construed and enforced as if the illegal or invalid provision had not been included. ARTICLE 3. ADMINISTRATION 3.1 THE COMMITTEE. This Plan shall be administered by the Committee in accordance with the rules that it may establish from time to time that are not inconsistent with the provisions of the Plan. 2 5 The determination of the Committee as to any disputed question arising under this Plan, including questions of construction and interpretation, shall be final, binding, and conclusive upon all persons. 3.2 INDEMNIFICATION. Each person who is or shall have been a member of the Committee, or of the Board, shall be indemnified and held harmless by the Company against and from any loss, cost, liability, or expense that may be imposed upon or reasonably incurred by him in connection with or resulting from any claim, action, suit, or proceeding to which he may be a party or in which he may be involved by reason of any action taken or failure to act under the Plan and against and from any and all amounts paid by him in settlement thereof, with the Company's approval, or paid by him in satisfaction of any judgment in any such action, suit, or proceeding against him, provided he shall give the Company an opportunity, at its own expense, to handle and defend the same before he undertakes to handle and defend it on his own behalf. The foregoing right of indemnification shall not be exclusive of any other rights of indemnification to which such persons may be entitled under the Company's Restated Certificate of Incorporation or Bylaws, as a matter of law, or otherwise, or any power that the Company may have to indemnify them or hold them harmless. ARTICLE 4. ELIGIBILITY AND PARTICIPATION 4.1 ELIGIBILITY. Eligibility for participation in the Plan shall be limited to those Key Employees who, by the nature and scope of their position, contribute to the overall results or success of the Company and its subsidiaries. 4.2 PARTICIPATION. Participation in the Plan shall be determined annually based upon the recommendation of the Chief Executive Officer of the Company and the approval of the Committee. Employees approved for participation shall be notified in writing of their selection, and of their performance goals and related Award Opportunities (as defined in Article 5.1), as soon after approval as is practicable. 4.3 PARTIAL PLAN YEAR PARTICIPATION. The Committee may, upon recommendation of the Chief Executive Officer of the Company, allow an individual who becomes eligible after the beginning of a Plan Year to participate in the Plan for that year. In such case, the Participant's Final Award normally shall be prorated based on the number of full months of participation. However, the Committee may, based upon the recommendation of the Chief Executive Officer of the Company, authorize an unreduced Final Award. 4.4 TERMINATION OF APPROVAL. The Committee may withdraw its approval for participation in the Plan for a Participant at any time. In the event of such withdrawal, the employee concerned shall cease to be a Participant as of the date designated by the Committee and the employee shall be notified of such withdrawal as soon as practicable following such action. Further, such employee shall cease to have any right to a Final Award for the Plan Year in which such withdrawal is effective; provided, however, that the Committee may, in its sole discretion, authorize a prorated award based on the number of full months of participation prior to the effective date of such withdrawal. 3 6 ARTICLE 5. AWARD DETERMINATION 5.1 AWARD OPPORTUNITIES. As soon as practicable (but in no event later than ninety (90) days) after the beginning of each Plan Year, the Committee shall establish, in writing, maximum, target, and minimum incentive award levels (the "Award Opportunities") for each Participant. The established Award Opportunities may vary in relation to the responsibility level of the Participant. In the event a Participant changes job levels or salary grades during the Plan Year, the Award Opportunities may be adjusted by the Committee, in its sole discretion, to reflect the amount of time at each job level and/or in each salary grade. 5.2 PERFORMANCE GOALS. As soon as practicable (but in no event later than ninety (90) days) after the beginning of each Plan Year, the Committee shall establish, in writing, performance goals for each Participant for that Plan Year. The goals will be based on one or more financial objectives of the Company determined by and defined by the Committee, which objectives may include profits before-tax, profits after-tax, earnings per share, and/or the ratio of after-tax profits to net capital employed; provided, however, that as an alternative to other goals, and in addition thereto, an Award Opportunity shall provide an element based on a goal tied to total shareholder return ("TSR"), as defined by the Committee and discussed in Article 5.4. Nonfinancial objectives may also be included in a Participant's performance goals, and will not represent more than 20 percent of target Award Opportunities, as discussed in Article 5.1. Notwithstanding the foregoing, no covered employee (as such term is defined in Section 162(m)) may have any portion of his Final Award based on nonfinancial, subjective performance goals. 5.3 ADJUSTMENT OF PERFORMANCE GOALS. The Committee shall have the right to adjust the performance goals (either up or down) during the Plan Year if it determines that external changes or other unanticipated business conditions have materially affected the fairness of the goals and unduly influenced the Company's ability to meet them. Further, in the event of a Plan Year of less than twelve (12) months, the Committee shall have the right to adjust the performance goals, at its discretion, to protect the purpose and intent of the Plan. Notwithstanding the foregoing, no such adjustment shall be made with respect to an individual who is a covered employee (within the meaning of Section 162(m)) to the extent the same is considered an upward discretionary increase in the amount of the Final Award for such individual (within the meaning of Section 162(m)). 5.4 FINAL AWARD DETERMINATIONS. As soon as practicable after the end of each Plan Year, Final Awards shall be computed for each Participant as determined by the Committee. The Committee shall certify to what extent the performance goals established pursuant to Article 5.2 and any other material terms of an award were in fact satisfied. Then, two (2) independent computations will be made, as follows: (a) Achievement of financial goals (other than TSR goals), as discussed in Article 5.2, shall be assessed via a quantitative formula established by the Committee. Individuals' award calculations will be based on varying Award Opportunities, as discussed in Article 5.1. Adjustment will be made to reflect nonfinancial objectives for eligible Participants, as described in Article 5.2. 4 7 (b) Achievement of TSR goals, as discussed in Article 5.2, shall be assessed via a quantitative formula established by the Committee. Individuals' award calculations will be based on one-half of the target Award Opportunity, as discussed in Article 5.1. The greater of the resulting two calculations will be used to determine the Final Award paid for the Plan Year. In determining the Final Award, the Committee, in its sole discretion, may increase or decrease calculated amounts to reflect factors regarding performance during the Plan Year which were not, in the sole opinion of the Committee, appropriately reflected in the Final Award calculation. Notwithstanding the foregoing, the Final Award to an individual who is a covered employee (within the meaning of Section 162(m)) will not be subject to upward discretionary adjustment by the Committee. Downward discretionary adjustment for these individuals will be permitted to the extent that such downward adjustments do not prevent the Final Awards to those individuals from being deductible by the Company for federal income tax purposes under Section 162(m). 5.5 INDIVIDUAL AWARD CAP. The maximum annual Final Award any individual may receive in connection with the Plan is $1,000,000. ARTICLE 6. PAYMENT OF FINAL AWARDS As soon as practicable following the end of each Plan Year, Final Award payments shall be paid in cash. ARTICLE 7. TERMINATION OF EMPLOYMENT 7.1 TERMINATION OF EMPLOYMENT DUE TO DEATH, DISABILITY, OR RETIREMENT. In the event a Participant's employment is terminated by reason of death, total and permanent disability (as determined by the Committee), or retirement, the Final Award, determined in accordance with Article 5.4 herein, shall be reduced so that it reflects only participation prior to termination. This reduction shall be determined by multiplying said Final Award by a fraction, the numerator or which is the months of participation through the date of termination rounded up to whole months, and the denominator of which is twelve (12). The Final Award thus determined plus all unpaid amounts, if any, from previous years shall be paid as soon as practicable following the Committee's determinations under Article 5.4 hereof for that Plan Year. 7.2 EMPLOYMENT TRANSFERS. If a Participant transfers from one division to another division within the Company, the Final Award for the Participant's time at the Participant's former division will be prorated for the number of whole months rounded to the nearest whole month of the Plan Year the Participant was at that division. The Final Award will be determined as soon as practicable after the end of the Plan Year and will be based on the financial results at the close of the Plan Year. The Final Award will be paid at the same time the other Final Awards for that division are paid. If a Participant is eligible for a Final Award in his new position, the Final Award will be based on the months left in the Plan 5 8 Year, on his new base salary level and Award Opportunities, as determined by the Committee based upon the recommendation of the Chief Executive Officer of the Company. 7.3 DISPOSITION OF BUSINESS. If the Participant's division is disposed of during the Plan Year, payment of the Participant's Final Award shall be determined in accordance with the following alternatives: (a) If the acquiring party of the division offers employment to the Participant and assumes the obligations under the Plan, either directly or indirectly, and the Participant accepts such offer of employment, the Company shall not be obligated to pay the Final Award and such obligation shall be that of the acquiring party in accordance with the Final Award parameters; or (b) If the acquiring party does not assume the obligations under the Plan, whether or not the Participant is offered and accepts employment, then the Participant will receive a prorated Final Award for the portion of the Plan Year that the Participant was employed by the Company prior to the date of the consummation of the sale of the division, to be paid at the same time other Final Awards are paid under the Plan. The computation shall be made on the basis of the number of whole months rounded to the nearest whole month of the Plan Year that the Participant was in active service with the Company; or (c) If the acquiring party of the division offers employment to the Participant and assumes the obligations under the Plan, either directly or indirectly, and the Participant rejects such employment, the Participant shall be deemed to have voluntarily resigned as provided under Article 7.4 below. 7.4 TERMINATION OF EMPLOYMENT FOR OTHER REASONS. In the event a Participant's employment is terminated voluntarily by the employee or by the Company for Cause, all of the Participant's rights to a Final Award for the Plan Year then in progress shall be forfeited. If a Participant's termination is for any reason other than as described in Article 7.3, death, disability, retirement, voluntary resignation, or Cause, the Participant will receive a prorated bonus award for the portion of the Plan Year that the Participant was employed by the Company, computed as determined by the Committee, to be paid at the same time other Final Awards are paid under the Plan. ARTICLE 8. RIGHTS OF PARTICIPANTS 8.1 EMPLOYMENT. Nothing in this Plan shall interfere with or limit in any way the right of the Company to terminate any Participant's employment at any time for any reason, nor confer upon any Participant any right to continue in the employ of the Company. For all purposes of the Plan, a Participant shall be considered to be in the employment of the Company as long as he or she remains employed on a full-time basis by the Company or any of its subsidiaries or is on an authorized leave of absence approved by the Committee. Any question as to whether and when there has been a termination of a Participant's employment, 6 9 and the reason for such termination, shall be determined solely by the Committee, and its determination shall be final and conclusive. 8.2 PARTICIPATION. No Participant or other employee shall at any time have a right to be selected for participation in the Plan for any Plan Year, despite having been selected for participation in a previous Plan Year. 8.3 NONTRANSFERABILITY. No right or interest of any Participant in this Plan shall be assigned or transferable, or subject to any lien, directly, by operation of law, or otherwise, including execution, levy, garnishment, attachment, pledge, and bankruptcy. ARTICLE 9. BENEFICIARY DESIGNATION Each Participant under the Plan may, from time to time, name any beneficiary or beneficiaries (who may be named contingently or successively) to whom any benefit under the Plan is to be paid in case of his death before he receives any or all of such benefit. Each designation will revoke all prior designations by the same Participant, shall be in a form prescribed by the Committee, and will be effective only when filed by the Participant in writing with the Committee during his lifetime. In the absence of any such designation, benefits remaining unpaid at the Participant's death shall be paid to the Participant's estate. ARTICLE 10. AMENDMENT AND TERMINATION The Board may modify or amend, in whole or in part, any or all of the provisions of this Plan, or suspend or terminate it entirely; provided, that no such modification, amendment, suspension, or termination may, without the consent of a Participant (or his beneficiary in the case of the death of the Participant), reduce the right of a Participant (or his beneficiary as the case may be) to a payment or distribution hereunder to which he is entitled with respect to a Plan Year that has ended prior to such modification, amendment, suspension, or termination. ARTICLE 11. GOVERNING LAW AND WITHHOLDING 11.1 GOVERNING LAW. THE PLAN, AND ALL AWARDS HEREUNDER, SHALL BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE LAWS OF THE STATE OF TEXAS. 11.2 WITHHOLDING TAXES. The Company shall have the right to deduct from all payments under this Plan any Federal, state, or local taxes required by law to be withheld with respect to such payments. 7 EX-10.29 6 1ST AMENDMENT TO CREDIT AGREEMENT 1 EXHIBIT 10.29 FIRST AMENDMENT TO CREDIT AGREEMENT This FIRST AMENDMENT TO CREDIT AGREEMENT, dated as of September __ 1999, is hereby made and entered into by and between BAKER HUGHES INCORPORATED, a Delaware corporation (the "Company"), and the undersigned bank (the "Bank"). WITNESSETH WHEREAS, the Company and the Bank have entered into that certain Credit Agreement dated as of October 1, 1998 with an initial term of 364 days (the "Credit Agreement"); and WHEREAS, the Company and the Bank desire to amend the Credit Agreement as hereinafter set forth. NOW, THEREFORE, in consideration of the premises and the mutual agreements herein contained, the Company and the Bank agree as follows: 1. AMENDMENTS TO CREDIT AGREEMENT. (a) Section 1.01 (Definitions) of the Credit Agreement is amended as follows: (i) The words "or the most recent amendment to this agreement" are inserted between the words "Agreement" and "as" in the second line of the definition of "Commitment Limit." (ii) The following phrase is added at the end of the definition of "LIBOR Margin": "; provided, further, that, in the event that the aggregate Eurodollar Advances and Reference Rate Advances outstanding exceed thirty-three and one-third percent (331/3%) of the Commitment Limit, then the Eurodollar Rates in (a), (b) and (c) above shall be increased to .245%, .35% and .52%, respectively, for all Eurodollar Advances outstanding during the period in which the aggregate Eurodollar Advances and Reference Rate Advances outstanding exceed thirty-three and one-third percent (331/3%) of the Commitment Limit." (b) Section 2.04 (Facility and Origination Fees) of the Credit Agreement is amended by adding the following subsection (c): "(c) Up-Front Fee. If the Bank consents to the Company's Extension Request pursuant to Section 3.01(h), then the Company 1 2 EXHIBIT 10.29 agrees to pay the Bank a one-time fee, in Dollars, equal to .03% of the Commitment Limit, payable no later than October 15, 1999." (c) Exhibit B (Bank and Other Banks) to the Credit Agreement is amended in its entirety and replaced with a new Exhibit B as attached hereto. 2. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company's execution, delivery and performance of this Amendment have been duly authorized by all necessary corporate action, do not require the consent or approval of any 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 charter or bylaws of the Company. This Amendment is the valid and legally binding obligation of the Company, enforceable in accordance with its 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). 3. REAFFIRMATION OF CREDIT AGREEMENT. This Amendment shall be deemed to be an amendment to the Credit Agreement, and the Credit Agreement, as amended hereby, is hereby ratified, approved and confirmed in each and every respect. All references to the Credit Agreement in the Credit Agreement shall hereafter be deemed to refer to the Credit Agreement, as amended hereby. 4. DEFINED TERMS. Terms used but not defined herein when defined in the Credit Agreement shall have the same meanings herein unless the context otherwise requires. 5. APPLICABLE LAW. This Amendment shall be governed by and construed in accordance with the laws of the State of Texas, United States of America. 6. COUNTERPARTS. This Amendment 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 2 3 EXHIBIT 10.29 counterparts, each of which when so executed shall be deemed to constitute one and the same Amendment. 7. SEVERABILITY. If any term or provision of this Amendment 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. HEADINGS. Section headings used in this Amendment are for reference only and shall not affect the construction of this Amendment. 9. FINAL AGREEMENT. THIS AMENDMENT, TOGETHER WITH THE CREDIT 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. 3 4 EXHIBIT 10.29 IN WITNESS WHEREOF, the Company and the Bank have caused this First Amendment to Credit Agreement to be duly executed as of the day and year first above written. COMPANY: BAKER HUGHES INCORPORATED By: --------------------------------- H. Gene Shiels Assistant Treasurer BANK: By: --------------------------------- Name: Title: Commitment Limit: (if different than limit on signature page to Credit Agreement) 4 5 EXHIBIT 10.29 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 Bank of Tokyo-Mitsubishi, Ltd. 12,500,000 The Bank of New York 12,500,000 Barclays Bank PLC 25,000,000 Bayerische Hypo- Und Vereinsbank AG 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 ----------- TOTAL 250,000,000
5 EX-10.30 7 NONQUALIFIED STOCK OPTION AGREEMENT FOR EMPLOYEES 1 EXHIBIT 10.30 BAKER HUGHES INCORPORATED 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 Long Term Incentive Plan, as amended (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 $23.50 for each share subject to this option, payable at the time of exercise. Subject to the terms of the Plan and this Nonqualified 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 3rd day of February 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 February 3, 2010. 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 as covered by the following paragraphs, or by the Company without Cause or by the Grantee for Good Reason within two years following a Change of Control), 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 February 3, 2010). 2. If Grantee's employment is terminated for Cause, including but not limited to fraud, theft, embezzlement committed against the Company or any of its affiliated companies or customer of the Company, or for conflict of interest, unethical conduct, dishonesty affecting the assets, properties or business of the Company or any of its affiliated companies, willful misconduct, or continued material dereliction of duties, if such termination of employment occurs prior to a Change of Control or after the second anniversary of a Change of Control, this option will wholly and completely terminate on the date of termination of employment, or if such termination occurs within two years following a Change of Control, this option will wholly and completely terminate on the date thirty days following such termination of employment (but in no event later than February 3, 2010). 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 February 3, 2010). 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 February 3, 2010). 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 of Control, the Grantee shall have two years from the date of termination of employment to exercise this option (but in no event later than February 3, 2010). 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 2 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." Notwithstanding any other provision of this Nonqualified Stock Option Agreement, if Grantee engages in a "Prohibited Activity," as described below, while employed by the Company or any of its affiliates or within two years after Grantee's employment termination date, then Grantee's right to exercise any portion of this option, to the extent still outstanding at that time, shall immediately thereupon wholly and completely terminate. If an allegation of a Prohibited Activity by Grantee is made to the Compensation Committee of the Board of Directors of the Company (the "Committee"), the Committee, in its discretion, may suspend the exercisability of this option for up to two months to permit the investigation of such allegation, however, if it is determined that no Prohibited Activity was engaged in by Grantee, the period of exercisability of this option will be increased by the amount of time of such suspension, however, in no event will this option be exercisable more than ten (10) years from the date of grant. A "Prohibited Activity" shall be deemed to have occurred, as determined by the Committee in its sole and absolute discretion, if Grantee: (i) divulges any non-public, confidential or proprietary information of the Company or its past, present or future affiliates (collectively, the "Baker Hughes Group"), but excluding information that (a) becomes generally available to the public other than as a result of Grantee's public use, disclosure, or fault, or (b) becomes available to Grantee on a non-confidential basis after Grantee's employment termination date from a source other than a member of the Baker Hughes Group prior to the public use or disclosure by Grantee, provided that such source is not bound by a confidentiality agreement or otherwise prohibited from transmitting the information by a contractual, legal or fiduciary obligation; or (ii) directly or indirectly, consults or becomes affiliated with, conducts, participates or engages in, or becomes employed by, any business that is competitive with the business of any member of the Baker Hughes Group, wherever from time to time conducted throughout the world, including situations where Grantee solicits or participates in or assists in any way in the solicitation or recruitment, directly or indirectly, of any employees of any member of the Baker Hughes Group. 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: February 3, 2000 BAKER HUGHES INCORPORATED -------------------------------- G. S. FINLEY SENIOR VICE PRESIDENT EX-10.31 8 NONQUALIFIED STOCK OPTION AGREEMENT FOR EMPLOYEES 1 EXHIBIT 10.31 BAKER HUGHES INCORPORATED 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 Long Term Incentive Plan, as amended (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 $22.857 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 26th day of January 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 January 26, 2010. 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 as covered by the following paragraphs, or by the Company without Cause or by the Grantee for Good Reason within two years following a Change of Control), 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 employement to exercise the option (but in no event later than January 26, 2010). 2. If Grantee's employment is terminated for Cause, including but not limited to fraud, theft, embezzlement committed against the Company or any of its affiliated companies or customer of the Company, or for conflict of interest, unethical conduct, dishonesty affecting the assets, properties or business of the Company or any of its affiliated companies, willful misconduct, or continued material dereliction of duties, if such termination of employment occurs prior to a Change of Control or after the second anniversary of a Change of Control, this option will wholly and completely terminate on the date of termination of employment, or if such termination occurs within two years following a Change of Control, this option will wholly and completely terminate on the date thirty days following such termination of employment (but in no event later than January 26, 2010). 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 January 26, 2010). 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 January 26, 2010). 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 of Control, the Grantee shall have two years from the date of termination of employment to exercise this option (but in no event later than January 26, 2010). 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 2 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." Notwithstanding any other provision of this Nonqualified Stock Option Agreement, if Grantee engages in a "Prohibited Activity," as described below, while employed by the Company or any of its affiliates or within two years after Grantee's employment termination date, then Grantee's right to exercise any portion of this option, to the extent still outstanding at that time, shall immediately thereupon wholly and completely terminate. If an allegation of a Prohibited Activity by Grantee is made to the Compensation Committee of the Board of Directors of the Company (the "Committee"), the Committee, in its discretion, may suspend the exercisability of this option for up to two months to permit the investigation of such allegation, however, if it is determined that no Prohibited Activity was engaged in by Grantee, the period of exercisability of this option will be increased by the amount of time of such suspension, however, in no event will this option be exercisable more than ten (10) years from the date of grant. A "Prohibited Activity" shall be deemed to have occurred, as determined by the Committee in its sole and absolute discretion, if Grantee: (i) divulges any non-public, confidential or proprietary information of the Company or its past, present or future affiliates (collectively, the "Baker Hughes Group"), but excluding information that (a) becomes generally available to the public other than as a result of Grantee's public use, disclosure, or fault, or (b) becomes available to Grantee on a non-confidential basis after Grantee's employment termination date from a source other than a member of the Baker Hughes Group prior to the public use or disclosure by Grantee, provided that such source is not bound by a confidentiality agreement or otherwise prohibited from transmitting the information by a contractual, legal or fiduciary obligation; or (ii) directly or indirectly, consults or becomes affiliated with, conducts, participates or engages in, or becomes employed by, any business that is competitive with the business of any member of the Baker Hughes Group, wherever from time to time conducted throughout the world, including situations where Grantee solicits or participates in or assists in any way in the solicitation or recruitment, directly or indirectly, of any employees of any member of the Baker Hughes Group. 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: January 26, 2000 BAKER HUGHES INCORPORATED ----------------------------------- G. S. FINLEY SENIOR VICE PRESIDENT EX-21 9 SUBSIDIARIES OF REGISTRANT 1 BAKER HUGHES INCORPORATED EXHIBIT 21 12/31/99
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 Hughes International Branches, Inc. Delaware (2) Baker Hughes EHHC, Inc. Delaware 100% Baker Hughes GmbH Austria 100% Baker Hughes Asia Pacific Ltd. Cayman Islands 100% Baker Hughes Limited England 100% Baker Hughes Nederland Holdings B.V. The Netherlands 100% Baker Hughes Canada Holdings B.V. The Netherlands 100% Baker Hughes Canada Company Nova Scotia 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 Hughes International Branches, Inc. Baker Hughes Oilfield Operations, Inc. - 96.16% Other subsidiaries - 3.84%
EX-23.1 10 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, in Registration Statement No. 333-62205 on Form S-8, in Registration Statement No. 333-74897 on Form S-8, in Registration Statement No. 333-81463 on Form S-8, and in Post-Effective Amendment No. 1 to Registration Statement No. 333-76183 on Form S-4 of our report dated February 16, 2000 (which expresses an unqualified opinion and includes explanatory paragraphs relating to the restatement of the Company's consolidated statement of financial position as of December 31, 1998 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 the year ended September 30, 1997, and to a 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) appearing in this Annual Report on Form 10-K of Baker Hughes Incorporated for the year ended December 31, 1999. /s/ DELOITTE & TOUCHE LLP Houston, Texas March 16, 2000 EX-27.1 11 FINANCIAL DATA SCHEDULE
5 1,000 12-MOS DEC-31-1999 DEC-31-1999 16,900 0 1,011,400 52,600 800,000 2,329,800 2,010,200 1,778,800 7,039,800 1,000,200 2,706,000 0 0 329,800 2,741,300 7,039,800 4,546,700 4,546,700 3,677,700 3,677,700 662,200 22,400 159,000 84,300 32,000 52,300 (19,000) 0 0 33,300 0.10 0.10
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