-----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, G/JR+2IWJdVEJwj4Rl3K5JgCgbWhJ6UGJWTnaMheV1viE7TSRcWZhMp9LZ4gT6nD WAspg7m3ySaFhCDg+6HaZg== 0000950129-02-001261.txt : 20020415 0000950129-02-001261.hdr.sgml : 20020415 ACCESSION NUMBER: 0000950129-02-001261 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 15 CONFORMED PERIOD OF REPORT: 20011231 FILED AS OF DATE: 20020313 FILER: COMPANY DATA: COMPANY CONFORMED NAME: BAKER HUGHES INC CENTRAL INDEX KEY: 0000808362 STANDARD INDUSTRIAL CLASSIFICATION: OIL & GAS FILED MACHINERY & EQUIPMENT [3533] IRS NUMBER: 760207995 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-09397 FILM NUMBER: 02573951 BUSINESS ADDRESS: STREET 1: 3900 ESSEX LANE CITY: HOUSTON STATE: TX ZIP: 77027 BUSINESS PHONE: 7134398600 MAIL ADDRESS: STREET 1: 3900 ESSEX LAND CITY: HOUSTON STATE: TX ZIP: 77210 10-K 1 h94456e10-k.txt BAKER HUGHES INCORPORATED - DECEMBER 31, 2001 ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2001 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 --------------- Commission File Number 1-9397 --------------- BAKER HUGHES INCORPORATED (Exact Name of Registrant as Specified in its Charter) DELAWARE 76-0207995 (State or Other Jurisdiction (IRS Employer Identification No.) of Incorporation or Organization) 3900 ESSEX LANE, SUITE 1200, HOUSTON, TEXAS 77027-5177 (Address of Principal Executive Offices) (Zip Code) Registrant's Telephone Number, Including Area Code: (713) 439-8600 --------------- Securities Registered Pursuant to Section 12(b) of the Act:
Name of Each Exchange Title of Each Class On Which Registered ------------------- --------------------- Common Stock, $1 Par Value Per Share New York Stock Exchange Pacific Exchange Swiss Exchange
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES [X] NO [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] --------------- At March 1, 2002, the registrant has outstanding 336,743,642 shares of Common Stock, $1 par value. The aggregate market value of the Common Stock on such date (based on the closing price on February 28, 2002 reported by the New York Stock Exchange) held by nonaffiliates was approximately $11,869,371,200. --------------- DOCUMENTS INCORPORATED BY REFERENCE Portions of Registrant's 2001 Proxy Statement for the Annual Meeting of Stockholders to be held April 24, 2002 are incorporated by reference into Part III. ================================================================================ PART I ITEM 1. BUSINESS Baker Hughes Incorporated (the "Company") is a Delaware corporation engaged in the oilfield and process industries. In addition, the Company manufactures and sells other products and provides services to industries that are not related to the oilfield or continuous process industries. The Company conducts certain of its operations through subsidiaries, affiliates, ventures, partnerships or alliances. The Company was formed in April 1987 in connection with the combination of Baker International Corporation and Hughes Tool Company. The Company acquired Western Atlas Inc. ("Western Atlas") in a merger completed on August 10, 1998. As used herein, the "Company" may refer to Baker Hughes Incorporated or its subsidiaries. The use of the terms Company and Baker Hughes are not intended to connote particular corporate status or relationships. For additional industry segment information for the three years ended December 31, 2001, see Note 10 of the Notes to Consolidated Financial Statements in Item 8 herein. OILFIELD The Oilfield segment of the Company consists of six operating divisions: Baker Atlas, Baker Hughes INTEQ, Baker Oil Tools, Baker Petrolite, Centrilift and Hughes Christensen. The Company, through its Oilfield segment, is a major supplier of wellbore-related products, technology services and systems to the oil and gas industry on a worldwide basis and provides equipment, products and services for drilling, formation evaluation, completion and production of oil and gas wells. These divisions have been aggregated because the long-term financial performance of these divisions is affected by similar economic conditions and the consolidated results are evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance. The principal markets for this segment include all major oil and gas producing regions of the world, including North America, Latin America, Europe, Africa, the Middle East and the Far East. Baker Atlas. The Company, through its Baker Atlas division, is a premier provider of a complete range of downhole well logging technology and services, including advanced formation evaluation, production and reservoir engineering and petrophysical and geophysical data acquisition services. In addition, the Company provides perforating and completion technologies, pipe recovery and data management, processing and analysis. This diverse range of services is applicable through the life cycle of a reservoir - initially, in support of the drilling process, continuing through the prospect evaluation and appraisal phase and finally, to production and reservoir management. In performing well logging services, the Company transmits electronic instrumentation and sensor packages into the borehole by means of an electrical wireline, drill pipe, coiled tubing or well tractor. The surface-controlled instrumentation gathers measurements, collects samples and performs experiments downhole. The measurements are recorded digitally and can be displayed on a continuous graph, or well log, against depth or time. These well logs are processed, analyzed and interpreted to determine physical attributes of the well, which can indicate the volume of hydrocarbon present, the extent of the reservoir and its producibility. Perforating services are offered by both Baker Atlas and the Company's Baker Oil Tools division and provide a pathway through the casing and cement sheath in wells so that the hydrocarbon can enter the wellbore from the formation. These services and information that these divisions provide allow oil and gas companies to define, reduce and manage their risk. The Company's largest competitors in the downhole logging and perforating markets include Schlumberger Limited ("Schlumberger") and Halliburton Company ("Halliburton"). Baker Hughes INTEQ. The Company, through its Baker Hughes INTEQ division, is a major supplier of real-time drilling and evaluation services to the oil and gas industry. These services include directional and horizontal drilling technologies, drilling fluid systems, logging-while-drilling, measurement-while-drilling, mud logging, coring and subsurface surveying. The Company provides high-end technology solutions that oil and gas companies require to drill complex wells in challenging reservoir environments. Baker Hughes INTEQ is an industry leader in the design and planning of wells that incorporate complex trajectories set to intercept multiple reservoir targets. As exploration and development is increasingly conducted in the costlier offshore deepwater areas, there is an increased demand for the Company's drilling technology to reduce cost through optimized performance. In the upper hole sections of an oil and gas well, the Company's survey services and high performance drilling motors can help to provide safe and efficient drilling of the formations. In the directional portion of the well, the Company's 1 rotary steering technology is combined with logging-while-drilling technology to allow clients to drill three-dimensional well trajectories while taking measurements to evaluate the formations drilled. The measurements are transmitted to the surface through the use of pulse telemetry, a system where differential pressure patterns are transmitted through a fluid column to the surface for decoding. The Company's visualization technology at the surface allows this real-time data to be overlaid on images of the reservoir, permitting engineers to steer the well while watching graphical representation of the drilling assembly moving through the reservoir. These technologies allow access to, and the efficient drilling of, reservoirs that could not have been developed effectively five years ago. The Company competes principally with Halliburton and Schlumberger in these products and services. The Company, through its Baker Hughes INTEQ division, also produces and markets drilling fluids (muds) and specialty chemicals and provides technical services for the use of the muds and chemicals in oil and gas well drilling. Drilling fluids typically contain barite or bentonite and may use a water or oil base. The main purpose of the drilling fluid is to provide stability within the wellbore by cleaning the bottom of a hole as it removes cuttings and transports them to the surface, by cooling the bit and drill string, by controlling formation pressures and by sealing porous well formations. To provide optimized stability and future oil production, a fluid is often customized for a wellbore as the well-site engineer monitors the interaction between the drilling fluid and the formation. The Company also furnishes on-site, around-the-clock laboratory analysis and examination of circulated and recovered drilling fluids and recovered drill cuttings to detect the presence of hydrocarbons and identify the formations penetrated by the drill bit. The Company's principal competitors for these products and services are Smith International, Inc. ("Smith") and Halliburton. Baker Oil Tools. The Company, through its Baker Oil Tools division, is a premier provider of downhole completion, workover and fishing equipment and services. Downhole completion product lines include packers, flow control equipment, subsurface safety valves, liner hangers and sand control systems. Packers are used in the wellbore to seal the space between the production tubing and the casing, to protect the casing from reservoir pressures and corrosive formation fluids and to maintain the separation of production zones. Casing is steel pipe used to line the well bore to keep the wall of the drilled hole from caving in, to prevent fluids from moving from one formation to another and to improve the efficiency of extracting oil and gas from producing wells. Production tubing is the pipe through which the oil and gas flows from the producing zone under the ground to the surface of the well. Flow control equipment provides additional means to control and adjust the flow of downhole fluids from producing zones, while subsurface safety valves shut off all flow of fluids to the surface in the event of an emergency. New technology developments in this area include intelligent completion systems, which can provide lower customer operating costs through remote actuation and the opportunity for enhanced production by controlling selective zone production based on real time reservoir data. The Company is a major worldwide manufacturer and provider of packers, flow control and safety valve equipment. Its principal competitors in this area are Halliburton, Schlumberger and Weatherford International Inc. ("Weatherford"). The Company also manufactures and sells liner hanger systems which the Company's customers use to suspend and set strings of casing pipe in wells. The Company's new technology developments in this area include multi-lateral completions systems, which provide multiple downhole casing pipes to be tied to one main wellbore casing pipe with pressure seal integrity. The Company is a leading worldwide producer of liner hangers and multi-lateral systems. Its primary competitors in this area are Halliburton and Weatherford. The Company offers sand control equipment (gravel pack tools, screens, fluids and pumping) and services that prevent sand from entering the wellbore and reducing productivity. The Company has expanded its marine vessel, high pressure, "frac-pack" service capabilities. The frac-pack service involves injecting fluids and propants into the formation to expand the formation and increase the rate of production. Propants are spherical-shaped particles (generally made of a silicant) that, when forced into fissures in the formation, expand the fissures and maintain the expansion. The Company's new technology developments in this area include expanding solid and sand screen pipe technologies. By expanding pipe and screen downhole, the internal flow areas are increased, which, in turn, allows for enhanced production. The Company is a leading provider of sand control equipment and services. Its primary competitors are Halliburton, Schlumberger and BJ Services Company. For the workover segment of the market, the Company provides mechanical services tools and inflatable packers. The inflatable products enable thru-tubing remedial operations that utilize coiled tubing rigs. The inflatable packers are also used in the open hole environment for testing the potential of a well during the drilling phase prior to the installation of casing. The inflatable packers also become an integral part of the casing (external 2 casing packer) to provide zone separation. The Company's primary competitors for these product lines are Halliburton, Schlumberger and Weatherford. The Company also provides fishing equipment and services using specialized tools to locate, dislodge and retrieve twisted off, dropped or damaged pipe, tools or other objects from inside the wellbore, potentially hundreds or thousands of feet below the surface. In addition, milling, cutting and whipstock services are offered to clean out wellbores or mill windows in the casing to drill a sidetrack, or multi-lateral well. The Company's fishing services are also offered in a thru-tubing product line, making it compatible with coiled tubing workover operations. The Company is a leading provider of fishing services. Its major competitors are Weatherford and Smith. The Company also provides other completion, remedial and production products and services, including control systems for surface and subsurface safety valves and surface flow lines and flow regulators and packers used in secondary recovery waterflood projects. The Company's primary competitors are Halliburton and Schlumberger. Baker Petrolite. The Company, through its Baker Petrolite division, is a premier provider of oilfield specialty chemicals and integrated chemical technology solutions for petroleum production, transportation and refining. Chemicals that the Company provides include specialty chemicals that production segments of the petroleum industry use, as well as industrial chemicals that customers use in refining, wastewater treatment and cooling and boiler water processes. The Company also provides chemical technology solutions to other industrial markets throughout the world including petrochemicals, fuel additives, plastics, imaging, adhesives, steel and crop protection. The Company believes that its primary competitors are Ondeo Nalco Energy Services, LP and the Betz Dearborn division of Hercules, Inc. Centrilift. The Company, through its Centrilift division, is a market leader for oilfield electric submersible pumping systems, which help raise oil to the surface. These pumping systems consist of an electric submersible pump placed inside the oil well near the productive formation, power and control cables between the pump and the surface and a surface control system. The Company manufactures the critical components of the systems, including variable speed motor controllers and specialty armored power cables designed for oilfield use. Its major competitor is Schlumberger. Hughes Christensen. The Company, through its Hughes Christensen division, is a leading manufacturer and marketer of Tricone(R) roller cone drill bits and polycrystalline diamond compact fixed cutter bits for the worldwide oil, gas, mining and geothermal industries. The Company believes that its principal competitors in this area are Smith, Halliburton and Schlumberger for oil and gas applications, and Sandvik Smith and Varel International, Inc. for other applications. PROCESS The Process segment of the Company consists of two operating divisions: EIMCO Process Equipment and BIRD Machine. Through its Process segment, the Company manufactures, markets and services a broad range of separation and treatment solutions and continuous and batch centrifuges and specialty filters to a wide range of markets. EIMCO Process Equipment. The Company, through its EIMCO Process Equipment division ("EIMCO"), provides a broad range of separation and treatment solutions to a wide range of process industries including minerals processing, power generation, pulp and paper production, municipal water and wastewater, industrial water and wastewater, chemical processing, steel production and refining. EIMCO designs, manufactures and installs customer-specific solutions that can improve process performance and productivity. The Company's product lines include vacuum filters (drum, disc and horizontal belt filters), pressure filters (filter presses and belt presses), sedimentation products (thickeners, hi-rate thickeners, Deep Cone(TM) paste thickeners, E-Cat(TM) clarifier thickeners and EIMCO(R) clarifiers), Wemco(R) flotation cells, Pyramid(TM) column cells, biological treatment equipment (Carrousel(R) system, aerators, digestors and Advent integral systems), KnowledgeScape(R) process control systems and specialty equipment (solvent-oil dewaxer and ClariDisc(R) filters). EIMCO has one of the largest bases of installed equipment in the industry. The Company's principal competitors include Krauss Maffei, Outokumpu, Metso Minerals (formerly Svedala), U.S. Filter, Westec and Ahlstrom. 3 BIRD Machine. The Company, through its BIRD Machine division, manufactures a broad range of continuous and batch centrifuges and specialty filters, which are each widely used in the municipal, industrial, chemical, minerals and pharmaceutical markets to separate, dewater or classify process and waste streams. The Company's principal competitors in its continuous centrifuge product line are Alfa-Laval/Sharples Tomoe, Westfalia and Flottweg. There are numerous small and large companies that compete in the batch centrifuge and filter product lines. The Company provides parts, repairs and services for all of its process equipment product lines through a global network of personnel and facilities strategically located to serve the customer community. The Company also offers equipment and operation services for processes that utilize many of the Company's process equipment product and service lines. Petreco. The Company has a 49% interest in the voting power of Petreco, an entity created by the Company and Sequel Holdings, Inc. ("Sequel"). Petreco was formed in October 2001, and the Company contributed $16.6 million of net assets of the refining and production product line of its Process segment for the Petreco formation. Petreco sells process equipment to oil and gas production (including electrostatic de-salters and hydrocyclones) and refining applications. WESTERN GECO The Company owns a 30% interest in a venture, Western GECO, formed in late 2000, with Schlumberger owning the remaining 70%. Western GECO is a leading provider of seismic data acquisition and processing services to assist oil and gas companies in evaluating the producing potential of sedimentary basins and in locating productive hydrocarbon zones. Seismic data is acquired by producing sound waves which move through the ground and are recorded by audio instruments. The recordings are then analyzed to determine the characteristics of the geologic formations through which the sound waves moved and the extent that oil and gas may be trapped in or moving through those formations. This analysis is known as a seismic survey. Western GECO conducts seismic surveys on land, in deep waters and across shallow-water transition zones worldwide. These seismic surveys encompass high-resolution, two-dimensional and three-dimensional surveys for delineating exploration targets. Western GECO also conducts time-lapse, four-dimensional seismic surveys for monitoring reservoir fluid movement over time. Seismic information can reduce field development and production costs by reducing turnaround time, lowering drilling risks and minimizing the number of wells necessary to explore and develop reservoirs. Western GECO's major competitors in providing these services are Compagnie Generale de Geophysique, Veritas DGC, Inc. and Petroleum Geo-Services ASA. EXPLORATION AND PRODUCTION ACTIVITIES The Company owns a 40% interest in the OML-114 project (formerly OPL-230), a Nigerian oil and gas exploration and production operation. The Company's intent to hold or divest of this project could change in the future depending on the relative value of the project and the viability of an offer from a third party with respect to a proposed transaction regarding the project. The Company divested all of its other exploration and production properties in 2000 and 2001 and does not expect to actively pursue additional interests in exploration and production properties. MARKETING, COMPETITION AND ECONOMIC CONDITIONS The Company markets the products of each of its principal industry segments primarily through the Company's own sales organizations on a product line basis, although certain of its products and services are marketed through supply stores, independent distributors or sales representatives. The Company ordinarily provides technical and advisory services to assist in its customers' use of the Company's products and services. Stockpoints and service centers for oilfield products and services are located in areas of drilling and production activity throughout the world. The Company markets its oilfield products and services in nearly all of the oil-producing countries. For process products and services, stockpoints and service centers are located near the operations of the Company's customers, and the Company markets process products and services throughout the world. In certain areas outside the United States, the Company utilizes licensees, sales representatives and distributors. 4 The Company's products and services are sold in highly competitive markets, and its revenues and earnings can be affected by changes in competitive prices, fluctuations in the level of activity in major markets, general economic conditions and governmental regulation. The Company competes with the oil and gas industry's largest integrated oilfield service providers. The Company believes that the principal competitive factors in the industries that it serves are product and service quality, availability and reliability; health, safety and environmental standards; technical proficiency and price. Further information concerning marketing, competition and economic conditions is contained under the caption "Business Environment" in "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations". INTERNATIONAL OPERATIONS The Company operates in over 70 countries worldwide, and its operations are subject to the risks inherent in doing business in multiple countries with various laws and differing political structures and situations. These risks include, but are not limited to, war, boycotts, political changes, terrorism, expropriation, foreign exchange or currency restrictions, taxes and changes in currency exchange rates. Although it is impossible to predict the likelihood of such occurrences or their effect on the Company, management believes these risks to be acceptable. However, there can be no assurance that an occurrence of any one or more of these events would not have a material adverse effect on the Company's operations. RESEARCH AND DEVELOPMENT; PATENTS The Company is engaged in research and development activities directed primarily toward the improvement of existing products and services, the design of specialized products to meet specific customer needs and the development of new products and processes. For information regarding the amounts of research and development expense in each of the three years ended December 31, 2001, see Note 14 of the Notes to Consolidated Financial Statements in Item 8 herein. The Company has followed a policy of seeking patent and trademark protection both inside and outside the United States for products and methods that appear to have commercial significance. The Company believes its patents and trademarks to be adequate for the conduct of its business, and while it regards patent and trademark protection important to its business and future prospects, it considers its established reputation, the reliability and quality of its products and the technical skills of its personnel to be more important. The Company aggressively pursues protection of its patents against patent infringement worldwide. BUSINESS DEVELOPMENTS OILFIELD In February 2002, the Company acquired Apollo Services, Inc. ("Apollo") for its Baker Hughes INTEQ division drilling fluids product line. Apollo is primarily engaged in the drying, injection and transfer of drill cuttings from oil and gas wells. In February 2002, the Company and Luna Innovations Incorporated ("Luna Innovations") formed a venture named Luna Energy, L.L.C. ("Luna Energy") to develop, manufacture, commercialize, sell, market and distribute downhole fiber optic and other sensors for oil and gas exploration, production, transportation and refining applications. The Company and Luna Innovations own 40% and 60% interests, respectively, in Luna Energy. PROCESS In the year 2000, the Company had announced plans to sell Baker Process as an entire business unit, but has since determined that it would consider selling the Baker Process operations as individual units. The Company has separated the product lines comprising Baker Process into three separate operational business units to provide focus and to allow these business units to better meet the needs of their individual client bases. These operations were reconstituted into the three original business units that were put together in 1999 to form Baker Process: EIMCO Process Equipment, BIRD Machine and a production and refining product line. 5 On October 30, 2001, the Company and Sequel created an entity to operate under the name of Petreco International ("Petreco"). The Company contributed $16.6 million of net assets of the refining and production product line of its Baker Process segment to Petreco, consisting primarily of intangible assets, accounts receivable and inventories. Petreco profits are shared by the Company and Sequel in 49% and 51% interests, respectively. Sequel is entitled to a liquidation preference upon the liquidation or sale of Petreco. EMPLOYEES At December 31, 2001, the Company had approximately 26,800 employees, as compared to approximately 24,500 employees at December 31, 2000. Approximately 2,370 employees at December 31, 2001, were represented under collective bargaining agreements that terminate at various times through September 30, 2006. The Company believes that its relations with its employees are satisfactory. 6 EXECUTIVE OFFICERS The following table shows as of March 6, 2002, the name of each executive officer of the Company, together with his age and all offices presently held with the Company.
NAME AGE Michael E. Wiley 51 Chairman of the Board, President and Chief Executive Officer of the Company since August 2000. Employed by Atlantic Richfield Company as President and Chief Operating Officer from 1997 to 2000 and as Executive Vice President from 1997 to 1998. Employed by Vastar Resources, Inc. as Chairman of the Board from 1994 to 2000 and President and Chief Executive Officer from 1996 to 1997. Employed by the Company in 2000. Andrew J. Szescila 54 Senior Vice President and Chief Operating Officer of the Company since 2000. Employed as President of Baker Hughes Oilfield Operations from January to October 2000. Served as Senior Vice President of the Company since 1997 and Vice President of the Company from 1995 to 1997. Employed as President of Hughes Christensen Company from 1989 to 1997 and President of Baker Service Tools from 1988 to 1989. Served as President of BJ Services International from 1987 to 1988. Employed by the Company in 1973. George S. Finley 51 Senior Vice President - Finance and Administration and Chief Financial Officer of the Company since 1999. Employed as Senior Vice President and Chief Administrative Officer of the Company from 1995 to 1999, Controller from 1987 to 1993 and Vice President from 1990 to 1995. Served as Chief Financial Officer of Baker Hughes Oilfield Operations from 1993 to 1995. Employed by the Company in 1982. Alan R. Crain, Jr. 50 Vice President and General Counsel of the Company since October 2000. Executive Vice President, General Counsel and Secretary of Crown, Cork & Seal Company, Inc. from 1999 to 2000. Vice President and General Counsel, 1996 to 1999, and Assistant General Counsel, 1988 to 1996, of Union Texas Petroleum Holding, Inc. Employed by the Company in 2000. Greg Nakanishi 50 Vice President, Human Resources of the Company since November 2000. Employed as President of GN Resources from 1989 to 2000. Employed by the Company in 2000. Alan J. Keifer 47 Vice President and Controller of the Company since July 1999. Employed as Western Hemisphere Controller of Baker Oil Tools from 1997 to 1999 and Director of Corporate Audit for the Company from 1990 to 1996. Employed by the Company in 1990. John A. O'Donnell 53 Vice President of the Company since 2000. Employed as Vice President, Business Process Development, of the Company from 1997 to 2002; Vice President, Manufacturing, of Baker Oil Tools from 1990 to 1997 and Plant Manager of Hughes Tool Company from 1975 to 1990. Employed by the Company in 1975. Ray Ballantyne 52 Vice President of the Company since 1998 and President, Baker Hughes INTEQ since 1999. Employed as Vice President, Marketing, Technology and Business Development, of the Company from 1998 to 1999; Vice President, Worldwide Marketing, of Baker Oil Tools from 1992 to 1998 and Vice President, International Operations, of Baker Service Tools, from 1989 to 1992. Employed by the Company in 1975.
7 David H. Barr 52 Vice President of the Company and President of Baker Atlas since 2000. Employed as Vice President, Supply Chain Management, of Cooper Cameron from 1999 to 2000. Mr. Barr also held the following position with the Company: Vice President, Business Process Development, from 1997 to 1998 and the following positions with Hughes Tool Company/Hughes Christensen: Vice President, Production and Technology, from 1994 to 1997; Vice President, Diamond Products, from 1993 to 1994; Vice President, Eastern Hemisphere Operations, from 1990 to 1993 and Vice President, North American Operations, from 1988 to 1990. Employed by the Company in 1972. James R. Clark 51 Vice President of the Company and President of Baker Petrolite Corporation since 2001. President and Chief Executive Officer of Consolidated Equipment Companies, Inc. from 2000 to 2001 and President of Sperry-Sun from 1996 to 1999. Employed by the Company in 2001. William P. Faubel 46 Vice President of the Company and President of Centrilift since 2001. Vice President, Marketing, of Hughes Christensen from 1994 to 2001 and served as Region Manager for various Hughes Christensen areas (both domestic and international) from 1986 to 1994. Employed by a predecessor of the Company, Hughes Tool Company, in 1977. Edwin C. Howell 54 Vice President of the Company since 1995 and President of Baker Oil Tools since 1992. Employed as President of Baker Service Tools from 1989 to 1992 and Vice President - General Manager of Baker Performance Chemicals (the predecessor of Baker Petrolite) from 1984 to 1989. Employed by the Company in 1975. Douglas J. Wall 49 Vice President of the Company and President of Hughes Christensen since 1997. Served as President and Chief Executive Officer of Western Rock Bit Company Limited, Hughes Christensen's former distributor in Canada, from 1991 to 1997. Previously employed as General Manager of Century Valve Company from 1989 to 1991 and Vice President, Contracts and Marketing, of Adeco Drilling & Engineering from 1980 to 1989. Employed by the Company in 1997.
There are no family relationships among the executive officers of the Company. ENVIRONMENTAL MATTERS The Company's operations are subject to U.S. federal, state and local regulations with regard to air and water quality and other environmental matters. The Company believes that it is in substantial compliance with these regulations. Regulation in this area continues to evolve and changes in standards of enforcement of existing regulations, as well as the enactment and enforcement of new legislation, may require the Company and its customers to modify, supplement or replace equipment or facilities or to change or discontinue present methods of operation. During the year ended December 31, 2001, the Company spent approximately $15.8 million to comply with U.S. federal, state and local provisions regulating the discharge of materials into the environment or otherwise relating to the protection of the environment (collectively, "Environmental Regulations"). In the upcoming year ending December 31, 2002, the Company expects to spend a total of approximately $17 million to comply with the Environmental Regulations. Based upon current information, the Company believes that its compliance with Environmental Regulations will not have a material adverse effect upon the capital expenditures, earnings and competitive position of the Company because the Company has either made adequate reserves for such compliance expenditures or the cost to the Company for such compliance is expected to be small in comparison with the Company's overall net worth. The Company estimates that it will incur approximately $4 million in capital expenditures for environmental control equipment during the year ending December 31, 2002 and approximately $3 million in capital expenditures in 2003. The Company believes that capital expenditures for environmental control equipment for the years 2002 and 2003 will not have a material adverse effect upon the financial condition of the Company because the 8 aggregate amount of these expenditures is expected to be small in comparison with the Company's overall net worth. The Comprehensive Environmental Response, Compensation and Liability Act (known as "Superfund") imposes liability for the release of a "hazardous substance" into the environment. Superfund liability is imposed without regard to fault and even if the waste disposal was in compliance with the then current laws and regulations. With the joint and several liability imposed under Superfund, a potentially responsible party ("PRP") may be required to pay more than its proportional share of such costs. The Company and several of its subsidiaries and divisions have been identified as PRPs at various sites discussed below. The United States Environmental Protection Agency (the "EPA") and appropriate state agencies are supervising investigative and cleanup activities at these sites. (a) Baker Petrolite Corporation ("Petrolite"), Hughes Christensen Company, a Baker Hughes INTEQ predecessor entity, Baker Oil Tools and a former subsidiary were named in April 1984 as PRPs at the Sheridan Superfund Site located in Hempstead, Texas. The Texas Natural Resource Conservation Commission ("TNRCC") is overseeing the remedial work at this site. The Sheridan Site Trust was formed to manage the site remediation, and the Company participates as a member of the Sheridan Site Trust. Sheridan Site Trust officials estimate the total remedial and administrative costs to be approximately $30 million, of which the Company's estimated contribution is approximately 2%. (b) In May 1987, Baker Performance Chemicals Incorporated (subsequently merged into Petrolite) entered into an Agreed Administrative Order with the Texas Water Commission (currently, the TNRCC) with respect to soil and groundwater contamination at the Odessa - Hillmont site located in Odessa, Texas. Baker Performance Chemicals used the site as a chemical blending plant. The contaminated soil has been removed and the site continues in the groundwater recovery and treatment phase at an annual cost to the Company of approximately $25,000. (c) In December 1987, a former subsidiary of the Company was named a respondent in an EPA Administrative Order for Remedial Design and Remedial Action associated with the Middlefield-Ellis-Whisman (known as "MEW") Study Area, an eight-square mile soil and groundwater contamination site located in Mountain View, California. Several PRPs for the site have estimated the total cost of remediation to be approximately $80 million. The conclusion of extensive investigations conducted by the Company's third-party environmental consultants is that the activities of the former subsidiary's operating facility in the MEW Study Area could not have been the source of any contamination in the soil or groundwater within the MEW Study Area. As a result of the Company's environmental investigations and a resulting report delivered to the EPA in September 1991, the EPA has informed the Company that no further work needs to be performed on the former subsidiary's site, and further, the EPA has indicated that it does not believe there is a contaminant source on the property. Although the Company's former subsidiary continues to be named in the EPA's Administrative Order, the Company believes the Administrative Order is not valid with respect to the Company's former subsidiary and is seeking the withdrawal of the Administrative Order with respect to that subsidiary. (d) In January 1996, the TNRCC named Petrolite as a PRP at the McBay Oil and Gas State Superfund Site in Grapevine, Texas. According to Petrolite's records, it sold product to McBay Oil and Gas Company, but did not transport waste to the site. Documentation of the product sales has been sent to the TNRCC. Based on available information, the Company does not believe that Petrolite has any liability for contamination at this site. (e) In July 1997, Petrolite was named by the EPA as a PRP at the Shore Refinery Site, Kilgore, Texas. According to Petrolite's records, it did not arrange for the disposal, treatment or transportation of hazardous substances or used oil in relation to the site, and to date, the EPA has not produced any documentation linking the Company or any of its subsidiaries or divisions to the environmental conditions at the site. The Company does not believe that it has any liability for contamination at this site. (f) In June 1999, the EPA named Hughes Tool Company (now known as Hughes Christensen) as a PRP at the Li Tungsten Site in Glen Cove, New York. The Company believes that it has contributed a de minimis amount of hazardous substance to the site and has responded to the EPA's inquiry. A third-party consultant is 9 conducting investigative studies at the site to determine a suitable remedial action plan, as well as the total estimated cost for remediation. (g) In January 1999, Baker Oil Tools, Petrolite and predecessor entities of Petrolite were named as PRPs by the State of California's Department of Toxic Substances Control for the Gibson site in Bakersfield, California. The combined volume that Baker Hughes companies contributed to the site is estimated to be less than 0.5%. The preliminary cost estimate for remediation of the site is approximately $14 million. (h) In December 2000, the EPA named Petrolite as a PRP at the Casmalia Disposal Site, Santa Barbara County, California. The EPA estimated that the volumetric portion of waste the Teir Group of PRPs (of which Petrolite is a member) transported and placed at the site is less than 0.1% of the total material. The EPA has estimated the total cost of remediation to range from $225 million to $290 million. Petrolite is considered a de minimis contributor and is negotiating a settlement. (i) In 2001, Hughes Christensen (formerly Hughes Tool Company), Baker Oil Tools, Baker Hughes INTEQ and a former subsidiary of the Company were named as PRPs in the Force State Superfund Site located in Brazoria County, Texas. The TNRCC is overseeing the investigation and remediation at the Force State Site. Although the investigation of the site is incomplete, preliminary cost estimates for the closure of the site are approximately $3 million, with the total contribution from the Company's divisions estimated to be 25% of that cost. While PRPs in Superfund actions have joint and several liability for all costs of remediation, it is not possible at this time to quantify the Company's ultimate exposure because the projects are either in the investigative or early remediation stage. Based upon current information, the Company does not believe that probable or reasonably possible expenditures in connection with the sites described above are likely to have a material adverse effect on the Company's financial condition because: (1) the Company has established adequate reserves to cover the estimate the Company presently believes will be its ultimate liability with respect to the matter, (2) the Company and its subsidiaries have only limited involvement in the sites based upon a volumetric calculation, as described above, (3) other PRPs involved in the sites have substantial assets and may reasonably be expected to pay their share of the cost of remediation, (4) the Company has adequate resources, insurance coverage or contractual indemnities from third parties to cover the ultimate liability, and (5) the Company believes that its ultimate liability is small compared with the Company's overall net worth. The Company is subject to various other governmental proceedings and regulations, including foreign regulations, relating to environmental matters, but the Company does not believe that any of these matters is likely to have a material adverse effect on its financial condition or results of operation. "Environmental Matters" contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. The words "will," "believe," "to be," "expects" and similar expressions are intended to identify forward-looking statements. The Company's expectations regarding its compliance with Environmental Regulations and its expenditures to comply with Environmental Regulations, including (without limitation) its capital expenditures on environmental control equipment, are only its forecasts regarding these matters. These forecasts may be substantially different from actual results, which may be affected by the following factors: changes in Environmental Regulations; unexpected, adverse outcomes with respect to sites where the Company has been named as a PRP, including (without limitation) the sites described above; the discovery of new sites of which the Company is not aware and where additional expenditures may be required to comply with Environmental Regulations; an unexpected discharge of hazardous materials in the course of the Company's business or operations; an acquisition of one or more new businesses; a catastrophic event causing discharges into the 10 environment of hydrocarbons; and a material change in the allocation to the Company of the volume of discharge and a resulting change in the Company's liability as a PRP with respect to a site. ITEM 2. PROPERTIES The Company operates 69 manufacturing plants, ranging in size from approximately 1,500 to 0.3 million square feet of manufacturing space. The total area of the plants is more than 3.8 million square feet, of which approximately 2.3 million square feet (62%) are located in the United States, 0.4 million square feet (10%) are located in the Western Hemisphere exclusive of the United States, 0.9 million square feet (23%) are located in Europe, and 0.2 million square feet (5%) are located in the Eastern Hemisphere exclusive of Europe. These manufacturing plants by industry segment and geographic area appear in the table below. The Company also owns or leases and operates various customer service centers and shops and sales and administrative offices throughout the geographic areas in which it operates.
OTHER OTHER WESTERN EASTERN UNITED STATES HEMISPHERE EUROPE HEMISPHERE TOTAL ------------- ---------- ------ ---------- ----- Oilfield 29 9 8 11 57 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, manufacturing and other equipment. ITEM 3. LEGAL PROCEEDINGS The Company and its subsidiaries are involved in litigation or proceedings that have arisen in the Company's ordinary business activities. The Company insures against these risks to the extent deemed prudent by its management, but no assurance can be given that the nature and amount of such insurance will be sufficient to fully indemnify the Company against liabilities arising out of pending and future legal proceedings. Many of these insurance policies contain self-insured retentions in amounts the Company deems prudent. The Company has been named as a defendant in a number of shareholder class action suits filed by purported shareholders shortly after the Company's December 8, 1999 announcement regarding the accounting issues it discovered at its Baker Hughes INTEQ division. These suits, which seek unspecified monetary damages, have been consolidated in the federal district court for the Southern District of Texas pursuant to the Private Securities Litigation Reform Act of 1995. The Company filed Motions to Dismiss in both the shareholder derivative suit and the class action. The federal district court granted the Company's Motions on both actions. No appeal was filed in the shareholder derivative suit, but the class action case is currently on appeal at the U.S. Fifth Circuit Court of Appeals. The Company believes the allegations in these suits are without merit, and the Company intends to vigorously defend these lawsuits. Even so, an adverse outcome in this class action litigation could have an adverse effect on the Company's financial condition or results of operations. See also "Item 1. Business - Environmental Matters". ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. 11 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Common Stock, $1.00 par value per share (the "Common Stock"), of the Company is principally traded on The New York Stock Exchange. The Common Stock is also traded on the Pacific Exchange and the Swiss Exchange. At March 1, 2002, there were approximately 75,581 stockholders and approximately 23,314 stockholders of record. For information regarding quarterly high and low sales prices on the New York Stock Exchange for the Common Stock during the two years ended December 31, 2001 and information regarding dividends declared on the Common Stock during the two years ended December 31, 2001, see Note 15 of the Notes to Consolidated Financial Statements in Item 8 herein. 12 ITEM 6. SELECTED FINANCIAL DATA The Selected Financial Data should be read in conjunction with "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" and with "Item 8. Financial Statements and Supplementary Data" herein.
THREE MONTHS YEAR ENDED ENDED YEAR ENDED DECEMBER 31, DECEMBER 31, SEPTEMBER 30, -------------------------------------------------- ------------- ------------- (In millions, except per share amounts) 2001 2000 1999 1998 1997 1997 --------------------------------------- ---------- ---------- ---------- ---------- ------------- ------------- Revenues $ 5,382.2 $ 5,233.8 $ 4,936.5 $ 6,310.6 $ 1,572.8 $ 5,343.6 Costs and expenses: Cost of revenues 3,831.8 4,009.6 4,009.8 5,138.4 1,156.3 4,188.2 Selling, general and administrative 818.6 759.6 741.9 876.3 215.7 538.8 Merger related costs -- -- (1.6) 219.1 -- -- Unusual charge 1.6 69.6 4.8 215.8 -- 52.1 Acquired in-process research and development -- -- -- -- -- 118.0 ---------- ---------- ---------- ---------- ---------- ---------- Total 4,652.0 4,838.8 4,754.9 6,449.6 1,372.0 4,897.1 ---------- ---------- ---------- ---------- ---------- ---------- Operating income (loss) 730.2 395.0 181.6 (139.0) 200.8 446.5 Equity in income (loss) of affiliates 45.8 (4.6) 7.0 6.7 1.9 2.8 Interest expense (126.4) (173.3) (167.0) (149.0) (24.5) (91.4) Interest income 12.2 4.8 5.1 3.6 1.2 3.6 Gain on trading securities -- 14.1 31.5 -- -- -- Spin-off related costs -- -- -- -- -- (8.4) ---------- ---------- ---------- ---------- ---------- ---------- Income (loss) from continuing operations before income taxes, extraordinary loss and cumulative effect of accounting change 661.8 236.0 58.2 (277.7) 179.4 353.1 Income taxes (223.1) (133.7) (24.9) (18.4) (68.0) (160.7) ---------- ---------- ---------- ---------- ---------- ---------- Income (loss) from continuing operations before extraordinary loss and cumulative effect of accounting change 438.7 102.3 33.3 (296.1) 111.4 192.4 Extraordinary loss (1.5) -- -- -- -- -- Cumulative effect of accounting change 0.8 -- -- -- -- (12.1) ---------- ---------- ---------- ---------- ---------- ---------- Income (loss) from continuing operations 438.0 102.3 33.3 (296.1) 111.4 180.3 Income (loss) from discontinued operations of UNOVA, Inc., net of tax -- -- -- -- 2.8 (154.9) ---------- ---------- ---------- ---------- ---------- ---------- Net income (loss) $ 438.0 $ 102.3 $ 33.3 $ (296.1) $ 114.2 $ 25.4 ========== ========== ========== ========== ========== ========== Per share of common stock: Income (loss) from continuing operations before extraordinary loss and cumulative effect of accounting change Basic $ 1.31 $ 0.31 $ 0.10 $ (0.92) $ 0.35 $ 0.64 Diluted 1.30 0.31 0.10 (0.92) 0.34 0.63 Dividends 0.46 0.46 0.46 0.46 0.12 0.46 Financial Position: Working capital $ 1,484.8 $ 1,498.8 $ 1,158.2 $ 1,381.2 $ 1,466.8 $ 1,433.8 Total assets 6,676.2 6,489.1 7,182.1 7,788.3 7,208.3 7,064.8 Long-term debt 1,682.4 2,049.6 2,706.0 2,726.3 1,605.3 1,473.3 Stockholders' equity 3,327.8 3,046.7 3,071.1 3,165.1 3,483.4 3,455.7
NOTES TO SELECTED FINANCIAL DATA (1) In August 1998, the Board of Directors of the Company approved a change in the fiscal year-end of the Company from September 30 to December 31, effective with the calendar year beginning January 1, 1998. A three-month transition period from October 1, 1997 through December 31, 1997 precedes the start of the 1998 fiscal year. 13 (2) See Note 6 of the Notes to Consolidated Financial Statements in Item 8 herein for a description of the Western GECO venture formed by the Company in November 2000. (3) During 1998, the Company acquired WEDGE DIA-LOG, Inc. and 3-D Geophysical, Inc. for $218.5 million in cash and $117.5 million in cash, respectively. The Company also made several smaller acquisitions with an aggregate purchase price of $121.6 million. The purchase method of accounting was used to record these acquisitions. During the year ended September 30, 1997, the Company acquired Petrolite Corporation ("Petrolite") for 19.3 million shares of the Company's common stock and the assumption of Petrolite's outstanding vested and unvested employee stock options, resulting in total consideration of $751.2 million, and acquired Drilex International Inc. ("Drilex") for 2.7 million shares of the Company's common stock. The Petrolite acquisition was accounted for as a purchase, and the Drilex acquisition was accounted for using the pooling of interests method. In connection with the Petrolite acquisition, the Company wrote off $118.0 million of in-process research and development because the technological feasibility of the projects in-process had not been established, and there was no alternative future use at that date. (4) In August 1998, the Company completed a merger with Western Atlas, Inc. ("Western Atlas") accounted for using the pooling of interests method. In connection with the merger, the Company recorded merger related costs of $219.1 million for transaction costs, employee related costs, integration costs, the write-off of the carrying value of a product line and the triggering of change in control rights contained in certain stock options plans of Western Atlas and the Company. (5) See Note 2 of the Notes to Consolidated Financial Statements in Item 8 herein for a description of the unusual charges in 2001, 2000 and 1999. The unusual charge in 1998 consisted of cash charges for severance benefits, charges to combine operations and consolidate facilities, and environmental and litigation reserves. The noncash portion of the charge consisted of charges for impairment of inventory and rental tools, the write-down of a former consolidated joint venture, the write-off and write-down of certain assets, a ceiling test charge for the Company's oil and gas properties and a write-down of real estate held for sale. In 1998, the charges reflected in cost of revenues, selling, general and administrative expense and unusual charge were $305.0 million, $68.7 million and $215.8 million, respectively. The unusual charge in the year ended September 30, 1997 consisted of charges in connection with certain 1997 acquisitions to combine the acquired operations with those of the Company, the write-down of a low margin product line and the write-down of the Company's investment in a subsidiary held for sale to its net realizable value. (6) See Note 1 of the Notes to Consolidated Financial Statements in Item 8 herein for a description of the cumulative effect of accounting change in 2001 related to the adoption of Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities. In the year ended September 30, 1997, the Company changed its method of accounting for the impairment of long-lived assets and for long-lived assets held for disposal. 14 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") should be read in conjunction with the consolidated financial statements of the Company for the years ended December 31, 2001, 2000 and 1999 and the related Notes to Consolidated Financial Statements contained in Item 8 herein. FORWARD-LOOKING STATEMENTS MD&A and certain statements in the Notes to Consolidated Financial Statements include forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, (each a "Forward-Looking Statement"). The words "anticipate," "believe," "expect," "plan," "intend," "estimate," "project," "forecasts," "will," "could," "may" and similar expressions, and the negative thereof, are intended to identify forward-looking statements. Baker Hughes' expectations about its business outlook, customer spending, oil and gas prices and the business environment for the Company and the industry in general are only its forecasts regarding these matters. These forecasts may be substantially different from actual results, which are affected by the following factors: the effect of competition; the level of petroleum industry exploration and production expenditures; drilling rig and oil and gas industry manpower and equipment availability; the Company's ability to implement and effect price increases for its products and services; the Company's ability to control its costs; the availability of sufficient manufacturing capacity and subcontracting capacity at forecasted costs to meet the Company's revenue goals; the ability of the Company to introduce new technology on its forecasted schedule and at its forecasted cost; the ability of the Company's competitors to capture market share; world economic conditions; price of, and the demand for, crude oil and natural gas; drilling activity; weather; the legislative environment in the United States and other countries; Organization of Petroleum Exporting Countries ("OPEC") policy; war or extended period of conflict involving the United States, the Middle East and other major petroleum-producing or consuming regions; acts of war or terrorism, the development of technology that lowers overall finding and development costs; the condition of the capital and equity markets and the timing of any of the foregoing. See "Business Environment" for a more detailed discussion of certain of these factors. Baker Hughes' expectations regarding its level of capital expenditures described in "Liquidity and Capital Resources" below are only its forecasts regarding these matters. In addition to the factors described in the previous paragraph and in "Business Environment," these forecasts may be substantially different from actual results, which are affected by the following factors: the accuracy of the Company's estimates regarding its spending requirements; regulatory, legal and contractual impediments to spending reduction measures; the occurrence of any unanticipated acquisition or research and development opportunities; changes in the Company's strategic direction; the need to replace any unanticipated losses in capital assets and the factors listed in "Item 1. Business-Environmental Matters". BUSINESS ENVIRONMENT The Company has eight operating divisions each with separate management teams and infrastructure that offer different products and services. The divisions have been aggregated into two reportable segments - "Oilfield" and "Process". The Oilfield segment consists of six operating divisions - Baker Atlas, Baker Hughes INTEQ, Baker Oil Tools, Baker Petrolite, Centrilift and Hughes Christensen - that manufacture and sell equipment and provide related services used in exploring for, developing and producing hydrocarbon reserves. The Oilfield segment also includes the Company's interest in an oil and gas property in Nigeria and its investment in Western GECO. In 2001, revenues from the Oilfield segment accounted for 94.1% of total revenues. The Process segment consists of two operating divisions - EIMCO Process Equipment and BIRD Machine - that manufacture and sell process equipment for separating solids from liquids and liquids from liquids through filtration, sedimentation, centrifugation and flotation processes. The business environment for the Company's Oilfield segment and its corresponding operating results can be significantly affected by the level of energy industry capital expenditures for the exploration and production of oil 15 and gas reserves. These expenditures are influenced strongly by oil company expectations about the supply and demand for crude oil and natural gas products and by the energy price environment that results from supply and demand imbalances. Key factors currently influencing the worldwide crude oil and gas markets are: o Production control - the degree to which OPEC nations and other large producing countries, such as Mexico, Norway, and Russia, are willing and able to control production and exports of crude oil to reduce supply and support their targeted oil price while meeting their market share objectives. o Global economic growth - particularly the impact of the U.S. and Western European economies and economic activity in Japan, China, South Korea and the developing areas of Asia where the correlation between energy demand and economic growth is strong. The International Energy Agency forecasted in February 2001 worldwide oil demand growth of approximately 0.5%, compared with the 2.0% averaged for the 10 years ending December 2000. During 2001, the U.S. economy went into a recession that is expected to continue into 2002. An important factor in the global economic growth in 2002 is the timing and strength of the U.S. economic recovery. o Oil and gas storage inventories - relative to historic levels. Inventory levels offer a measure of the balance between supply and demand. North American natural gas inventories at the beginning of November 2001 (the start of the 2001/2002 winter withdrawal season) were at record high levels. Continued high inventories, without an increase in demand, indicate a market that is amply supplied. o Technological progress - in the design and application of new products that allow oil and gas companies to drill fewer wells and to drill, complete and produce wells faster and at lower cost. o Maturity of the resource base - of known hydrocarbon reserves in the North Sea, U.S., Canada and Latin America. o Pace of new investment - access to capital and the reinvestment of available cash flow into existing and emerging markets. o Price volatility - the impact of widely fluctuating commodity prices on the stability of the market and subsequent impact on customer spending. o Possible supply disruptions - from key oil exporting countries, including, but not limited to, Iraq, Saudi Arabia and other Middle Eastern countries, due to political instability or military activity. o Weather - the impact of variations in temperatures as compared with normal weather patterns and the related effect on demand for oil and natural gas. OIL AND GAS PRICES Generally, customers' expectations about their prospects from oil and gas sales and customers' expenditures to explore for or produce oil and gas rise or fall with corresponding changes in the prices of oil or gas. Accordingly, changes in these expenditures will normally result in increased or decreased demand for the Company's products and services in its Oilfield segment. Crude oil and natural gas prices are summarized in the table below as averages of the daily closing prices during each of the periods indicated.
2001 2000 1999 --------- --------- --------- West Texas Intermediate Crude ($/bbl) $ 25.96 $ 30.37 $ 19.37 U.S. Spot Natural Gas ($/MMBtu) 3.96 4.30 2.19
Oil prices averaged $25.96/bbl in 2001, ranging from a low of $17.45/bbl to a high of $32.19/bbl. Slower economic growth and higher OPEC production levels contributed to an increase in inventories and a moderation in oil prices. Oil prices over the course of the year fell from levels above OPEC's self-declared targeted price zone in 16 the first half of 2001 to levels below OPEC's targeted price zone in the second half of the year. In November 2001, OPEC abandoned defense of its targeted price zone as it sought cooperation with certain non-OPEC countries, particularly Russia, Norway and Mexico, to jointly reduce production in an effort to reduce inventories and support prices. During 2001, natural gas prices averaged $3.96/MMBtu, down from the $4.30/MMBtu average price for 2000. Prices ranged from a high of $10.20/MMBtu in January to a low of $1.74/MMBtu in November. The decline in natural gas prices was driven by a decrease in demand for natural gas due to slowing U.S. economic growth, offset only partially by increased demand from fuel switching back to natural gas. A modest increase in production also contributed to the decline in prices. At the beginning of the 2001/2002 withdrawal season, inventories were at record high levels following record storage injections during the summer of 2001. Mild weather and the U.S. recession continued to moderate demand and allowed year-over-year storage surpluses to grow through the remainder of 2001, resulting in softer prices. RIG COUNTS The Company is engaged in the oilfield service industry providing products and services that are used in exploring for, developing and producing oil and gas reservoirs. When drilling or workover rigs are active, they consume the products and services produced by the oilfield service industry. The rig counts act as a leading indicator of consumption of products and services used in drilling, completing, producing and processing hydrocarbons. Rig count trends are governed by the exploration and development spending by oil and gas companies, which in turn is influenced by current and future price expectations for oil and natural gas. Rig counts therefore reflect the relative strength and stability of energy prices. The Company's rig counts are summarized in the table below as averages for each of the periods indicated and are based on weekly rig counts for the U.S. and Canada and monthly rig counts for all other areas.
2001 2000 1999 ---- ---- ---- U.S. - Land 1,003 778 519 U.S. - Offshore 153 140 106 Canada 341 345 245 ----- ----- ----- North America 1,497 1,263 870 ----- ----- ----- Latin America 262 227 186 North Sea 56 45 39 Other Europe 39 38 42 Africa 53 46 42 Middle East 179 156 140 Asia Pacific 157 140 139 ----- ----- ----- Outside North America 746 652 588 ----- ----- ----- Worldwide 2,243 1,915 1,458 ===== ===== ===== U.S. Workover Rigs 1,211 1,056 835 ===== ===== =====
INDUSTRY OUTLOOK Caution is advised that the factors described above in "Forward Looking Statements" and "Business Environment" could negatively impact the Company's expectations for oil demand, oil and gas prices and drilling activity. Oil - Oil prices are expected to average between $18/bbl and $22/bbl in 2002. Sustained oil prices in this range and an outlook that prices are likely to remain in this range are expected to support the Company's forecast of customer spending. Oil prices are particularly susceptible to changes in oil supply as oil demand growth in 2002 compared with 2001 is expected to be the lowest year-to-year growth in a decade. Prices could fall to $13/bbl to $15/bbl by mid-year, resulting in lower than forecasted spending, if one or more of the following occurs: OPEC is unwilling or unable to control its production; Russia or other major non-OPEC producers are unwilling or unable to restrain their production; or the U.S. economic recovery is delayed into late 2002 or 2003. Prices could rise to $23/bbl to $25/bbl, or more, if one or more of the following occur: the U.S. and worldwide economic recovery 17 occurs sooner or is stronger than forecasted; OPEC or key non-OPEC oil-exporting countries, particularly Russia, constrain oil production; or a supply disruption occurs, resulting from political or military action in a key oil exporting region. North America Natural Gas - U.S. natural gas prices are expected to average between $2.25/MMBtu and $2.75/MMBtu in 2002. Prices are expected to average between $1.90/MMBtu and $2.20/MMBtu in the first half of 2002 as year-over-year inventory surpluses and weak demand continue to influence prices. As a result of lower natural gas prices during this period, spending by the Company's customers directed at developing natural gas supplies (and therefore, drilling activity) is expected to remain soft. In the second half of the year, the impact of a growing U.S. economy and production declines resulting from lower spending in the second half of 2001 and the first half of 2002 are expected to result in a tighter supply/demand balance in the market. As a result, prices could exceed $3.00/MMBtu by year end. Prices could trade lower if weather is milder than normal, if the economic recovery is delayed, or if production levels are maintained despite lower drilling activity. Prices could trade higher if weather is more extreme than normal, if the economic recovery occurs sooner or is stronger than expected, or if production levels fall more than expected as a result of lower drilling activity. Customer Spending - Based upon the Company's discussions with its major customers and its review of published industry surveys and reports and the Company's outlook for oil and gas prices described above, the anticipated customer spending trends are as follows: o North America - Spending in North America, primarily towards developing natural gas supplies, is expected to be down 15% to 20% in 2002 compared with 2001. o Outside North America - Customer spending, primarily directed at developing oil supplies, is expected to be flat to up 5% in 2002 compared with 2001. o Total spending is expected to be down 5% to 7% in 2002 compared with 2001. Drilling Activity - Based upon the Company's outlooks for oil and natural gas prices and customer spending described above, the Company's outlook for drilling activity, as measured by the Baker Hughes rig count, is as follows: o The North American rig count is expected to decline between 15% to 20% in 2002 compared with 2001. o Drilling activity outside of North America is expected to increase 3% to 5% in 2002 compared with 2001. COMPANY OUTLOOK The trends as described above relating to declining rig counts, decreased customer spending and low oil and gas prices began in late 2001 and have continued to develop in 2002. As a result, the Company expects that 2002 will not be as strong as 2001, with revenues expected to decline by approximately 5% to 7% as compared with 2001, with related declines in operating results. Recent changes in currency laws and other economic events in Argentina are expected to negatively impact the Company. Changes mandated by law may prevent the Company from being able to fully recover outstanding receivables from its customers and losses are expected as a result of the devaluation of the Argentine Peso. In addition, the uncertain economic environment in Argentina will likely negatively impact the exploration and production spending plans of the Company's customers in Argentina in 2002 and beyond, thus reducing the demand for the Company's products. The Company is responding to this situation in a number of ways, including negotiating with its customers for acceptable payment terms on outstanding receivables, increasing the use of U.S. Dollar based invoicing (or U.S. Dollar equivalent pricing and invoicing), adjusting pricing and contracts to reflect the changes in Argentina's currency, and shipping products to Argentina directly from outside the country with payment made offshore in U.S. Dollar or equivalent currency. Although the Company has provided for its best estimate of uncollectible receivables at December 31, 2001, it is uncertain at this time as to the ultimate resolution of these matters and the impact on the Company; however, the Company estimates potential losses related to the devaluation and uncollectible receivables could be between $5 million and $10 million. In 2001, revenues from 18 Argentina were less than 3% of the Company's total revenue; accordingly, the impact on the Company's total revenues in 2002 is not expected to be significant. Historically, the Venezuelan economy has experienced high inflation and a weakening currency. Recently, Venezuela has experienced additional political and economic uncertainties, including large fluctuations in exchange rates with the U.S. Dollar. This creates additional uncertainties for the business environment and market for the Company's products and services. The Company continues to closely monitor the economic situation in Venezuela and is taking appropriate actions to minimize its exposure to these risks. CRITICAL ACCOUNTING POLICIES The Company has defined a critical accounting policy as one that is both important to the portrayal of the Company's financial condition and results of operations and requires the management of the Company to make difficult, subjective or complex judgments. Estimates and assumptions about future events and their effects cannot be perceived with certainty. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments. These estimates may change as new events occur, as more experience is acquired, as additional information is obtained and as the Company's operating environment changes. The Company believes the following are the most critical accounting polices used in the preparation of the Company's consolidated financial statements as well as the significant judgments and uncertainties affecting the application of these policies. REVENUE RECOGNITION Inherent in the Company's revenue recognition policy is the determination of collectibility, which requires the Company to use estimates and exercise judgment. The Company routinely monitors its customers' payment history and current credit worthiness to determine that collectibility is reasonably assured. This requires the Company to make frequent judgments and estimates in order to determine the appropriate amount of allowances needed for doubtful accounts. The Company records provisions for doubtful accounts when it becomes evident that the customer will not be able to make the required payments either at contractual due dates or in the future. Adverse changes in the financial condition of the Company's customers could require additional allowances for doubtful accounts. INVENTORY The Company records inventory at the lower of cost or market. The Company regularly reviews inventory quantities on hand and records provisions for excess or obsolete inventory based primarily on its estimated forecast of product demand, market conditions, production requirements and technological developments. Significant or unanticipated changes to the Company's forecasts could require additional provisions for excess or obsolete inventory. IMPAIRMENT OF LONG-LIVED ASSETS Long-lived assets, which include property, plant and equipment, goodwill and other intangibles, and other assets comprise a significant amount of the Company's total assets. The Company makes judgments and estimates in conjunction with the carrying value of these assets, including amounts to be capitalized, depreciation and amortization methods and useful lives. Additionally, the carrying values of these assets are periodically reviewed for impairment or whenever events or changes in circumstances indicate that the carrying amounts may not be recoverable. An impairment loss is recorded in the period in which it is determined that the carrying amount is not recoverable. This requires the Company to make long-term forecasts of its future revenues and costs related to the assets subject to review. These forecasts require assumptions about demand for the Company's products and services, future market conditions and technological developments. Significant and unanticipated changes to these assumptions could require a provision for impairment in a future period. 19 INCOME TAXES The Company uses the liability method for reporting income taxes, under which current and deferred tax liabilities and assets are recorded in accordance with enacted tax laws and rates. Under this method, the amounts of deferred tax liabilities and assets at the end of each period are determined using the tax rate expected to be in effect when taxes are actually paid or recovered. A valuation allowance to reduce deferred tax assets is established when it is more likely than not that some portion or all of the deferred tax assets will not be realized. While the Company has considered future taxable income and ongoing prudent and feasible tax planning strategies in assessing the need for the valuation allowance, there can be no guarantee that the Company will be able to realize its deferred tax assets. The Company operates under many legal forms and in more than 70 countries. As a result, the Company is subject to many domestic and foreign tax jurisdictions and to many tax agreements and treaties among the various taxing authorities. Determination of taxable income in any jurisdiction requires the interpretation of the related tax laws and regulations and the use of estimates and assumptions regarding significant future events. Changes in tax laws, regulations, agreements and treaties, foreign currency exchange restrictions or the Company's level of operations or profitability in each taxing jurisdiction could have an impact upon the amount of income taxes that the Company provides during any given year. WESTERN GECO On November 30, 2000, the Company and Schlumberger and certain wholly owned subsidiaries of Schlumberger created a venture by transferring the seismic fleets, data processing assets, exclusive and nonexclusive multiclient surveys and other assets of the Company's Western Geophysical division and Schlumberger's Geco-Prakla business unit. The venture operates under the name of Western GECO. In conjunction with the transaction, the Company received $493.4 million in cash from Schlumberger in exchange for the transfer of a portion of the Company's ownership in Western GECO. The Company also contributed $15.0 million in working capital to Western GECO. The Company did not recognize any gain or loss resulting from the initial formation of the venture due to the Company's material continued involvement in the operations of Western GECO. In addition, as soon as practicable after November 30, 2004, the Company or Schlumberger will make a cash true-up payment to the other party based on a formula comparing the ratio of the net present value of sales revenue from each party's contributed multiclient seismic libraries during the four-year period ending November 30, 2004 and the ratio of the net book value of those libraries as of November 30, 2000. The maximum payment that either party will be required to make as a result of this adjustment is $100.0 million. Summarized financial information for Western Geophysical included in the Company's consolidated financial statements are as follows for the years ended December 31 (in millions):
2000 (1) 1999 -------- -------- Revenues $ 723.7 $ 946.7 Income (loss) before income taxes (2) 56.9 (75.3) Expenditures for capital assets and multiclient seismic data 309.6 319.5
(1) Financial information for the eleven months ended November 30, 2000, the effective close date of the transaction. (2) Includes unusual items and corporate allocations excluding interest. RESULTS OF OPERATIONS REVENUES Revenues for 2001 were $5,382.2 million, an increase of 2.8% compared with 2000. Excluding revenues from Western Geophysical, revenues increased 19.3% compared with 2000. Oilfield revenues, excluding Western Geophysical, were $5,063.4 million, an increase of 20.9% compared with 2000. Oilfield revenues in North America, which account for 44.6% of total Oilfield revenues, increased 28.2% compared with 2000. This increase reflects the increased drilling activity in this area, as evidenced by a 18.5% increase in the North American rig count, and improved pricing for the Company's products and services. Outside North America, Oilfield revenues increased 15.7% compared with 2000. This increase reflects the improvement in international drilling activity, particularly in 20 the North Sea, Latin America, and the Middle East. Revenues from crude oil production from the Company's interest in the Nigerian property decreased to $58.9 million in 2001 from $132.1 million in 2000 primarily due to the decrease in the price of oil and as a result of the Company reaching the cost recovery threshold in its operating agreement. Revenues for 2000 were $5,233.8 million, an increase of 6.0% compared with 1999. This increase reflects increased drilling activity, as evidenced by the 31.3% increase in the average worldwide rig count, increased oil and natural gas prices and improved pricing for the Company's products and services offset by the ongoing weakness in the seismic market. Approximately 55.6% of the Company's 2000 revenues were derived from sources outside North America. Revenues from production of crude oil from the Nigerian property increased to $132.1 million in 2000 from $68.2 million in 1999 due to higher crude oil prices and increased productions. GROSS MARGIN Gross margin was 28.8%, 23.4% and 18.8% for 2001, 2000 and 1999, respectively. As discussed in "Unusual Charges", during 1999 the Company recorded unusual charges in cost of revenues of $72.1 million. Excluding these charges and Western Geophysical, gross margin in 2000 and 1999 was 25.3% and 21.0%, respectively. The increases in gross margin in 2001 and 2000 are primarily the result of pricing improvements for the Company's products and services, primarily in North America, continued cost management measures throughout the Company and higher utilization of the Company's assets. SELLING, GENERAL AND ADMINISTRATIVE Selling, general and administrative ("SG&A") expenses for 2001 were $818.6 million, an increase of 7.8% compared with 2000. SG&A expenses as a percentage of revenues increased to 15.2% for 2001 from 14.5% in 2000. These increases were primarily due to increased costs to support the higher revenue level, increased employee incentive costs and decreased foreign exchange gains. SG&A expenses for 2000 were $759.6 million, an increase of 2.4% compared with 1999. As discussed in "Unusual Charges", during 1999 the Company recorded an unusual credit of $20.3 million in SG&A expenses. Excluding this unusual credit, SG&A expenses decreased 0.4% in 2000 compared with 1999. SG&A expenses as a percentage of revenues decreased from 15.4% in 1999 to 14.5% in 2000. The decreases primarily related to increased foreign exchange gains, partially offset by increases in employee incentive costs. UNUSUAL CHARGES 2001 During 2001, the Company recorded unusual charges of $9.2 million. The Company accrued cash charges of $6.0 million that consisted of severance for approximately 100 employees due to the restructuring of the German operations of BIRD Machine, a division of the Process segment. The Company paid $1.1 million of this accrued severance in 2001. Based on current estimates, the Company expects that the remainder of the accrued severance will be paid in 2002 or when the employees leave the Company. The noncash portion of the charge was $3.2 million, of which $2.2 million related to the ceiling test write-down for the Company's oil and gas property in Nigeria. The Company recorded unusual credits of $7.6 million, which included $4.2 million related to a reduction of an unusual charge accrual originally recorded in 2000 and a gain of $3.4 million on the disposition of its interest in a joint venture. 2000 In October 2000, the Company's Board of Directors approved the Company's plan to substantially exit the oil and gas exploration business. The Company sold its interests in its China, Gulf of Mexico and Gabon oil and gas properties and recorded a loss of $75.5 million on the sale of these properties. The Company also wrote off its remaining undeveloped oil and gas exploration properties resulting in a loss of $16.2 million. The Company accrued cash charges of $13.3 million for severance costs for approximately 50 employees and other contractual 21 obligations. The Company has paid $2.6 million of this accrued severance through 2001. Based on current estimates, the Company expects that the remainder of the accrued severance will be paid during 2002 or as the employees leave the Company. In 2001, the Company paid $2.4 million of accrued contractual obligations and reduced the accrual by $4.2 million to reflect the current estimates of remaining expenditures. The remaining contractual obligations will be paid as the Company settles with the various counterparties. The Company has retained its interest in an oil and gas property in Nigeria. The Company's intent to hold or divest this project could change in the future depending on the relative value of the project and the value and viability of an offer from a third party with respect to a proposed transaction regarding the project. The Company also recorded a noncash unusual charge of $6.0 million for employee related obligations resulting from the Western GECO formation. The Company recorded unusual credits of $41.4 million related to net reductions to unusual charge accruals from prior years of $28.5 million and gains of $12.9 million on the sale of various product lines within the Oilfield and Process segments. 1999 As a result of continuing low activity levels, predominantly for the Company's seismic products and services, the Company recorded charges during the fourth quarter of 1999 of $122.8 million. The cash portion of the charges was $50.7 million and consisted of severance benefits, expected costs to settle contractual obligations and terminate leases on certain marine vessels and other cash charges. As of December 31, 2000, all activities were completed and the related accruals fully utilized through cash payments or adjustments. The noncash portion of the charges was $72.1 million and related to the write-off and write-down of certain assets utilized in the Company's seismic business. During 1999, the Company realized unusual gains totaling $54.8 million. The Company sold two large excess real estate properties for $68.1 million and realized net gains totaling $39.5 million. In addition, the Company sold certain assets related to its previous divestiture of a joint venture and realized a net gain of $15.3 million. During 1999, the Company reviewed the remaining balances of the accruals for cash charges recorded in 1998 and prior years and made net reductions of $11.4 million to reflect the current estimates of remaining expenditures. These net reductions included reversals of previously recorded accruals that will not be utilized and related primarily to severance accruals and lease obligations. In addition, for accruals related to certain terminated lease obligations, revisions were made to increase previously recorded amounts based on current information and estimates of expected cash flows related to these leases. The unusual items described above were reflected in the following captions of the consolidated statement of operations for the year ended December 31, 1999 (in millions):
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) (6.4) 4.8 -------- -------- -------- -------- Total $ 122.8 $ (54.8) $ (11.4) $ 56.6 ======== ======== ======== ========
EQUITY IN INCOME (LOSS) OF AFFILIATES Equity in income (loss) of affiliates relates to the Company's share of the income (loss) of affiliates accounted for using the equity method of accounting. The increase in 2001 compared with 2000 is primarily due to the inclusion of a full year of the Company's 30% share of the net income of Western GECO, a venture formed in November 2000. Included in equity in income (loss) of affiliates for 2001 and 2000 was $10.3 million related to the write-off of certain assets associated with Western GECO and $9.5 million for restructuring and integration charges associated with Western GECO, respectively. 22 INTEREST EXPENSE Interest expense for 2001 decreased $46.9 million compared with 2000. The decrease was primarily due to lower debt levels coupled with lower average interest rates on short-term debt and commercial paper. Average short-term debt and commercial paper for 2001 was $259.7 million compared with $929.0 million for 2000. The approximate average interest rate on short-term debt and commercial paper was 4.0% for 2001 compared with 6.3% for 2000. Interest expense for 2000 increased $6.3 million compared with 1999. The increase was primarily due to higher average interest rates on the Company's short-term debt and commercial paper. Average short-term debt and commercial paper for 2000 was $929.0 million compared with $962.0 million for 1999. The approximate average interest rate on short-term debt and commercial paper was 6.3% for 2000 compared with 5.2% for 1999. INTEREST INCOME Interest income primarily relates to income earned on cash and cash equivalents. Interest income for 2001 increased $7.4 million compared with 2000 primarily due to $5.4 million of interest income recognized from a settlement with the Internal Revenue Service ("IRS") related to an examination of certain 1994 through 1997 pre-acquisition tax returns and related refund claims of Western Atlas. GAIN ON TRADING SECURITIES In the fourth quarter of 1999, the Company announced its intention to sell its holdings in Tuboscope, Inc., now known as Varco International, Inc. ("Varco"), and reclassified these holdings from available-for-sale securities to trading securities. As a result of this decision, the Company recognized a pre-tax gain of $31.5 million in the fourth quarter of 1999. During 2000, the Company disposed of these holdings and recorded additional pre-tax gains of $14.1 million. INCOME TAXES The Company's effective tax rates differ from the statutory income tax rate of 35% due to different tax rates on international operations, the non-deductibility of certain goodwill amortization, incremental taxes due to Western GECO and IRS settlements. During 2001, additional taxes of $14.8 million from the Western GECO venture arose due to unbenefitted foreign losses and due to taxes assessed in jurisdictions on a deemed profit basis. In addition, a $23.5 million benefit was recognized as a result of the settlement of the IRS examination of certain 1994 through 1997 pre-acquisition tax returns and related refund claims of Western Atlas. During 2000, the Company provided $9.4 million of foreign and additional U.S. taxes as a result of the repatriation of the proceeds from the formation of the Western GECO venture. The formation of the venture also reduced the expected amount of foreign source income against which to use the Company's foreign tax credit carryover; therefore, the Company provided $35.6 million for additional U.S. taxes with respect to future repatriation of earnings necessary to utilize the foreign tax credit carryover. During 1999, the Company recognized a tax benefit of $18.1 million through the reversal of previously deferred taxes after settling the IRS examination of its 1994 and 1995 tax years. LIQUIDITY AND CAPITAL RESOURCES The Company's capital requirements have principally related to working capital needs, payment of dividends, and capital expenditures. These requirements have been met through a combination of bank debt and internally generated funds. In 2001, net cash inflows from operating activities totaled $720.8 million, an increase of $157.3 million compared with 2000. This increase was primarily due to increased profitability and improved balance sheet 23 management. Net cash inflows in 2000 increased $20.3 million compared with 1999. This slight increase related to higher net income, partially offset by increases in working capital. Expenditures for capital assets and multiclient seismic data totaled $319.0 million, $599.2 million and $640.4 million for 2001, 2000 and 1999, respectively. Excluding Western Geophysical, expenditures for capital assets were $319.0 million, $289.6 million and $320.9 million for 2001, 2000 and 1999, respectively. The majority of these expenditures was for rental tools and costs associated with the implementation of SAP R/3. The Company generates proceeds from the disposal or sale of assets in either the normal course of its business or from non-recurring asset sales. During 2001, the Company generated total proceeds of $77.7 million, which included non-recurring asset sales of $7.4 million related to the sale of a product line and the disposition of the Company's interest in a joint venture. During 2000, the Company generated total proceeds of $213.0 million. Non-recurring asset sales totaled $124.5 million and included sales of product lines, the sale of the Company's interests in its China, Gulf of Mexico and Gabon oil and gas properties, and the sale of real estate held for sale. During 1999, the Company generated total proceeds of $154.2 million, which included non-recurring asset sales of $68.1 million related to the sale of two large excess real estate properties. In 2001, the Company redeemed its outstanding Liquid Yield Options Notes at a redemption price of $786.13 per $1,000 principal amount, for a total of $301.8 million. The redemption was funded through the issuance of commercial paper. In connection with the early extinguishment of debt, the Company recorded an extraordinary loss of $2.3 million ($1.5 million after tax). The Company expects that the redemption will not have a significant impact on interest expense in future periods. In 2001, commercial paper and short-term borrowings were reduced by $73.0 million primarily due to cash flow from operations. In 2000, commercial paper and short-term borrowings were reduced by $669.4 million primarily due to cash flow from operations, $117.7 million in proceeds from a sale/leaseback transaction and $493.4 million in proceeds from the formation of Western GECO. In 1999, the Company borrowed $1,010.7 million from the public debt market. The proceeds were used to repay commercial paper and short-term borrowings of $816.0 million as well as $150.0 million in long-term debt. Total debt outstanding at December 31, 2001 was $1,694.6 million, a decrease of $368.3 million compared with December 31, 2000. Debt was repaid using cash flow from operations, proceeds from the disposal or sale of assets and proceeds from the issuance of common stock. The debt to equity ratio was 0.51 at December 31, 2001 compared with 0.68 at December 31, 2000. The Company's long-term objective is to maintain a debt to equity ratio between 0.40 and 0.60. At December 31, 2001, the Company had $1,289.9 million of credit facilities with commercial banks, of which $800.5 million was committed. There were no direct borrowings under these facilities during the years ended December 31, 2001 and 2000; however, to the extent the Company has outstanding commercial paper, available borrowings under the committed credit facilities are reduced. At December 31, 2001 and 2000, the Company had $95.0 million and $215.0 million, respectively, in commercial paper outstanding under this program, with a weighted average interest rate of 2.0% and 6.5%, respectively. The committed facilities mature in September 2003. If the credit facilities are not renewed, the Company would pursue other borrowing alternatives. Cash flow from operations is expected to be the principal source of liquidity in 2002. The Company believes that cash flow from operations, combined with existing credit facilities, will provide the Company with sufficient capital resources and liquidity to manage its operations, meet debt obligations and fund projected capital expenditures. The Company currently expects 2002 capital expenditures to be between $300.0 million and $340.0 million, excluding acquisitions. The expenditures are expected to be used primarily for normal, recurring items necessary to support the growth of the Company. There are no provisions in the Company's debt or lease agreements that would accelerate their repayment or require collateral or material changes in terms due to a reduction in the Company's debt ratings or stock price. Other than normal operating leases, the Company does not have any off-balance sheet financing arrangements such as securitization agreements, liquidity trust vehicles or special purpose entities. As such, the Company is not materially exposed to any financing, liquidity, market or credit risk that could arise if the Company had engaged in such financing arrangements. 24 The words "expected" and "expects" are intended to identify Forward-Looking Statements in "Liquidity and Capital Resources". See "Forward-Looking Statements" and "Business Environment" above for a description of risk factors related to these Forward-Looking Statements. The following tables summarize the Company's contractual cash obligations and commercial commitments as of December 31, 2001 (in millions):
Payments due by Period -------------------------------------------------------------- Less Than 2 - 3 4 - 5 After Contractual Cash Obligations Total 1 year Years Years 5 Years - ---------------------------- ---------- ---------- ---------- ---------- ---------- Total debt $ 1,694.6 $ 12.2 $ 620.4 $ 0.1 $ 1,061.9 Operating leases 286.0 54.5 82.0 39.6 109.9 Unconditional purchase obligations 138.2 138.2 -- -- -- ---------- ---------- ---------- ---------- ---------- Total contractual cash obligations $ 2,118.8 $ 204.9 $ 702.4 $ 39.7 $ 1,171.8 ========== ========== ========== ========== ==========
Amount of Commitment Expiration by Period -------------------------------------------------------------- Total Amounts Less Than 2 - 3 4 - 5 After Commercial Commitments Committed 1 year Years Years 5 Years - ---------------------- --------- ---------- ---------- ---------- ---------- Standby letters of credit $ 187.8 $ 162.0 $ 22.5 $ 3.3 $ -- Guarantees for: Lease on seismic vessel 96.4 96.4 -- -- -- Other 36.9 8.0 8.7 -- 20.2 ---------- ---------- ---------- ---------- ---------- Total commercial commitments $ 321.1 $ 266.4 $ 31.2 $ 3.3 $ 20.2 ========== ========== ========== ========== ==========
RELATED PARTY TRANSACTIONS The Company has investments in affiliates that are accounted for using the equity method of accounting. The most significant of these affiliates is Western GECO. In conjunction with the formation of Western GECO, the Company transferred to the venture a lease on a seismic vessel. The Company is the sole guarantor of this lease obligation; however, Schlumberger has indemnified the Company for 70% of the total lease obligation. At December 31, 2001, the remaining commitment under this lease is $96.4 million. The lease expires in 2002. As soon as practicable after November 30, 2004, the Company or Schlumberger will make a cash true-up payment to the other party based on a formula comparing the ratio of the net present value of sales revenue from each party's contributed multiclient seismic libraries during the four-year period ending November 30, 2004 and the ratio of the net book value of those libraries as of November 30, 2000. The maximum payment that either party will be required to make as a result of this adjustment is $100.0 million. In November 2000, the Company entered into an agreement with Western GECO whereby Western GECO subleased a facility from the Company for a period of ten years at current market rates. During 2001, the Company received $5.9 million of rental income from Western GECO related to this lease. At December 31, 2001 and 2000, net accounts receivable from affiliates totaled $33.5 million and $11.4 million, respectively. There were no other significant related party transactions. ACCOUNTING STANDARDS On January 1, 2001, the Company adopted Statement of Financial Accounting Standards ("SFAS") No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended by SFAS Nos. 137 and 138. SFAS No. 133 establishes accounting and reporting standards for derivative instruments and hedging activities that require an entity to recognize all derivatives as an asset or liability measured at fair value. Depending on the intended use of the derivative and its effectiveness, changes in its fair value will be reported in the period of change as either a component of earnings or a component of accumulated other comprehensive loss. The adoption of SFAS No. 133 on January 1, 2001 resulted in a gain of $0.8 million, net of tax, recorded as the cumulative effect of an accounting change in the consolidated statement of operations and a gain of $1.2 million, net of tax, recorded in accumulated other comprehensive loss. During 2001, all of the $1.2 million gain was reclassified into earnings upon maturity of the contracts. 25 In June 2001, the Financial Accounting Standards Board ("FASB") issued SFAS No. 141, Business Combinations. SFAS No. 141 requires that all business combinations initiated after June 30, 2001 be accounted for under the purchase method and addresses the initial recognition and measurement of goodwill and other intangible assets acquired in a business combination. Business combinations accounted for under the pooling of interests method prior to June 30, 2001 were not changed. The adoption of SFAS No. 141 by the Company did not have an impact on the consolidated financial statements of the Company. In June 2001, the FASB issued SFAS No. 142, Goodwill and Other Intangible Assets. SFAS No. 142 addresses the initial recognition and measurement of intangible assets acquired in a business combination and the accounting for goodwill and other intangible assets subsequent to their acquisition. SFAS No. 142 provides that intangible assets with finite useful lives be amortized and that goodwill and intangible assets with indefinite lives not be amortized, but rather be tested at least annually for impairment. SFAS No. 142 requires that a transitional impairment test be performed within six months of adoption and any transitional impairment loss will be recognized as the cumulative effect of a change in accounting principle. The Company will adopt SFAS No. 142 effective January 1, 2002. The cessation of amortization expense related to goodwill and goodwill associated with equity method investments under the guidelines of SFAS No. 142 will result in a reduction of approximately $52.5 million in annual amortization expense in 2002. The Company has not completed its analysis of the impact of the adoption of SFAS No. 142 as it relates to the possible impairment of goodwill. In June 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement Obligations. SFAS No. 143 addresses financial accounting and reporting for obligations associated with the retirement of long-lived assets and the associated asset retirement costs. SFAS No. 143 requires that the fair value of a liability associated with an asset retirement be recognized in the period in which it is incurred if a reasonable estimate of fair value can be made. The associated retirement costs are capitalized as part of the carrying amount of the long-lived asset and subsequently depreciated over the life of the asset. The Company has not completed its analysis of the impact, if any, of the adoption of SFAS No. 143 on its consolidated financial statements. The Company will adopt SFAS No. 143 for its fiscal year beginning January 1, 2003. In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. SFAS No. 144 addresses the financial accounting and reporting for the impairment or disposal of long-lived assets. SFAS No. 144 replaces SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of. SFAS No. 144 provides updated guidance concerning the recognition and measurement of an impairment loss for certain types of long-lived assets and modifies the accounting and reporting of discontinued operations. SFAS No. 144 is not expected to materially change the methods used by the Company to measure impairment losses on long-lived assets, but may result in future dispositions being reported as discontinued operations to a greater extent than is currently permitted. The Company will adopt SFAS No. 144 for its fiscal year beginning January 1, 2002. EURO CONVERSION A single European currency (the "Euro") was introduced on January 1, 1999, at which time the conversion rates between the old, or legacy, currencies and the Euro were set for participating member countries. The legacy currencies in those countries were used as legal tender through December 31, 2001 and will be used for a short transition period subsequent to December 31, 2001. Thereafter, the legacy currencies will be canceled, and Euro bills and coins will be used in the participating countries. Prior to December 31, 2001, the Company converted its legacy currency based financial records to the Euro. In addition, the Company reviewed existing contracts and agreements with customers and vendors to assess the potential impact of converting to the Euro. The Company did not experience any problems or issues in converting its financial records and systems to the Euro that, in the opinion of management, materially or adversely affected the consolidated financial condition of the Company. In addition, due to the nature of the Company's business as it relates to customers and vendors, it does not expect any significant problems related to the Euro to arise subsequent to December 31, 2001 that could materially or adversely affect the financial condition of the Company. The word "expect" is intended to identify a Forward-Looking Statement in "Euro Conversion." The Company's anticipation regarding the lack of significance of the Euro introduction on the Company's operations is only its forecast regarding this matter. This forecast may be substantially different from actual results, which are affected 26 by factors such as the following: the failure of the Company to implement SAP R/3 or another Euro compliant computer system or unforeseen difficulties in updating computer systems to accommodate the Euro in any new geographic location that prices in Euros or in any newly acquired entity; the inability of third parties to adequately address their own Euro systems issues, including vendors, contractors, financial institutions, U.S. and foreign governments and customers; and the lack of alternatives available to the Company. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company is exposed to certain market risks that are inherent in the Company's financial instruments that arise in the normal course of business. The Company may enter into derivative financial instrument transactions to manage or reduce market risk. The Company does not enter into derivative financial instrument transactions for speculative purposes. A discussion of the Company's primary market risk exposure in financial instruments is presented below. LONG-TERM DEBT The Company is subject to interest rate risk on its long-term fixed interest rate debt. Commercial paper borrowings, other short-term borrowings and variable rate long-term debt do not give rise to significant interest rate risk because these borrowings either have maturities of less than three months or have variable interest rates. All other things being equal, the fair market value of the Company's debt with a fixed interest rate will increase as interest rates fall and the fair market value will decrease as interest rates rise. This exposure to interest rate risk is managed by borrowing money that has a variable interest rate or using interest rate swaps to change fixed interest rate borrowings to variable interest rate borrowings. At December 31, 2001, the Company had fixed rate debt aggregating $1,524.9 million and variable rate debt aggregating $169.7 million. The following table sets forth, as of December 31, 2001 and 2000, the Company's principal cash flows for its long-term debt obligations, which bear a fixed rate of interest and are denominated in U.S. Dollars, and the related weighted average effective interest rates by expected maturity dates. Additionally, the table sets forth the notional amounts and weighted average interest rates of the Company's interest rate swaps by expected maturity (dollar amounts in millions).
2001 2002 2003 2004 2005 2006 THEREAFTER TOTAL ---- ---- ---- ---- ---- ---- ---------- ----- As of December 31, 2001: Long-term debt (1) $ - $ 0.7 $ 100.1 $ 350.0 $ 0.1 $ - $ 1,074.0 $ 1,524.9 Weighted average interest rates 10.26% 6.04% 8.12% 8.00% 6.93% 7.14% Fixed to variable swaps: (2) Notional amount $ 100.0 $ 325.0 Pay rate 5.74%(5) 5.73%(4) Receive rate 7.88% 6.25% As of December 31, 2000: Long-term debt (1) $ 1.8 $ 1.0 $ 100.0 $ 350.0 $ - $ - $ 1,459.1(3) $ 1,911.9 Weighted average interest rates 13.69% 8.00% 6.04% 8.12% 5.99% 6.39% Fixed to variable swaps: (2) Notional amount $ 325.0 Pay rate 6.01%(4) Receive rate 6.25%
(1) Fair market value of long-term debt is $1,576.9 million and $1,874.3 million at December 31, 2001 and 2000, respectively. (2) Fair market value of the interest rate swaps is a $1.3 million asset and a $9.6 million liability at December 31, 2001 and 2000, respectively. (3) Includes the Liquid Yield Options Notes ("LYONS") with an accreted value of $296.2 million at December 31, 2000. The LYONS were redeemed for cash in May 2001. (4) Average six-month LIBOR for the Japanese Yen, the Euro and the Swiss Franc plus 3.16%. (5) Three-month LIBOR plus 2.7625%. 27 INVESTMENTS During 2000, the Company sold its investment in common stock and common stock warrants of Varco at an average price of $18.70 per share. Total proceeds from the sale of the Company's investment in the common stock and the warrants were $72.7 million. CRUDE OIL CONTRACTS During the year ended December 31, 2001, the Company entered into two crude oil contracts to mitigate price risk associated with production from the Company's interest in an oil producing property in Nigeria. Based on the Company's outlook for crude oil prices, the Company elected to terminate these contracts prior to their maturity dates. Accordingly, the contracts were terminated on October 3, 2001, and the Company received a cash payment of $4.4 million. In accordance with SFAS No. 133, the net gain recognized in earnings in 2001 from all crude oil contracts was $3.1 million and is reported in revenue in the consolidated statements of operations. During the year ended December 31, 2000, the Company had entered into two contracts to mitigate price risk associated with the Company's interest in an oil producing property in Nigeria. The fair value of these contracts at December 31, 2000 was a $3.1 million unrecorded asset. FOREIGN CURRENCY AND FOREIGN CURRENCY FORWARD CONTRACTS The Company's operations are conducted around the world in a number of different currencies. The majority of the Company's foreign subsidiaries have designated the local currency as their functional currency. As such, future earnings are subject to change due to changes in foreign currency exchange rates when transactions are denominated in currencies other than the Company's functional currencies. To minimize the need for foreign currency contracts, the Company is generally able to manage its foreign currency exposure by maintaining a minimal consolidated net asset or net liability position in a currency other than the functional currency. At December 31, 2001, the Company had entered into foreign currency forward contracts with notional amounts of $8.5 million, $1.0 million and $0.7 million to hedge exposure to currency fluctuations in the Canadian Dollar, the Indonesian Rupiah and the Euro, respectively. These contracts are cash flow hedges. Based on year-end quoted market prices for contracts with similar terms and maturity dates, no asset or liability was recorded as the forward price is substantially the same as the contract price. At December 31, 2000, the Company had entered into foreign currency forward contracts with notional amounts of $50.0 million, $0.3 million and $0.2 million to hedge against exposure to fluctuations in the British Pound, the South African Rand and the Euro, respectively. The fair market value of these forward contracts was a $1.5 million unrecorded asset. The counterparties to the Company's forward contracts are major financial institutions. The credit ratings and concentration of risk of these financial institutions are monitored on a continuing basis. In the unlikely event that the counterparties fail to meet the terms of a foreign currency contract, the Company's exposure is limited to the foreign currency rate differential. Certain borrowings of the Company are denominated in currencies other than its functional currency. At December 31, 2001, these nonfunctional currency borrowings totaled $14.8 million with exposures between the U.S. Dollar and the Euro, the Saudi Riyal, the Brazilian Real, the Thai Baht and the Malaysian Ringgit. A 10% depreciation of the U.S. Dollar against these currencies would not have a material adverse effect on the future earnings of the Company. 28 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA MANAGEMENT REPORT OF FINANCIAL RESPONSIBILITIES The management of Baker Hughes Incorporated is responsible for the preparation and integrity of the accompanying consolidated financial statements and all other information contained in this Annual Report. The consolidated financial statements have been prepared in conformity with generally accepted accounting principles and include amounts that are based on management's informed judgments and estimates. In fulfilling its responsibilities for the integrity of financial information, management maintains and relies on the Company's system of internal control. This system includes written policies, an organizational structure providing division of responsibilities, the selection and training of qualified personnel and a program of financial and operational reviews by a professional staff of corporate auditors. The system is designed to provide reasonable assurance that assets are safeguarded, transactions are executed in accordance with management's authorization and accounting records are reliable as a basis for the preparation of the consolidated financial statements. Management believes that, as of December 31, 2001, the Company's internal control system provides reasonable assurance that material errors or irregularities will be prevented or detected within a timely period and is cost effective. Management recognizes its responsibility for fostering a strong ethical climate so that the Company's affairs are conducted according to the highest standards of personal and corporate conduct. This responsibility is characterized and reflected in the Company's Standards of Conduct which are distributed throughout the Company. Management maintains a systematic program to assess compliance with the policies included in the standards. The Board of Directors, through its Audit/Ethics Committee composed solely of nonemployee directors, reviews the Company's financial reporting, accounting and ethical practices. The Audit/Ethics Committee recommends to the Board of Directors the selection of independent public accountants and reviews their fee arrangements. It meets periodically with the independent public accountants, management and the corporate auditors to review the work of each and the propriety of the discharge of their responsibilities. The independent public accountants and the corporate auditors have full and free access to the Audit/Ethics Committee, without management present, to discuss auditing and financial reporting matters. /s/ MICHAEL E. WILEY /s/ G. STEPHEN FINLEY /s/ ALAN J. KEIFER Michael E. Wiley G. Stephen Finley Alan J. Keifer Chairman, President and Senior Vice President - Vice President and Chief Executive Officer Finance and Administration, Controller and Chief Financial Officer 29 INDEPENDENT AUDITORS' REPORT Stockholders of Baker Hughes Incorporated: We have audited the accompanying consolidated balance sheets of Baker Hughes Incorporated and its subsidiaries as of December 31, 2001 and 2000, and the related consolidated statements of operations, stockholders' equity and cash flows for each of the three years in the period ended December 31, 2001. Our audits also included the financial statement schedule II, valuation and qualifying accounts. These financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Baker Hughes Incorporated and its subsidiaries at December 31, 2001 and 2000, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2001, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects the information set forth therein. As described in Note 1 to the consolidated financial statements, effective as of January 1, 2001, the Company adopted Statement of Financial Accounting Standards Nos. 133, 137 and 138, which established new accounting and reporting standards for derivative instruments and hedging activities. /s/ DELOITTE & TOUCHE LLP Houston, Texas February 13, 2002 30 BAKER HUGHES INCORPORATED CONSOLIDATED STATEMENTS OF OPERATIONS (IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
YEAR ENDED DECEMBER 31, -------------------------------------- 2001 2000 1999 ---------- ---------- ---------- Revenues $ 5,382.2 $ 5,233.8 $ 4,936.5 ---------- ---------- ---------- Costs and expenses: Cost of revenues 3,831.8 4,009.6 4,009.8 Selling, general and administrative 818.6 759.6 741.9 Merger related costs -- -- (1.6) Unusual charge 1.6 69.6 4.8 ---------- ---------- ---------- Total 4,652.0 4,838.8 4,754.9 ---------- ---------- ---------- Operating income 730.2 395.0 181.6 Equity in income (loss) of affiliates 45.8 (4.6) 7.0 Interest expense (126.4) (173.3) (167.0) Interest income 12.2 4.8 5.1 Gain on trading securities -- 14.1 31.5 ---------- ---------- ---------- Income before income taxes, extraordinary loss and cumulative effect of accounting change 661.8 236.0 58.2 Income taxes (223.1) (133.7) (24.9) ---------- ---------- ---------- Income before extraordinary loss and cumulative 438.7 102.3 33.3 effect of accounting change Extraordinary loss (net of $0.8 income tax benefit) (1.5) -- -- Cumulative effect of accounting change (net of $0.5 income tax expense) 0.8 -- -- ---------- ---------- ---------- Net income $ 438.0 $ 102.3 $ 33.3 ========== ========== ========== Basic earnings per share: Income before extraordinary loss and cumulative effect of accounting change $ 1.31 $ 0.31 $ 0.10 Extraordinary loss -- -- -- Cumulative effect of accounting change -- -- -- ---------- ---------- ---------- Net income $ 1.31 $ 0.31 $ 0.10 ========== ========== ========== Diluted earnings per share: Income before extraordinary loss and cumulative effect of accounting change $ 1.30 $ 0.31 $ 0.10 Extraordinary loss -- -- -- Cumulative effect of accounting change -- -- -- ---------- ---------- ---------- Net income $ 1.30 $ 0.31 $ 0.10 ========== ========== ==========
See Notes to Consolidated Financial Statements 31 BAKER HUGHES INCORPORATED CONSOLIDATED BALANCE SHEETS (IN MILLIONS, EXCEPT PAR VALUE)
DECEMBER 31, ------------------------ 2001 2000 ---------- ---------- ASSETS Current Assets: Cash and cash equivalents $ 45.4 $ 34.6 Accounts receivable - less allowance for doubtful accounts: December 31, 2001, $74.1; December 31, 2000, $81.8 1,365.3 1,310.4 Inventories 1,049.8 898.5 Other current assets 236.7 243.1 ---------- ---------- Total current assets 2,697.2 2,486.6 Investment in affiliates 929.0 869.3 Property - less accumulated depreciation: December 31, 2001, $1,628.0; December 31, 2000, $1,518.0 1,375.8 1,378.7 Goodwill and other intangibles - less accumulated amortization: December 31, 2001, $395.8; December 31, 2000, $362.5 1,414.4 1,498.1 Other assets 259.8 256.4 ---------- ---------- Total assets $ 6,676.2 $ 6,489.1 ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Accounts payable $ 573.0 $ 469.3 Short-term borrowings and current portion of long-term debt 12.2 13.3 Accrued employee compensation 318.8 250.6 Other accrued liabilities 308.4 254.6 ---------- ---------- Total current liabilities 1,212.4 987.8 Long-term debt 1,682.4 2,049.6 Deferred income taxes 210.3 158.6 Other long-term liabilities 243.3 246.4 Commitments and contingencies Stockholders' equity: Common stock, one dollar par value (shares authorized - 750.0; outstanding 336.0 at December 31, 2001 and 333.7 at December 31, 2000) 336.0 333.7 Capital in excess of par value 3,119.3 3,065.7 Retained earnings (accumulated deficit) 182.3 (101.3) Accumulated other comprehensive loss (309.8) (251.4) ---------- ---------- Total stockholders' equity 3,327.8 3,046.7 ---------- ---------- Total liabilities and stockholders' equity $ 6,676.2 $ 6,489.1 ========== ==========
See Notes to Consolidated Financial Statements 32 BAKER HUGHES INCORPORATED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) ----------------------------------------- UNREALIZED CAPITAL RETAINED FOREIGN GAIN (LOSS) IN EXCESS EARNINGS CURRENCY ON SECURITIES PENSION COMMON OF (ACCUMULATED TRANSLATION AVAILABLE LIABILITY STOCK PAR VALUE DEFICIT) ADJUSTMENT FOR SALE ADJUSTMENT TOTAL ------ --------- ------------ ----------- ------------- ---------- ----- BALANCE, DECEMBER 31, 1998 $ 327.1 $ 2,931.8 $ 66.1 $ (155.4) $ (0.1) $ (4.4) $ 3,165.1 Comprehensive income: Net income 33.3 Other comprehensive income (loss) (net of tax of $2.0, $0.04 and $0.9, respectively) (30.2) 0.1 1.7 Total comprehensive income 4.9 Cash dividends ($0.46 per share) (150.9) (150.9) Stock issued pursuant to employee stock plans 2.7 49.3 52.0 --------- --------- -------- -------- -------- --------- --------- BALANCE, DECEMBER 31, 1999 329.8 2,981.1 (51.5) (185.6) -- (2.7) 3,071.1 Comprehensive income: Net income 102.3 Other comprehensive loss (net of tax of $0.7 and $2.0, respectively) (59.5) (3.6) Total comprehensive income 39.2 Cash dividends ($0.46 per share) (152.1) (152.1) Stock issued pursuant to employee stock plans 3.9 84.6 88.5 --------- --------- -------- -------- -------- --------- --------- BALANCE, DECEMBER 31, 2000 333.7 3,065.7 (101.3) (245.1) -- (6.3) 3,046.7 Comprehensive income: Net income 438.0 Other comprehensive loss (net of tax of ($0.2) and $3.2, respectively) (52.5) (5.9) Total comprehensive income 379.6 Cash dividends ($0.46 per share) (154.4) (154.4) Stock issued pursuant to employee stock plans 2.3 53.6 55.9 --------- --------- -------- -------- -------- --------- --------- BALANCE, DECEMBER 31, 2001 $ 336.0 $ 3,119.3 $ 182.3 $ (297.6) $ -- $ (12.2) $ 3,327.8 ========= ========= ======== ======== ======== ========= =========
See Notes to Consolidated Financial Statements 33 BAKER HUGHES INCORPORATED CONSOLIDATED STATEMENT OF CASH FLOWS (IN MILLIONS)
YEAR ENDED DECEMBER 31, -------------------------------------- 2001 2000 1999 ---------- ---------- ---------- Cash flows from operating activities: Net income $ 438.0 $ 102.3 $ 33.3 Adjustments to reconcile net income to net cash flows from operating activities: Depreciation, depletion and amortization 344.7 611.5 790.7 Provision (benefit) for deferred income taxes 74.0 49.0 (47.2) Loss on extinguishment of debt 2.3 -- -- Noncash portion of unusual charges 3.2 22.2 72.1 Gain on trading securities -- (14.1) (31.5) (Gain) loss on disposal or sale of assets (35.7) 27.9 (47.8) Equity in (income) loss of affiliates (45.8) 4.6 (7.0) Change in operating accounts (59.9) (239.9) (219.4) ---------- ---------- ---------- Net cash flows from operating activities 720.8 563.5 543.2 Cash flows from investing activities: Expenditures for capital assets and multiclient seismic data (319.0) (599.2) (640.4) Proceeds from disposal or sale of assets 77.7 213.0 154.2 Proceeds from sale of trading securities -- 72.7 -- ---------- ---------- ---------- Net cash flows from investing activities (241.3) (313.5) (486.2) Cash flows from financing activities: Net repayments of commercial paper and other short-term debt (67.9) (753.1) (816.0) Repayment of indebtedness (301.8) -- (150.0) Borrowings of long-term debt -- -- 1,010.7 Proceeds from sale of interest in affiliate 9.0 493.4 -- Proceeds from sale/leaseback -- 117.7 -- Proceeds from issuance of common stock 50.1 70.9 47.6 Dividends (154.4) (152.1) (150.9) ---------- ---------- ---------- Net cash flows from financing activities (465.0) (223.2) (58.6) Effect of foreign exchange rate changes on cash (3.7) (7.8) 1.0 ---------- ---------- ---------- Increase (decrease) in cash and cash equivalents 10.8 19.0 (0.6) Cash and cash equivalents, beginning of year 34.6 15.6 16.2 ---------- ---------- ---------- Cash and cash equivalents, end of year $ 45.4 $ 34.6 $ 15.6 ========== ========== ==========
See Notes to Consolidated Financial Statements 34 BAKER HUGHES INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BASIS OF PRESENTATION The consolidated financial statements include the accounts of Baker Hughes Incorporated and all majority owned subsidiaries (the "Company"). Investments in which the Company owns 20% to 50% and exercises significant influence over operating and financial policies are accounted for using the equity method of accounting. All significant intercompany accounts and transactions have been eliminated in consolidation. In the Notes to Consolidated Financial Statements, all dollar and share amounts in tabulations are in millions of dollars and shares, respectively, unless otherwise indicated. USE OF ESTIMATES The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Future events and their effects cannot be perceived with certainty. Accordingly, the Company's accounting estimates require the exercise of judgment. While management believes that the estimates and assumptions used in the preparation of the consolidated financial statements are appropriate, actual results could differ from those estimates. Estimates are used for, but are not limited to, determining the following: allowance for doubtful accounts and inventory valuation reserves, recoverability of long-lived assets, useful lives used in depreciation and amortization, income taxes and related valuation allowances, and insurance, environmental, legal and restructuring accruals. The accounting estimates used in the preparation of the consolidated financial statements may change as new events occur, as more experience is acquired, as additional information is obtained and as the Company's operating environment changes. REVENUE RECOGNITION The Company's products and services are generally sold based upon purchase orders or contracts with the customer that include fixed or determinable prices and that do not include right of return or other similar provisions or other significant post delivery obligations. Revenue is recognized for products upon delivery and when title passes or when services are rendered and only when collectibility is reasonably assured. Certain revenues from the Company's Process segment are reported on the percentage of completion method of accounting using measurements of progress towards completion appropriate for the products and services being provided. Provisions for estimated warranty returns or similar types of items are made at the time the related revenue is recognized. CASH EQUIVALENTS The Company considers all highly liquid investments with an original maturity of three months or less at the time of purchase to be cash equivalents. INVENTORIES Inventories are stated at the lower of cost or market. Cost is primarily determined on the average cost method and includes the cost of materials, labor and manufacturing overhead. PROPERTY AND DEPRECIATION Property is stated at cost less accumulated depreciation, which is generally provided by using the straight-line method over the estimated useful lives of the individual assets. The Company manufactures a substantial portion of its rental tools and equipment, and the cost of these items, which includes direct and indirect manufacturing costs, are capitalized and carried in inventory until the tool is completed and transferred into the rental tool fleet. 35 BAKER HUGHES INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Significant improvements and betterments are capitalized if they extend the useful life of the asset. Routine repairs and maintenance are expensed when incurred. The Company has substantially completed its development and implementation of SAP R/3 as an enterprise-wide software system. External direct costs of consulting services and payroll-related cost of employees who worked full-time on the implementation of the system were capitalized and classified in machinery and equipment. Costs associated with business process reengineering were expensed as incurred. Amortization of a pro-rata amount of the capitalized costs began as the system was implemented at each of the Company's operations. The Company uses the full-cost method of accounting for its investment in oil and gas properties. Under this method, the Company capitalizes all acquisition, exploration, and development costs incurred for the purpose of finding oil and gas reserves. Depreciation, depletion, and amortization of oil and gas properties are computed using the unit-of-production method based upon production and estimates of proved reserves. GOODWILL AND OTHER INTANGIBLES AND AMORTIZATION Goodwill arising from acquisitions is amortized using the straight-line method over the lesser of its expected useful life or 40 years. Other intangibles are stated at cost and are amortized on a straight-line basis over the asset's estimated useful life. IMPAIRMENT OF LONG-LIVED ASSETS Long-lived assets, which includes property, plant and equipment, goodwill and other intangibles, and certain other assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recorded in the period in which it is determined that the carrying amount is not recoverable. The determination of recoverability is made based upon the estimated undiscounted future net cash flows, excluding interest expense. The impairment loss is determined by comparing the fair value, as determined by a discounted cash flow analysis, with the carrying value of the related assets. INCOME TAXES The Company uses the liability method for reporting income taxes, under which current and deferred tax liabilities and assets are recorded in accordance with enacted tax laws and rates. Under this method, the amounts of deferred tax liabilities and assets at the end of each period are determined using the tax rate expected to be in effect when taxes are actually paid or recovered. Future tax benefits are recognized to the extent that realization of such benefits is more likely than not. Deferred income taxes are provided for the estimated income tax effect of temporary differences between financial and tax bases in assets and liabilities. Deferred tax assets are also provided for certain tax credit carryforwards. A valuation allowance to reduce deferred tax assets is established when it is more likely than not that some portion or all of the deferred tax assets will not be realized. The Company intends to indefinitely reinvest earnings of certain non-U.S. subsidiaries in operations outside the United States; accordingly, the Company does not provide U.S. income taxes for such earnings. The Company operates under many legal forms and in more than 70 countries. As a result, the Company is subject to many domestic and foreign tax jurisdictions and to many tax agreements and treaties among the various taxing authorities. Determination of taxable income in any jurisdiction requires the interpretation of the related tax laws and regulations and the use of estimates and assumptions regarding significant future events. Changes in tax laws, regulations, agreements and treaties, foreign currency exchange restrictions or the Company's level of operations or profitability in each taxing jurisdiction could have an impact upon the amount of income taxes that the Company provides during any given year. 36 BAKER HUGHES INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) ENVIRONMENTAL MATTERS Remediation costs are accrued based on estimates of known environmental remediation exposure using currently available facts, existing environmental permits and technology and presently enacted laws and regulations. The Company's estimates of costs are developed based on internal evaluations and, when necessary, recommendations from external environmental consultants. Such accruals are recorded when it is probable that the Company will be obligated to pay amounts for environmental site evaluation, remediation or related costs, and such amounts can be reasonably estimated. If the obligation can only be estimated within a range, the Company accrues the minimum amount in the range. Such accruals are recorded even if significant uncertainties exist over the ultimate cost of the remediation. Ongoing environmental compliance costs, including maintenance and monitoring costs, are expensed as incurred. Where the Company has been identified as a potentially responsible party in a United States federal "Superfund" site, the Company accrues its share of the estimated remediation costs of the site based on the ratio of the estimated volume of waste contributed to the site by the Company to the total volume of waste at the site. STOCK BASED COMPENSATION The Company accounts for its stock based compensation using the intrinsic value method of accounting in accordance with Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees ("APB No. 25"). Under this method, no compensation expense is recognized when the number of shares granted are known and the exercise price of the employee stock option is equal to or greater than the market price of the Company's common stock on the grant date. FOREIGN CURRENCY TRANSLATION The majority of the Company's foreign subsidiaries have designated the local currency as their functional currency and, as such, gains and losses resulting from balance sheet translation of foreign operations are included as a separate component of accumulated other comprehensive loss within stockholders' equity. For those foreign subsidiaries that have designated the U.S. Dollar as the functional currency, gains and losses resulting from balance sheet translation of foreign operations are included in the consolidated statements of operations as incurred. DERIVATIVE FINANCIAL INSTRUMENTS The Company monitors its exposure to various business risks including commodity price, foreign exchange rate and interest rate risks and occasionally uses derivative financial instruments to manage the impact of certain of these risks. The Company's policies do not permit the use of derivative financial instruments for speculative purposes. The Company uses forward exchange contracts and currency swaps to hedge certain firm commitments and transactions denominated in foreign currencies. The Company uses interest rate swaps to manage interest rate risk. The Company also uses crude oil swaps and collars to hedge price risk associated with the Company's crude oil production. On January 1, 2001, the Company adopted Statement of Financial Accounting Standards ("SFAS") No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended by SFAS Nos. 137 and 138. SFAS No. 133 establishes accounting and reporting standards for derivative instruments and hedging activities that require an entity to recognize all derivatives as an asset or liability measured at fair value. Depending on the intended use of the derivative and its effectiveness, changes in its fair value will be reported in the period of change as either a component of earnings or a component of accumulated other comprehensive loss. The adoption of SFAS No. 133 on January 1, 2001 resulted in a gain of $0.8 million, net of tax, recorded as the cumulative effect of an accounting change in the consolidated statement of operations and a gain of $1.2 million, net of tax, recorded in accumulated other comprehensive loss. During 2001, all of the $1.2 million gain was reclassified into earnings upon maturity of the contracts. To qualify for hedge accounting, the derivative must qualify either as a fair value hedge, cash flow hedge or a hedge of the net investment in foreign operations. A fair value hedge is a hedge of a recognized asset or liability or an unrecognized firm commitment. Both the effective and ineffective portions of the changes in the fair value 37 BAKER HUGHES INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) of the derivative, along with the gain or loss on the hedged item, are recorded in earnings and reported in the consolidated statements of operations on the same line as the hedged item. A cash flow hedge is a hedge of a forecasted transaction or the variability of cash flows to be received or paid in the future related to a recognized asset or liability. The effective portion of the changes in the fair value of the derivative is recorded in accumulated other comprehensive loss. When the hedged item is realized, the gain or loss included in accumulated other comprehensive loss is reported on the same line in the consolidated statements of operations as the hedged item. In addition, both the fair value changes excluded from the Company's effectiveness assessments and the ineffective portion of the changes in the fair value of derivatives used as cash flow hedges are immediately recognized in earnings. The Company is not currently hedging any of its net investments in foreign operations. At the inception of any new derivative, the Company designates the derivative as a cash flow hedge or fair value hedge. The Company documents all relationships between hedging instruments and the hedged items, as well as its risk management objectives and strategy for undertaking various hedge transactions. The Company assesses whether the derivatives that are used in hedging transactions are highly effective in offsetting changes in cash flows of the hedged item at both the inception of the hedge and on an ongoing basis. NEW ACCOUNTING PRONOUNCEMENTS In June 2001, the Financial Accounting Standards Board ("FASB") issued SFAS No. 141, Business Combinations. SFAS No. 141 requires that all business combinations initiated after June 30, 2001 be accounted for under the purchase method of accounting and addresses the initial recognition and measurement of goodwill and other intangible assets acquired in a business combination. Business combinations accounted for under the pooling of interests method prior to June 30, 2001 were not changed. The adoption of SFAS No. 141 by the Company did not have an impact on the consolidated financial statements of the Company. In June 2001, the FASB issued SFAS No. 142, Goodwill and Other Intangible Assets. SFAS No. 142 addresses the initial recognition and measurement of intangible assets acquired in a business combination and the accounting for goodwill and other intangible assets subsequent to their acquisition. SFAS No. 142 provides that intangible assets with finite useful lives be amortized and that goodwill and intangible assets with indefinite lives not be amortized, but rather be tested at least annually for impairment. SFAS No. 142 requires that a transitional impairment test be performed within six months of adoption and any transitional impairment loss will be recognized as the cumulative effect of a change in accounting principle. The Company will adopt SFAS No. 142 effective January 1, 2002. The cessation of amortization expense related to goodwill and goodwill associated with equity method investments under the guidelines of SFAS No. 142 will result in a reduction of approximately $52.5 million in annual amortization expense in 2002. The Company has not completed its analysis of the impact of the adoption of SFAS No. 142 as it relates to the possible impairment of goodwill. In June 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement Obligations. SFAS No. 143 addresses financial accounting and reporting for obligations associated with the retirement of long-lived assets and the associated asset retirement costs. SFAS No. 143 requires that the fair value of a liability associated with an asset retirement be recognized in the period in which it is incurred if a reasonable estimate of fair value can be made. The associated retirement costs are capitalized as part of the carrying amount of the long-lived asset and subsequently depreciated over the life of the asset. The Company has not completed its analysis of the impact, if any, of the adoption of SFAS No. 143 on its consolidated financial statements. The Company will adopt SFAS No. 143 for its fiscal year beginning January 1, 2003. In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. SFAS No. 144 addresses the financial accounting and reporting for the impairment or disposal of long-lived assets. SFAS No. 144 replaces SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of. SFAS No. 144 provides updated guidance concerning the recognition and measurement of an impairment loss for certain types of long-lived assets and modifies the accounting and reporting of discontinued operations. SFAS No. 144 is not expected to materially change the methods used by the Company to measure impairment losses on long-lived assets, but may result in future dispositions being reported as discontinued operations to a greater extent than is currently permitted. The Company will adopt SFAS No. 144 for its fiscal year beginning January 1, 2002. 38 BAKER HUGHES INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) RECLASSIFICATIONS Certain reclassifications have been made to the prior years' consolidated financial statements to conform with the current year presentation. NOTE 2. UNUSUAL ITEMS 2001 During 2001, the Company incurred items resulting in a net unusual charge of $1.6 million. Unusual items included charges of $9.2 million offset by credits of $7.6 million. The table set forth below summarizes these transactions:
ACCRUED BALANCE AT DECEMBER 31, TOTAL CHARGE PAYMENTS 2001 ------------ -------- ------------ Cash charge: Severance for approximately 100 employees $ 6.0 $ (1.1) $ 4.9 ------ ====== ====== Noncash charges: Ceiling test charge for oil and gas properties 2.2 Other noncash charges 1.0 ------ Subtotal noncash charges 3.2 ------ Total cash and noncash charges 9.2 Unusual credits (7.6) ------ Total unusual charge $ 1.6 ======
The severance relates to the restructuring of the German operations of BIRD Machine, a division of the Process segment. The employee groups to be terminated will be engineering, field service and support personnel. The amount accrued for severance is based upon the positions eliminated and the Company's specific or statutory severance plans in place for these operations and does not include any portion of the employees' salary through their severance dates. Based on current estimates, the Company expects that the remainder of the accrued severance will be paid during 2002 or when the employees leave the Company. During 2001, the Company recorded an unusual credit of $4.2 million as a reduction to an unusual charge accrual recorded in 2000 to reflect the current estimate of remaining expenditures. The reduction related to adjustments to its estimated costs to settle contractual obligations based on new events and information. The Company recognized a gain of $3.4 million on the disposition of its interest in a joint venture within the Oilfield segment and received net proceeds of $6.0 million from this transaction. These items are reflected as unusual credits in the consolidated statement of operations. 39 BAKER HUGHES INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 2000 During 2000, the Company incurred items resulting in a net unusual charge of $69.6 million. Unusual items included charges of $111.0 million offset by credits of $41.4 million. The table set forth below summarizes these transactions:
ACCRUED BALANCE AT TOTAL DECEMBER 31, CHARGE PAYMENTS ADJUSTMENTS 2001 ------ -------- ----------- ------------ Cash charges: Severance for approximately 50 employees $ 5.5 $ (2.6) $ -- $ 2.9 Other contractual obligations 7.8 (2.4) (4.2) 1.2 --------- --------- --------- --------- Subtotal cash charges 13.3 $ (5.0) $ (4.2) $ 4.1 --------- ========= ========= ========= Noncash charges: Write-off of undeveloped oil and gas properties 16.2 Venture formation expenses 6.0 --------- Subtotal noncash charges 22.2 --------- Total cash and noncash charges 35.5 Loss on sale of oil and gas properties 75.5 Unusual credits (41.4) --------- Total unusual charge $ 69.6 =========
In October 2000, the Company's Board of Directors approved the Company's plan to substantially exit the oil and gas exploration business. The Company sold its interests in its China, Gulf of Mexico and Gabon oil and gas properties and recorded a loss of $75.5 million on the sale of these properties. Net proceeds from these sales were $53.4 million and were used to repay outstanding indebtedness. The Company also wrote off its remaining undeveloped exploration properties in other foreign jurisdictions resulting in a loss of $16.2 million. The Company accrued cash charges of $13.3 million for costs resulting from exiting the business, including severance and other employee-related costs and costs to settle contractual obligations. The employee groups to be terminated will be executive, engineering, field service and support personnel. The amount accrued for severance is based upon the positions eliminated and the Company's specific or statutory plans in place for these operations and does not include any portion of the employees' salary through their severance dates. Based on current estimates, the Company expects that the remainder of the accrued severance will be paid during 2002 or as the employees leave the Company. The contractual obligations will be paid as the Company settles with the various counterparties. The Company incurred fees of $6.0 million in connection with the formation of Western GECO, a venture formed by the Company in 2000. During 2000, the Company recorded an unusual credit of $28.5 million as net reductions to unusual charge accruals recorded in 1999 and prior years to reflect current estimates of remaining expenditures. The net reductions primarily related to severance accruals, legal accruals and accruals for lease obligations. In addition, the Company recognized gains of $12.9 million on the sale of various product lines within the Oilfield and Process segments. The Company received net proceeds from these sales of $41.7 million. These items are reflected as unusual credits in the consolidated statement of operations. 40 BAKER HUGHES INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 1999 As a result of continuing low activity levels, predominantly for the Company's seismic products and services, the Company recorded charges during the fourth quarter of 1999 totaling $122.8 million as summarized below:
ACCRUED BALANCE AT TOTAL DECEMBER 31, CHARGE PAYMENTS ADJUSTMENTS 2001 ------ -------- ----------- ------------ Cash charges: Severance for approximately 800 employees $ 12.5 $ (8.8) $ (3.7) $ -- Lease termination and other contractual obligations 36.0 (21.4) (14.6) -- Other cash charges 2.2 (0.7) (1.5) -- -------- -------- -------- -------- Subtotal cash charges 50.7 $ (30.9) $ (19.8) $ -- ======== ======== ======== Noncash charges - impairment of property and equipment 72.1 -------- Total cash and noncash charges $ 122.8 ========
The employee groups to be terminated were executive, marketing, field service and support personnel of which substantially all were either terminated by the Company or transferred as of December 31, 2000 to Western GECO. The amount accrued for severance was based upon the positions eliminated and the Company's specific or statutory severance plans in place for these operations and did not include any portion of the employees' salary through their severance dates. The Company accrued $36.0 million related to expected costs to settle contractual obligations based upon management's decision to reduce or abandon certain operations and based on the terms of the applicable agreements. These costs consisted primarily of the cost of terminating leases on certain marine vessels that were taken out of service and removed from the fleet. The impairment of property included the write-off or write-down of certain assets utilized in the Company's seismic business. These assets were scrapped or otherwise disposed of and consisted of $51.1 million of land and marine recording equipment, $1.4 million of data processing equipment and $19.6 million of marine vessels that were sold or otherwise abandoned. Write-down amounts were generally determined by use of internal appraisal techniques to assess the estimated fair value to be realized upon disposal. During 1999, the Company realized unusual gains totaling $54.8 million. The Company sold two large excess real estate properties and realized net gains totaling $39.5 million. The Company received net proceeds of $68.1 million. In addition, the Company sold certain assets related to its previous divestiture of a joint venture and realized a net gain of $15.3 million. During 1999, the Company reviewed the remaining balances of the accruals for merger and unusual cash charges recorded in 1998 and prior years and made net reductions of $13.0 million to reflect the current estimates of remaining expenditures. These net reductions included reversals of previously recorded accruals that will not be utilized and that relate primarily to severance accruals and lease obligations. In addition, for accruals related to certain terminated lease obligations, revisions were made to increase previously recorded amounts based on current information and estimates of expected cash flows related to these leases. The unusual items described above were reflected in the following captions of the consolidated statement of operations for the year ended December 31, 1999:
CHARGES CREDITS ADJUSTMENTS TOTAL ------- ------- ----------- ----- Cost of revenues $ 72.1 $ -- $ -- $ 72.1 Selling, general and administrative -- (15.3) (5.0) (20.3) Merger related costs -- -- (1.6) (1.6) Unusual charge 50.7 (39.5) (6.4) 4.8 -------- -------- -------- -------- Total $ 122.8 $ (54.8) $ (13.0) $ 55.0 ======== ======== ======== ========
41 BAKER HUGHES INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 3. INCOME TAXES The provision for income taxes is comprised of the following for the years ended December 31:
2001 2000 1999 -------- -------- -------- Current: United States $ 1.9 $ 2.1 $ 3.0 Foreign 146.8 82.7 71.8 -------- -------- -------- Total current 148.7 84.8 74.8 -------- -------- -------- Deferred: United States 74.0 18.5 (30.4) Foreign 0.4 30.4 (19.5) -------- -------- -------- Total deferred 74.4 48.9 (49.9) -------- -------- -------- Provision for income taxes $ 223.1 $ 133.7 $ 24.9 ======== ======== ========
The geographic sources of income before income taxes, extraordinary loss and cumulative effect of accounting changes are as follows for the years ended December 31:
2001 2000 1999 -------- -------- -------- United States $ 206.8 $ (12.0) $ 76.0 Foreign 455.0 248.0 (17.8) -------- -------- -------- Total $ 661.8 $ 236.0 $ 58.2 ======== ======== ========
Tax benefits of $5.5 million, $5.8 million and $4.2 million associated with the exercise of employee stock options were allocated to equity and recorded in capital in excess of par value in the years ended December 31, 2001, 2000 and 1999, respectively. The provision for income taxes differs from the amount computed by applying the U.S. statutory income tax rate to income before income taxes, extraordinary loss and cumulative effect of accounting changes for the reasons set forth below for the years ended December 31:
2001 2000 1999 -------- -------- -------- Statutory income tax at 35% $ 231.6 $ 82.6 $ 20.4 Formation-related taxes for Western GECO -- 45.0 -- Incremental effect of joint venture operations 14.8 2.2 -- Incremental effect of foreign operations (2.5) (13.7) (39.4) Net tax (benefit) charge related to foreign losses (7.4) 11.7 52.0 Nondeductible goodwill amortization 10.0 8.2 9.3 State income taxes - net of U.S. tax benefit 2.7 1.3 2.0 IRS audit agreement and refund claims (23.5) -- (18.1) Other - net (2.6) (3.6) (1.3) -------- -------- -------- Provision for income taxes $ 223.1 $ 133.7 $ 24.9 ======== ======== ========
During 2001, incremental taxes of $14.8 million from the Western GECO venture arose due to unbenefitted foreign losses and due to taxes assessed in jurisdictions on a deemed profit basis. In addition, a current year benefit of $23.5 million was recognized as a result of the settlement of the Internal Revenue Service ("IRS") examination of certain 1994 through 1997 pre-acquisition tax returns and related refund claims of Western Atlas, Inc. The Company recognized interest income of $5.4 million associated with this settlement. During 2000, as a result of the repatriation of the proceeds from the formation of the Western GECO venture, the Company incurred $3.4 million of foreign withholdings and other taxes and provided $6.0 million of additional U.S. taxes. In addition, the formation of the venture reduced the expected amount of foreign source income available in the future to utilize the Company's foreign tax credit carryover; accordingly, the Company provided $35.6 million for additional U.S. taxes with respect to future repatriation of earnings necessary to utilize the foreign tax credit carryover. Such amounts, aggregating $45.0 million, are presented in the above income tax rate reconciliation table under the caption "Formation-related taxes for Western GECO." 42 BAKER HUGHES INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) During 1999, the Company recognized a tax benefit of $18.1 million through the reversal of previously provided deferred taxes after settling the IRS examination of its 1994 and 1995 U.S. tax years. Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes, as well as operating loss and tax credit carryforwards. The tax effects of the Company's temporary differences and carryforwards are as follows at December 31:
2001 2000 -------- -------- Deferred tax assets: Receivables $ 15.8 $ 16.5 Inventory 100.7 97.2 Employee benefits 20.3 17.2 Other accrued expenses 54.9 64.1 Operating loss carryforwards 59.3 146.9 Tax credit carryforwards 186.9 178.5 Other 61.7 57.8 -------- -------- Subtotal 499.6 578.2 Valuation allowances (45.4) (56.4) -------- -------- Total 454.2 521.8 -------- -------- Deferred tax liabilities: Property 124.8 114.2 Other assets 106.8 126.1 Goodwill 115.6 107.3 Undistributed earnings of foreign subsidiaries 74.9 74.9 Other 59.8 66.1 -------- -------- Total 481.9 488.6 -------- -------- Net deferred tax (liability) asset $ (27.7) $ 33.2 ======== ========
A valuation allowance is recorded when it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of the deferred tax assets depends on the ability to generate sufficient taxable income of the appropriate character in the future and in the appropriate taxing jurisdictions. The Company has provided a valuation allowance for operating loss carryforwards in certain non-U.S. jurisdictions where its operations have decreased, currently ceased or the Company has withdrawn entirely. Provision has been made for U.S. and additional foreign taxes for the anticipated repatriation of certain earnings of foreign subsidiaries of the Company. The Company considers the undistributed earnings of its foreign subsidiaries above the amount already provided to be indefinitely reinvested. These additional foreign earnings could become subject to additional tax if remitted, or deemed remitted, as a dividend; however, the additional amount of taxes payable is not practicable to estimate. At December 31, 2001, the Company had approximately $104.1 million of foreign tax credits and $61.3 million of general business credits available to offset future payments of federal income taxes, expiring in varying amounts between 2004 and 2022. The Company's $21.5 million alternative minimum tax credits carryforward may be carried forward indefinitely under current U.S. law. The operating loss carryforwards without a valuation allowance will expire in varying amounts over the next twenty years. 43 BAKER HUGHES INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 4. EARNINGS PER SHARE A reconciliation of the number of shares used for the basic and diluted earnings per share ("EPS") computations is as follows for the years ended December 31:
2001 2000 1999 ---- ---- ---- Weighted average common shares outstanding for basic EPS 335.6 330.9 328.2 Effect of dilutive securities - stock plans 1.8 2.0 1.7 ------ ------ ------ Adjusted weighted average common shares outstanding for diluted EPS 337.4 332.9 329.9 ====== ====== ====== Future potentially anti-dilutive shares excluded from diluted EPS: Options with option price greater than market price 4.6 3.6 10.2 Liquid Yield Options Notes ("LYONS") convertible into common stock -- 7.2 7.2
NOTE 5. INVENTORIES Inventories are comprised of the following at December 31:
2001 2000 ---------- ---------- Finished goods $ 856.9 $ 706.0 Work in process 81.7 82.0 Raw materials 111.2 110.5 ---------- ---------- Total $ 1,049.8 $ 898.5 ========== ==========
NOTE 6. INVESTMENTS IN AFFILIATES The Company has investments in affiliates that are accounted for using the equity method of accounting. The most significant of these affiliates is Western GECO, which was formed on November 30, 2000 between the Company and Schlumberger Limited ("Schlumberger"), and certain wholly owned subsidiaries of Schlumberger, with the Company and Schlumberger owning 30% and 70% of the venture, respectively. The Company contributed certain assets of its Western Geophysical division with a net book value of $1.1 billion, consisting primarily of multiclient seismic data and property and $15.0 million in working capital to Western GECO. The Company did not recognize any gain or loss resulting from the initial formation of the venture due to the Company's material continued involvement in the operations of Western GECO. The Company incurred fees and expenses of approximately $16.6 million in connection with the transaction. Of this total, $10.6 million of direct costs were capitalized to the Company's investment and $6.0 million were recorded as an unusual charge in the Company's consolidated statement of operations for the year ended December 31, 2000. In conjunction with the transaction, the Company received $493.4 million in cash from Schlumberger in exchange for the transfer of a portion of the Company's ownership in Western GECO. Additionally, as soon as practicable after November 30, 2004, the Company or Schlumberger will make a cash true-up payment to the other party based on a formula comparing the ratio of the net present value of sales revenue from each party's contributed multiclient seismic data libraries during the four-year period ending November 30, 2004 and the ratio of the net book value of those libraries as of November 30, 2000. The maximum payment that either party will be required to make as a result of this adjustment is $100.0 million. In conjunction with the formation of Western GECO, the Company transferred to the venture a lease on a seismic vessel. The Company is the sole guarantor of this lease obligation; however, Schlumberger has indemnified the Company for 70% of the total lease obligation. At December 31, 2001, the remaining commitment under this lease is $96.4 million. The Company also entered into an agreement with Western GECO whereby Western GECO subleased a facility from the Company for a period of ten years at current market rates. During 2001, the Company received $5.9 million of rental income from Western GECO. Included in the caption "Equity in income (loss) of affiliates" in the Company's consolidated statement of operations for 2001 and 2000 was $10.3 million for asset impairment charges associated with Western GECO and $9.5 million for restructuring and integration charges associated with Western GECO, respectively. 44 BAKER HUGHES INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) On October 30, 2001, the Company and Sequel Holdings, Inc. ("Sequel") created an entity to operate under the name of Petreco International ("Petreco"). The Company contributed $16.6 million of net assets of the refining and production product line of its Process segment to Petreco consisting primarily of intangible assets, accounts receivable and inventories. In conjunction with the transaction, the Company received $9.0 million in cash and two promissory notes totaling $10.0 million. Petreco profits are shared by the Company and Sequel in 49% and 51% interests, respectively. Sequel is entitled to a liquidation preference upon the liquidation or sale of Petreco. The Company accounts for its ownership in Petreco using the equity method of accounting and did not recognize any gain or loss from the initial formation of the entity due to the Company's material continued involvement in the operations of Petreco. Summarized unaudited combined financial information for all equity method affiliates is as follows as of December 31:
2001 2000 ---------- ---------- Combined operating results: Revenues $ 1,752.9 $ 228.6 ========== ========== Operating income (loss) $ 226.1 $ (14.9) ========== ========== Net income (loss) $ 118.2 $ (21.4) ========== ========== Combined financial position: Current assets $ 2,045.9 $ 1,565.5 Noncurrent assets 1,043.0 945.1 ---------- ---------- Total assets $ 3,088.9 $ 2,510.6 ========== ========== Current liabilities $ 961.2 $ 690.1 Noncurrent liabilities 130.2 12.5 Stockholders' equity 1,997.5 1,808.0 ---------- ---------- Total liabilities and stockholders' equity $ 3,088.9 $ 2,510.6 ========== ==========
At December 31, 2001 and 2000, net accounts receivable from affiliates totaled $33.5 million and $11.4 million, respectively. As of December 31, 2001 and 2000, the excess of the Company's investment over the Company's equity in affiliates is $303.4 million and $291.5 million, respectively. This amount is being amortized over 40 years and the amortization is included in the Company's equity in income (loss) of affiliates. NOTE 7. PROPERTY, GOODWILL AND OTHER INTANGIBLES Property, plant and equipment is comprised of the following at December 31:
DEPRECIATION PERIOD 2001 2000 ------------ --------- --------- Land $ 37.8 $ 40.0 Buildings and improvements 5 - 40 years 534.1 517.1 Machinery and equipment 2 - 15 years 1,457.7 1,412.2 Rental tools and equipment 1 - 10 years 852.2 811.2 Oil and gas properties, full cost method 122.0 116.2 --------- --------- Total property 3,003.8 2,896.7 Accumulated depreciation and depletion (1,628.0) (1,518.0) --------- --------- Property - net $ 1,375.8 $ 1,378.7 ========= =========
45 BAKER HUGHES INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Goodwill and other intangibles are as follows at December 31:
AMORTIZATION PERIOD 2001 2000 ------------ ---------- ---------- Goodwill 5 - 40 years $ 1,607.8 $ 1,640.5 Other intangible assets 3 - 40 years 202.4 220.1 ---------- ---------- Total goodwill and other intangibles 1,810.2 1,860.6 Accumulated amortization (395.8) (362.5) ---------- ---------- Goodwill and other intangibles - net $ 1,414.4 $ 1,498.1 ========== ==========
NOTE 8. INDEBTEDNESS Total debt consisted of the following at December 31:
2001 2000 ---------- ---------- Short-term debt with a weighted average interest rate of 4.90% at $ 89.1 $ 42.1 December 31, 2001 (7.43% at December 31, 2000) Commercial Paper with a weighted average interest rate of 2.00% at December 31, 2001 (6.51% at December 31, 2000) 95.0 215.0 5.8% Notes due February 2003 with an effective interest rate of 6.04%, net of unamortized discount of $0.1 at December 31, 2001 ($0.4 at December 31, 2000) 99.9 99.6 8% Notes due May 2004 with an effective interest rate of 8.08%, net of unamortized discount of $0.3 at December 31, 2001 ($0.5 at December 31, 2000) 99.7 99.5 7.875% Notes due June 2004 with an effective interest rate of 8.13%, net of unamortized discount of $1.0 at December 31, 2001 ($1.4 at December 31, 2000) 251.2 248.6 Liquid Yield Option Notes due May 2008 with a yield to maturity of 3.5% per annum, net of unamortized discount of $88.9 at December 31, 2000 -- 296.2 6.25% Notes due January 2009 with an effective interest rate of 6.38%, net of unamortized discount of $2.2 at December 31, 2001 ($2.5 at December 31, 2000) 321.9 322.5 6% Notes due February 2009 with an effective interest rate of 6.11%, net of unamortized discount of $1.2 at December 31, 2001 ($1.3 at December 31, 2000) 198.8 198.7 8.55% Debentures due June 2024 with an effective interest rate of 8.80%, net of unamortized discount of $2.5 at December 31, 2001 ($2.6 at December 31, 2000) 147.5 147.4 6.875% Notes due January 2029 with an effective interest rate of 7.08%, net of unamortized discount of $9.4 at December 31, 2001 ($9.6 at December 31, 2000) 390.6 390.4 Other debt 0.9 2.9 ---------- ---------- Total debt 1,694.6 2,062.9 Less short-term debt and current maturities 12.2 13.3 ---------- ---------- Long-term debt $ 1,682.4 $ 2,049.6 ========== ==========
At December 31, 2001, the Company had $1,289.9 million of credit facilities with commercial banks, of which $800.5 million were committed. The committed facilities mature in September 2003. The Company's policy is to classify commercial paper and short-term borrowings as long-term debt to the extent of its committed facilities because the Company has the ability under these credit agreements and the intent to maintain these obligations 46 BAKER HUGHES INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) for longer than one year. There were no borrowings under these credit facilities during the years ended December 31, 2001 and 2000. On May 25, 2001, the Company redeemed its outstanding LYONS at a redemption price of $786.13 per $1,000 principal amount, for a total of $301.8 million. The redemption was funded through the issuance of commercial paper. In connection with the early extinguishment of debt, the Company recorded an extraordinary loss of $2.3 million ($1.5 million after tax) which represents the write-off of the remaining debt issuance costs. Maturities of debt at December 31, 2001 are as follows: 2002 - $12.2 million; 2003 - $272.6 million; 2004 - $347.8 million; 2005 - $0.1 million; 2006 - - $0.0 million and $1,061.9 million thereafter. NOTE 9. FINANCIAL INSTRUMENTS FAIR VALUE OF FINANCIAL INSTRUMENTS The Company's financial instruments include cash and short-term investments, receivables, payables, debt, interest rate swaps, crude oil contracts and foreign currency contracts. Except as described below, the estimated fair value of such financial instruments at December 31, 2001 and 2000 approximate their carrying value as reflected in the consolidated balance sheets. The fair value of the Company's debt, interest rate swaps, crude oil contracts and foreign currency contracts has been estimated based on year-end quoted market prices. The estimated fair value of the Company's debt at December 31, 2001 and 2000 was $1,761.7 million and $2,131.5 million, respectively, which differs from the carrying amounts of $1,694.6 million and $2,062.9 million, respectively, included in the consolidated balance sheets. INTEREST RATE SWAPS The Company entered into an interest rate swap agreement in February 1999 for a notional amount of $325.0 million. The Company receives interest at a rate of 6.25% and pays interest at a rate equal to the average of 6-month LIBOR for the Yen, Euro and Swiss Franc plus a 3.16% spread. The interest rate swap settles semi-annually and terminates in January 2009. The Company entered into a second interest rate swap agreement in June 2001 for a notional amount of $100.0 million on which the Company receives interest at a rate of 7.875% and pays interest at a rate of three-month LIBOR plus a spread of 2.7625%. The interest rate swap settles semi-annually and terminates in June 2004. In accordance with SFAS No. 133, these two interest rate swap agreements have been designated and have qualified as fair value hedging instruments. They were fully effective, resulting in no net gain or loss recorded in the consolidated statement of operations in 2001. In the unlikely event that the counterparty fails to meet the terms of the interest rate swap agreements, the Company's exposure is limited to the interest rate differentials. The fair value of these contracts at December 31, 2001 and 2000 was a $1.3 million recognized asset, under SFAS No. 133, and a $9.6 million unrecorded liability, respectively. CRUDE OIL CONTRACTS During the year ended December 31, 2001, the Company entered into two crude oil contracts to mitigate price risk associated with production from the Company's interest in an oil producing property in Nigeria. Based on the Company's outlook on crude oil prices, the Company elected to terminate these contracts prior to their maturity date. Accordingly, the contracts were terminated on October 3, 2001 and the Company received a cash payment of $4.4 million. In accordance with SFAS No. 133, the net gain recognized in earnings in 2001 from all crude oil contracts was $3.1 million and is reported in revenue in the consolidated statement of operations. 47 BAKER HUGHES INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) During the year ended December 31, 2000, the Company had entered into two crude oil contracts to mitigate price risk associated with the Company's interest in an oil producing property in Nigeria. The fair value of these contracts at December 31, 2000 was a $3.1 million unrecorded asset. FOREIGN CURRENCY FORWARD CONTRACTS At December 31, 2001, the Company had entered into foreign currency forward contracts with notional amounts of $8.5 million, $1.0 million and $0.7 million to hedge exposure to currency fluctuations in the Canadian Dollar, the Indonesian Rupiah and the Euro, respectively. These contracts are cash flow hedges. Based on year-end quoted market prices for contracts with similar terms and maturity dates, no asset or liability was recorded as the forward price is substantially the same as the contract price. At December 31, 2000, the Company had entered into foreign currency forward contracts with notional amounts of $50.0 million, $0.3 million and $0.2 million to hedge against exposure to fluctuations in the British Pound, the South African Rand and the Euro, respectively. The fair value of these forward contracts at December 31, 2000, was a $1.5 million unrecorded asset. The counterparties to the Company's forward contracts are major financial institutions. The credit ratings and concentration of risk of these financial institutions are monitored on a continuing basis. In the unlikely event that the counterparties fail to meet the terms of a foreign currency contract, the Company's exposure is limited to the foreign currency rate differential. During 2001, the Company entered into several foreign currency contracts to hedge exposure to currency fluctuations for specific transactions or balances. The impact on the consolidated statement of operations was not significant for these contracts either individually or in the aggregate. CONCENTRATION OF CREDIT RISK The Company sells its products and services to numerous companies in the oil and gas industry. Although this concentration could affect the Company's overall exposure to credit risk, management believes that the Company is exposed to minimal risk since the majority of its business is conducted with major companies within the industry. The Company performs periodic credit evaluations of its customers' financial condition and generally does not require collateral for its accounts receivable. In some cases, the Company will require payment in advance or security in the form of a letter of credit or bank guarantee. The Company maintains cash deposits with major banks that from time to time may exceed federally insured limits. The Company periodically assesses the financial condition of the institutions and believes that the risk of any loss is minimal. NOTE 10. SEGMENT AND RELATED INFORMATION The Company currently has eight operating divisions that have separate management teams and infrastructures that offer different products and services. The divisions have been aggregated into two reportable segments, "Oilfield" and "Process". The Oilfield segment consists of six operating divisions - Baker Atlas, Baker Hughes INTEQ, Baker Oil Tools, Baker Petrolite, Centrilift, and Hughes Christensen - that manufacture and sell equipment and provide services used in the drilling, completion, production and maintenance of oil and gas wells and in reservoir measurement and evaluation. They have been aggregated because the long-term financial performance of these divisions is affected by similar economic conditions and the consolidated results are evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance. The principal markets for this segment include all major oil and gas producing regions of the world, including North America, Latin America, Europe, Africa, the Middle East and the Far East. Customers include major multi-national, independent and national or state-owned oil companies. The Oilfield segment also includes the Company's interest in an oil and gas property in Nigeria and its investment in Western GECO and other less significant equity method investments. 48 BAKER HUGHES INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The Process segment consists of two operating divisions - EIMCO Process Equipment and BIRD Machine- that manufacture and sell process equipment for separating solids from liquids and liquids from liquids through filtration, sedimentation, centrifugation and flotation processes. The principal markets for this segment include all regions of the world where there are significant industrial and municipal wastewater applications and base metals activity. Customers include municipalities, contractors, engineering companies and pulp and paper, minerals, industrial and oil and gas producers. The Process segment also includes the Company's investment in Petreco. The accounting policies of each segment are the same as those described in Note 1 of Notes to Consolidated Financial Statements. The Company evaluates the performance of its segments based on income before income taxes, accounting changes, unusual items and interest income and expense. Intersegment sales and transfers are not significant. Summarized financial information is shown in the following table. The "Other" column includes corporate related items, results of insignificant operations and, as it relates to segment profit (loss), income and expense not allocated to reportable segments.
OILFIELD PROCESS OTHER TOTAL ---------- ---------- ---------- ---------- 2001 Revenues $ 5,063.4 $ 318.8 $ -- $ 5,382.2 Equity in income (loss) of affiliates 56.0 0.1 (10.3) 45.8 Segment profit (loss) 932.6 (14.4) (256.4) 661.8 Total assets 5,807.6 296.1 572.5 6,676.2 Investment in affiliates 902.8 26.2 -- 929.0 Capital expenditures 294.2 2.6 22.2 319.0 Depreciation, depletion and amortization 323.6 8.7 12.4 344.7 2000 Revenues $ 4,910.8 $ 323.0 $ -- $ 5,233.8 Equity in income (loss) of affiliates 4.9 -- (9.5) (4.6) Segment profit (loss) 573.9 (5.2) (332.7) 236.0 Total assets 5,597.9 332.3 558.9 6,489.1 Investment in affiliates 869.3 -- -- 869.3 Capital expenditures 565.0 2.5 31.7 599.2 Depreciation, depletion and amortization 591.3 11.9 8.3 611.5 1999 Revenues $ 4,546.7 $ 389.8 $ -- $ 4,936.5 Equity in income of affiliates 7.0 -- -- 7.0 Segment profit (loss) 360.8 (22.3) (280.3) 58.2 Total assets 6,297.7 420.7 463.7 7,182.1 Investment in affiliates 40.2 -- -- 40.2 Capital expenditures 572.1 6.6 61.7 640.4 Depreciation, depletion and amortization 769.5 12.3 8.9 790.7
For the years ended December 31, 2001, 2000 and 1999, there were no revenues attributable to one customer that accounted for more than 10% of total revenues for any segment. The following table presents the details of "Other" segment loss for the years ended December 31:
2001 2000 1999 -------- -------- -------- Corporate expenses $ (130.3) $ (99.2) $ (94.9) Interest - net (114.2) (168.5) (161.9) Unusual charge - net (1.6) (69.6) (4.8) Unusual charges to costs of revenues and SG&A -- -- (51.8) Gain on sale of securities -- 14.1 31.5 Unusual charge related to equity method investments (10.3) (9.5) -- Merger related costs -- -- 1.6 -------- -------- -------- Total $ (256.4) $ (332.7) $ (280.3) ======== ======== ========
49 BAKER HUGHES INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The following table presents the details of "Other" total assets at December 31:
2001 2000 1999 ---------- ---------- ---------- Current deferred tax asset $ 181.3 $ 190.5 $ 141.6 Net property 176.3 170.9 145.6 Accounts receivable 44.0 34.9 29.9 Other tangible assets 85.6 85.6 62.5 Other 85.3 77.0 84.1 ---------- ---------- ---------- Total $ 572.5 $ 558.9 $ 463.7 ========== ========== ==========
The following table presents consolidated revenues by country based on the location of the use of the product or service for the years ended December 31:
2001 2000 1999 ---------- ---------- ---------- United States $ 2,082.0 $ 2,034.9 $ 1,874.2 United Kingdom 340.8 349.0 411.4 Norway 312.2 279.2 274.1 Canada 303.9 289.7 234.5 Venezuela 233.0 277.4 228.3 Other countries (approximately 65 countries) 2,110.3 2,003.6 1,914.0 ---------- ---------- ---------- Total $ 5,382.2 $ 5,233.8 $ 4,936.5 ========== ========== ==========
The following table presents net property by country based on the location of the asset at December 31:
2001 2000 1999 ---------- ---------- ---------- United States $ 799.1 $ 758.0 $ 947.4 United Kingdom 108.7 133.7 183.4 Nigeria 83.0 78.6 91.9 Norway 48.1 37.3 43.0 Venezuela 37.4 45.4 53.6 Other countries 299.5 325.7 365.4 Western Geophysical mobile assets* -- -- 369.0 ---------- ---------- ---------- Total $ 1,375.8 $ 1,378.7 $ 2,053.7 ========== ========== ==========
* These assets represent marine seismic vessels, land crews and related equipment that are mobile and move frequently between countries. Data processing centers, land and buildings have been included in the countries where these assets were located. NOTE 11. EMPLOYEE STOCK PLANS The Company has stock option plans that provide for the issuance of incentive and non-qualified stock options to directors, officers and other key employees at an exercise price equal to or greater than the fair market value of the stock at the date of grant. These stock options generally vest over three years. Vested options are exercisable in part or in full at any time prior to the expiration date of ten years from the date of grant. As of December 31, 2001, 7.6 million shares were available for future option grants. 50 BAKER HUGHES INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The following table summarizes the activity for the Company's stock option plans (shares in thousands):
WEIGHTED AVERAGE NUMBER EXERCISE PRICE OF SHARES PER SHARE ---------- -------------- Outstanding at December 31, 1998 13,332 $ 27.24 Granted 557 22.07 Exercised (1,096) 17.42 Forfeited (1,058) 33.03 ---------- ---------- Outstanding at December 31, 1999 11,735 27.39 Granted 2,154 27.40 Exercised (2,471) 21.16 Forfeited (766) 27.79 ---------- ---------- Outstanding at December 31, 2000 10,652 28.80 Granted 1,850 40.97 Exercised (2,291) 22.05 Forfeited (344) 30.01 ---------- ---------- Outstanding at December 31, 2001 9,867 $ 32.61 ========== ==========
The following table summarizes information for stock options outstanding at December 31, 2001 (shares in thousands):
OUTSTANDING EXERCISABLE ------------------------------------------ -------------------------- WEIGHTED AVERAGE REMAINING WEIGHTED WEIGHTED CONTRACTUAL AVERAGE AVERAGE RANGE OF EXERCISE LIFE EXERCISE EXERCISE PRICES SHARES (IN YEARS) PRICE SHARES PRICE ----------------- ---------- ----------- ---------- ---------- ---------- $ 1.17 $ 14.86 154 3.83 $ 10.19 138 $ 9.66 $ 16.81 $ 21.00 3,144 6.30 20.82 2,606 20.78 $ 21.06 $ 26.07 1,343 7.28 22.82 554 22.73 $ 28.25 $ 40.25 1,174 7.01 36.30 743 35.85 $ 43.63 $ 47.81 4,052 7.24 44.80 2,243 47.79 ---------- ---------- ---------- ---------- ---------- Total 9,867 6.87 $ 32.61 6,284 $ 32.13 ========== ========== ========== ========== ==========
The Company also has an employee stock purchase plan whereby eligible employees may purchase shares of the Company's common stock at a price equal to 85% of the lower of the closing price of the Company's common stock on the first or last trading day of the Company's fiscal year. A total of 1.5 million shares are remaining for issuance under the plan. Employees purchased 0.6 million shares in 2001, 1.1 million shares in 2000 and 1.5 million shares in 1999. As allowed by SFAS No. 123, the Company has elected to continue to follow APB No. 25 in accounting for its employee stock plans. Under APB No. 25, the Company does not recognize compensation expense upon the issuance of its stock options because the option terms are fixed and the exercise price is equal to or greater than the market price of the underlying stock on the grant date. 51 BAKER HUGHES INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) SFAS No. 123 requires the disclosure of pro forma net income and EPS as if the Company had adopted the fair value method as of January 1, 1995. Under SFAS No. 123, the fair value of stock based awards to employees is calculated through the use of option pricing models. These models also require subjective assumptions, including future stock price volatility and expected time to exercise, which greatly affect the calculated values. The Company's calculations were made using the Black-Scholes option pricing model with the following weighted average assumptions:
ASSUMPTIONS -------------------------------------------------------- RISK-FREE EXPECTED DIVIDEND EXPECTED INTEREST LIFE YIELD VOLATILITY RATE (IN YEARS) -------- ---------- --------- ---------- 2001 1.1% 53.0% 3.4% 3.1 2000 1.7% 59.6% 5.0% 3.2 1999 2.2% 55.4% 6.5% 5.0
The weighted average fair values of options granted in 2001, 2000 and 1999 were $15.04, $11.15 and $11.77 per share, respectively. If the Company had recognized compensation expense based on these values, the Company's net income and EPS would have been reduced to the pro forma amounts indicated below:
2001 2000 1999 ---------- ---------- ---------- Net income As reported $ 438.0 $ 102.3 $ 33.3 Pro forma 412.0 81.6 6.2 Basic EPS As reported $ 1.31 $ 0.31 $ 0.10 Pro forma 1.23 0.25 0.02 Diluted EPS As reported $ 1.30 $ 0.31 $ 0.10 Pro forma 1.22 0.25 0.02
These pro forma calculations may not be indicative of future amounts since the pro forma disclosure does not apply to options granted prior to 1996 and additional awards in future years are anticipated. NOTE 12. EMPLOYEE BENEFIT PLANS DEFINED BENEFIT PENSION PLANS AND POSTRETIREMENT BENEFITS OTHER THAN PENSIONS The Company has various noncontributory defined benefit pension plans covering various domestic and foreign employees. Generally, the Company makes annual contributions to the plans in amounts necessary to meet or exceed minimum governmental funding requirements. The Company also provides certain postretirement health care and life insurance benefits other than pensions ("Postretirement Benefits") to substantially all U.S. employees who retire and have met certain age and service requirements. During 2001, the Company approved amendments to the Postretirement Benefits plan for certain employees to enhance their health care benefits, which will be effective January 1, 2002. 52 BAKER HUGHES INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The reconciliation of the beginning and ending balances of benefit obligations and fair value of plan assets, and the funded status of the plans are as follows for the years ended December 31:
PENSION BENEFITS POSTRETIREMENT BENEFITS ---------------------- ----------------------- 2001 2000 2001 2000 -------- -------- -------- -------- Change in benefit obligation: Benefit obligation at beginning of year $ 220.8 $ 210.0 $ 120.4 $ 113.7 Service cost 4.5 6.2 1.6 1.7 Interest cost 14.8 14.2 8.9 8.3 Plan participants' contributions 0.5 1.1 -- -- Amendments -- -- 12.2 -- Actuarial loss 17.2 7.1 16.3 11.6 Settlement/curtailment gain (13.5) -- -- (1.6) Benefits paid (10.2) (10.3) (15.7) (13.3) Exchange rate adjustment (5.0) (7.5) -- -- -------- -------- -------- -------- Benefits obligation at end of year 229.1 220.8 143.7 120.4 -------- -------- -------- -------- Change in plan assets: Fair value of plan assets at beginning of year 323.8 299.0 -- -- Actual return (loss) on plan assets (40.3) 35.2 -- -- Employer contribution 7.5 4.8 -- -- Plan participants' contributions 0.5 1.1 -- -- Benefits paid (10.2) (10.3) -- -- Exchange rate adjustment (3.2) (6.0) -- -- -------- -------- -------- -------- Fair value of plan assets at end of year 278.1 323.8 -- -- -------- -------- -------- -------- Funded status - over (under) 49.0 103.0 (143.7) (120.4) Unrecognized actuarial (gain)loss 62.3 (8.0) 16.9 0.7 Unrecognized prior service cost 0.8 1.0 9.7 (3.0) -------- -------- -------- -------- Net amount recognized 112.1 96.0 (117.1) (122.7) Benefits paid - October to December 1.1 0.7 4.1 3.5 -------- -------- -------- -------- Net amount recognized $ 113.2 $ 96.7 $ (113.0) $ (119.2) ======== ======== ======== ========
Amounts recognized in the consolidated balance sheet are as follows at December 31:
PENSION BENEFITS POSTRETIREMENT BENEFITS -------------------------- -------------------------- 2001 2000 2001 2000 ---------- ---------- ---------- ---------- Prepaid benefit cost $ 143.6 $ 128.8 $ -- $ -- Accrued benefit liability (30.4) (32.1) (113.0) (119.2) Minimum liability (19.3) (10.1) -- -- Intangible asset 0.5 0.4 -- -- Accumulated other comprehensive income 18.8 9.7 -- -- ---------- ---------- ---------- ---------- Net amount recognized $ 113.2 $ 96.7 $ (113.0) $ (119.2) ========== ========== ========== ==========
Actuarial assumptions used to determine costs and benefit obligation for these plans are as follows for the years ended December 31:
PENSION BENEFITS POSTRETIREMENT BENEFITS ------------------------------------ ------------------------------------ 2001 2000 1999 2001 2000 1999 -------- -------- -------- -------- -------- -------- Discount rate 6.53% 6.96% 6.95% 7.0% 7.75% 7.50% Expected return on plan assets 8.68% 8.69% 8.68% Rate of compensation increase 3.75% 3.98% 3.92%
53 BAKER HUGHES INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The components of net pension and postretirement costs are as follows for the years ended December 31:
PENSION BENEFITS POSTRETIREMENT BENEFITS ------------------------------------ ------------------------------------ 2001 2000 1999 2001 2000 1999 -------- -------- -------- -------- -------- -------- Service cost $ 4.5 $ 6.2 $ 6.2 $ 1.6 $ 1.7 $ 2.0 Interest cost 14.8 14.2 13.7 8.9 8.3 8.1 Expected return on plan assets (27.8) (25.4) (22.5) -- -- -- Amortization of prior service cost -- -- -- (0.5) (0.5) (0.4) Recognized actuarial (gain) loss 0.5 0.2 0.5 -- (0.1) -- -------- -------- -------- -------- -------- -------- Net periodic benefit cost (8.0) (4.8) (2.1) 10.0 9.4 9.7 Curtailment effect recognized -- -- (0.2) -- -- -- -------- -------- -------- -------- -------- -------- Net periodic benefit cost $ (8.0) $ (4.8) $ (2.3) $ 10.0 $ 9.4 $ 9.7 ======== ======== ======== ======== ======== ========
The projected benefit obligation, accumulated benefit obligation, and fair value of plan assets for the pension plans with accumulated benefit obligations in excess of plan assets were $116.7 million, $112.4 million and $72.3 million, respectively, as of December 31, 2001, and $109.3 million, $99.9 million and $66.8 million, respectively, as of December 31, 2000. The Company's postretirement benefit plan is not funded. Assumed health care cost trend rates have a significant effect on the amounts reported for the Postretirement Benefits plan. As of December 31, 2001, the health care cost trend rate was 7.3% for employees under age 65 and 8.3% for participants over age 65 with each declining gradually each successive year until it reaches 5.0% for both employees under age 65 and over age 65 in 2007. The assumed health care cost trend rate used in measuring the accumulated benefit obligation for Postretirement Benefits was adjusted in 2000. A one-percentage-point change in assumed health care cost trend rates would have the following effects:
ONE PERCENTAGE ONE PERCENTAGE POINT INCREASE POINT DECREASE -------------- -------------- Effect on total of service and interest cost components $ 0.7 $ (0.6) Effect on postretirement benefit obligation 9.6 (8.5)
DEFINED CONTRIBUTION PLANS During the periods reported, generally all of the Company's U.S. employees were eligible to participate in the Company sponsored Thrift Plan, which is a 401(k) plan under the Internal Revenue Code of 1986, as amended. The Company sponsored Thrift Plan allows eligible employees to elect to contribute from 1% to 15% of their salaries to an investment trust. Employee contributions are matched in cash by the Company at the rate of $1.00 per $1.00 employee contribution for the first 3% and $0.50 per $1.00 employee contribution for the next 2% of the employee's salary. Such contributions vest immediately. In addition, the Company makes a cash contribution for all eligible employees between 2% and 5% of their salary depending on the employee's age. Such contributions become fully vested to the employee after five years of employment. The Thrift Plan provides for nine different investment options, for which the employee has sole discretion in determining how both the employer and employee contributions are invested. The Company's contribution to the Thrift Plan and other defined contribution plans amounted to $63.7 million, $57.5 million and $55.5 million in 2001, 2000 and 1999, respectively. For certain non-U.S. employees who are not eligible to participate in the Thrift Plan, the Company provides a non-qualified defined contribution plan that provides basically the same benefits as the Thrift Plan. In addition, the Company provides a non-qualified supplemental retirement plan ("SRP") for certain officers and employees whose benefits under the Thrift Plan are limited by federal tax law. The SRP also allows the eligible employees to defer a portion of their eligible compensation and provides for employer matching and base contributions pursuant to limitations. Both non-qualified plans are fully funded and invested through trusts, the assets of which are included in the Company's consolidated balance sheet. The Company's contributions to these non-qualified plans were $4.2 million, $2.4 million and $2.0 million for 2001, 2000 and 1999, respectively. 54 BAKER HUGHES INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) POST EMPLOYMENT BENEFITS During the periods reported, the Company provided certain postemployment disability and medical benefits to substantially all qualifying former or inactive U.S. employees. Disability income benefits ("Disability Benefits"), available at the date of hire, are provided through a qualified plan which has been funded by contributions from the Company and employees. The primary asset of the plan is a guaranteed insurance contract with an insurance company. The asset currently earns interest at 5.7%. The actuarially determined obligation is calculated at a discount rate of 7.25%. Disability Benefits (income) expense was $(1.9) million, $0.4 million and $1.3 million in 2001, 2000 and 1999, respectively. The continuation of medical, life insurance and Thrift Plan benefits while on disability and the service related salary continuance benefits ("Continuation Benefits") are also provided through a qualified plan. Expense for Continuation Benefits, which is primarily interest cost on the projected benefit obligation, was $2.7 million, $2.6 million and $5.9 million, for 2001, 2000 and 1999, respectively. During 2000, the Company changed its salary continuance benefits to a non-service related plan. The following table sets forth the funded status and amounts recognized in the Company's consolidated balance sheets for Disability Benefits and Continuation Benefits at December 31:
2001 2000 ---------- ---------- Actuarial present value of accumulated benefit obligation $ (45.2) $ (42.1) Plan assets at fair value 15.5 15.0 ---------- ---------- Accumulated benefit obligation in excess of plan assets (29.7) (27.1) Prior service costs (0.5) (0.6) Unrecognized net (gain)/loss 3.6 (0.9) ---------- ---------- Postemployment liability $ (26.6) $ (28.6) ========== ==========
Health care cost assumptions used to measure the Continuation Benefits obligation are similar to the assumptions used in determining the obligation for postretirement health care benefits. A discount rate of 6.50% in 2001 and 7.25% in 2000 was used in the accounting for Continuation Benefits. NOTE 13. COMMITMENTS AND CONTINGENCIES LEASES At December 31, 2001, the Company had long-term non-cancelable operating leases covering certain facilities and equipment. The minimum annual rental commitments, net of amounts due under subleases, for each of the five years in the period ending December 31, 2006 are $54.5 million, $47.8 million, $34.2 million, $23.1 million and $16.5 million, respectively, and $109.9 million in the aggregate thereafter. The Company has not entered into any significant capital leases. In September 2000, the Company sold four facilities for approximately $117.7 million. The proceeds were used to repay outstanding indebtedness. The facilities were leased back from the purchaser over a period of 15 years at current market rates. One of these facilities was subsequently subleased to Western GECO at current market rates for a period of 10 years, in conjunction with the formation of the venture. LITIGATION The Company and its subsidiaries are involved in litigation or proceedings that have arisen in the Company's ordinary business activities. The Company insures against these risks to the extent deemed prudent by its management, but no assurance can be given that the nature and amount of such insurance will be sufficient to fully indemnify the Company against liabilities arising out of pending and future legal proceedings. Many of these insurance policies contain self-insured retentions in amounts the Company deems prudent. The Company has been named as a defendant in a number of shareholder class action suits filed by purported shareholders shortly after the Company's December 8, 1999 announcement regarding the accounting issues it discovered at its INTEQ division. These suits, which seek unspecified monetary damages, have been consolidated in 55 BAKER HUGHES INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) the federal district court for the Southern District of Texas pursuant to the Private Securities Litigation Reform Act of 1995. The Company filed Motions to Dismiss in both the shareholder derivative suit and the class action. The federal district court granted the Company's Motions on both actions. No appeal was filed in the shareholder derivative suit, but the class action case is currently on appeal at the U. S. Fifth Circuit Court of Appeals. The Company believes the allegations in these suits are without merit, and the Company intends to vigorously defend these lawsuits. Even so, an adverse outcome in this class action litigation could have an adverse effect on the Company's results of operations or financial condition. ENVIRONMENTAL MATTERS The Company's past and present operations include activities which are subject to extensive federal and state environmental regulations. The Company has been identified as a potentially responsible party ("PRP") in remedial activities related to various "Superfund" sites. Applicable United States federal law imposes joint and several liability on each PRP for the cleanup of these sites leaving the Company with the uncertainty that it may be responsible for the remediation cost attributable to other PRPs who are unable to pay their share of the remediation costs. Generally, the Company has estimated its share of such total cost based on the ratio that the estimated volume of waste contributed to the site by the Company bears to the total estimated volume of waste disposed at the site. The Company has accrued what it believes to have been its pro rata share of the total estimated cost of remediation of these Superfund sites based upon such a volumetric calculation. No accrual has been made under the joint and several liability concept since the Company believes that the probability that it will have to pay material costs above its volumetric share is remote. The Company believes there are other PRPs who have greater involvement on a volumetric calculation basis, who have substantial assets and who may be reasonably expected to pay their share of the cost of remediation. In some cases, the Company has insurance coverage or contractual indemnities from third parties to cover the ultimate liability. At December 31, 2001 and 2000, the Company had accrued $17.6 million and $14.1 million, respectively, for remediation costs, including the Superfund sites referred to above. The measurement of the accruals for remediation costs is subject to uncertainty, including the evolving nature of environmental regulations and the difficulty in estimating the extent and type of remediation activity that will be utilized. The Company believes that the likelihood of material losses in excess of those amounts recorded is remote. OTHER In the normal course of business with customers, vendors and others, the Company is contingently liable for performance under letters of credit and other bank issued guarantees totaling approximately $187.8 million at December 31, 2001. The Company also had commitments outstanding for purchase obligations related to capital expenditures and inventory under purchase orders and contracts of approximately $138.2 million at December 31, 2001. In addition, at December 31, 2001, the Company has guaranteed debt of third parties totaling $36.9 million. It is not practicable to estimate the fair value of these financial instruments and management does not expect any material losses from these financial instruments. In conjunction with the formation of Western GECO, the Company transferred to the venture a lease on a seismic vessel. The Company is the sole guarantor of this lease obligation; however, Schlumberger has indemnified the Company for 70% of the total lease obligation. At December 31, 2001, the remaining commitment under this lease is $96.4 million. NOTE 14. OTHER SUPPLEMENTAL INFORMATION Supplemental consolidated statement of operations information is as follows for the years ended December 31:
2001 2000 1999 -------- -------- -------- Rental expense (generally transportation equipment $ 96.9 $ 138.1 $ 169.1 and warehouse facilities) Research and development 129.6 118.0 99.8
56 BAKER HUGHES INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Supplemental consolidated statement of cash flows information is as follows for the years ended December 31:
2001 2000 1999 -------- -------- -------- Sources (uses) of cash in: Accounts receivable $ (64.9) $ (138.8) $ 219.3 Inventories (150.6) (54.5) 190.3 Accounts payable 110.2 (27.2) (88.3) Accrued employee compensation and other current liabilities 112.5 (7.9) (179.0) Deferred revenue and other long-term liabilities (8.0) (11.8) (175.3) Other assets and liabilities (59.1) 0.3 (186.4) -------- -------- -------- Net effect of change in operating accounts $ (59.9) $ (239.9) $ (219.4) ======== ======== ======== Income taxes paid $ 97.7 $ 116.0 $ 118.7 Interest paid 122.2 172.6 148.8
The formation of Petreco in 2001 and Western GECO in 2000 included the following cash and noncash amounts for the year ended December 31:
2001 2000 -------- -------- Assets (liabilities) reclassified: Working capital - net $ 1.8 $ 15.6 Property - net 1.3 416.0 Goodwill and other intangibles 33.5 259.8 Multiclient seismic data and other assets (1.0) 707.4 Long-term liabilities (0.5) (77.6) -------- -------- Noncash assets and liabilities reclassified to investment in affiliates 35.1 1,321.2 Less proceeds from sale of interest in affiliate (9.0) (493.4) -------- -------- Net investment in venture at formation $ 26.1 $ 827.8 ======== ========
NOTE 15. QUARTERLY DATA (UNAUDITED)
FIRST SECOND THIRD FOURTH TOTAL QUARTER QUARTER QUARTER QUARTER YEAR ---------- ---------- ---------- ---------- ---------- 2001* Revenues $ 1,228.5 $ 1,342.0 $ 1,436.0 $ 1,375.7 $ 5,382.2 Gross profit** 338.5 380.2 427.2 404.5 1,550.4 Net income 71.1 103.8 137.1 126.0 438.0 Basic earnings per share 0.21 0.31 0.41 0.37 1.31 Diluted earnings per share 0.21 0.31 0.41 0.37 1.30 Dividends per share $ 0.11 $ 0.12 $ 0.11 $ 0.12 $ 0.46 Common stock market prices: High $ 44.99 $ 41.50 $ 36.17 $ 37.70 Low $ 36.31 $ 32.85 $ 26.29 $ 28.60 2000* Revenues $ 1,240.8 $ 1,255.5 $ 1,353.7 $ 1,383.8 $ 5,233.8 Gross profit** 252.1 286.9 334.2 351.0 1,224.2 Net income (loss) 15.4 62.7 65.2 (41.0) 102.3 Basic earnings (loss) per share 0.04 0.19 0.20 (0.12) 0.31 Diluted earnings (loss) per share 0.04 0.19 0.20 (0.12) 0.31 Dividends per share $ 0.11 $ 0.12 $ 0.11 $ 0.12 $ 0.46 Common stock market prices: High $ 30.25 $ 37.88 $ 39.31 $ 42.94 Low $ 20.25 $ 26.00 $ 30.38 $ 32.44
* See Note 2 for unusual charges. ** Represents revenues less cost of revenues. 57 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Information concerning the directors of the Company is set forth in the section entitled "Election of Directors" in the Proxy Statement of the Company for the Annual Meeting of Stockholders to be held April 24, 2002, which section is incorporated herein by reference. For information regarding executive officers of the Company, see "Item 1. Business - Executive Officers." Additional information regarding compliance by directors and executive officers with Section 16(a) of the Securities Exchange Act of 1934, as amended, is set forth under the section entitled "Compliance with Section 16(a) of the Securities Exchange Act of 1934" in the Proxy Statement for the Annual Meeting of Stockholders to be held on April 24, 2002, which section is incorporated herein by reference. ITEM 11. EXECUTIVE COMPENSATION Information for this item is set forth in the section entitled "Executive Compensation" in the Proxy Statement of the Company for the Annual Meeting of Stockholders to be held April 24, 2002, which section is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Information concerning security ownership of certain beneficial owners and management is set forth in the sections entitled "Voting Securities" and "Security Ownership of Management" in the Proxy Statement of the Company for the Annual Meeting of Stockholders to be held April 24, 2002, which sections are incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Information concerning certain relationships and related transactions with management is set forth in the section entitled "Certain Relationships and Related Transactions" in the Proxy Statement of the Company for the Annual Meeting of Stockholders to be held April 24, 2002, which section is incorporated herein by reference. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) List of Documents filed as part of this Report (1) Financial Statements All financial statements of the Registrant as set forth under Item 8 of this Annual Report on Form 10-K. (2) Financial Statement Schedules Schedule II Valuation and Qualifying Accounts 58 (3) Exhibits Each exhibit identified below is filed as a part of this report. Exhibits designated with an "*" are filed as an exhibit to this Annual Report on Form 10-K. Exhibits previously filed as indicated below are incorporated by reference. 3.1 Restated Certificate of Incorporation (filed as Exhibit 3.1 to Annual Report of Baker Hughes Incorporated on Form 10-K for the year ended December 31, 1998). 3.2* Bylaws of Baker Hughes Incorporated restated as of January 30, 2002. 3.3 Certificate of Amendment to Restated Certificate of Incorporation (filed as Exhibit 4.2 to Baker Hughes Incorporated Registration Statement on Form S-3 dated September 27, 1999). 4.1 Rights of Holders of the Company's Long-Term Debt. The Company has no long-term debt instrument with regard to which the securities authorized thereunder equal or exceed 10% of the total assets of the Company and its subsidiaries on a consolidated basis. The Company agrees to furnish a copy of its long-term debt instruments to the SEC upon request. 4.2 Restated Certificate of Incorporation (filed as Exhibit 3.1 to Annual Report of Baker Hughes Incorporated on Form 10-K for the year ended December 31, 1998). 4.3* Bylaws of Baker Hughes Incorporated restated as of January 30, 2002 (filed as Exhibit 3.2 of this Form 10-K). 4.4 Certificate of Amendment to Restated Certificate of Incorporation (filed as Exhibit 4.2 to Baker Hughes Incorporated Registration Statement on Form S-3 dated September 27, 1999). 4.5 Indenture dated as of May 15, 1994 between Western Atlas Inc. and The Bank of New York, Trustee, providing for the issuance of securities in series (filed as Exhibit 4.6 to Annual Report of Baker Hughes Incorporated on Form 10-K for the year ended December 31, 1999). 10.1 Employment Agreement by and between Baker Hughes Incorporated and Michael E. Wiley dated as of July 17, 2000 (filed as Exhibit 10.1 to Quarterly Report of Baker Hughes Incorporated on Form 10-Q for the quarter ended June 30, 2000). 10.2 Severance Agreement between Baker Hughes Incorporated and Michael E. Wiley dated as of July 17, 2000 (filed as Exhibit 10.2 to Quarterly Report of Baker Hughes Incorporated on Form 10-Q for the quarter ended June 30, 2000). 10.3 Severance Agreement between Baker Hughes Incorporated and G. Stephen Finley dated as of July 23, 1997 (filed as Exhibit 10.6 to Annual Report of Baker Hughes Incorporated on Form 10-K for the year ended September 30, 1997). 10.4 Severance Agreement between Baker Hughes Incorporated and Andrew J. Szescila dated as of July 23, 1997 (filed as Exhibit 10.13 to Annual Report of Baker Hughes Incorporated on Form 10-K for the year ended September 30, 1997). 10.5 Form of Amendment 1 to Severance Agreement between Baker Hughes Incorporated and each of G. Stephen Finley and Andrew J. Szescila effective November 11, 1998 (filed as Exhibit 10.7 to Annual Report of Baker Hughes Incorporated on Form 10-K for the year ended December 31, 1998). 10.6 Severance Agreement between Baker Hughes Incorporated and Alan R. Crain, Jr. dated as of October 25, 2000 (filed as Exhibit 10.6 to Annual Report of Baker Hughes Incorporated on Form 10-K for the year ended December 31, 2000). 59 10.7 Severance Agreement between Baker Hughes Incorporated and Greg Nakanishi dated as of November 1, 2000 (filed as Exhibit 10.7 to Annual Report of Baker Hughes Incorporated on Form 10-K for the year ended December 31, 2000). 10.8 Agreement regarding restricted stock award issued to Michael E. Wiley on August 15, 2000 in the amount of 150,000 shares of Company Common Stock (filed as Exhibit 10.8 to Annual Report of Baker Hughes Incorporated on Form 10-K for the year ended December 31, 2000). 10.9 Agreement regarding supplemental restricted stock award issued to Michael E. Wiley on August 15, 2000 in the amount of 83,000 shares of Company Common Stock (filed as Exhibit 10.9 to Annual Report of Baker Hughes Incorporated on Form 10-K for the year ended December 31, 2000). 10.10 Amended and Restated 1991 Employee Stock Bonus Plan of Baker Hughes Incorporated (filed as Exhibit 10.15 to Annual Report of Baker Hughes Incorporated on Form 10-K for the year ended September 30, 1997), as amended by Amendment No. 1997-1 to the Amended and Restated 1991 Employee Stock Bonus Plan (filed as Exhibit 10.16 to Annual Report of Baker Hughes Incorporated on Form 10-K for the year ended September 30, 1997) and as amended by Amendment No. 1999-1 to the Amended and Restated 1991 Employee Stock Bonus Plan (filed as Exhibit 10.11 to Annual Report of Baker Hughes Incorporated on Form 10-K for the year ended December 31, 1998). 10.11 Restated 1987 Stock Option Plan of Baker Hughes Incorporated (amended as of October 24, 1990) (filed as Exhibit 10.17 to Annual Report of Baker Hughes Incorporated on Form 10-K for the year ended September 30, 1997). 10.12 Baker Hughes Incorporated Supplemental Retirement Plan (filed as Exhibit 10.14 to Annual Report of Baker Hughes Incorporated on Form 10-K for the year ended September 30, 1997), as amended by Amendment No. 1997-1 to the Baker Hughes Incorporated Supplemental Retirement Plan (filed as Exhibit 10.20 to Annual Report of Baker Hughes Incorporated on Form 10-K for the year ended September 30, 1997) and as amended by Amendment No. 1999-1 to the Baker Hughes Incorporated Supplemental Retirement Plan (filed as Exhibit 10.16 to Annual Report of Baker Hughes Incorporated on Form 10-K for the year ended December 31, 1998). 10.13 Executive Severance Policy (filed as Exhibit 10.12 to Annual Report of Baker Hughes Incorporated on Form 10-K for the year ended December 31, 1999). 10.14 1993 Stock Option Plan (filed as Exhibit 10.18 to Annual Report of Baker Hughes Incorporated on Form 10-K for the year ended December 31, 1998), as amended by Amendment No. 1997-1 to the 1993 Stock Option Plan (filed as Exhibit 10.23 to Annual Report of Baker Hughes Incorporated on Form 10-K for the year ended September 30, 1997) and as amended by Amendment No. 1999-1 to the 1993 Stock Option Plan (filed as Exhibit 10.20 to Annual Report of Baker Hughes Incorporated on Form 10-K for the year ended December 31, 1998). 10.15 1993 Employee Stock Bonus Plan (filed as Exhibit 10.21 to Annual Report of Baker Hughes Incorporated on Form 10-K for the year ended December 31, 1998), as amended by Amendment No. 1997-1 to the 1993 Employee Stock Bonus Plan (filed as Exhibit 10.25 to Annual Report of Baker Hughes Incorporated on Form 10-K for the year ended September 30, 1997) and as amended by Amendment No. 1999-1 to the 1993 Employee Stock Bonus Plan (filed as Exhibit 10.23 to Annual Report of Baker Hughes Incorporated on Form 10-K for the year ended December 31, 1998). 10.16 Amended and Restated Director Compensation Deferral Plan (filed as Exhibit 10.24 to Annual Report of Baker Hughes Incorporated on Form 10-K for the year ended December 31, 1998). 10.17 1995 Employee Annual Incentive Compensation Plan (filed as Exhibit 10.20 to Annual Report of Baker Hughes Incorporated on Form 10-K for the year ended December 31, 1999), as amended by Amendment No. 1997-1 to the 1995 Employee Annual Incentive Compensation Plan (filed as Exhibit 10.25 to Annual Report of Baker Hughes Incorporated on Form 10-K for the year ended September 30, 1997), and as amended by Amendment No. 1999-1 to the 1995 Employee Annual Incentive 60 Compensation Plan (filed as Exhibit 10.27 to Annual Report of Baker Hughes Incorporated on Form 10-K for the year ended December 31, 1998). 10.18 Long Term Incentive Plan (filed as Exhibit 10.31 to Annual Report of Baker Hughes Incorporated on Form 10-K for the year ended September 30, 1997), as amended by Amendment No. 1999-1 to Long Term Incentive Plan (filed as Exhibit 10.32 to Annual Report of Baker Hughes Incorporated on Form 10-K for the year ended December 31, 1998). 10.19 1998 Employee Stock Option Plan (filed as Exhibit 10.33 to Annual Report of Baker Hughes Incorporated on Form 10-K for the year ended December 31, 1998), as amended by Amendment No. 1999-1 to 1998 Employee Stock Option Plan (filed as Exhibit 10.34 to Annual Report of Baker Hughes Incorporated on Form 10-K for the year ended December 31, 1998). 10.20 Form of Credit Agreement, dated as of October 1, 1998, among Baker Hughes Incorporated and fourteen banks for $750,000,000, in the aggregate for all banks (filed as Exhibit 10.35 to Annual Report of Baker Hughes Incorporated on Form 10-K for the year ended December 31, 1998). 10.21 Form of Credit Agreement dated as of October 1, 1998 among Baker Hughes Incorporated and fourteen banks for $250,000,000, in the aggregate for all banks (filed as Exhibit 10.36 to Annual Report of Baker Hughes Incorporated on Form 10-K for the year ended December 31, 1998), as amended by Form of First Amendment of Credit Agreement dated as of September 29, 1999 among Baker Hughes Incorporated and fourteen banks for $250,000,000, in the aggregate for all banks (filed as Exhibit 10.29 to Annual Report of Baker Hughes Incorporated on Form 10-K for the year ended December 31, 1999) and as amended by Form of Second Amendment of Credit Agreement dated as of September 25, 2000 among Baker Hughes Incorporated and fourteen banks for $250,000,000, in the aggregate for all banks (filed as Exhibit 10.35 to Annual Report of Baker Hughes Incorporated on Form 10-K for the year ended December 31, 2000). 10.22 Form of Stock Option Agreement for executives effective January 26, 2000 (filed as Exhibit 10.36 to Annual Report of Baker Hughes Incorporated on Form 10-K for the year ended December 31, 2000). 10.23 Form of Stock Option Agreement for executive officers effective October 1, 1998 (filed as Exhibit 10.37 to Annual Report of Baker Hughes Incorporated on Form 10-K for the year ended December 31, 2000). 10.24 Form of Nonqualified Stock Option Agreement for employees effective October 1, 1998 (filed as Exhibit 10.39 to Annual Report of Baker Hughes Incorporated on Form 10-K for the year ended December 31, 1998). 10.25 Form of Nonqualified Stock Option Agreement for directors effective October 25, 1998 (filed as Exhibit 10.39 to Annual Report of Baker Hughes Incorporated on Form 10-K for the year ended December 31, 2000). 10.26* Form of Nonqualified Stock Option Agreement for directors effective October 25, 1995. 10.27* Form of Nonqualified Stock Option Agreement for employees effective October 25, 1995. 10.28* Form of Incentive Stock Option Agreement for employees effective October 25, 1995. 10.29 Agreement regarding restricted stock award issued to Alan R. Crain, Jr. on October 25, 2000 in the amount of 7,500 shares of Company Common Stock (filed as Exhibit 10.43 to Annual Report of Baker Hughes Incorporated on Form 10-K for the year ended December 31, 2000). 10.30 Agreement regarding restricted stock award issued to Greg Nakanishi on November 1, 2000 in the amount of 5,000 shares of Company Common Stock (filed as Exhibit 10.44 to Annual Report of Baker Hughes Incorporated on Form 10-K for the year ended December 31, 2000). 61 10.31 Agreement regarding restricted stock award issued to Andrew J. Szescila on January 24, 2001 in the amount of 25,000 shares of Company Common Stock (filed as Exhibit 10.45 to Annual Report of Baker Hughes Incorporated on Form 10-K for the year ended December 31, 2000). 10.32 Agreement and Plan of Merger among Baker Hughes Incorporated, Baker Hughes Delaware I, Inc. and Western Atlas Inc. dated as of May 10, 1998 (filed as Exhibit 2.1 to Form 8-K dated May 20, 1998). 10.33 Tax Sharing Agreement dated October 31, 1997, between Western Atlas Inc. and UNOVA, Inc. (filed as Exhibit 10.19 to Western Atlas Inc.'s Form 10-Q for the quarter ended September 30, 1997). 10.34 Employee Benefits Agreement dated October 31, 1997, between Western Atlas Inc. and UNOVA, Inc. (filed as Exhibit 10.21 to Western Atlas Inc.'s Form 10-Q for the quarter ended September 30, 1997). 10.35 Master Formation Agreement by and among the Company, Schlumberger Limited and certain wholly owned subsidiaries of Schlumberger Limited dated as of September 6, 2000 (filed as Exhibit 2.1 to Form 8-K dated September 7, 2000). 10.36 Shareholders' Agreement by and among Schlumberger Limited, Baker Hughes Incorporated and other parties listed on the signature pages thereto dated November 30, 2000 (filed as Exhibit 10.1 to form 8-K dated November 30, 2000). 10.37 Corporate Executive Loan Program (filed as Exhibit 10.50 to Annual Report of Baker Hughes Incorporated on Form 10-K for the year ended December 31, 1998). 10.38* Amendment 1 to Employment Agreement, effective April 25, 2001, by and between Baker Hughes Incorporated and Michael E. Wiley; Amendment 2 to Employment Agreement, effective December 5, 2001, by and between Baker Hughes Incorporated and Michael E. Wiley and Amendment 3 to Employment Agreement, effective December 5, 2001, by and between Baker Hughes Incorporated and Michael E. Wiley. 10.39* Severance Agreement, dated as of July 23, 1997, by and between Baker Hughes Incorporated and Edwin C. Howell, as amended by Amendment 1 to Severance Agreement, effective November 11, 1998. 10.40* Severance Agreement, dated as of December 3, 1997, by and between Baker Hughes Incorporated and Douglas J. Wall, as amended by Amendment 1 to Severance Agreement, effective November 11, 1998. 10.41* Form of Baker Hughes Incorporated Nonqualified Stock Option Agreement for executive officers, dated January 24, 2001. 10.42* Form of Severance Agreement, dated as of March 1, 2001, by and between Baker Hughes Incorporated and certain executives, executed by James R. Clark (dated March 1, 2001) and William P. Faubel (dated May 29, 2001). 10.43* Form of Baker Hughes Incorporated Nonqualified Stock Option Agreement for employees, dated January 30, 2002. 10.44* Form of Baker Hughes Incorporated Incentive Stock Option Agreement for employees, dated January 30, 2002. 10.45* Form of Stock Matching Agreement, executed on March 1, 2001, by and between Baker Hughes Incorporated and James Roderick Clark, as amended by Amendment 1 to Stock Matching Agreement, with the Amendment effective March 6, 2002. 21.1 Subsidiaries of Registrant. 62 23.1 Consent of Deloitte & Touche LLP. (b) Reports on Form 8-K None. 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 6th day of March, 2002. BAKER HUGHES INCORPORATED By /s/ MICHAEL E. WILEY ----------------------------------------- (Michael E. Wiley, Chairman of the Board, President and Chief Executive Officer) Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE --------- ----- ---- /s/ MICHAEL E. WILEY Chairman of the Board, President and March 6, 2002 - --------------------------------------- Chief Executive Officer (principal (Michael E. Wiley) executive officer) /s/ G. S. FINLEY Senior Vice President - Finance and March 6, 2002 - --------------------------------------- Administration and Chief Financial (G. S. Finley) Officer (principal financial officer) /s/ ALAN J. KEIFER Vice President and Controller March 6, 2002 - --------------------------------------- (principal accounting officer) (Alan J. Keifer) /s/ VICTOR G. BEGHINI Director March 6, 2002 - --------------------------------------- (Victor G. Beghini) /s/ JOSEPH T. CASEY Director March 6, 2002 - --------------------------------------- (Joseph T. Casey) Director March , 2002 - --------------------------------------- (Edward P. Djerejian) /s/ ANTHONY G. FERNANDES Director March 6, 2002 - --------------------------------------- (Anthony G. Fernandes) /s/ EUNICE M. FILTER Director March 6, 2002 - --------------------------------------- (Eunice M. Filter) /s/ CLAIRE W. GARGALLI Director March 6, 2002 - --------------------------------------- (Claire W. Gargalli) /s/ RICHARD D. KINDER Director March 6, 2002 - --------------------------------------- (Richard D. Kinder) /s/ JAMES F. MCCALL Director March 6, 2002 - --------------------------------------- (James F. McCall) /s/ J. LARRY NICHOLS Director March 6, 2002 - --------------------------------------- (J. Larry Nichols)
64 /s/ H. JOHN RILEY, JR. Director March 6, 2002 - --------------------------------------- (H. John Riley, Jr.) /s/ CHARLES L. WATSON Director March 6, 2002 - --------------------------------------- (Charles L. Watson)
65 BAKER HUGHES INCORPORATED SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
Balance at Charged to Balance at Beginning Cost and End of (In millions) of Period Expenses Deductions Period - ------------- ---------- ---------- ---------- ---------- Year ended December 31, 2001: Reserve for doubtful accounts receivable $ 81.8 $ 18.0 $ (25.7) $ 74.1 Reserve for inventories 195.5 91.8 (68.1) 219.2 Year ended December 31, 2000: Reserve for doubtful accounts receivable 56.2 38.2 (12.6) 81.8 Reserve for inventories 175.3 68.9 (48.7) 195.5 Year ended December 31, 1999: Reserve for doubtful accounts receivable 50.1 23.5 (17.4) 56.2 Reserve for inventories 229.6 31.2 (85.5) 175.3
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). 3.2* Bylaws of Baker Hughes Incorporated restated as of January 30, 2002. 3.3 Certificate of Amendment to Restated Certificate of Incorporation (filed as Exhibit 4.2 to Baker Hughes Incorporated Registration Statement on Form S-3 dated September 27, 1999). 4.1 Rights of Holders of the Company's Long-Term Debt. The Company has no long-term debt instrument with regard to which the securities authorized thereunder equal or exceed 10% of the total assets of the Company and its subsidiaries on a consolidated basis. The Company agrees to furnish a copy of its long-term debt instruments to the SEC upon request. 4.2 Restated Certificate of Incorporation (filed as Exhibit 3.1 to Annual Report of Baker Hughes Incorporated on Form 10-K for the year ended December 31, 1998). 4.3* Bylaws of Baker Hughes Incorporated restated as of January 30, 2002 (filed as Exhibit 3.2 of this Form 10-K). 4.4 Certificate of Amendment to Restated Certificate of Incorporation (filed as Exhibit 4.2 to Baker Hughes Incorporated Registration Statement on Form S-3 dated September 27, 1999). 4.5 Indenture dated as of May 15, 1994 between Western Atlas Inc. and The Bank of New York, Trustee, providing for the issuance of securities in series (filed as Exhibit 4.6 to Annual Report of Baker Hughes Incorporated on Form 10-K for the year ended December 31, 1999). 10.1 Employment Agreement by and between Baker Hughes Incorporated and Michael E. Wiley dated as of July 17, 2000 (filed as Exhibit 10.1 to Quarterly Report of Baker Hughes Incorporated on Form 10-Q for the quarter ended June 30, 2000). 10.2 Severance Agreement between Baker Hughes Incorporated and Michael E. Wiley dated as of July 17, 2000 (filed as Exhibit 10.2 to Quarterly Report of Baker Hughes Incorporated on Form 10-Q for the quarter ended June 30, 2000). 10.3 Severance Agreement between Baker Hughes Incorporated and G. Stephen Finley dated as of July 23, 1997 (filed as Exhibit 10.6 to Annual Report of Baker Hughes Incorporated on Form 10-K for the year ended September 30, 1997). 10.4 Severance Agreement between Baker Hughes Incorporated and Andrew J. Szescila dated as of July 23, 1997 (filed as Exhibit 10.13 to Annual Report of Baker Hughes Incorporated on Form 10-K for the year ended September 30, 1997). 10.5 Form of Amendment 1 to Severance Agreement between Baker Hughes Incorporated and each of G. Stephen Finley and Andrew J. Szescila effective November 11, 1998 (filed as Exhibit 10.7 to Annual Report of Baker Hughes Incorporated on Form 10-K for the year ended December 31, 1998). 10.6 Severance Agreement between Baker Hughes Incorporated and Alan R. Crain, Jr. dated as of October 25, 2000 (filed as Exhibit 10.6 to Annual Report of Baker Hughes Incorporated on Form 10-K for the year ended December 31, 2000).
EXHIBIT NUMBER DESCRIPTION ------- ----------- 10.7 Severance Agreement between Baker Hughes Incorporated and Greg Nakanishi dated as of November 1, 2000 (filed as Exhibit 10.7 to Annual Report of Baker Hughes Incorporated on Form 10-K for the year ended December 31, 2000). 10.8 Agreement regarding restricted stock award issued to Michael E. Wiley on August 15, 2000 in the amount of 150,000 shares of Company Common Stock (filed as Exhibit 10.8 to Annual Report of Baker Hughes Incorporated on Form 10-K for the year ended December 31, 2000). 10.9 Agreement regarding supplemental restricted stock award issued to Michael E. Wiley on August 15, 2000 in the amount of 83,000 shares of Company Common Stock (filed as Exhibit 10.9 to Annual Report of Baker Hughes Incorporated on Form 10-K for the year ended December 31, 2000). 10.10 Amended and Restated 1991 Employee Stock Bonus Plan of Baker Hughes Incorporated (filed as Exhibit 10.15 to Annual Report of Baker Hughes Incorporated on Form 10-K for the year ended September 30, 1997), as amended by Amendment No. 1997-1 to the Amended and Restated 1991 Employee Stock Bonus Plan (filed as Exhibit 10.16 to Annual Report of Baker Hughes Incorporated on Form 10-K for the year ended September 30, 1997) and as amended by Amendment No. 1999-1 to the Amended and Restated 1991 Employee Stock Bonus Plan (filed as Exhibit 10.11 to Annual Report of Baker Hughes Incorporated on Form 10-K for the year ended December 31, 1998). 10.11 Restated 1987 Stock Option Plan of Baker Hughes Incorporated (amended as of October 24, 1990) (filed as Exhibit 10.17 to Annual Report of Baker Hughes Incorporated on Form 10-K for the year ended September 30, 1997). 10.12 Baker Hughes Incorporated Supplemental Retirement Plan (filed as Exhibit 10.14 to Annual Report of Baker Hughes Incorporated on Form 10-K for the year ended September 30, 1997), as amended by Amendment No. 1997-1 to the Baker Hughes Incorporated Supplemental Retirement Plan (filed as Exhibit 10.20 to Annual Report of Baker Hughes Incorporated on Form 10-K for the year ended September 30, 1997) and as amended by Amendment No. 1999-1 to the Baker Hughes Incorporated Supplemental Retirement Plan (filed as Exhibit 10.16 to Annual Report of Baker Hughes Incorporated on Form 10-K for the year ended December 31, 1998). 10.13 Executive Severance Policy (filed as Exhibit 10.12 to Annual Report of Baker Hughes Incorporated on Form 10-K for the year ended December 31, 1999). 10.14 1993 Stock Option Plan (filed as Exhibit 10.18 to Annual Report of Baker Hughes Incorporated on Form 10-K for the year ended December 31, 1998), as amended by Amendment No. 1997-1 to the 1993 Stock Option Plan (filed as Exhibit 10.23 to Annual Report of Baker Hughes Incorporated on Form 10-K for the year ended September 30, 1997) and as amended by Amendment No. 1999-1 to the 1993 Stock Option Plan (filed as Exhibit 10.20 to Annual Report of Baker Hughes Incorporated on Form 10-K for the year ended December 31, 1998). 10.15 1993 Employee Stock Bonus Plan (filed as Exhibit 10.21 to Annual Report of Baker Hughes Incorporated on Form 10-K for the year ended December 31, 1998), as amended by Amendment No. 1997-1 to the 1993 Employee Stock Bonus Plan (filed as Exhibit 10.25 to Annual Report of Baker Hughes Incorporated on Form 10-K for the year ended September 30, 1997) and as amended by Amendment No. 1999-1 to the 1993 Employee Stock Bonus Plan (filed as Exhibit 10.23 to Annual Report of Baker Hughes Incorporated on Form 10-K for the year ended December 31, 1998). 10.16 Amended and Restated Director Compensation Deferral Plan (filed as Exhibit 10.24 to Annual Report of Baker Hughes Incorporated on Form 10-K for the year ended December 31, 1998). 10.17 1995 Employee Annual Incentive Compensation Plan (filed as Exhibit 10.20 to Annual Report of Baker Hughes Incorporated on Form 10-K for the year ended December 31, 1999), as amended
EXHIBIT NUMBER DESCRIPTION ------- ----------- by Amendment No. 1997-1 to the 1995 Employee Annual Incentive Compensation Plan (filed as Exhibit 10.25 to Annual Report of Baker Hughes Incorporated on Form 10-K for the year ended September 30, 1997), and as amended by Amendment No. 1999-1 to the 1995 Employee Annual Incentive Compensation Plan (filed as Exhibit 10.27 to Annual Report of Baker Hughes Incorporated on Form 10-K for the year ended December 31, 1998). 10.18 Long Term Incentive Plan (filed as Exhibit 10.31 to Annual Report of Baker Hughes Incorporated on Form 10-K for the year ended September 30, 1997), as amended by Amendment No. 1999-1 to Long Term Incentive Plan (filed as Exhibit 10.32 to Annual Report of Baker Hughes Incorporated on Form 10-K for the year ended December 31, 1998). 10.19 1998 Employee Stock Option Plan (filed as Exhibit 10.33 to Annual Report of Baker Hughes Incorporated on Form 10-K for the year ended December 31, 1998), as amended by Amendment No. 1999-1 to 1998 Employee Stock Option Plan (filed as Exhibit 10.34 to Annual Report of Baker Hughes Incorporated on Form 10-K for the year ended December 31, 1998). 10.20 Form of Credit Agreement, dated as of October 1, 1998, among Baker Hughes Incorporated and fourteen banks for $750,000,000, in the aggregate for all banks (filed as Exhibit 10.35 to Annual Report of Baker Hughes Incorporated on Form 10-K for the year ended December 31, 1998). 10.21 Form of Credit Agreement dated as of October 1, 1998 among Baker Hughes Incorporated and fourteen banks for $250,000,000, in the aggregate for all banks (filed as Exhibit 10.36 to Annual Report of Baker Hughes Incorporated on Form 10-K for the year ended December 31, 1998), as amended by Form of First Amendment of Credit Agreement dated as of September 29, 1999 among Baker Hughes Incorporated and fourteen banks for $250,000,000, in the aggregate for all banks (filed as Exhibit 10.29 to Annual Report of Baker Hughes Incorporated on Form 10-K for the year ended December 31, 1999) and as amended by Form of Second Amendment of Credit Agreement dated as of September 25, 2000 among Baker Hughes Incorporated and fourteen banks for $250,000,000, in the aggregate for all banks (filed as Exhibit 10.35 to Annual Report of Baker Hughes Incorporated on Form 10-K for the year ended December 31, 2000). 10.22 Form of Stock Option Agreement for executives effective January 26, 2000 (filed as Exhibit 10.36 to Annual Report of Baker Hughes Incorporated on Form 10-K for the year ended December 31, 2000). 10.23 Form of Stock Option Agreement for executive officers effective October 1, 1998 (filed as Exhibit 10.37 to Annual Report of Baker Hughes Incorporated on Form 10-K for the year ended December 31, 2000). 10.24 Form of Nonqualified Stock Option Agreement for employees effective October 1, 1998 (filed as Exhibit 10.39 to Annual Report of Baker Hughes Incorporated on Form 10-K for the year ended December 31, 1998). 10.25 Form of Nonqualified Stock Option Agreement for directors effective October 25, 1998 (filed as Exhibit 10.39 to Annual Report of Baker Hughes Incorporated on Form 10-K for the year ended December 31, 2000). 10.26* Form of Nonqualified Stock Option Agreement for directors effective October 25, 1995. 10.27* Form of Nonqualified Stock Option Agreement for employees effective October 25, 1995. 10.28* Form of Incentive Stock Option Agreement for employees effective October 25, 1995. 10.29 Agreement regarding restricted stock award issued to Alan R. Crain, Jr. on October 25, 2000 in the amount of 7,500 shares of Company Common Stock (filed as Exhibit 10.43 to Annual Report of Baker Hughes Incorporated on Form 10-K for the year ended December 31, 2000).
EXHIBIT NUMBER DESCRIPTION ------- ----------- 10.30 Agreement regarding restricted stock award issued to Greg Nakanishi on November 1, 2000 in the amount of 5,000 shares of Company Common Stock (filed as Exhibit 10.44 to Annual Report of Baker Hughes Incorporated on Form 10-K for the year ended December 31, 2000). 10.31 Agreement regarding restricted stock award issued to Andrew J. Szescila on January 24, 2001 in the amount of 25,000 shares of Company Common Stock (filed as Exhibit 10.45 to Annual Report of Baker Hughes Incorporated on Form 10-K for the year ended December 31, 2000). 10.32 Agreement and Plan of Merger among Baker Hughes Incorporated, Baker Hughes Delaware I, Inc. and Western Atlas Inc. dated as of May 10, 1998 (filed as Exhibit 2.1 to Form 8-K dated May 20, 1998). 10.33 Tax Sharing Agreement dated October 31, 1997, between Western Atlas Inc. and UNOVA, Inc. (filed as Exhibit 10.19 to Western Atlas Inc.'s Form 10-Q for the quarter ended September 30, 1997). 10.34 Employee Benefits Agreement dated October 31, 1997, between Western Atlas Inc. and UNOVA, Inc. (filed as Exhibit 10.21 to Western Atlas Inc.'s Form 10-Q for the quarter ended September 30, 1997). 10.35 Master Formation Agreement by and among the Company, Schlumberger Limited and certain wholly owned subsidiaries of Schlumberger Limited dated as of September 6, 2000 (filed as Exhibit 2.1 to Form 8-K dated September 7, 2000). 10.36 Shareholders' Agreement by and among Schlumberger Limited, Baker Hughes Incorporated and other parties listed on the signature pages thereto dated November 30, 2000 (filed as Exhibit 10.1 to form 8-K dated November 30, 2000). 10.37 Corporate Executive Loan Program (filed as Exhibit 10.50 to Annual Report of Baker Hughes Incorporated on Form 10-K for the year ended December 31, 1998). 10.38* Amendment 1 to Employment Agreement, effective April 25, 2001, by and between Baker Hughes Incorporated and Michael E. Wiley; Amendment 2 to Employment Agreement, effective December 5, 2001, by and between Baker Hughes Incorporated and Michael E. Wiley and Amendment 3 to Employment Agreement, effective December 5, 2001, by and between Baker Hughes Incorporated and Michael E. Wiley. 10.39* Severance Agreement, dated as of July 23, 1997, by and between Baker Hughes Incorporated and Edwin C. Howell, as amended by Amendment 1 to Severance Agreement, effective November 11, 1998. 10.40* Severance Agreement, dated as of December 3, 1997, by and between Baker Hughes Incorporated and Douglas J. Wall, as amended by Amendment 1 to Severance Agreement, effective November 11, 1998. 10.41* Form of Baker Hughes Incorporated Nonqualified Stock Option Agreement for executive officers, dated January 24, 2001. 10.42* Form of Severance Agreement, dated as of March 1, 2001, by and between Baker Hughes Incorporated and certain executives, executed by James R. Clark (dated March 1, 2001) and William P. Faubel (dated May 29, 2001). 10.43* Form of Baker Hughes Incorporated Nonqualified Stock Option Agreement for employees, dated January 30, 2002.
EXHIBIT NUMBER DESCRIPTION ------- ----------- 10.44* Form of Baker Hughes Incorporated Incentive Stock Option Agreement for employees, dated January 30, 2002. 10.45* Form of Stock Matching Agreement, executed on March 1, 2001, by and between Baker Hughes Incorporated and James Roderick Clark, as amended by Amendment 1 to Stock Matching Agreement, with the Amendment effective March 6, 2002. 21.1 Subsidiaries of Registrant. 23.1 Consent of Deloitte & Touche LLP.
EX-3.2 3 h94456ex3-2.txt BYLAWS EXHIBIT 3.2 BYLAWS OF BAKER HUGHES INCORPORATED Restated as of January 30, 2002 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..................................................................3 Section 9. Maintenance and Inspection of Stockholder List....................................3 Section 10. Stockholder Action by Written Consent Without a Meeting...........................3 Section 11. Inspectors of Election............................................................3 Section 12. Procedure for Stockholders' Meetings..............................................4 Section 13. Order of Business.................................................................4 Section 14. Procedures for Bringing Business before an Annual Meeting.........................4 Section 15. Procedures for Nominating Directors...............................................5 ARTICLE III - DIRECTORS.................................................................................6 Section 1. Number and Qualification of Directors.............................................6 Section 2. Election and Term of Office.......................................................6 Section 3. Resignation and Removal of Directors..............................................6 Section 4. Vacancies.........................................................................7 Section 5. Powers............................................................................7 Section 6. Place of Directors' Meetings......................................................8 Section 7. Regular Meetings..................................................................8 Section 8. Special Meetings..................................................................8 Section 9. Quorum............................................................................8 Section 10. Action Without Meeting............................................................8 Section 11. Telephonic Meetings...............................................................8 Section 12. Meetings and Action of Committees.................................................9 Section 13. Special Meetings of Committees....................................................9 Section 14. Minutes of Committee Meetings.....................................................9 Section 15. Compensation of Directors.........................................................9 Section 16. Indemnification..................................................................10
- i - ARTICLE IV - OFFICERS..................................................................................12 Section 1. Officers.........................................................................12 Section 2. Election of Officers.............................................................12 Section 3. Subordinate Officers.............................................................13 Section 4. Removal and Resignation of Officers..............................................13 Section 5. Vacancies in Offices.............................................................13 Section 6. Chairman of the Board............................................................13 Section 7. Vice Chairman of the Board.......................................................13 Section 8. President........................................................................13 Section 9. Vice Presidents..................................................................13 Section 10. Secretary........................................................................14 Section 11. Chief Financial Officer..........................................................14 Section 12. Treasurer and Controller.........................................................14 ARTICLE V - CERTIFICATE OF STOCK.......................................................................15 Section 1. Certificates.....................................................................15 Section 2. Signatures on Certificates.......................................................15 Section 3. Statement of Stock Rights, Preferences, Privileges...............................15 Section 4. Lost, Stolen or Destroyed Certificates...........................................15 Section 5. Transfers of Stock...............................................................16 Section 6. Fixing Record Date...............................................................16 Section 7. Registered Stockholders..........................................................16 ARTICLE VI - GENERAL PROVISIONS........................................................................16 Section 1. Dividends........................................................................16 Section 2. Payment of Dividends.............................................................16 Section 3. Checks...........................................................................16 Section 4. Corporate Contracts and Instruments..............................................17 Section 5. Fiscal Year......................................................................17 Section 6. Manner of Giving Notice..........................................................17 Section 7. Waiver of Notice.................................................................17 ARTICLE VII - AMENDMENTS...............................................................................17 Section 1. Amendment by Directors...........................................................17 Section 2. Amendment by Stockholders........................................................18
- ii - BYLAWS OF BAKER HUGHES INCORPORATED ARTICLE I OFFICES Section 1. Registered Office. The registered office shall be in the City of Wilmington, County of New Castle, State of Delaware. Section 2. Other Offices. The Corporation may also have offices at such other places both within and without the State of Delaware as the Board of Directors may from time to time determine or the business of the Corporation may require. ARTICLE II MEETINGS OF STOCKHOLDERS Section 1. Place of Meetings. All meetings of the stockholders shall be held at such place, if any, either within or without the State of Delaware as shall be designated from time to time by the Board of Directors and stated in the notice of the meeting. Section 2. Annual Meetings of Stockholders. An annual meeting of stockholders shall be held on the fourth Wednesday in April in each year, if not a legal holiday, and if a legal holiday, then on the next business day following, at 11:00 a.m. or at such other date and time as may be determined from time to time by resolution adopted by the Board of Directors, for the purpose of electing, subject to Article III, Section 2 hereof, one class of the directors of the Corporation, and transacting such other business as may properly be brought before the meeting. Section 3. Quorum; Adjourned Meetings and Notice Thereof. A majority of the stock issued and outstanding and entitled to vote at any meeting of stockholders, the holders of which are present in person or represented by proxy, without regard to class or series, shall constitute a quorum for the transaction of business except as otherwise provided by law, by the Certificate of Incorporation, or by these Bylaws. If a separate vote by a class or classes or series is required, a majority of the outstanding shares of such class or classes or series present in person or represented by proxy shall constitute a quorum entitled to take action with respect to that vote on that matter. A quorum, once established, shall not be broken by the withdrawal of enough votes to leave less than a quorum and the votes present may continue to transact business until adjournment provided that any action taken (other than adjournment) is approved by at least a majority of the shares required to constitute a quorum. If, however, such quorum shall not be present or represented at any meeting of the stockholders, a majority of the voting stock represented in person or by proxy may adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum shall be present or represented. At such adjourned meeting at which a quorum shall be present or represented, any business may be transacted which might have been transacted at the meeting as originally noticed. If the adjournment is for more than 30 days, or if after the adjournment a new record date is fixed for the adjourned meeting, a notice of the adjourned meeting shall be given to each stockholder of record entitled to vote thereat. Section 4. Voting. When a quorum is present at any meeting, the affirmative vote of the holders of a majority of the stock having voting power present in person or represented by proxy shall decide any question brought before such meeting, or, if a separate vote by a class or series or classes or series is required, the affirmative vote of the holders of a majority of the stock of such class or series or classes or series having voting power present in person or represented by proxy shall decide any question brought before such meeting unless the question is one upon which by express provision of the statutes or the Certificate of Incorporation or these Bylaws, a different vote is required in which case such express provision shall govern and control the decision of such question. Section 5. Proxies. At each meeting of the stockholders, each stockholder having the right to vote may vote in person or may authorize another person or persons to act for him by proxy authorized by an instrument in writing or by a transmission, including by telephone and electronic transmission, permitted by law filed in accordance with the procedure established for the meeting. Any copy, facsimile telecommunication or other reliable reproduction of the writing or transmission created pursuant to this Section may be substituted or used in lieu of the original writing or transmission for any and all purposes for which the original writing or transmission could be used, provided that such copy, facsimile telecommunication or other reproduction shall be a complete reproduction of the entire original writing or transmission. Each stockholder shall have one vote for each share of stock having voting power, registered in his name on the books of the Corporation on the record date set by the Board of Directors as provided in Article V, Section 6 hereof. Section 6. Special Meetings. Special meetings of the stockholders, for any purpose, or purposes, unless otherwise prescribed by statute or by the Certificate of Incorporation, may be called at any time by the Board of Directors or by a committee of the Board of Directors which has been duly designated by the Board of Directors and whose powers and authority, as provided in a resolution of the Board of Directors or in these Bylaws, include the power to call such meetings. Special meetings of stockholders of the Corporation may not be called by any other person or persons. Business transacted at any special meeting of stockholders shall be limited to the purposes stated in the notice. Section 7. Notice of Stockholders' Meetings. If mailed, notice to stockholders shall be deemed given when deposited in the mail, postage prepaid, directed to the stockholder at such stockholder's address as it appears on the records of the corporation. Without limiting the manner by which notice otherwise may be given effectively to stockholders, any notice to stockholders may be given by electronic transmission in the manner provided in, and subject to the provisions of, Section 232 of the Delaware General Corporation Law, as amended. - 2 - Section 8. Waiver of Notice. Attendance of a person at a meeting shall constitute a waiver of notice to such person of such meeting, except when the person objects at the beginning of the meeting to the transaction of any business because the meeting is not lawfully called or convened. Section 9. Maintenance and Inspection of Stockholder List. The officer or agent who has charge of the stock ledger of the Corporation shall prepare and make, at least 10 days before every meeting of stockholders, a complete list of the stockholders entitled to vote at the meeting, arranged in alphabetical order, and showing the address of each stockholder and the number of shares registered in the name of each stockholder. Such list shall be open to the examination of any stockholder, for any purpose germane to the meeting, during ordinary business hours, for a period of at least ten days prior to the meeting, in the manner provided by law. The list shall also be produced and kept open at the time and place of the meeting during the whole time thereof, and may be inspected by any stockholder who is present. The stock ledger of the Corporation shall be the only evidence as to who are the stockholders entitled to examine such list or to vote at any meetings of stockholders. Section 10. Stockholder Action by Written Consent Without a Meeting. No action shall be taken by stockholders except at an annual or special meeting of stockholders, and stockholders may not act by written consent. Section 11. Inspectors of Election. Before any meeting of stockholders, the Board of Directors may appoint any persons other than nominees for office to act as inspectors of election at the meeting or its adjournment. If no inspectors of election are so appointed, the chairman of the meeting may, and on the request of any stockholder or a stockholder's proxy shall, appoint inspectors of election at the meeting. The number of inspectors shall be either one or three. If inspectors are appointed at a meeting on the request of one or more stockholders or proxies, the holders of a majority of shares or their proxies present at the meeting shall determine whether one or three inspectors are to be appointed. If any person appointed as inspector fails to appear or fails or refuses to act, the chairman of the meeting may, and upon the request of any stockholder or a stockholder's proxy shall, appoint a person to fill such vacancy. The duties of these inspectors shall be as follows: (a) To ascertain the number of shares outstanding and the voting power of each; (b) To determine the shares represented at a meeting and the validity of proxies and ballots; (c) To count all votes and ballots; (d) To determine and retain for a reasonable period a record of the disposition of any challenges made to any determination by the inspectors; and (e) To certify their determination of the number of shares represented at the meeting and their count of all votes and ballots. - 3 - Section 12. Procedure for Stockholders' Meetings. Meetings of the stockholders shall be presided over by the Chairman of the Board of Directors, or in his absence, by the Vice Chairman, the President or by any Vice President, or, in the absence of any of such officers, by a chairman to be chosen by a majority of the stockholders entitled to vote at the meeting who are present in person or by proxy. The Secretary, or, in his absence, any person appointed by the chairman, shall act as secretary of all meetings of the stockholders. Section 13. Order of Business. The order of business at all meetings of stockholders shall be as determined by the chairman of the meeting. The chairman shall also determine the procedure at the meeting, including such regulation of the manner of voting and the conduct of discussion as seem to him or her in order. The chairman of the meeting shall have the power to adjourn the meeting to another place, if any, date and time. The date and time of the opening and closing of the polls for each matter upon which the stockholders will vote at the meeting shall be announced at the meeting. Section 14. Procedures for Bringing Business before an Annual Meeting. Notwithstanding anything in these Bylaws to the contrary, no business shall be conducted at an annual meeting of the stockholders except in accordance with the procedures set forth in this Section 14; provided, however, that nothing in this Section 14 shall be deemed to preclude discussion by any stockholder of any business properly brought before the annual meeting in accordance with such procedures. At an annual meeting of the stockholders, only such business shall be conducted as shall have been properly brought before the meeting. To be properly brought before an annual meeting, business must be (1) specified in the notice of meeting (or any supplement thereto) given by or at the direction of the Board, (2) otherwise properly brought before the meeting by or at the direction of the Board, or (3) otherwise properly brought before the meeting by a stockholder. In addition to any other applicable requirements, for business to be properly brought before an annual meeting by a stockholder, the stockholder must have given timely notice thereof in writing to the Secretary of the Corporation. To be timely, a stockholder's notice must be delivered to or mailed and received at the principal executive offices of the Corporation not less than 120 days in advance of the first annual anniversary of the date of the Corporation's proxy statement released to stockholders in connection with the previous year's annual meeting of stockholders, except that if no annual meeting was held in the previous year or the date of the annual meeting has been changed by more than 30 calendar days from the date contemplated at the time of the previous year's proxy statement, notice by the stockholder to be timely must be so received not later than the close of business on the tenth day following the day on which such notice of the date of the annual meeting was mailed or such public disclosure was made. Any adjournment(s) or postponement(s) of the original meeting whereby the meeting will convene or reconvene within 30 days from the original date shall be deemed for purposes of notice to be a continuation of the original meeting and no business may be brought before any such meeting unless timely notice of such business was given to the Secretary of the Corporation for the meeting as originally scheduled. A stockholder's notice to the Secretary shall set forth as to each matter the stockholder proposes to bring before the annual meeting (i) a brief description of the - 4 - business desired to be brought before the annual meeting and their reasons for conducting such business at the annual meeting, (ii) the name and record address of the stockholder proposing such business, (iii) the class and number of shares of the Corporation which are beneficially owned by the stockholders, and (iv) any material interest of the stockholder in such business. The chairman of an annual meeting shall, if the facts warrant, determine and declare to the meeting that business was not properly brought before the meeting in accordance with the provisions of this Section 14, and if he should so determine, he shall so declare to the meeting and any such business not properly brought before the meeting shall not be transacted. Section 15. Procedures for Nominating Directors. Notwithstanding anything in these Bylaws to the contrary, only persons who are nominated in accordance with the procedures hereinafter set forth in this Section 15 shall be eligible for election as directors of the Corporation. Nominations of persons for election to the Board of Directors of the Corporation may be made at a meeting of stockholders only (1) by or at the direction of the Board of Directors or (2) by any stockholder of the Corporation entitled to vote for the election of directors at the meeting who complies with the notice procedures set forth in this Section 15. Such nominations, other than those made by or at the direction of the Board of Directors, shall be made pursuant to timely notice in writing to the Secretary of the Corporation. To be timely, a stockholder's notice shall be delivered to or mailed and received at the principal executive offices of the Corporation not less than 120 days, nor more than 150 days, in advance of the first annual anniversary of the date of the Corporation's proxy statement released to stockholders in connection with the previous year's annual meeting of stockholders, except that if no annual meeting was held in the previous year or the date of the annual meeting has been changed by more than 30 calendar days from the date contemplated at the time of the previous year's proxy statement, notice by the stockholder to be timely must be so received not later than the close of business on the tenth day following the day on which such notice of the date of the annual meeting was mailed or such public disclosure was made. Any adjournment(s) or postponement(s) of the original meeting whereby the meeting will convene or reconvene within 30 days from the original date shall be deemed for purposes of notice to be a continuation of the original meeting and no nominations by a shareholder of persons to be elected directors of the Corporation may be made at any such meeting other than pursuant to a notice that was timely for the meeting on the date originally scheduled. Such stockholder's notice shall set forth: (i) as to each person whom the stockholder proposes to nominate for election or re-election as a director, all information relating to such person that is required to be disclosed in solicitations of proxies for election of directors, or is otherwise required, in each case pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended, or any successor regulation thereto (including such person's written consent to being named in the proxy statement as a nominee and to serving as a director if elected); and (ii) as to the stockholder giving notice (A) the name and address, as they appear on the Corporation's books, of such stockholder, and (B) the class and number of shares of the Corporation which are beneficially owned by such stockholder. At the request of the Board of Directors, any person nominated by the Board of Directors for election as a director shall furnish to the Secretary of the Corporation that information required to be set forth in a stockholder's notice of nomination that pertains to the nominee. - 5 - The chairman of the meeting shall, if the facts warrant, determine and declare to the meeting that a nomination was not made in accordance with the procedures prescribed by this Section 15, and if he should so determine, he shall so declare to the meeting and the defective nomination shall be disregarded. ARTICLE III DIRECTORS Section 1. Number and Qualification of Directors. The Board of Directors shall consist of a minimum of 9 and a maximum of 12 directors. The number of directors shall be fixed from time to time within the minimum and the maximum number established by the then elected Board of Directors. The number of directors until changed by the Board shall be 12. The maximum number of directors may not be increased by the Board of Directors to exceed 16 without the affirmative vote of 75% of the members of the entire Board. The directors need not be stockholders. No officer of the Corporation may serve on a board of directors of any company having a present or retired employee on the Corporation's Board of Directors. No person may stand for election as a director if within the previous one (1) year he has resigned from the Board as a result of the tenure provisions of Article III, Section 3 hereof regarding service for more than 10, 11 or 12 consecutive years on the Board. No person associated with an organization whose services are contracted by the Corporation shall serve on the Corporation's Board of Directors; provided, however, that this prohibition may be waived by a majority of the members of the whole Board if the Board in its judgment determines that such waiver would be in the best interest of the Corporation. Section 2. Election and Term of Office. The Board of Directors shall be divided into three classes, Class I, Class II and Class III. The number of directors in each class shall be the whole number contained in the quotient arrived at by dividing the authorized number of directors by three, and if a fraction is also contained in such quotient, then if such fraction is 1/3, the extra director shall be a member of Class III, and if the fraction is 2/3, one of the extra directors shall be a member of Class III and the other a member of Class II. Each director shall serve for a term ending on the date of the third annual meeting following the annual meeting at which such director was elected. One class of the directors shall be elected at each annual meeting of the stockholders. If any such annual meeting is not held or the directors are not elected thereat, the directors may be elected at any special meeting of stockholders held for that purpose. All directors shall hold office until their respective successors are elected and qualified or until their earlier death, resignation or removal. Section 3. Resignation and Removal of Directors. No person who is concurrently a director and an employee of the Corporation shall be qualified to serve as a director of the Corporation from and after the time of any diminution in such person's duties or responsibilities as an officer, the time they leave the employ of the Corporation for any reason or their 70th birthday; provided, however, that if any such person resigns from the board of directors upon such event, such person shall thereafter be deemed qualified to serve as a director - 6 - of the Corporation for so long as such person is otherwise qualified to so serve pursuant to the following sentence. No person shall be qualified to serve as a director of the corporation on or after the date of the annual meeting of stockholders following: (i) his 70th birthday; (ii) the third anniversary of his retirement from his principal occupation; (iii) unless he is an officer of the Corporation, the date on which he has served on the Corporation's Board of Directors a total of 10 complete years; (iv) any fiscal year in which he has failed to attend at least 66% of the meetings of the Board of Directors and any committees of the Board of Directors on which such director serves; or (v) the first anniversary of any change in his employment (other than a promotion or lateral movement within the same organization); provided that such a person shall be deemed to be qualified to serve as a director if so determined by a majority of the members of the whole Board (excluding the director whose resignation would otherwise be required) if the Board in its judgment determines that such waiver would be in the best interest of the Corporation. Any director may be removed for cause by the holders of a majority of the shares of the Corporation entitled to vote in the election of directors; stockholders may not remove any director without cause. The Board of Directors may not remove any director for or without cause, and no recommendation by the Board of Directors that a director be removed for cause may be made to the stockholders except by the affirmative vote of not less than 75% of the members of the whole Board. Section 4. Vacancies. Except as otherwise provided by statute or the Certificate of Incorporation, in the case of any increase in the number of directors, such additional director or directors shall be proposed for election to terms of office that will most nearly result in each class of directors containing 1/3 of the entire number of members of the whole Board, and, unless such position is to be filled by a vote of the stockholders at an annual or special meeting, shall be elected by a majority vote of the directors then in office, although less than a quorum, or by a sole remaining director. In the case of any vacancy in the Board of Directors, however created, the vacancy or vacancies shall be filled by majority vote of the directors then in office, although less than a quorum, or by a sole remaining director. In the event one or more directors shall resign, effective at a future date, such vacancy or vacancies shall be filled as provided herein. Directors so chosen or elected shall hold office for the remaining term of the directorship to which appointed. Any director elected or chosen as provided herein shall serve for the unexpired term of office or until his successor is elected and qualified or until his earlier death, resignation or removal. In the event of any decrease in the authorized number of directors, (a) each director then serving as such shall nevertheless continue as a director of the class of which he is a member until the expiration of his current term, or his prior death, resignation or removal, and (b) the newly eliminated directorships resulting from such decrease shall be apportioned by the Board of Directors to such class or classes as shall, so far as possible, bring the number of directors in the respective classes into conformity with the formula in Section 2 hereof as applied to the newly authorized number of directors. Section 5. Powers. The property and business of the Corporation shall be managed by or under the direction of its Board of Directors. In addition to the powers and authorities by these Bylaws expressly conferred upon them, the Board may exercise all such powers of the Corporation and do all such lawful acts and things as are not by statute, by the - 7 - Certificate of Incorporation or by these Bylaws directed or required to be exercised or done by the stockholders. Section 6. Place of Directors' Meetings. The directors may hold their meetings and have one or more offices, and keep the books of the Corporation outside the State of Delaware. Section 7. Regular Meetings. Regular meetings of the Board of Directors may be held without notice at such time and place as shall from time to time be determined by the Board. Except as otherwise provided by statute, any business may be transacted at any regular meeting of the Board of Directors. Section 8. Special Meetings. Special meetings of the Board of Directors may be called by the Chairman of the Board, the Vice Chairman or the President on at least 24 hours' notice, or such shorter period as the person calling deems appropriate, to each director. Special meetings shall be called by the President or the Secretary in like manner and on like notice on the written request of a majority of the total number of directors. Section 9. Quorum. At all meetings of the Board of Directors a majority of the authorized number of directors shall be necessary and sufficient to constitute a quorum for the transaction of business, and the vote of a majority of the directors present at any meeting at which there is a quorum, shall be the act of the Board of Directors, except as may be otherwise specifically provided by statute, by the Certificate of Incorporation or by these Bylaws. If a quorum shall not be present at any meeting of the Board of Directors, the directors present thereat may adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum shall be present. If only one director is authorized, such sole director shall constitute a quorum. A meeting at which a quorum is initially present may continue to transact business notwithstanding the withdrawal of directors, if any action is approved by at least a majority of the required quorum for such meeting. Section 10. Action Without Meeting. Unless otherwise restricted by statute, the Certificate of Incorporation or these Bylaws, any action required or permitted to be taken at any meeting of the Board of Directors or of any committee thereof may be taken without a meeting, if all members of the Board or committee, as the case may be, consent thereto in writing or by electronic transmission, and the writing or writings or electronic transmission or transmissions are filed with the minutes of proceedings of the Board or committee. Such filing shall be in paper form if the minutes are maintained in paper form and shall be in electronic form if the minutes are maintained in electronic form. Section 11. Telephonic Meetings. Unless otherwise restricted by the Certificate of Incorporation or these Bylaws, members of the Board of Directors, or any committee designated by the Board of Directors, may participate in a meeting of the Board of Directors, or any committee, by means of conference telephone or similar communications equipment by means of which all persons participating in a meeting can hear each other, and such participation in a meeting shall constitute presence in person at such meeting. - 8 - Section 12. Meetings and Action of Committees. The Board of Directors may from time to time designate committees of the Board of Directors, with such lawfully delegable powers and duties as it thereby confers, to serve at the pleasure of the Board of Directors and shall, for those committees and any others provided for herein, elect a director or directors to serve as the member or members, designating, if it desires, other directors as alternate members who may replace any absent or disqualified member at any meeting of the committee. In the absence or disqualification of any member of any committee and any alternate member in his or her place, the member or members of the committee present at the meeting and not disqualified from voting, whether or not he or she or they constitute a quorum, may by unanimous vote appoint another member of the Board of Directors to act at the meeting in the place of the absent or disqualified member. The Board of Directors shall, by resolution passed by a majority of the whole Board, designate one member of each committee as chairman of such committee. Each such chairman shall hold such office for a period not in excess of five years, and shall upon surrender of such chairmanship resign from membership on such committee. Any such committee, to the extent provided in the resolution of the Board of Directors, shall have and may exercise all the powers and authority of the Board of Directors in the management of the business and affairs of the Corporation, and may authorize the seal of the corporation to be affixed to all papers which may require it; but no such committee shall have the power or authority in reference to the following matters: (i) approving or adopting, or recommending to the stockholders, any action or matter expressly required by the Delaware General Corporation Law to be submitted to stockholders for approval or (ii) adopting, amending or repealing any bylaw of the Corporation. Section 13. Special Meetings of Committees. Special meetings of committees may be called by the Chairman of such committee, the Chairman of the Board or the President, on at least 24 hours' notice, or such shorter period as the person calling deems appropriate, to each member. Alternate members shall have the right to attend all meetings of the committee. The Board of Directors may adopt rules of the government of any committee not inconsistent with the provisions of these Bylaws. If a committee is comprised of an odd number of members, a quorum shall consist of a majority of that number. If the committee is comprised of an even number of members, a quorum shall consist of 1/2 of that number. If a committee is comprised of two members, a quorum shall consist of both members; all matters shall be determined by a majority vote of the members present. Action may be taken by any committee without a meeting if all the members thereof consent thereto in writing or by electronic transmission, and the writing or writings or electronic transmission or transmissions are filed with the minutes of the proceedings of such committee. Such filing shall be in paper form if the minutes are maintained in paper form and shall be electronic form if the minutes are maintained in electronic form. Section 14. Minutes of Committee Meetings. Each Committee shall keep regular minutes of its meetings and report the same to the Board of Directors when requested. Section 15. Compensation of Directors. Unless otherwise restricted by the Certificate of Incorporation or these Bylaws, the Board of Directors shall have the authority to fix the compensation of directors. The directors may be paid their expenses, if any, of attendance at each meeting of the Board of Directors and may be paid a fixed sum for attendance at each meeting of the Board of Directors or a stated salary as director. No such payment shall preclude any director from serving the Corporation in any other capacity and receiving compensation - 9 - therefor. Members of special or standing committees may be allowed like compensation for attending committee meetings. Section 16. Indemnification. (a) The Corporation shall indemnify every person who is or was a party or is or was threatened to be made a party to any threatened, pending or completed action, suit, or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of the Corporation), by reason of the fact that he is or was a director, officer or employee of the Corporation or any of its direct or indirect wholly owned subsidiaries or, while a director, officer or employee of the Corporation or any of its direct or indirect wholly owned subsidiaries, is or was serving at the request of the Corporation or any of its direct or indirect wholly owned subsidiaries, as a director, officer or employee, of another corporation, partnership, joint venture, trust, employee benefit plan or other enterprise, against expenses (including counsel fees), judgments, fines, and amounts paid in settlement actually and reasonably incurred by him in connection with such action, suit or proceeding, to the full extent permitted by applicable law; provided that the Corporation shall not be obligated to indemnify any such person against any such action, suit or proceeding which is brought by such person against the Corporation or any of its direct or indirect wholly owned subsidiaries or the directors of the Corporation or any of its direct or indirect wholly owned subsidiaries, other than an action brought by such person to enforce his rights to indemnification hereunder, unless a majority of the Board of Directors of the Corporation shall have previously approved the bringing of such action, suit or proceeding, and provided further that the Corporation shall not be obligated to indemnify any such person against any action, suit or proceeding arising out of any adjudicated criminal, dishonest or fraudulent acts, errors or omissions of such person or any adjudicated willful, intentional or malicious acts, errors or omissions of such person. (b) The Corporation shall indemnify every person who is or was a party or is or was threatened to be made a party to any threatened, pending or completed action, suit, or proceeding, whether civil, criminal, administrative or investigative, by reason of the fact that he is or was licensed to practice law and an employee (including an employee who is or was an officer) of the Corporation or any of its direct or indirect wholly owned subsidiaries and, while acting in the course of such employment committed or is alleged to have committed any negligent acts, errors or omissions in rendering professional legal services at the request of the Corporation or pursuant to his employment (including, without limitation, rendering written or oral legal opinions to third parties) against expenses (including counsel fees), judgments, fines, and amounts paid in settlement actually and reasonably incurred by him in connection with such action, suit or proceeding, to the full extent permitted by applicable law; provided that the Corporation shall not be obligated to indemnify any such person against any action, suit or proceeding arising out of any adjudicated criminal, dishonest or fraudulent acts, errors or omissions of such person or any adjudicated willful, intentional or malicious acts, errors or omissions of such person. (c) The Corporation shall indemnify every person who was or is a party or is threatened to be made a party to any threatened, pending or completed action or suit by or in the right of the Corporation to procure a judgment in its favor by reason of the fact that he is or was a director, officer, or employee of the Corporation, or any of its direct or indirect wholly owned subsidiaries or, while a director, officer, or employee of the Corporation or any of its direct or indirect wholly owned subsidiaries, is or was serving at the request of the Corporation or any of its direct or - 10 - indirect wholly owned subsidiaries, as a director, officer, or employee of another corporation, partnership, joint venture, trust, employee benefit plan, or other enterprise against expenses (including attorneys' fees) actually and reasonably incurred by him in connection with the defense or settlement of such action or suit if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the Corporation and except that no indemnification shall be made in respect of any claim, issue or matter as to which such person shall have been adjudged to be liable to the Corporation unless and only to the extent that the Court of Chancery or the court in which such action or suit was brought shall determine upon application that, despite the adjudication of liability but in view of all the circumstances of the case, such person is fairly and reasonably entitled to indemnity for such expenses which the Court of Chancery or such other court shall deem proper. (d) To the extent that a director, officer, or employee of the Corporation, or any of its direct or indirect wholly owned subsidiaries, has been successful on the merits or otherwise in defense of any action, suit or proceeding referred to in subsections (a), (b) and (c) of this section, or in defense of any claim, issue or matter therein, he shall be indemnified against expenses (including attorneys' fees) actually and reasonably incurred by him in connection therewith. (e) Any indemnification under subsections (a), (b) and (c) of this section (unless ordered by a court) shall be made by the Corporation only as authorized in the specific case upon a determination that indemnification of the director, officer, or employee is proper in the circumstances because he has met the applicable standard of conduct set forth in subsections (a), (b) and (c) of this section. Such determination shall be made (1) by a majority vote of the directors who were not parties to such action, suit or proceeding, (2) by a committee or such directors designated by majority vote of such directors even though less than a quorum, or (3) if there are no such directors, or if such directors so direct, by independent legal counsel in a written opinion, or (4) by the stockholders. If a claim under this Section 16 is not paid in full by the Corporation within 60 days after a written claim has been received by the Corporation, except in the case of a claim for an advancement of expenses, in which case the applicable period shall be 20 days, the indemnitee may at any time thereafter bring suit against the Corporation to recover the unpaid amount of the claim. If successful in whole or in part in any such suit, or in a suit brought by the Corporation to recover an advancement of expenses pursuant to the terms of an undertaking, the indemnitee shall be entitled to be paid also the expense of prosecuting or defending such suit. In (i) any suit brought by the indemnitee to enforce a right to indemnification hereunder (but not in a suit brought by the indemnitee to enforce a right to an advancement of expenses) it shall be a defense that, and (ii) in any suit brought by the Corporation to recover an advancement of expenses pursuant to the terms of an undertaking, the Corporation shall be entitled to recover such expenses upon a final adjudication that, the indemnitee has not met any applicable standard for indemnification set forth in the Delaware General Corporation Law. Neither the failure of the Corporation (including its directors who are not parties to such action, a - 11 - committee of such directors, independent legal counsel, or its stockholders) to have made a determination prior to the commencement of such suit that indemnification of the indemnitee is proper in the circumstances because the indemnitee has met the applicable standard of conduct set forth in the Delaware General Corporation Law, nor an actual determination by the Corporation (including its directors who are not parties to such action, a committee of such directors, independent legal counsel, or its stockholders) that the indemnitee has not met such applicable standard of conduct, shall create a presumption that the indemnitee has not met the applicable standard of conduct or, in the case of such a suit brought by the indemnitee, be a defense to such suit. In any suit brought by the indemnitee to enforce a right to indemnification or to an advancement of expenses hereunder, or brought by the Corporation to recover an advancement of expenses pursuant to the terms of an undertaking, the burden of proving that the indemnitee is not entitled to be indemnified, or to such advancement of expenses, under this Section 16 or otherwise shall be on the Corporation. (f) Expenses (including attorneys' fees) incurred by an present or former officer or director of the Corporation or any of its direct or indirect wholly owned subsidiaries in defending a civil, criminal, administrative or investigative action, suit or proceeding shall be paid by the Corporation in advance of the final disposition of such action, suit or proceeding upon receipt of an undertaking by or on behalf of such director or officer to repay such amount if it shall ultimately be determined that he is not entitled to be indemnified by the Corporation as authorized in this Section 16. Such expenses incurred by other employees and agents may be so paid upon such terms and conditions, if any, as the Board of Directors deems appropriate. (g) The indemnification and advancement of expenses provided by, or granted pursuant to, this Section 16 shall not be deemed exclusive of any other rights to which those seeking indemnification or advancement of expenses may be entitled under any provision of law, the Corporation's Certificate of Incorporation, the Certificate of Incorporation or Bylaws or other governing documents of any direct or indirect wholly owned subsidiary of the Corporation, or any agreement, vote of stockholders or disinterested directors or otherwise, both as to action in his official capacity and as to action in another capacity while holding any of the positions or having any of the relationships referred to in this Section 16. (h) The indemnification and advancement of expenses provided by, or granted pursuant to, this Section 16 shall, unless otherwise provided when authorized or ratified, continue as to a person who has ceased to be a director, officer or employee and shall inure to the benefit of the heirs, executors and administrators of such a person. ARTICLE IV OFFICERS Section 1. Officers. The officers of the Corporation shall be a Chairman of the Board, a Vice Chairman of the Board, a President, a Chief Financial Officer, a Vice President, a Secretary, a Treasurer and a Controller. The Corporation may also have, at the discretion of the Board of Directors, one or more additional Vice Presidents, and such other officers as may be appointed in accordance with the provisions of Section 3 of this Article. Section 2. Election of Officers. The officers of the Corporation, except such officers as may be appointed in accordance with the provisions of Section 3 or Section 5 of this Article, shall be chosen by the Board of Directors, and each shall serve at the pleasure of the - 12 - Board, subject to the rights, if any, of any officer under any contract of employment. Section 3. Subordinate Officers. The Board of Directors may appoint, and may empower the President to appoint, such other officers as the business of the Corporation may require, each of whom shall hold office for such period, have such authority and perform such duties as are provided in the Bylaws or as the Board of Directors may from time to time determine. Section 4. Removal and Resignation of Officers. Any officer may be removed, either with or without cause, by the Board of Directors, at any regular or special meeting thereof, or except in case of an officer chosen by the Board of Directors, by any officer upon whom such power of removal may be conferred by the Board of Directors, provided that such removal shall not prejudice the remedy of such officer for breach of any contract of employment. Any officer may resign at any time by giving written notice to the Corporation. Any such resignation shall take effect on receipt of such notice or at any later time specified therein. Unless otherwise specified therein, the acceptance of such resignation shall not be necessary to make it effective. Any such resignation is without prejudice to the rights, if any, of the Corporation under any contract to which the officer is a party. Section 5. Vacancies in Offices. A vacancy in any office because of death, resignation, removal, disqualification or any other cause shall be filled in the manner prescribed in these Bylaws for regular appointments to such office. Section 6. Chairman of the Board. The Chairman of the Board shall, if present, preside at all meetings of the Board of Directors and of the stockholders, and shall exercise and perform such other powers and duties as may be from time to time assigned to him by the Board of Directors or prescribed by the Bylaws. Section 7. Vice Chairman of the Board. The Vice Chairman of the Board shall exercise and perform such powers and duties as may be from time to time assigned to him by the Board of Directors or prescribed in these Bylaws. In the absence of the Chairman of the Board, the Vice Chairman of the Board shall preside at all meetings of the stockholders and the Board of Directors. Section 8. President. The President shall be the chief executive officer of the Corporation and shall, subject to the control of the Board of Directors, have general supervision, direction and control of the business and the officers of the Corporation. In the absence of the Chairman of the Board and the Vice Chairman of the Board, the President shall preside at all meetings of the stockholders and the Board of Directors. He shall have the general powers and duties of management usually vested in the office of President of a corporation, and shall have such other powers and duties as may be prescribed by the Board of Directors or the Bylaws. Section 9. Vice Presidents. In the absence or disability of the President, the Vice Presidents, if any, in order of their rank as fixed by the Board of Directors, or if not ranked, the Vice President designated by the President, shall perform all the duties of the President, and - 13 - when so acting shall have all the powers of, and be subject to all the restrictions upon, the President. The Vice Presidents shall have such other powers and perform such other duties as from time to time may be prescribed for them respectively by the Board of Directors, these Bylaws or the President. Section 10. Secretary. The Secretary shall keep or cause to be kept, at the principal office or such other place as the Board of Directors may order, a book of minutes of all meetings and actions of directors, committees of directors and stockholders, with the time and place of holding, whether regular or special, and, if special, how authorized, the notice thereof given, the names of those present at directors' and committee meetings, the number of shares present or represented at stockholders' meetings, and the proceedings thereof. The Secretary shall keep, or cause to be kept, at the principal office or at the office of the Corporation's transfer agent or registrar, a share register, or a duplicate share register, showing the names of all stockholders and their addresses, the number and classes of shares held by each, the number and date of certificates issued for the same, and the number and date of cancellation of every certificate surrendered for cancellation. The Secretary shall give, or cause to be given, notice of all meetings of the stockholders and of the Board of Directors required by these Bylaws or by law to be given, and he shall keep the seal of the Corporation, if one be adopted, in safe custody, and shall have such other powers and perform such other duties as may be prescribed by the Board of Directors or by the Bylaws. Section 11. Chief Financial Officer. The Chief Financial Officer shall keep and maintain, or cause to be kept and maintained, adequate and correct books and records of accounts of the properties and business transactions of the Corporation, including accounts of its assets, liabilities, receipts, disbursements, gains, losses, capital, retained earnings and shares. The books of account shall be open at all times to inspection by any director. The Chief Financial Officer shall deposit all moneys and other valuables in the name and to the credit of the Corporation with such depositories as may be designated by the Board of Directors. He shall disburse the funds of the Corporation as may be ordered by the Board of Directors, shall render to the President and Directors, whenever they request it, an account of all of his transactions as Chief Financial Officer and of the financial condition of the Corporation, and shall have other powers and perform such other duties as may be prescribed by the Board of Directors or the Bylaws. Section 12. Treasurer and Controller. The Treasurer and the Controller shall each have such powers and perform such duties as from time to time may be prescribed for him by the Board of Directors, the President or these Bylaws. - 14 - ARTICLE V CERTIFICATE OF STOCK Section 1. Certificates. Shares of the stock of the Corporation may be represented by certificates or uncertificated. Owners of shares of the stock of the Corporation shall be recorded in the share register of the Corporation, and ownership of such shares shall be evidenced by a certificate or book-entry notation in the share register of the Corporation. Any certificates representing such shares shall be signed by, or in the name of the Corporation by, the Chairman or Vice Chairman of the Board of Directors, or the President or a Vice President, and by the Secretary or any Assistant Secretary, if one be appointed, or the Treasurer or an Assistant Treasurer of the Corporation, certifying the number of shares represented by the certificate owned by such stockholder in the Corporation. Section 2. Signature on Certificates. Any or all of the signatures on the certificate may be a facsimile. In case any officer, transfer agent or registrar who has signed or whose facsimile signature has been placed upon a certificate shall have ceased to be such officer, transfer agent or registrar before such certificate is issued, it may be issued by the Corporation with the same effect as if he were such officer, transfer agent or registrar at the date of issue. Section 3. Statement of Stock Rights, Preferences, Privileges. If the Corporation shall be authorized to issue more than one class of stock or more than one series of any class, the powers, designations, preferences and relative, participating, optional or other special rights of each class of stock or series thereof and the qualification, limitations or restrictions of such preferences and/or rights shall be set forth in full or summarized on the face or back of the certificate which the Corporation shall issue to represent such class or series of stock, provided that, except as otherwise provided by statute, in lieu of the foregoing requirements, there may be set forth on the face or back of the certificate which the Corporation shall issue to represent such class or series of stock, a statement that the Corporation will furnish without charge to each stockholder who so requests the powers, designations, preferences and relative, participating, optional or other special rights of each class of stock or series thereof and the qualifications, limitations or restrictions of such preferences and/or rights. Section 4. Lost, Stolen or Destroyed Certificates. The Board of Directors, the Secretary and the Treasurer each may direct a new certificate or certificates to be issued in place of any certificate or certificates theretofore issued by the Corporation alleged to have been lost, stolen or destroyed, upon the making of an affidavit of that fact by the owner of such certificate, or his legal representative. When authorizing such issue of a new certificate or certificates, the Board of Directors may, in its discretion and as a condition precedent to the issuance thereof, require the owner of such lost, stolen or destroyed certificate or certificates, or his legal representative, to advertise the same in such manner as it shall require and/or to furnish the Corporation a bond in such form and substance and with such surety as it may direct as indemnity against any claim that may be made against the Corporation with respect to the certificate alleged to have been lost, stolen or destroyed. - 15 - Section 5. Transfers of Stock. Upon surrender to the Corporation, or the transfer agent of the Corporation, of a certificate for shares duly endorsed or accompanied by proper evidence of succession, assignation or authority to transfer, it shall be the duty of the Corporation to issue a new certificate or other evidence of such new shares to the person entitled thereto, cancel the old certificate and record the transaction upon its books. Uncertificated shares shall be transferred in the share register of the Corporation upon the written instruction originated by the appropriate person to transfer the shares. Section 6. Fixing Record Date. In order that the Corporation may determine the stockholders entitled to notice of or to vote at any meeting of the stockholders, or any adjournment thereof, or entitled to receive payment of any dividend or other distribution or allotment of any rights, or entitled to exercise any rights in respect of any change, conversion or exchange of stock or for the purpose of any other lawful action, the Board of Directors may fix a record date which shall not be more than 60 nor less than 10 days before the date of such meeting, nor more than 60 days prior to any other action. A determination of stockholders of record entitled to notice of or to vote at a meeting of stockholders shall apply to any adjournment of the meeting; provided, however, that the Board of Directors may fix a new record date for the adjourned meeting. Section 7. Registered Stockholders. The Corporation shall be entitled to treat the holder of record of any share or shares of stock as the holder in fact thereof and, accordingly, shall not be bound to recognize any equitable or other claim or interest in such share on the part of any other person, whether or not it shall have express or other notice thereof, save as expressly provided by the laws of the State of Delaware. ARTICLE VI GENERAL PROVISIONS Section 1. Dividends. Dividends upon the capital stock of the Corporation, subject to the provisions of the Certificate of Incorporation, if any, may be declared by the Board of Directors at any regular or special meeting, pursuant to law. Dividends may be paid in cash, in property or in shares of the Corporation's capital stock, subject to the provisions of the Certificate of Incorporation. Section 2. Payment of Dividends. Before declaration of any dividend, there may be set aside out of any funds of the Corporation available for dividends such sum or sums as the Board of Directors from time to time, in its absolute discretion, thinks proper as a reserve fund to meet contingencies, or for equalizing dividends, or for repairing or maintaining any property of the Corporation, or for such other purpose as the Board of Directors shall think conducive to the interests of the Corporation, and the Board of Directors may thereafter abolish any such reserve in its absolute discretion. Section 3. Checks. All checks, drafts or other orders for payment of money, notes or other evidences of indebtedness, issued in the name of or payable to the Corporation - 16 - shall be signed by such officer or officers as the Board of Directors or the President or any Vice President, acting jointly, may from time to time designate. Section 4. Corporate Contracts and Instruments. The President, any Vice President, the Secretary or the Treasurer may enter into contracts and execute instruments on behalf of the Corporation. The Board of Directors, the President or any Vice President may authorize any officer or officers, and any employee or employees or agent or agents of the Corporation or any of its subsidiaries, to enter into any contract or execute any instrument in the name of and on behalf of the Corporation, and such authority may be general or confined to specific instances. Section 5. Fiscal Year. The fiscal year of the Corporation shall be January 1 through December 31, unless otherwise fixed by resolution of the Board of Directors. Section 6. Manner of Giving Notice. Whenever, under the provisions of the statutes, the Certificate of Incorporation or these Bylaws, notice is required to be given to any director, it shall not be construed to require personal notice, but such notice may be given in writing, by mail, addressed to such director, at his address as it appears on the records of the Corporation (unless prior to mailing of such notice he shall have filed with the Secretary a written request that notices intended for him be mailed to some other address, in which case such notice shall be mailed to the address designated in the request) with postage thereon prepaid, and such notice shall be deemed to be given at the time when the same shall be deposited in the United States mail; provided, however, that, in the case of notice of a special meeting of the Board of Directors, if such meeting is to be held within seven calendar days after the date of such notice, notice shall be deemed given as of the date such notice shall be accepted for delivery by a courier service that provides "opening of business next day" delivery, so long as at least one attempt shall have been made, on or before the date such notice is accepted for delivery by such courier service, to provide notice by telephone to each director at his principal place of business and at his principal residence. Notice to directors may also be given by telegram, by personal delivery, by telephone, by facsimile or by other electronic transmission. Section 7. Waiver of Notice. Whenever any notice is required to be given under the provisions of the statutes, the Certificate of Incorporation or these Bylaws, a waiver thereof in writing, signed by the person or persons entitled to said notice, or waiver by electronic transmission by such person, whether before or after the time stated therein, shall be deemed equivalent thereto. ARTICLE VII AMENDMENTS Section 1. Amendment by Directors. Except any amendment to this Article VII and to Article II, Section 6, Article II, Section 10, Article III, Section 1 (as it relates to increases in the number of directors), Article III, Section 2, the last sentence of Article III, Section 3 (as it relates to removal of directors), Article III, Section 4, Article III, Section 16 and Article VI, - 17 - Section 6 of these Bylaws, or any of such provisions, which shall require approval by the affirmative vote of directors representing at least 75% of the number of directors provided for in accordance with Article III, Section 1, the directors, by the affirmative vote of a majority of the whole Board and without the assent or vote of the stockholders, may at any meeting, make, repeal, alter, amend or rescind any of these Bylaws, provided the substance of the proposed amendment or other action shall have been stated in a notice of the meeting. Section 2. Amendment by Stockholders. These Bylaws may not be altered, amended or rescinded, and new Bylaws may not be adopted, by the stockholders of the Corporation except by the vote of the holders of not less than 75% of the total voting power of all shares of stock of the Corporation entitled to vote in the election of directors, considered for such purpose as one class. - 18 - EX-10.26 4 h94456ex10-26.txt FORM OF NONQUALIFIED STOCK OPTION AGMT - DIRECTORS EXHIBIT 10.26 BAKER HUGHES INCORPORATED NONQUALIFIED STOCK OPTION AGREEMENT ((NAME)) ((SHARES)) GRANTEE SHARES GRANTED Pursuant to action by the Compensation Committee for administration of the Baker Hughes Incorporated ("Company") 1993 Stock Option Plan ("Plan"), the above Grantee is hereby granted a nonqualified stock option to purchase the above number of shares of the Company's $1 par value common stock at the exercise price of (Price) for each share subject to this option, payable at the time of exercise. Subject to the terms of the Plan regarding exercise, this option will be exercisable during the period beginning one year from the date of grant set forth below and ending seven years from such date, provided that the Grantee remains a member of the Board of Directors of the Company. This option may not be exercised after (Date). Cashless exercise, in accordance with the terms of the Plan, shall be available to Grantee for the shares subject to this option. To the extent the exercise of this option results in taxable income to Grantee, the Company is authorized to withhold from any remuneration payable to Grantee any tax required to be withheld by reason of such taxable income. This option is granted under and is subject to all of the provisions of the Plan. This option is not transferable by the Grantee otherwise than by will or by the laws of descent and distribution, and is exercisable during the Grantee's lifetime only by the Grantee. Date of Grant: (Date) BAKER HUGHES INCORPORATED By (Name) (Title) EX-10.27 5 h94456ex10-27.txt FORM OF NONQUALIFIED STOCK OPTION AGMT - EMPLOYEES EXHIBIT 10.27 BAKER HUGHES INCORPORATED NONQUALIFIED STOCK OPTION AGREEMENT ((NAME)) ((SHARES)) GRANTEE SHARES GRANTED Pursuant to action taken by the Compensation Committee of the Board of Directors of Baker Hughes Incorporated, a Delaware corporation (the "Company"), for the purposes of administration of the Baker Hughes Incorporated 1993 Stock Option Plan (the "Plan"), the above-named Grantee is hereby granted a nonqualified stock option to purchase the above number of shares of the Company's $1 par value per share common stock at the exercise price of (Price) for each share subject to this option, payable at the time of exercise. Subject to the terms of the Plan regarding exercise, (i) twenty percent (20%) of the shares subject to this option are immediately vested and this option is exercisable with respect thereto on the date of grant, and this option will be exercisable with respect to subsequent increments of twenty percent (20%) of the shares subject to this option on each of the next four (4) anniversaries of the grant date, and (ii) if the closing price of the Company Common Stock on the New York Stock Exchange increases to at least $50.00 per share and thereafter the closing price of the Company Common Stock on the New York Stock Exchange averages $50.00 per share or above for a period of ten consecutive trading days, any unvested portion of this option shall immediately vest in its entirety; in each case, provided the Grantee remains in the employment of the Company. This option may not be exercised after (Date). The following provisions will apply in the event of Grantee's termination of employment: 1. If Grantee's employment is terminated for any reason (other than death, retirement or disability pursuant to paragraphs 4 and 5 below), this option will wholly and completely terminate on the date of termination of employment, to the extent it is not then exercisable. 2. If Grantee's employment is terminated because of fraud, theft or embezzlement committed against the Company or one of its subsidiaries, or for conflict of interest as provided in the Plan, this option will wholly and completely terminate on the date of termination of employment. 3. If Grantee's employment is terminated for any reason other than death, retirement, disability, fraud, theft, embezzlement or conflict of interest as provided in the Plan, Grantee shall have three months from the date of termination of employment to exercise this option, to the extent then exercisable (but in no event later than (Date)). 4. In the event of the retirement (such that the Grantee's age plus years of service with the Company equals or exceeds 65) or disability of the Grantee, all granted but unvested options shall immediately vest upon the Grantee's retirement or disability. The Grantee shall have three years from the date of termination of employment due to retirement or disability to exercise this option (but in no event later than (Date)). 5. Upon the death of the Grantee in active service, all granted but unvested options shall immediately vest upon the Grantee's death and otherwise shall be exercisable for a period of one year following Grantee's death (but in no event later than (Date)). Cashless exercise, in accordance with the terms of the Plan, shall be available to Grantee for the shares subject to this option. To the extent the exercise of this option results in taxable income to Grantee, the Company is authorized to withhold from any remuneration payable to Grantee any tax required to be withheld by reason of such taxable income. This option is granted under and is subject to all of the provisions of the Plan. This option is not transferable by the Grantee otherwise than by will or by the laws of descent and distribution, and is exercisable during the Grantee's lifetime only by the Grantee. Date of Grant: (Date) BAKER HUGHES INCORPORATED (NAME) (TITLE) EX-10.28 6 h94456ex10-28.txt FORM OF INCENTIVE STOCK OPTION AGMT FOR EMPLOYEES EXHIBIT 10.28 BAKER HUGHES INCORPORATED INCENTIVE STOCK OPTION AGREEMENT ((NAME)) ((SHARES)) GRANTEE SHARES GRANTED Pursuant to action taken by the Compensation Committee of the Board of Directors of BAKER HUGHES Incorporated, a Delaware corporation (the "Company"), for the purposes of administration of the BAKER HUGHES Incorporated 1993 STOCK OPTION Plan (the "Plan"), the above-named Grantee is hereby granted an incentive STOCK OPTION (within the meaning of Section 422(b) of the Internal Revenue Code) to purchase the above number of shares of the Company's $1 par value per share common stock at the exercise price of (Price) for each share subject to this option, payable at the time of exercise. Subject to the terms of the Plan regarding exercise, (i) twenty percent (20%) of the shares subject to this option are immediately vested and this option is exercisable with respect thereto on the date of grant, and this option will be exercisable with respect to subsequent increments of twenty percent (20%) of the shares subject to this option on each of the next four (4) anniversaries of the grant date, and (ii) if the closing price of the Company Common Stock on the New York Stock Exchange increases to at least $50.00 per share and thereafter the closing price of the Company Common Stock on the New York Stock Exchange averages $50.00 per share or above for a period of ten consecutive trading days, any unvested portion of this option shall immediately vest in its entirety; in each case, provided the Grantee remains in the employment of the Company. This option may not be exercised after (Date). The following provisions will apply in the event of Grantee's termination of employment: 1. If Grantee's employment is terminated for any reason (other than death, retirement or disability pursuant to paragraphs 4 and 5 below), this option will wholly and completely terminate on the date of termination of employment, to the extent it is not then exercisable. 2. If Grantee's employment is terminated because of fraud, theft or embezzlement committed against the Company or one of its subsidiaries, or for conflict of interest as provided in the Plan, this option will wholly and completely terminate on the date of termination of employment. 3. If Grantee's employment is terminated for any reason other than death, retirement, disability, fraud, theft, embezzlement or conflict of interest as provided in the Plan, Grantee shall have three months from the date of termination of employment to exercise this option, to the extent then exercisable (but in no event later than (Date)). 4. In the event of the retirement (such that the Grantee's age plus years of service with the Company equals or exceeds 65) or disability of the Grantee, all granted but unvested options shall immediately vest upon the Grantee's retirement or disability. The Grantee shall have three years from the date of termination of employment due to retirement or disability to exercise this option (but in no event later than (Date)). 5. Upon the death of the Grantee in active service, all granted but unvested options shall immediately vest upon the Grantee's death and otherwise shall be exercisable for a period of one year following Grantee's death (but in no event later than (Date)). Cashless exercise, in accordance with the terms of the Plan, shall be available to Grantee for the shares subject to this option. To the extent the exercise of this option results in taxable income to Grantee, the Company is authorized to withhold from any remuneration payable to Grantee any tax required to be withheld by reason of such taxable income. This option is granted under and is subject to all of the provisions of the Plan. This option is not transferable by the Grantee otherwise than by will or by the laws of descent and distribution, and is exercisable during the Grantee's lifetime only by the Grantee. Date of Grant: (Date) BAKER HUGHES INCORPORATED (NAME) (TITLE) EX-10.38 7 h94456ex10-38.txt AMEND.NO.1 TO EMPLOYMENT AGMT - MICHAEL E WILEY EXHIBIT 10.38 AMENDMENT 1 TO EMPLOYMENT AGREEMENT This Amendment 1 to Employment Agreement ("Amendment 1") is made and entered into effective April 25, 2001, by and between BAKER HUGHES INCORPORATED, a Delaware corporation (the "Company") and MICHAEL E. WILEY (the "Executive"). WHEREAS, the Board of Directors of the Company and the Executive desire to make certain changes to that certain Employment Agreement dated as of July 17, 2000, by and between the Company and the Executive (the "Employment Agreement"), providing the Executive with additional time to purchase the Company's Common Stock; NOW, THEREFORE, in consideration of the premises and the mutual agreements contained herein, the Company and the Executive hereby agree as follows: Section 2(f) of the Employment Agreement is hereby amended in its entirety to read as follows: "As Chief Executive Officer of the Company, the Executive is required to own common stock in the Company equal to three times Base Salary within five years from Effective Date. Subject to approval of the Compensation Committee of the Board, effective December 31, 2001, the Executive will receive a one-time grant of restricted common stock of the Company equal to the number of shares of common stock of the Company owned by the Executive on December 31, 2001, not to exceed 50,000 shares. Vesting of these restricted shares will occur upon retirement from the Company, involuntary termination (unless due to cause), permanent disability or death and is subject to the other terms and conditions of the grant. Retirement for this purchase means attaining age 55 with at least 10 years of service with the Company. On the first day of employment under this Agreement, the Executive will be credited with seven years of service for purposes of this program." All capitalized terms in this Amendment 1 shall have the definition ascribed to those terms in the Employment Agreement. The Employment Agreement continues in full foe and effect, except as amended hereby. This Amendment 1 may be executed in counterparts, each of which shall be deemed to be an original but all of which together will constitute one and the same instrument. EXECUTED effective as of the day and year first written above. Company: Executive: BAKER HUGHES INCORPORATED By: ------------------------------------- ------------------------------ Richard D. Kinder, Chairman, MICHAEL E. WILEY Compensation Committee of the Board of Directors AMENDMENT 2 TO EMPLOYMENT AGREEMENT This Amendment 2 to Employment Agreement ("Amendment 2") is made and entered into effective December 5, 2001, by and between BAKER HUGHES INCORPORATED, a Delaware corporation (the "Company") and MICHAEL E. WILEY (the "Executive"). WHEREAS, the Board of Directors of the Company and the Executive desire to make certain changes to that certain Employment Agreement dated as of July 17, 2000, by and between the Company and the Executive (the "Employment Agreement"), providing the Executive with additional time to purchase the Company's Common Stock; NOW, THEREFORE, in consideration of the premises and the mutual agreements contained herein, the Company and the Executive hereby agree as follows: Section 2(f) of the Employment Agreement is hereby amended in its entirety to read as follows: "As Chief Executive Officer of the Company, the Executive is required to own common stock in the Company equal to three times Base Salary within five years from Effective Date. Subject to approval of the Compensation Committee of the Board, effective June 30, 2002, the Executive will receive a one-time grant of restricted common stock of the Company equal to the number of shares of common stock of the Company owned by the Executive on June 30, 2002, not to exceed 50,000 shares. Vesting of these restricted shares will occur upon retirement from the Company, involuntary termination (unless due to cause), permanent disability or death and is subject to the other terms and conditions of the grant. Retirement for this purchase means attaining age 55 with at least 10 years of service with the Company. On the first day of employment under this Agreement, the Executive will be credited with seven years of service for purposes of this program." All capitalized terms in this Amendment 2 shall have the definition ascribed to those terms in the Employment Agreement. The Employment Agreement continues in full foe and effect, except as amended hereby. This Amendment 2 may be executed in counterparts, each of which shall be deemed to be an original but all of which together will constitute one and the same instrument. EXECUTED effective as of the day and year first written above. Company: Executive: BAKER HUGHES INCORPORATED By: ------------------------------------- ------------------------------ Richard D. Kinder, Chairman, MICHAEL E. WILEY Compensation Committee of the Board of Directors AMENDMENT 3 TO EMPLOYMENT AGREEMENT This Amendment 3 to Employment Agreement ("Amendment 2") is made and entered into effective December 5, 2001, by and between BAKER HUGHES INCORPORATED, a Delaware corporation (the "Company") and MICHAEL E. WILEY (the "Executive"). WHEREAS, the Board of Directors of the Company and the Executive desire to make certain changes to that certain Employment Agreement dated as of July 17, 2000, by and between the Company and the Executive (the "Employment Agreement"), providing the Executive with additional time to purchase the Company's Common Stock; NOW, THEREFORE, in consideration of the premises and the mutual agreements contained herein, the Company and the Executive hereby agree as follows: Section 1 of the Employment Agreement is hereby amended in its entirety to read as follows: "Employment; Term. The Company hereby agrees to employ the Executive, and the Executive hereby accepts such employment, on the terms and conditions hereinafter set forth. The period of employment of the Executive by the Company hereunder (the "Employment Period") shall commence the date the Executive begins full-time employment with the Company (which is expected to be on August 14, 2000, the "Effective Date") and shall end on the Executive's Date of Termination (as defined in Section 7(b) hereof). The term of this Agreement (the "Term") shall begin on the Effective Date and shall end on December 31, 2003 thereof; provided, that, on January 1, 2002, and each January 1 thereafter, the Term shall be extended for one additional year unless, prior to December 1, 2001 with respect to the extension on January 1, 2002, and each December 1 thereafter with respect to each subsequent annual extension, the Company or the Executive shall have given notice not to extend the Term." All capitalized terms in this Amendment 3 shall have the definition ascribed to those terms in the Employment Agreement. The Employment Agreement continues in full foe and effect, except as amended hereby. This Amendment 3 may be executed in counterparts, each of which shall be deemed to be an original but all of which together will constitute one and the same instrument. EXECUTED effective as of the day and year first written above. Company: Executive: BAKER HUGHES INCORPORATED By: ------------------------------------- ------------------------------ Richard D. Kinder, Chairman, MICHAEL E. WILEY Compensation Committee of the Board of Directors EX-10.39 8 h94456ex10-39.txt SEVERANCE AGREEMENT - EDWIN C HOWELL EXHIBIT 10.39 SEVERANCE AGREEMENT THIS AGREEMENT, dated as of July 23, 1997, is made by and between BAKER HUGHES INCORPORATED, a Delaware corporation (the "Company"), and EDWIN C. HOWELL (the "Executive"). WHEREAS, the Company considers it essential to the best interests of its stockholders to foster the continued employment of key management personnel; and WHEREAS, the Board recognizes that, as is the case with many publicly held corporations, the possibility of a Change in Control exists and that such possibility, and the uncertainty and questions which it may raise among management, may result in the departure or distraction of management personnel to the detriment of the Company and its stockholders; and WHEREAS, the Board has determined that appropriate steps should be taken to reinforce and encourage the continued attention and dedication of members of the Company's management, including the Executive, to their assigned duties without distraction in the face of potentially disturbing circumstances arising from the possibility of a Change in Control; NOW, THEREFORE, in consideration of the premises and the mutual covenants herein contained, the Company and the Executive hereby agree as follows: 1. Defined Terms. The definitions of capitalized terms used in this Agreement are provided in the last Section hereof. 2. Term of Agreement. Subject to the provisions of Section 12.2 hereof, the Term of this Agreement shall commence on the date hereof and shall continue in effect through December 31, 1999; provided, however, that commencing on January 1, 1998 and each January 1 thereafter (an "Extension Date"), the Term shall automatically be extended for one additional year (i.e., resulting in a two-year Term on the Extension Date) unless, not later than September 30 of the year preceding the Extension Date, the Company or the Executive shall have given notice not to extend the Term; and further provided, however, that if a Change in Control shall have occurred during the Term, the Term shall expire no earlier than twenty-four (24) months beyond the month in which such Change in Control occurred. 3. Company's Covenants Summarized. In order to induce the Executive to remain in the employ of the Company and in consideration of the Executive's covenants set forth in Section 4 hereof, the Company agrees, under the conditions described herein, to pay the Executive the Severance Payments and the other payments and benefits described herein. Except as provided in Section 9.1 hereof, no Severance Payments shall be payable under this Agreement unless there shall have been (or, under the terms of the second sentence of Section 6.1 hereof, there shall be deemed to have been) a termination of the Executive's employment with the Company following a Change in Control and during the Term. This Agreement shall not be construed as creating an express or implied contract of employment and, except as otherwise agreed in writing between the Executive and the Company, the Executive shall not have any right to be retained in the employ of the Company. 1 4. The Executive's Covenants. The Executive agrees that, subject to the terms and conditions of this Agreement, in the event of a Potential Change in Control during the Term, the Executive will remain in the employ of the Company until the earliest of (i) a date which is six (6) months from the date of such Potential Change of Control, (ii) the date of a Change in Control, (iii) the date of termination by the Executive of the Executive's employment for Good Reason or by reason of death, Disability or Retirement, or (iv) the termination by the Company of the Executive's employment for any reason. 5. Compensation Other Than Severance Payments. 5.1 Following a Change in Control and during the Term, during any period that the Executive fails to perform the Executive's full-time duties with the Company as a result of incapacity due to physical or mental illness, the Company shall pay the Executive's full salary to the Executive at the rate in effect at the commencement of any such period, together with all compensation and benefits payable to the Executive under the terms of any compensation or benefit plan, program or arrangement maintained by the Company during such period, until the Executive's employment is terminated by the Company for Disability. 5.2 If the Executive's employment shall be terminated for any reason following a Change in Control and during the Term, the Company shall pay the Executive's full salary to the Executive through the Date of Termination at the rate in effect immediately prior to the Date of Termination or, if higher, the rate in effect immediately prior to the first occurrence of an event or circumstance constituting Good Reason, together with all compensation and benefits payable to the Executive through the Date of Termination under the terms of the Company's compensation and benefit plans, programs or arrangements as in effect immediately prior to the Date of Termination or, if more favorable to the Executive, as in effect immediately prior to the first occurrence of an event or circumstance constituting Good Reason. 5.3 If the Executive's employment shall be terminated for any reason following a Change in Control and during the Term, the Company shall pay to the Executive the Executive's normal post-termination compensation and benefits as such payments become due. Such post-termination compensation and benefits shall be determined under, and paid in accordance with, the Company's retirement, insurance and other compensation or benefit plans, programs and arrangements as in effect immediately prior to the Date of Termination or, if more favorable to the Executive, as in effect immediately prior to the occurrence of the first event or circumstance constituting Good Reason. 5.4 Upon the occurrence of a Change in Control all options to acquire shares of Company stock, all shares of restricted Company stock and all other equity or phantom equity incentives held by the Executive under any plan of the Company (including, but not limited to, the Company's 1995 Stock Award Plan (and the Stock Matching Programs thereunder), 1993 Stock Option Plan, 1993 Stock Bonus Plan and 1991 Stock Bonus Plan) shall become immediately vested, exercisable and nonforfeitable and all conditions thereof (including, but not limited to, any required holding periods) shall be deemed to have been satisfied. 6. Severance Payments. 6.1 If the Executive's employment is terminated following a Change in Control and during the Term, other than (A) by the Company for Cause, (B) by reason of death or Disability, or (C) by the Executive without Good Reason, then, the Company shall pay the Executive the amounts, and provide the Executive the benefits, described in this Section 6.1 ("Severance Payments") and Section 6.2, in addition to any payments and benefits to which the Executive is entitled under Section 5 hereof. For purposes of this 2 Agreement, the Executive's employment shall be deemed to have been terminated following a Change in Control by the Company without Cause or by the Executive with Good Reason, if (i) the Executive's employment is terminated by the Company without Cause prior to a Change in Control (whether or not a Change in Control ever occurs) and such termination was at the request or direction of a Person who has entered into an agreement with the Company the consummation of which would constitute a Change in Control, (ii) the Executive terminates his employment for Good Reason prior to a Change in Control (whether or not a Change in Control ever occurs) and the circumstance or event which constitutes Good Reason occurs at the request or direction of such Person described in clause (i), or (iii) the Executive's employment is terminated by the Company without Cause or by the Executive for Good Reason and such termination or the circumstance or event which constitutes Good Reason is otherwise in connection with or in anticipation of a Change in Control (whether or not a Change in Control ever occurs). For purposes of any determination regarding the applicability of the immediately preceding sentence, any position taken by the Executive shall be presumed to be correct unless the Company establishes to the Committee by clear and convincing evidence that such position is not correct. (A) In lieu of any further salary payments to the Executive for periods subsequent to the Date of Termination and in lieu of any severance benefit otherwise payable to the Executive, the Company shall pay to the Executive a lump sum severance payment, in cash, equal to three times the sum of (i) the Executive's base salary as in effect immediately prior to the Date of Termination or, if higher, in effect immediately prior to the first occurrence of an event or circumstance constituting Good Reason, and (ii) the average annual bonus earned by the Executive pursuant to any annual bonus or incentive plan maintained by the Company in respect of the three fiscal years ending immediately prior to the fiscal year in which occurs the Date of Termination or, if higher, immediately prior to the fiscal year in which occurs the first event or circumstance constituting Good Reason; provided, that if the Executive has not participated in an annual bonus or incentive plan maintained by the Company for the entirety of such three-year period, the amount referred to in this clause (ii) shall be calculated using such lesser number of bonuses as have been actually earned by the Executive in respect of such lesser period. (B) For the thirty-six (36) month period immediately following the Date of Termination, the Company shall arrange to provide the Executive and his dependents life, disability, accident and health insurance benefits and perquisites (including, but not limited to, executive life insurance, club memberships, financial planning and tax preparation, annual physical examination and charitable contributions), in each case, substantially similar to those provided to the Executive and his dependents immediately prior to the Date of Termination or, if more favorable to the Executive, those provided to the Executive and his dependents immediately prior to the first occurrence of an event or circumstance constituting Good Reason, at no greater cost to the Executive than the cost to the Executive immediately prior to such date or occurrence; provided, however, that, unless the Executive consents to a different method (after taking into account the effect of such method on the calculation of "parachute payments" pursuant to Section 6.2 hereof), such health insurance benefits shall be provided through a third-party insurer. Benefits otherwise receivable by the Executive pursuant to this Section 6.1(B) shall be reduced to the extent benefits of the same type are received by or made available to the Executive during the thirty-six (36) month period following the Executive's termination of employment (and any such benefits received by or made available to the Executive shall be reported to the Company by the Executive); provided, however, that the Company shall reimburse the Executive for the excess, if any, of the cost of such benefits to the Executive over such cost immediately prior to the Date of Termination or, if more favorable to the Executive, the first occurrence of an event or circumstance constituting Good Reason. 3 (C) Notwithstanding any provision of the Baker Hughes Incorporated 1995 Employee Annual Incentive Compensation Plan (the "Annual Incentive Plan"), the Company shall pay to the Executive a lump sum amount, in cash, equal to the sum of (i) any unpaid incentive compensation which has been allocated or awarded to the Executive for a completed fiscal year or other measuring period preceding the Date of Termination under the Annual Incentive Plan and which, as of the Date of Termination, is contingent only upon the continued employment of the Executive to a subsequent date, and (ii) a pro rata portion to the Date of Termination of the aggregate value of all contingent incentive compensation awards to the Executive for all then uncompleted periods under the Annual Incentive Plan, calculated as to each such award by multiplying the award that the Executive would have earned on the last day of the performance award period, assuming the achievement, at the expected value target level, of the individual and corporate performance goals established with respect to such award, by the fraction obtained by dividing the number of full months and any fractional portion of a month during such performance award period through the Date of Termination by the total number of months contained in such performance award period; provided, however, that if such termination of employment occurs during the same year in which the Change in control occurs, the pro-rata bonus payment referred to in clause (ii) above shall be offset by any payments received under the Annual Incentive Plan in connection with such Change in Control. (D) In addition to the retirement benefits to which the Executive is entitled under the Company's Thrift Plan (the "Thrift Plan") and the Company's Supplemental Retirement Plan (the "SRP"), the Company shall pay the Executive a lump sum amount, in cash, equal to the present value of the employer-provided contributions, deferrals and allocations the Executive would have received had he continued to participate, after the Date of Termination, in the Thrift Plan and the SRP for three (3) additional years, assuming for this purpose that (i) the Executive earned compensation for purposes of the Thrift Plan and SRP during such three-year period the amount used to calculate the Executive's severance payment under subparagraph (A) of this Section 6.1, and (ii) the percentages of contributions, deferrals and allocations made under the Thrift Plan and the SRP by or on behalf of the Executive during such three-year period are the same percentages of contributions, deferrals and allocations in effect on the date of the Change in Control or the Date of Termination, whichever is more favorable to the Executive. (E) If the Executive would have become entitled to benefits under the Company's post-retirement health care or life insurance plans, as in effect immediately prior to the Date of Termination or, if more favorable to the Executive, as in effect immediately prior to the first occurrence of an event or circumstance constituting Good Reason, had the Executive's employment terminated at any time during the period of thirty-six (36) months after the Date of Termination, the Company shall provide such post-retirement health care or life insurance benefits to the Executive and the Executive's dependents commencing on the later of (i) the date on which such coverage would have first become available and (ii) the date on which benefits described in subsection (B) of this Section 6.1 terminate. (F) The Company shall provide the Executive with outplacement services suitable to the Executive's position for a period of three years or, if earlier, until the first acceptance by the Executive of an offer of employment. 6.2 (A) Whether or not the Executive becomes entitled to the Severance Payments, if any of the payments or benefits received or to be received by the Executive in connection with a Change in Control or the Executive's termination of employment (whether pursuant to the terms of this Agreement or any other plan, arrangement or agreement with the Company, any Person whose actions result in a 4 Change in Control or any Person affiliated with the Company or such Person) (such payments or benefits, excluding the Gross-Up Payment, being hereinafter referred to as the "Total Payments") will be subject to the Excise Tax, the Company shall pay to the Executive an additional amount (the "Gross-Up Payment") such that the net amount retained by the Executive, after deduction of any Excise Tax on the Total Payments and any federal, state and local income and employment taxes and Excise Tax upon the Gross-Up Payment, shall be equal to the Total Payments. (B) For purposes of determining whether any of the Total Payments will be subject to the Excise Tax and the amount of such Excise Tax, (i) all of the Total Payments shall be treated as "parachute payments" (within the meaning of section 280G(b)(2) of the Code) unless, in the opinion of tax counsel ("Tax Counsel") reasonably acceptable to the Executive and selected by the accounting firm which was, immediately prior to the Change in Control, the Company's independent auditor (the "Auditor"), such payments or benefits (in whole or in part) do not constitute parachute payments, including by reason of section 280G(b)(4)(A) of the Code, (ii) all "excess parachute payments" within the meaning of section 280G(b)(l) of the Code shall be treated as subject to the Excise Tax unless, in the opinion of Tax Counsel, such excess parachute payments (in whole or in part) represent reasonable compensation for services actually rendered (within the meaning of section 280G(b)(4)(B) of the Code) in excess of the Base Amount allocable to such reasonable compensation, or are otherwise not subject to the Excise Tax, and (iii) the value of any noncash benefits or any deferred payment or benefit shall be determined by the Auditor in accordance with the principles of sections 280G(d)(3) and (4) of the Code. For purposes of determining the amount of the Gross-Up Payment, the Executive shall be deemed to pay federal income tax at the highest marginal rate of federal income taxation in the calendar year in which the Gross-Up Payment is to be made and state and local income taxes at the highest marginal rate of taxation in the state and locality of the Executive's residence on the Date of Termination (or if there is no Date of Termination, then the date on which the Gross-Up Payment is calculated for purposes of this Section 6.2), net of the maximum reduction in federal income taxes which could be obtained from deduction of such state and local taxes. (C) In the event that the Excise Tax is finally determined to be less than the amount taken into account hereunder in calculating the Gross-Up Payment, the Executive shall repay to the Company, within five (5) business days following the time that the amount of such reduction in the Excise Tax is finally determined, the portion of the Gross-Up Payment attributable to such reduction (plus that portion of the Gross-Up Payment attributable to the Excise Tax and federal, state and local income and employment taxes imposed on the Gross-Up Payment being repaid by the Executive, to the extent that such repayment results in a reduction in the Excise Tax and a dollar-for-dollar reduction in the Executive's taxable income and wages for purposes of federal, state and local income and employment taxes, plus interest on the amount of such repayment at 120% of the rate provided in section 1274(b)(2)(B) of the Code. In the event that the Excise Tax is determined to exceed the amount taken into account hereunder in calculating the Gross-Up Payment (including by reason of any payment the existence or amount of which cannot be determined at the time of the Gross-Up Payment), the Company shall make an additional Gross-Up Payment in respect of such excess (plus any interest, penalties or additions payable by the Executive with respect to such excess) within five (5) business days following the time that the amount of such excess is finally determined. The Executive and the Company shall each reasonably cooperate with the other in connection with any administrative or judicial proceedings concerning the existence or amount of liability for Excise Tax with respect to the Total Payments. 6.3 The payments provided in subsections (A), (C) and (D) of Section 6.1 hereof and in Section 6.2 hereof shall be made not later than the fifth day following the Date of Termination; provided, however, that if the amounts of such payments cannot be finally determined on or before such day, the Company shall pay to the Executive on such day an estimate, as determined in good faith by the Executive or, in the case of payments under Section 6.2 hereof, in accordance with Section 6.2 hereof, of the minimum 5 amount of such payments to which the Executive is clearly entitled and shall pay the remainder of such payments (together with interest on the unpaid remainder (or on all such payments to the extent the Company fails to make such payments when due) at 120% of the rate provided in section 1274(b)(2)(B) of the Code) as soon as the amount thereof can be determined but in no event later than the thirtieth (30th) day after the Date of Termination. In the event that the amount of the estimated payments exceeds the amount subsequently determined to have been due, such excess shall constitute a loan by the Company to the Executive, payable on the fifth (5th) business day after demand by the Company (together with interest at 120% of the rate provided in section 1274(b)(2)(B) of the Code), but only to the extent such amount has not been paid by the Executive pursuant to Section 6.2(C) above. At the time that payments are made under this Agreement, the Company shall provide the Executive with a written statement setting forth the manner in which such payments were calculated and the basis for such calculations including, without limitation, any opinions or other advice the Company has received from Tax Counsel, the Auditor or other advisors or consultants (and any such opinions or advice which are in writing shall be attached to the statement). 6.4 The Company also shall pay to the Executive all legal fees and expenses incurred by the Executive in disputing in good faith any issue hereunder relating to the termination of the Executive's employment, in seeking in good faith to obtain or enforce any benefit or right provided by this Agreement or in connection with any tax audit or proceeding to the extent attributable to the application of section 4999 of the Code to any payment or benefit provided hereunder. Such payments shall be made within five (5) business days after delivery of the Executive's written requests for payment accompanied with such evidence of fees and expenses incurred as the Company reasonably may require. 7. Termination Procedures and Compensation During Dispute. 7.1 Notice of Termination. After a Change in Control and during the Term, any purported termination of the Executive's employment (other than by reason of death) shall be communicated by written Notice of Termination from one party hereto to the other party hereto in accordance with Section 10 hereof. For purposes of this Agreement, a "Notice of Termination" shall mean a notice which shall indicate the specific termination provision in this Agreement relied upon and shall set forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of the Executive's employment under the provision so indicated. Further, a Notice of Termination for Cause is required to include a copy of a resolution duly adopted by the affirmative vote of not less than three-quarters (3/4) of the entire membership of the Board at a meeting of the Board which was called and held for the purpose of considering such termination (after reasonable notice to the Executive and an opportunity for the Executive, together with the Executive's counsel, to be heard before the Board) finding that, in the good faith opinion of the Board, the Executive was guilty of conduct set forth in clause (i) or (ii) of the definition of Cause herein, and specifying the particulars thereof in detail. 7.2 Date of Termination. "Date of Termination," with respect to any purported termination of the Executive's employment after a Change in Control and during the Term, shall mean (i) if the Executive's employment is terminated for Disability, thirty (30) days after Notice of Termination is given (provided that the Executive shall not have returned to the full-time performance of the Executive's duties during such thirty (30) day period), and (ii) if the Executive's employment is terminated for any other reason, the date specified in the Notice of Termination (which, in the case of a termination by the Company, shall not be less than thirty (30) days (except in the case of a termination for Cause) and, in the case of a termination by the Executive, shall not be less than fifteen (15) days nor more than sixty (60) days, respectively, from the date such Notice of Termination is given). 7.3 Dispute Concerning Termination. If within fifteen (15) days after any Notice of Termination is given, or, if later, prior to the Date of Termination (as determined without regard to this 6 Section 7.3), the party receiving such Notice of Termination notifies the other party that a dispute exists concerning the termination, the Date of Termination shall be extended until the earlier of (i) the date on which the Term ends or (ii) the date on which the dispute is finally resolved, either by mutual written agreement of the parties or by a final judgment, order or decree of an arbitrator or a court of competent jurisdiction (which is not appealable or with respect to which the time for appeal therefrom has expired and no appeal has been perfected); provided, however, that the Date of Termination shall be extended by a notice of dispute given by the Executive only if such notice is given in good faith and the Executive pursues the resolution of such dispute with reasonable diligence. 7.4 Compensation During Dispute. If a purported termination occurs following a Change in Control and during the Term and the Date of Termination is extended in accordance with Section 7.3 hereof, the Company shall continue to pay the Executive the full compensation in effect when the notice giving rise to the dispute was given (including, but not limited to, salary) and continue the Executive as a participant in all compensation, benefit and insurance plans in which the Executive was participating when the notice giving rise to the dispute was given or those plans in which the Executive was participating immediately prior to the first occurrence of an event or circumstance giving rise to the Notice of Termination, if more favorable to the Executive, until the Date of Termination, as determined in accordance with Section 7.3 hereof. Amounts paid under this Section 7.4 are in addition to all other amounts due under this Agreement (other than those due under Section 5.2 hereof) and shall not be offset against or reduce any other amounts due under this Agreement. 8. No Mitigation. The Company agrees that, if the Executive's employment with the Company terminates during the Term, the Executive is not required to seek other employment or to attempt in any way to reduce any amounts payable to the Executive by the Company pursuant to Sections 5, 6 or 7.4 hereof. Further, the amount of any payment or benefit provided for in this Agreement (other than Section 6.1(B) hereof but including (but not limited to) Section 7.4 hereof) shall not be reduced by any compensation earned by the Executive as the result of employment by another employer, by retirement benefits, by offset against any amount claimed to be owed by the Executive to the Company, or otherwise. 9. Successors; Binding Agreement. 9.1 In addition to any obligations imposed by law upon any successor to the Company, the Company will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company to expressly assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place. Failure of the Company to obtain such assumption and agreement prior to the effectiveness of any such succession shall be a breach of this Agreement and shall entitle the Executive to compensation from the Company in the same amount and on the same terms as the Executive would be entitled to hereunder if the Executive were to terminate the Executive's employment for Good Reason after a Change in Control, except that, for purposes of implementing the foregoing, the date on which any such succession becomes effective shall be deemed the Date of Termination. 9.2 This Agreement shall inure to the benefit of and be enforceable by the Executive's personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. If the Executive shall die while any amount would still be payable to the Executive hereunder (other than amounts which, by their terms, terminate upon the death of the Executive) if the Executive had continued to live, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to the executors, personal representatives or administrators of the Executive's estate. 7 10. Notices. For the purpose of this Agreement, notices and all other communications provided for in the Agreement shall be in writing and shall be deemed to have been duly given when delivered or mailed by United States registered mail, return receipt requested, postage prepaid, addressed, if to the Executive, to the address inserted below the Executive's signature on the final page hereof and, if to the Company, to the address set forth below, or to such other address as either party may have furnished to the other in writing in accordance herewith, except that notice of change of address shall be effective only upon actual receipt: To the Company: 3900 Essex Lane Suite 210 Houston, Texas 77027 Attention: General Counsel 11. Miscellaneous. Except as otherwise specifically provided in Section 12.2 below, no provision of this Agreement may be modified, waived or discharged unless such waiver, modification or discharge is agreed to in writing and signed by the Executive and such officer as may be specifically designated by the Board. No waiver by either party hereto at any time of any breach by the other party hereto of, or of any lack of compliance with, any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. This Agreement supersedes any other agreements or representations, oral or otherwise, express or implied, with respect to the subject matter hereof which have been made by either party; provided, however, that this Agreement shall supersede any agreement setting forth the terms and conditions of the Executive's employment with the Company only in the event that the Executive's employment with the Company is terminated on or following a Change in Control, by the Company other than for Cause or by the Executive other than for Good Reason; and provided further that all agreements otherwise superseded by this Agreement will be automatically reinstated with full force and effect to the extent this Agreement is terminated or otherwise rendered inapplicable or amended in accordance with Section 12.2 hereof. The validity, interpretation, construction and performance of this Agreement shall be governed by the laws of the State of Texas. All references to sections of the Exchange Act or the Code shall be deemed also to refer to any successor provisions to such sections. Any payments provided for hereunder shall be paid net of any applicable withholding required under federal, state or local law and any additional withholding to which the Executive has agreed. The obligations of the Company and the Executive under this Agreement which by their nature may require either partial or total performance after the expiration of the Term (including, without limitation, those under Sections 6 and 7 hereof) shall survive such expiration. 12. Validity; Pooling. 12.1 Validity. The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement, which shall remain in full force and effect. 12.2 Pooling. In the event that (A) the Company is party to a transaction which is otherwise intended to qualify for "pooling of interests" accounting treatment, (B) such transaction constitutes a Change in Control within the meaning of Section 15(G)(III) and (C) individuals who satisfy the requirements in clauses (i) and (ii) below constitute more than two-thirds (2/3) of the number of directors of the entity surviving such transaction or any parent thereof, if any: individuals who (i) immediately prior to such transaction constitute the Board and (ii) on the date hereof constitute the Board and any new director (other than a director whose initial assumption of office is in connection with an actual or threatened 8 election contest relating to the election of directors of the Company) whose appointment or election by the Board or nomination for election by the Company's stockholders was approved or recommended, by a vote of at least two-thirds (2/3) of the directors then still in office who either were directors on the date hereof or whose appointment, election or nomination for election was previously so approved or recommended then (a) this Agreement shall, to the extent practicable, be interpreted so as to permit such accounting treatment, and (b) to the extent that the application of clause (a) of this Section 12.2 does not preserve the availability of such accounting treatment, then, to the extent that any provision or combination of provisions of the Agreement disqualifies the transaction as a "pooling" transaction (including, if applicable, the entire Agreement), the Board shall have the right, by sending written notice to the Executive prior to the Change in Control, to unilaterally amend (without the consent of the Executive) such provision or provisions if and to the extent necessary (including declaring such provision or provisions to be null and void as of the date hereof) so that such transaction may be accounted for as a "pooling of interests." All determinations under this Section 12.2 shall be made by the Board prior to the Change in Control, based upon the advice of the accounting firm whose opinion with respect to "pooling of interests" is required as a condition to the consummation of such transaction. 13. Counterparts. This Agreement may be executed in several counterparts, each of which shall be deemed to be an original but all of which together will constitute one and the same instrument. 14. Settlement of Disputes; Arbitration. 14.1 All claims by the Executive for benefits under this Agreement shall be directed to and determined by the Committee and shall be in writing. Any denial by the Committee of a claim for benefits under this Agreement shall be delivered to the Executive in writing within thirty (30) days after written notice of the claim is provided to the Company in accordance with Section 10 and shall set forth the specific reasons for the denial and the specific provisions of this Agreement relied upon. The Committee shall afford a reasonable opportunity to the Executive for a review of the decision denying a claim and shall further allow the Executive to appeal to the Committee a decision of the Committee within sixty (60) days after notification by the Committee that the Executive's claim has been denied. 14.2 Any further dispute or controversy arising under or in connection with this Agreement shall be settled exclusively by arbitration in Houston, Texas in accordance with the rules of the American Arbitration Association then in effect; provided, however, that the evidentiary standards set forth in this Agreement shall apply. Judgment may be entered on the arbitrator's award in any court having jurisdiction. Notwithstanding any provision of this Agreement to the contrary, the Executive shall be entitled to seek specific performance of the Executive's right to be paid until the Date of Termination during the pendency of any dispute or controversy arising under or in connection with this Agreement. 1. Definitions. For purposes of this Agreement, the following terms shall have the meanings indicated below: (A) "Affiliate" shall have the meaning set forth in Rule 12b-2 promulgated under Section 12 of the Exchange Act. (B) "Auditor" shall have the meaning set forth in Section 6.2 hereof. (C) "Base Amount" shall have the meaning set forth in section 280G(b)(3) of the Code. (D) "Beneficial Owner" shall have the meaning set forth in Rule 13d-3 under the Exchange Act. 9 (E) "Board" shall mean the Board of Directors of the Company. (F) "Cause" for termination by the Company of the Executive's employment shall mean (i) the willful and continued failure by the Executive to substantially perform the Executive's duties with the Company (other than any such failure resulting from the Executive's incapacity due to physical or mental illness or any such actual or anticipated failure after the issuance of a Notice of Termination for Good Reason by the Executive pursuant to Section 7.1 hereof) after a written demand for substantial performance is delivered to the Executive by the Board, which demand specifically identifies the manner in which the Board believes that the Executive has not substantially performed the Executive's duties, or (ii) the willful engaging by the Executive in conduct which is demonstrably and materially injurious to the Company or its subsidiaries, monetarily or otherwise. For purposes of clauses (i) and (ii) of this definition, (x) no act, or failure to act, on the Executive's part shall be deemed "willful" unless done, or omitted to be done, by the Executive not in good faith and without reasonable belief that the Executive's act, or failure to act, was in the best interest of the Company and (y) in the event of a dispute concerning the application of this provision, no claim by the Company that Cause exists shall be given effect unless the Company establishes to the Committee by clear and convincing evidence that Cause exists. (G) A "Change in Control" shall be deemed to have occurred if the event set forth in any one of the following paragraphs shall have occurred: (I) any Person is or becomes the Beneficial Owner, directly or indirectly, of securities of the Company (not including in the securities beneficially owned by such Person any securities acquired directly from the Company or its affiliates) representing 20% or more of the combined voting power of the Company's then outstanding securities, excluding any Person who becomes such a Beneficial Owner in connection with a transaction described in clause (i) of paragraph (III) below; or (II) the following individuals cease for any reason to constitute a majority of the number of directors then serving: individuals who, on the date hereof, constitute the Board and any new director (other than a director whose initial assumption of office is in connection with an actual or threatened election contest relating to the election of directors of the Company) whose appointment or election by the Board or nomination for election by the Company's stockholders was approved or recommended by a vote of at least two-thirds (2/3) of the directors then still in office who either were directors on the date hereof or whose appointment, election or nomination for election was previously so approved or recommended; or (III) there is consummated a merger or consolidation of the Company or any direct or indirect subsidiary of the Company with any other corporation, other than (i) a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior to such merger or consolidation continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity or any parent thereof), in combination with the ownership of any trustee or other fiduciary holding securities under an employee benefit plan of the Company or any subsidiary of the Company, at least 65% of the combined voting power of the securities of the Company or such surviving entity or any parent thereof outstanding immediately after such merger or consolidation, or (ii) a merger or consolidation effected to implement a recapitalization of the Company (or similar transaction) in which no Person is or becomes the Beneficial Owner, directly or indirectly, of securities of the Company (not including in the securities Beneficially Owned by such Person any securities acquired directly from the 10 Company or its Affiliates other than in connection with the acquisition by the Company or its Affiliates of a business) representing 20% or more of the combined voting power of the Company's then outstanding securities; or (IV) the stockholders of the Company approve a plan of complete liquidation or dissolution of the Company or there is consummated an agreement for the sale or disposition by the Company of all or substantially all of the Company's assets, other than a sale or disposition by the Company of all or substantially all of the Company's assets to an entity, at least 65% of the combined voting power of the voting securities of which are owned by stockholders of the Company in substantially the same proportions as their ownership of the Company immediately prior to such sale. Notwithstanding the foregoing, a "Change in Control" shall not be deemed to have occurred by virtue of the consummation of any transaction or series of integrated transactions immediately following which the record holders of the common stock of the Company immediately prior to such transaction or series of transactions continue to have substantially the same proportionate ownership in an entity which owns all or substantially all of the assets of the Company immediately following such transaction or series of transactions. (H) "Code" shall mean the Internal Revenue Code of 1986, as amended from time to time. (I) "Committee" shall mean (i) the individuals (not fewer than three in number) who, on the date six months before a Change in Control, constitute the Compensation Committee of the Board, plus (ii) in the event that fewer than three individuals are available from the group specified in clause (i) above for any reason, such individuals as may be appointed by the individual or individuals so available (including for this purpose any individual or individuals previously so appointed under this clause (ii)); provided, however, that the maximum number of individuals constituting the Committee shall not exceed six (6). (J) "Company" shall mean Baker Hughes Incorporated and, except in determining under Section 15(G) hereof whether or not any Change in Control of the Company has occurred, shall include any successor to its business and/or assets which assumes and agrees to perform this Agreement by operation of law, or otherwise. (K) "Date of Termination" shall have the meaning set forth in Section 7.2 hereof. (L) "Disability" shall be deemed the reason for the termination by the Company of the Executive's employment, if, as a result of the Executive's incapacity due to physical or mental illness, the Executive shall have been absent from the full-time performance of the Executive's duties with the Company for a period of six (6) consecutive months, the Company shall have given the Executive a Notice of Termination for Disability, and, within thirty (30) days after such Notice of Termination is given, the Executive shall not have returned to the full-time performance of the Executive's duties. (M) "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended from time to time. (N) "Excise Tax" shall mean any excise tax imposed under section 4999 of the Code. (O) "Executive" shall mean the individual named in the first paragraph of this Agreement. (P) "Extension Date" shall have the meaning set forth in Section 2 hereof. 11 (Q) "Good Reason" for termination by the Executive of the Executive's employment shall mean the occurrence (without the Executive's express written consent) after any Change in Control, or prior to a Change in Control under the circumstances described in clauses (ii) and (iii) of the second sentence of Section 6.1 hereof (treating all references in paragraphs (I) through (VII) below to a "Change in Control" as references to a "Potential Change in Control"), of any one of the following acts by the Company, or failures by the Company to act, unless, in the case of any act or failure to act described in paragraph (I), (V), (VI) or (VII) below, such act or failure to act is corrected prior to the Date of Termination specified in the Notice of Termination given in respect thereof: (I) the assignment to the Executive of any duties inconsistent with the Executive's status as a senior executive officer of the Company or a substantial adverse alteration in the nature or status of the Executive's responsibilities from those in effect immediately prior to the Change in Control; (II) a reduction by the Company in the Executive's annual base salary as in effect on the date hereof or as the same may be increased from time to time except for across-the-board salary reductions similarly affecting all senior executives of the Company and all senior executives of any Person in control of the Company; (III) the relocation of the Executive's principal place of employment to a location more than 50 miles from the Executive's principal place of employment immediately prior to the Change in Control or the Company's requiring the Executive to be based anywhere other than such principal place of employment (or permitted relocation thereof) except for required travel on the Company's business to an extent substantially consistent with the Executive's present business travel obligations; (IV) the failure by the Company to pay to the Executive any portion of the Executive's current compensation except pursuant to an across-the-board compensation deferral similarly affecting all senior executives of the Company and all senior executives of any Person in control of the Company, or to pay to the Executive any portion of an installment of deferred compensation under any deferred compensation program of the Company, within seven (7) days of the date such compensation is due; (V) the failure by the Company to continue in effect any compensation plan in which the Executive participates immediately prior to the Change in Control which is material to the Executive's total compensation, including but not limited to the Company's 1993 Stock Option Plan, 1993 Employee Stock Bonus Plan, 1991 Employee Stock Bonus Plan, 1995 Stock Award Plan (and the 1995, 1996 and 1997 Stock Matching Programs thereunder and any subsequent Stock Matching Programs in which the Executive participates), 1987 Convertible Debenture Plan and 1995 Employee Annual Incentive Compensation Plan or any substitute plans adopted prior to the Change in Control, unless an equitable arrangement (embodied in an ongoing substitute or alternative plan) has been made with respect to such plan, or the failure by the Company to continue the Executive's participation therein (or in such substitute or alternative plan) on a basis not materially less favorable, both in terms of the amount or timing of payment of benefits provided and the level of the Executive's participation relative to other participants, as existed immediately prior to the Change in Control; (VI) the failure by the Company to continue to provide the Executive with 12 benefits substantially similar to those enjoyed by the Executive under any of the Company's pension, savings, life insurance, medical, health and accident, or disability plans in which the Executive was participating immediately prior to the Change in Control (except for across the board changes similarly affecting all senior executives of the Company and all senior executives of any Person in control of the Company), the taking of any other action by the Company which would directly or indirectly materially reduce any of such benefits or deprive the Executive of any material fringe benefit or perquisite enjoyed by the Executive at the time of the Change in Control, or the failure by the Company to provide the Executive with the number of paid vacation days to which the Executive is entitled on the basis of years of service with the Company in accordance with the Company's normal vacation policy in effect at the time of the Change in Control; or (VII) any purported termination of the Executive's employment which is not effected pursuant to a Notice of Termination satisfying the requirements of Section 7.1 hereof; for purposes of this Agreement, no such purported termination shall be effective. The Executive's right to terminate the Executive's employment for Good Reason shall not be affected by the Executive's incapacity due to physical or mental illness. The Executive's continued employment shall not constitute consent to, or a waiver of rights with respect to, any act or failure to act constituting Good Reason hereunder. For purposes of any determination regarding the existence of Good Reason, any claim by the Executive that Good Reason exists shall be presumed to be correct unless the Company establishes to the Committee by clear and convincing evidence that Good Reason does not exist. (R) "Gross-Up Payment" shall have the meaning set forth in Section 6.2 hereof. (S) "Notice of Termination" shall have the meaning set forth in Section 7.1 hereof. (T) "Person" shall have the meaning given in Section 3(a)(9) of the Exchange Act, as modified and used in Sections 13(d) and 14(d) thereof, except that such term shall not include (i) the Company or any of its subsidiaries, (ii) a trustee or other fiduciary holding securities under an employee benefit plan of the Company or any of its Affiliates, (iii) an underwriter temporarily holding securities pursuant to an offering of such securities, or (iv) a corporation owned, directly or indirectly, by the stockholders of the Company in substantially the same proportions as their ownership of stock of the Company. (U) "Potential Change in Control" shall be deemed to have occurred if the event set forth in any one of the following paragraphs shall have occurred: (I) the Company enters into an agreement, the consummation of which would result in the occurrence of a Change in Control; (II) the Company or any Person publicly announces an intention to take or to consider taking actions which, if consummated, would constitute a Change in Control; (III) any Person becomes the Beneficial Owner, directly or indirectly, of securities of the Company representing 15% or more of either the then outstanding shares of common stock of the Company or the combined voting power of the Company's then outstanding securities (not including in the securities beneficially owned by such Person 13 any securities acquired directly from the Company or its affiliates); or (IV) the Board adopts a resolution to the effect that, for purposes of this Agreement, a Potential Change in Control has occurred. (V) "Retirement" shall, for purposes of Section 4 hereof, be deemed the reason for the termination by the Executive of the Executive's employment if such employment is terminated after completion of ten (10) years of service with the Company and attainment of age fifty-five (55). (W) "Severance Payments" shall have the meaning set forth in Section 6.1 hereof. (X) "SRP" shall have the meaning set forth in Section 6.1 hereof. (Y) "Tax Counsel" shall have the meaning set forth in Section 6.2 hereof. (Z) "Term" shall mean the period of time described in Section 2 hereof (including any extension, continuation or termination described therein). (AA) "Thrift Plan" shall have the meaning set forth in Section 6.1 hereof. (BB) "Total Payments" shall mean those payments so described in Section 6.2 hereof. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date above first written. BAKER HUGHES INCORPORATED By: /s/ John F. Maher -------------------------------------- Name: John F. Maher Title: Chairman - Compensation Committee of the Board of Directors EXECUTIVE /s/ Edwin C. Howell ----------------------------------------- Edwin C. Howell Address: ----------------------------------------- ----------------------------------------- (Please print carefully) 14 AMENDMENT 1 TO SEVERANCE AGREEMENT This Amendment 1 to Severance Agreement ("Amendment 1") is made and entered into effective November 11, 1998, by and between BAKER HUGHES INCORPORATED, A Delaware corporation (the "Company") and EDWIN C. HOWELL (the "Executive"). WHEREAS, the Company and the Executive desire to make certain changes to that certain Severance Agreement dated as of July 23, 1997, by and between the Company and the Executive (the "Severance Agreement"), to take into account the recent Change in Control (as defined in the Severance Agreement) involving Western Atlas Inc.; NOW, THEREFORE, in consideration of the premises and the mutual agreements contained herein, the Company and the Executive hereby agree as follows: Term. The following shall be added to the end of Paragraph 2 of the Severance Agreement: "; and further provided however, that solely with respect to any rights or claims of the Executive in connection with the Change in Control brought about by the merger with Western Atlas, Inc. which occurred on August 10, 1998, the Term shall be deemed to expire on September 1, 2000, but for all other purposes and other events of Change in Control which may occur subsequent to August 10, 1998, this proviso shall have no force or effect." All capitalized terms in this Amendment 1 shall have the definition ascribed to those terms in the Severance Agreement. The Severance Agreement continues in full force and effect, except as amended hereby. This Amendment 1 may be executed in several counterparts, each of which shall be deemed to be an original but all of which together will constitute one and the same instrument. EXECUTED effective the day and year first written above. Company: Baker Hughes Incorporated By: /s/ John F. Maher ------------------------------ John F. Maher Chairman-Compensation Committee Of the Board of Directors Executive: /s/ Edwin C. Howell --------------------------------- Edwin C. Howell 15 EX-10.40 9 h94456ex10-40.txt SEVERANCE AGREEMENT - DOUGLAS J WALL EXHIBIT 10.40 SEVERANCE AGREEMENT THIS AGREEMENT, dated as of December 3, 1997, is made by and between BAKER HUGHES INCORPORATED, a Delaware corporation (the "Company"), and DOUGLAS J. WALL (the "Executive"). WHEREAS, the Company considers it essential to the best interests of its stockholders to foster the continued employment of key management personnel; and WHEREAS, the Board recognizes that, as is the case with many publicly held corporations, the possibility of a Change in Control exists and that such possibility, and the uncertainty and questions which it may raise among management, may result in the departure or distraction of management personnel to the detriment of the Company and its stockholders; and WHEREAS, the Board has determined that appropriate steps should be taken to reinforce and encourage the continued attention and dedication of members of the Company's management, including the Executive, to their assigned duties without distraction in the face of potentially disturbing circumstances arising from the possibility of a Change in Control; NOW, THEREFORE, in consideration of the premises and the mutual covenants herein contained, the Company and the Executive hereby agree as follows: 1. Defined Terms. The definitions of capitalized terms used in this Agreement are provided in the last Section hereof. 2. Term of Agreement. Subject to the provisions of Section 12.2 hereof, the Term of this Agreement shall commence on the date hereof and shall continue in effect through December 31, 1999; provided, however, that commencing on January 1, 1998 and each January 1 thereafter (an "Extension Date"), the Term shall automatically be extended for one additional year (i.e., resulting in a two-year Term on the Extension Date) unless, not later than September 30 of the year preceding the Extension Date, the Company or the Executive shall have given notice not to extend the Term; and further provided, however, that if a Change in Control shall have occurred during the Term, the Term shall expire no earlier than twenty-four (24) months beyond the month in which such Change in Control occurred. 3. Company's Covenants Summarized. In order to induce the Executive to remain in the employ of the Company and in consideration of the Executive's covenants set forth in Section 4 hereof, the Company agrees, under the conditions described herein, to pay the Executive the Severance Payments and the other payments and benefits described herein. Except as provided in Section 9.1 hereof, no Severance Payments shall be payable under this Agreement unless there shall have been (or, under the terms of the second sentence of Section 6.1 hereof, there shall be deemed to have been) a termination of the Executive's employment with the Company following a Change in Control and during the Term. This Agreement shall not be construed as creating an express or implied contract of employment and, except as otherwise agreed in writing between the Executive and the Company, the Executive shall not have any right to be retained in the employ of the Company. 1 4. The Executive's Covenants. The Executive agrees that, subject to the terms and conditions of this Agreement, in the event of a Potential Change in Control during the Term, the Executive will remain in the employ of the Company until the earliest of (i) a date which is six (6) months from the date of such Potential Change of Control, (ii) the date of a Change in Control, (iii) the date of termination by the Executive of the Executive's employment for Good Reason or by reason of death, Disability or Retirement, or (iv) the termination by the Company of the Executive's employment for any reason. 5. Compensation Other Than Severance Payments. 5.1 Following a Change in Control and during the Term, during any period that the Executive fails to perform the Executive's full-time duties with the Company as a result of incapacity due to physical or mental illness, the Company shall pay the Executive's full salary to the Executive at the rate in effect at the commencement of any such period, together with all compensation and benefits payable to the Executive under the terms of any compensation or benefit plan, program or arrangement maintained by the Company during such period, until the Executive's employment is terminated by the Company for Disability. 5.2 If the Executive's employment shall be terminated for any reason following a Change in Control and during the Term, the Company shall pay the Executive's full salary to the Executive through the Date of Termination at the rate in effect immediately prior to the Date of Termination or, if higher, the rate in effect immediately prior to the first occurrence of an event or circumstance constituting Good Reason, together with all compensation and benefits payable to the Executive through the Date of Termination under the terms of the Company's compensation and benefit plans, programs or arrangements as in effect immediately prior to the Date of Termination or, if more favorable to the Executive, as in effect immediately prior to the first occurrence of an event or circumstance constituting Good Reason. 5.3 If the Executive's employment shall be terminated for any reason following a Change in Control and during the Term, the Company shall pay to the Executive the Executive's normal post-termination compensation and benefits as such payments become due. Such post-termination compensation and benefits shall be determined under, and paid in accordance with, the Company's retirement, insurance and other compensation or benefit plans, programs and arrangements as in effect immediately prior to the Date of Termination or, if more favorable to the Executive, as in effect immediately prior to the occurrence of the first event or circumstance constituting Good Reason. 5.4 Upon the occurrence of a Change in Control all options to acquire shares of Company stock, all shares of restricted Company stock and all other equity or phantom equity incentives held by the Executive under any plan of the Company (including, but not limited to, the Company's 1995 Stock Award Plan (and the Stock Matching Programs thereunder), 1993 Stock Option Plan, 1993 Stock Bonus Plan and 1991 Stock Bonus Plan) shall become immediately vested, exercisable and nonforfeitable and all conditions thereof (including, but not limited to, any required holding periods) shall be deemed to have been satisfied. 6. Severance Payments. 6.1 If the Executive's employment is terminated following a Change in Control and during the Term, other than (A) by the Company for Cause, (B) by reason of death or Disability, or (C) by the Executive without Good Reason, then, the Company shall pay the Executive the amounts, and provide the Executive the benefits, described in this Section 6.1 ("Severance Payments") and Section 6.2, in addition to any payments and benefits to which the Executive is entitled under Section 5 hereof. For purposes of this 2 Agreement, the Executive's employment shall be deemed to have been terminated following a Change in Control by the Company without Cause or by the Executive with Good Reason, if (i) the Executive's employment is terminated by the Company without Cause prior to a Change in Control (whether or not a Change in Control ever occurs) and such termination was at the request or direction of a Person who has entered into an agreement with the Company the consummation of which would constitute a Change in Control, (ii) the Executive terminates his employment for Good Reason prior to a Change in Control (whether or not a Change in Control ever occurs) and the circumstance or event which constitutes Good Reason occurs at the request or direction of such Person described in clause (i), or (iii) the Executive's employment is terminated by the Company without Cause or by the Executive for Good Reason and such termination or the circumstance or event which constitutes Good Reason is otherwise in connection with or in anticipation of a Change in Control (whether or not a Change in Control ever occurs). For purposes of any determination regarding the applicability of the immediately preceding sentence, any position taken by the Executive shall be presumed to be correct unless the Company establishes to the Committee by clear and convincing evidence that such position is not correct. (A) In lieu of any further salary payments to the Executive for periods subsequent to the Date of Termination and in lieu of any severance benefit otherwise payable to the Executive, the Company shall pay to the Executive a lump sum severance payment, in cash, equal to three times the sum of (i) the Executive's base salary as in effect immediately prior to the Date of Termination or, if higher, in effect immediately prior to the first occurrence of an event or circumstance constituting Good Reason, and (ii) the average annual bonus earned by the Executive pursuant to any annual bonus or incentive plan maintained by the Company in respect of the three fiscal years ending immediately prior to the fiscal year in which occurs the Date of Termination or, if higher, immediately prior to the fiscal year in which occurs the first event or circumstance constituting Good Reason; provided, that if the Executive has not participated in an annual bonus or incentive plan maintained by the Company for the entirety of such three-year period, the amount referred to in this clause (ii) shall be calculated using such lesser number of bonuses as have been actually earned by the Executive in respect of such lesser period. (B) For the thirty-six (36) month period immediately following the Date of Termination, the Company shall arrange to provide the Executive and his dependents life, disability, accident and health insurance benefits and perquisites (including, but not limited to, executive life insurance, club memberships, financial planning and tax preparation, annual physical examination and charitable contributions), in each case, substantially similar to those provided to the Executive and his dependents immediately prior to the Date of Termination or, if more favorable to the Executive, those provided to the Executive and his dependents immediately prior to the first occurrence of an event or circumstance constituting Good Reason, at no greater cost to the Executive than the cost to the Executive immediately prior to such date or occurrence; provided, however, that, unless the Executive consents to a different method (after taking into account the effect of such method on the calculation of "parachute payments" pursuant to Section 6.2 hereof), such health insurance benefits shall be provided through a third-party insurer. Benefits otherwise receivable by the Executive pursuant to this Section 6.1(B) shall be reduced to the extent benefits of the same type are received by or made available to the Executive during the thirty-six (36) month period following the Executive's termination of employment (and any such benefits received by or made available to the Executive shall be reported to the Company by the Executive); provided, however, that the Company shall reimburse the Executive for the excess, if any, of the cost of such benefits to the Executive over such cost immediately prior to the Date of Termination or, if more favorable to the Executive, the first occurrence of an event or circumstance constituting Good Reason. 3 (C) Notwithstanding any provision of the Baker Hughes Incorporated 1995 Employee Annual Incentive Compensation Plan (the "Annual Incentive Plan"), the Company shall pay to the Executive a lump sum amount, in cash, equal to the sum of (i) any unpaid incentive compensation which has been allocated or awarded to the Executive for a completed fiscal year or other measuring period preceding the Date of Termination under the Annual Incentive Plan and which, as of the Date of Termination, is contingent only upon the continued employment of the Executive to a subsequent date, and (ii) a pro rata portion to the Date of Termination of the aggregate value of all contingent incentive compensation awards to the Executive for all then uncompleted periods under the Annual Incentive Plan, calculated as to each such award by multiplying the award that the Executive would have earned on the last day of the performance award period, assuming the achievement, at the expected value target level, of the individual and corporate performance goals established with respect to such award, by the fraction obtained by dividing the number of full months and any fractional portion of a month during such performance award period through the Date of Termination by the total number of months contained in such performance award period; provided, however, that if such termination of employment occurs during the same year in which the Change in control occurs, the pro-rata bonus payment referred to in clause (ii) above shall be offset by any payments received under the Annual Incentive Plan in connection with such Change in Control. (D) In addition to the retirement benefits to which the Executive is entitled under the Company's Thrift Plan (the "Thrift Plan") and the Company's Supplemental Retirement Plan (the "SRP"), the Company shall pay the Executive a lump sum amount, in cash, equal to the present value of the employer-provided contributions, deferrals and allocations the Executive would have received had he continued to participate, after the Date of Termination, in the Thrift Plan and the SRP for three (3) additional years, assuming for this purpose that (i) the Executive earned compensation for purposes of the Thrift Plan and SRP during such three-year period the amount used to calculate the Executive's severance payment under subparagraph (A) of this Section 6.1, and (ii) the percentages of contributions, deferrals and allocations made under the Thrift Plan and the SRP by or on behalf of the Executive during such three-year period are the same percentages of contributions, deferrals and allocations in effect on the date of the Change in Control or the Date of Termination, whichever is more favorable to the Executive. (E) If the Executive would have become entitled to benefits under the Company's post-retirement health care or life insurance plans, as in effect immediately prior to the Date of Termination or, if more favorable to the Executive, as in effect immediately prior to the first occurrence of an event or circumstance constituting Good Reason, had the Executive's employment terminated at any time during the period of thirty-six (36) months after the Date of Termination, the Company shall provide such post-retirement health care or life insurance benefits to the Executive and the Executive's dependents commencing on the later of (i) the date on which such coverage would have first become available and (ii) the date on which benefits described in subsection (B) of this Section 6.1 terminate. (F) The Company shall provide the Executive with outplacement services suitable to the Executive's position for a period of three years or, if earlier, until the first acceptance by the Executive of an offer of employment. 6.2 (A) Whether or not the Executive becomes entitled to the Severance Payments, if any of the payments or benefits received or to be received by the Executive in connection with a Change in Control or the Executive's termination of employment (whether pursuant to the terms of this Agreement or any other plan, arrangement or agreement with the Company, any Person whose actions result in a 4 Change in Control or any Person affiliated with the Company or such Person) (such payments or benefits, excluding the Gross-Up Payment, being hereinafter referred to as the "Total Payments") will be subject to the Excise Tax, the Company shall pay to the Executive an additional amount (the "Gross-Up Payment") such that the net amount retained by the Executive, after deduction of any Excise Tax on the Total Payments and any federal, state and local income and employment taxes and Excise Tax upon the Gross-Up Payment, shall be equal to the Total Payments. (B) For purposes of determining whether any of the Total Payments will be subject to the Excise Tax and the amount of such Excise Tax, (i) all of the Total Payments shall be treated as "parachute payments" (within the meaning of section 280G(b)(2) of the Code) unless, in the opinion of tax counsel ("Tax Counsel") reasonably acceptable to the Executive and selected by the accounting firm which was, immediately prior to the Change in Control, the Company's independent auditor (the "Auditor"), such payments or benefits (in whole or in part) do not constitute parachute payments, including by reason of section 280G(b)(4)(A) of the Code, (ii) all "excess parachute payments" within the meaning of section 280G(b)(l) of the Code shall be treated as subject to the Excise Tax unless, in the opinion of Tax Counsel, such excess parachute payments (in whole or in part) represent reasonable compensation for services actually rendered (within the meaning of section 280G(b)(4)(B) of the Code) in excess of the Base Amount allocable to such reasonable compensation, or are otherwise not subject to the Excise Tax, and (iii) the value of any noncash benefits or any deferred payment or benefit shall be determined by the Auditor in accordance with the principles of sections 280G(d)(3) and (4) of the Code. For purposes of determining the amount of the Gross-Up Payment, the Executive shall be deemed to pay federal income tax at the highest marginal rate of federal income taxation in the calendar year in which the Gross-Up Payment is to be made and state and local income taxes at the highest marginal rate of taxation in the state and locality of the Executive's residence on the Date of Termination (or if there is no Date of Termination, then the date on which the Gross-Up Payment is calculated for purposes of this Section 6.2), net of the maximum reduction in federal income taxes which could be obtained from deduction of such state and local taxes. (C) In the event that the Excise Tax is finally determined to be less than the amount taken into account hereunder in calculating the Gross-Up Payment, the Executive shall repay to the Company, within five (5) business days following the time that the amount of such reduction in the Excise Tax is finally determined, the portion of the Gross-Up Payment attributable to such reduction (plus that portion of the Gross-Up Payment attributable to the Excise Tax and federal, state and local income and employment taxes imposed on the Gross-Up Payment being repaid by the Executive, to the extent that such repayment results in a reduction in the Excise Tax and a dollar-for-dollar reduction in the Executive's taxable income and wages for purposes of federal, state and local income and employment taxes, plus interest on the amount of such repayment at 120% of the rate provided in section 1274(b)(2)(B) of the Code. In the event that the Excise Tax is determined to exceed the amount taken into account hereunder in calculating the Gross-Up Payment (including by reason of any payment the existence or amount of which cannot be determined at the time of the Gross-Up Payment), the Company shall make an additional Gross-Up Payment in respect of such excess (plus any interest, penalties or additions payable by the Executive with respect to such excess) within five (5) business days following the time that the amount of such excess is finally determined. The Executive and the Company shall each reasonably cooperate with the other in connection with any administrative or judicial proceedings concerning the existence or amount of liability for Excise Tax with respect to the Total Payments. 6.3 The payments provided in subsections (A), (C) and (D) of Section 6.1 hereof and in Section 6.2 hereof shall be made not later than the fifth day following the Date of Termination; provided, however, that if the amounts of such payments cannot be finally determined on or before such day, the Company shall pay to the Executive on such day an estimate, as determined in good faith by the Executive or, in the case of payments under Section 6.2 hereof, in accordance with Section 6.2 hereof, of the minimum 5 amount of such payments to which the Executive is clearly entitled and shall pay the remainder of such payments (together with interest on the unpaid remainder (or on all such payments to the extent the Company fails to make such payments when due) at 120% of the rate provided in section 1274(b)(2)(B) of the Code) as soon as the amount thereof can be determined but in no event later than the thirtieth (30th) day after the Date of Termination. In the event that the amount of the estimated payments exceeds the amount subsequently determined to have been due, such excess shall constitute a loan by the Company to the Executive, payable on the fifth (5th) business day after demand by the Company (together with interest at 120% of the rate provided in section 1274(b)(2)(B) of the Code), but only to the extent such amount has not been paid by the Executive pursuant to Section 6.2(C) above. At the time that payments are made under this Agreement, the Company shall provide the Executive with a written statement setting forth the manner in which such payments were calculated and the basis for such calculations including, without limitation, any opinions or other advice the Company has received from Tax Counsel, the Auditor or other advisors or consultants (and any such opinions or advice which are in writing shall be attached to the statement). 6.4 The Company also shall pay to the Executive all legal fees and expenses incurred by the Executive in disputing in good faith any issue hereunder relating to the termination of the Executive's employment, in seeking in good faith to obtain or enforce any benefit or right provided by this Agreement or in connection with any tax audit or proceeding to the extent attributable to the application of section 4999 of the Code to any payment or benefit provided hereunder. Such payments shall be made within five (5) business days after delivery of the Executive's written requests for payment accompanied with such evidence of fees and expenses incurred as the Company reasonably may require. 7. Termination Procedures and Compensation During Dispute. 7.1 Notice of Termination. After a Change in Control and during the Term, any purported termination of the Executive's employment (other than by reason of death) shall be communicated by written Notice of Termination from one party hereto to the other party hereto in accordance with Section 10 hereof. For purposes of this Agreement, a "Notice of Termination" shall mean a notice which shall indicate the specific termination provision in this Agreement relied upon and shall set forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of the Executive's employment under the provision so indicated. Further, a Notice of Termination for Cause is required to include a copy of a resolution duly adopted by the affirmative vote of not less than three-quarters (3/4) of the entire membership of the Board at a meeting of the Board which was called and held for the purpose of considering such termination (after reasonable notice to the Executive and an opportunity for the Executive, together with the Executive's counsel, to be heard before the Board) finding that, in the good faith opinion of the Board, the Executive was guilty of conduct set forth in clause (i) or (ii) of the definition of Cause herein, and specifying the particulars thereof in detail. 7.2 Date of Termination. "Date of Termination," with respect to any purported termination of the Executive's employment after a Change in Control and during the Term, shall mean (i) if the Executive's employment is terminated for Disability, thirty (30) days after Notice of Termination is given (provided that the Executive shall not have returned to the full-time performance of the Executive's duties during such thirty (30) day period), and (ii) if the Executive's employment is terminated for any other reason, the date specified in the Notice of Termination (which, in the case of a termination by the Company, shall not be less than thirty (30) days (except in the case of a termination for Cause) and, in the case of a termination by the Executive, shall not be less than fifteen (15) days nor more than sixty (60) days, respectively, from the date such Notice of Termination is given). 7.3 Dispute Concerning Termination. If within fifteen (15) days after any Notice of Termination is given, or, if later, prior to the Date of Termination (as determined without regard to this 6 Section 7.3), the party receiving such Notice of Termination notifies the other party that a dispute exists concerning the termination, the Date of Termination shall be extended until the earlier of (i) the date on which the Term ends or (ii) the date on which the dispute is finally resolved, either by mutual written agreement of the parties or by a final judgment, order or decree of an arbitrator or a court of competent jurisdiction (which is not appealable or with respect to which the time for appeal therefrom has expired and no appeal has been perfected); provided, however, that the Date of Termination shall be extended by a notice of dispute given by the Executive only if such notice is given in good faith and the Executive pursues the resolution of such dispute with reasonable diligence. 7.4 Compensation During Dispute. If a purported termination occurs following a Change in Control and during the Term and the Date of Termination is extended in accordance with Section 7.3 hereof, the Company shall continue to pay the Executive the full compensation in effect when the notice giving rise to the dispute was given (including, but not limited to, salary) and continue the Executive as a participant in all compensation, benefit and insurance plans in which the Executive was participating when the notice giving rise to the dispute was given or those plans in which the Executive was participating immediately prior to the first occurrence of an event or circumstance giving rise to the Notice of Termination, if more favorable to the Executive, until the Date of Termination, as determined in accordance with Section 7.3 hereof. Amounts paid under this Section 7.4 are in addition to all other amounts due under this Agreement (other than those due under Section 5.2 hereof) and shall not be offset against or reduce any other amounts due under this Agreement. 8. No Mitigation. The Company agrees that, if the Executive's employment with the Company terminates during the Term, the Executive is not required to seek other employment or to attempt in any way to reduce any amounts payable to the Executive by the Company pursuant to Sections 5, 6 or 7.4 hereof. Further, the amount of any payment or benefit provided for in this Agreement (other than Section 6.1(B) hereof but including (but not limited to) Section 7.4 hereof) shall not be reduced by any compensation earned by the Executive as the result of employment by another employer, by retirement benefits, by offset against any amount claimed to be owed by the Executive to the Company, or otherwise. 9. Successors; Binding Agreement. 9.1 In addition to any obligations imposed by law upon any successor to the Company, the Company will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company to expressly assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place. Failure of the Company to obtain such assumption and agreement prior to the effectiveness of any such succession shall be a breach of this Agreement and shall entitle the Executive to compensation from the Company in the same amount and on the same terms as the Executive would be entitled to hereunder if the Executive were to terminate the Executive's employment for Good Reason after a Change in Control, except that, for purposes of implementing the foregoing, the date on which any such succession becomes effective shall be deemed the Date of Termination. 9.2 This Agreement shall inure to the benefit of and be enforceable by the Executive's personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. If the Executive shall die while any amount would still be payable to the Executive hereunder (other than amounts which, by their terms, terminate upon the death of the Executive) if the Executive had continued to live, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to the executors, personal representatives or administrators of the Executive's estate. 7 10. Notices. For the purpose of this Agreement, notices and all other communications provided for in the Agreement shall be in writing and shall be deemed to have been duly given when delivered or mailed by United States registered mail, return receipt requested, postage prepaid, addressed, if to the Executive, to the address inserted below the Executive's signature on the final page hereof and, if to the Company, to the address set forth below, or to such other address as either party may have furnished to the other in writing in accordance herewith, except that notice of change of address shall be effective only upon actual receipt: To the Company: 3900 Essex Lane Suite 210 Houston, Texas 77027 Attention: General Counsel 11. Miscellaneous. Except as otherwise specifically provided in Section 12.2 below, no provision of this Agreement may be modified, waived or discharged unless such waiver, modification or discharge is agreed to in writing and signed by the Executive and such officer as may be specifically designated by the Board. No waiver by either party hereto at any time of any breach by the other party hereto of, or of any lack of compliance with, any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. This Agreement supersedes any other agreements or representations, oral or otherwise, express or implied, with respect to the subject matter hereof which have been made by either party; provided, however, that this Agreement shall supersede any agreement setting forth the terms and conditions of the Executive's employment with the Company only in the event that the Executive's employment with the Company is terminated on or following a Change in Control, by the Company other than for Cause or by the Executive other than for Good Reason; and provided further that all agreements otherwise superseded by this Agreement will be automatically reinstated with full force and effect to the extent this Agreement is terminated or otherwise rendered inapplicable or amended in accordance with Section 12.2 hereof. The validity, interpretation, construction and performance of this Agreement shall be governed by the laws of the State of Texas. All references to sections of the Exchange Act or the Code shall be deemed also to refer to any successor provisions to such sections. Any payments provided for hereunder shall be paid net of any applicable withholding required under federal, state or local law and any additional withholding to which the Executive has agreed. The obligations of the Company and the Executive under this Agreement which by their nature may require either partial or total performance after the expiration of the Term (including, without limitation, those under Sections 6 and 7 hereof) shall survive such expiration. 12. Validity; Pooling. 12.1 Validity. The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement, which shall remain in full force and effect. 12.2 Pooling. In the event that (A) the Company is party to a transaction which is otherwise intended to qualify for "pooling of interests" accounting treatment, (B) such transaction constitutes a Change in Control within the meaning of Section 15(G)(III) and (C) individuals who satisfy the requirements in clauses (i) and (ii) below constitute more than two-thirds (2/3) of the number of directors of the entity surviving such transaction or any parent thereof, if any: individuals who (i) immediately prior to such transaction constitute the Board and (ii) on the date hereof constitute the Board and any new director (other than a director whose initial assumption of office is in connection with an actual or threatened 8 election contest relating to the election of directors of the Company) whose appointment or election by the Board or nomination for election by the Company's stockholders was approved or recommended, by a vote of at least two-thirds (2/3) of the directors then still in office who either were directors on the date hereof or whose appointment, election or nomination for election was previously so approved or recommended then (a) this Agreement shall, to the extent practicable, be interpreted so as to permit such accounting treatment, and (b) to the extent that the application of clause (a) of this Section 12.2 does not preserve the availability of such accounting treatment, then, to the extent that any provision or combination of provisions of the Agreement disqualifies the transaction as a "pooling" transaction (including, if applicable, the entire Agreement), the Board shall have the right, by sending written notice to the Executive prior to the Change in Control, to unilaterally amend (without the consent of the Executive) such provision or provisions if and to the extent necessary (including declaring such provision or provisions to be null and void as of the date hereof) so that such transaction may be accounted for as a "pooling of interests." All determinations under this Section 12.2 shall be made by the Board prior to the Change in Control, based upon the advice of the accounting firm whose opinion with respect to "pooling of interests" is required as a condition to the consummation of such transaction. 13. Counterparts. This Agreement may be executed in several counterparts, each of which shall be deemed to be an original but all of which together will constitute one and the same instrument. 14. Settlement of Disputes; Arbitration. 14.1 All claims by the Executive for benefits under this Agreement shall be directed to and determined by the Committee and shall be in writing. Any denial by the Committee of a claim for benefits under this Agreement shall be delivered to the Executive in writing within thirty (30) days after written notice of the claim is provided to the Company in accordance with Section 10 and shall set forth the specific reasons for the denial and the specific provisions of this Agreement relied upon. The Committee shall afford a reasonable opportunity to the Executive for a review of the decision denying a claim and shall further allow the Executive to appeal to the Committee a decision of the Committee within sixty (60) days after notification by the Committee that the Executive's claim has been denied. 14.2 Any further dispute or controversy arising under or in connection with this Agreement shall be settled exclusively by arbitration in Houston, Texas in accordance with the rules of the American Arbitration Association then in effect; provided, however, that the evidentiary standards set forth in this Agreement shall apply. Judgment may be entered on the arbitrator's award in any court having jurisdiction. Notwithstanding any provision of this Agreement to the contrary, the Executive shall be entitled to seek specific performance of the Executive's right to be paid until the Date of Termination during the pendency of any dispute or controversy arising under or in connection with this Agreement. 1. Definitions. For purposes of this Agreement, the following terms shall have the meanings indicated below: (A) "Affiliate" shall have the meaning set forth in Rule 12b-2 promulgated under Section 12 of the Exchange Act. (B) "Auditor" shall have the meaning set forth in Section 6.2 hereof. (C) "Base Amount" shall have the meaning set forth in section 280G(b)(3) of the Code. (D) "Beneficial Owner" shall have the meaning set forth in Rule 13d-3 under the Exchange Act. 9 (E) "Board" shall mean the Board of Directors of the Company. (F) "Cause" for termination by the Company of the Executive's employment shall mean (i) the willful and continued failure by the Executive to substantially perform the Executive's duties with the Company (other than any such failure resulting from the Executive's incapacity due to physical or mental illness or any such actual or anticipated failure after the issuance of a Notice of Termination for Good Reason by the Executive pursuant to Section 7.1 hereof) after a written demand for substantial performance is delivered to the Executive by the Board, which demand specifically identifies the manner in which the Board believes that the Executive has not substantially performed the Executive's duties, or (ii) the willful engaging by the Executive in conduct which is demonstrably and materially injurious to the Company or its subsidiaries, monetarily or otherwise. For purposes of clauses (i) and (ii) of this definition, (x) no act, or failure to act, on the Executive's part shall be deemed "willful" unless done, or omitted to be done, by the Executive not in good faith and without reasonable belief that the Executive's act, or failure to act, was in the best interest of the Company and (y) in the event of a dispute concerning the application of this provision, no claim by the Company that Cause exists shall be given effect unless the Company establishes to the Committee by clear and convincing evidence that Cause exists. (G) A "Change in Control" shall be deemed to have occurred if the event set forth in any one of the following paragraphs shall have occurred: (I) any Person is or becomes the Beneficial Owner, directly or indirectly, of securities of the Company (not including in the securities beneficially owned by such Person any securities acquired directly from the Company or its affiliates) representing 20% or more of the combined voting power of the Company's then outstanding securities, excluding any Person who becomes such a Beneficial Owner in connection with a transaction described in clause (i) of paragraph (III) below; or (II) the following individuals cease for any reason to constitute a majority of the number of directors then serving: individuals who, on the date hereof, constitute the Board and any new director (other than a director whose initial assumption of office is in connection with an actual or threatened election contest relating to the election of directors of the Company) whose appointment or election by the Board or nomination for election by the Company's stockholders was approved or recommended by a vote of at least two-thirds (2/3) of the directors then still in office who either were directors on the date hereof or whose appointment, election or nomination for election was previously so approved or recommended; or (III) there is consummated a merger or consolidation of the Company or any direct or indirect subsidiary of the Company with any other corporation, other than (i) a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior to such merger or consolidation continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity or any parent thereof), in combination with the ownership of any trustee or other fiduciary holding securities under an employee benefit plan of the Company or any subsidiary of the Company, at least 65% of the combined voting power of the securities of the Company or such surviving entity or any parent thereof outstanding immediately after such merger or consolidation, or (ii) a merger or consolidation effected to implement a recapitalization of the Company (or similar transaction) in which no Person is or becomes the Beneficial Owner, directly or indirectly, of securities of the Company (not including in the securities Beneficially Owned by such Person any securities acquired directly from the 10 Company or its Affiliates other than in connection with the acquisition by the Company or its Affiliates of a business) representing 20% or more of the combined voting power of the Company's then outstanding securities; or (IV) the stockholders of the Company approve a plan of complete liquidation or dissolution of the Company or there is consummated an agreement for the sale or disposition by the Company of all or substantially all of the Company's assets, other than a sale or disposition by the Company of all or substantially all of the Company's assets to an entity, at least 65% of the combined voting power of the voting securities of which are owned by stockholders of the Company in substantially the same proportions as their ownership of the Company immediately prior to such sale. Notwithstanding the foregoing, a "Change in Control" shall not be deemed to have occurred by virtue of the consummation of any transaction or series of integrated transactions immediately following which the record holders of the common stock of the Company immediately prior to such transaction or series of transactions continue to have substantially the same proportionate ownership in an entity which owns all or substantially all of the assets of the Company immediately following such transaction or series of transactions. (H) "Code" shall mean the Internal Revenue Code of 1986, as amended from time to time. (I) "Committee" shall mean (i) the individuals (not fewer than three in number) who, on the date six months before a Change in Control, constitute the Compensation Committee of the Board, plus (ii) in the event that fewer than three individuals are available from the group specified in clause (i) above for any reason, such individuals as may be appointed by the individual or individuals so available (including for this purpose any individual or individuals previously so appointed under this clause (ii)); provided, however, that the maximum number of individuals constituting the Committee shall not exceed six (6). (J) "Company" shall mean Baker Hughes Incorporated and, except in determining under Section 15(G) hereof whether or not any Change in Control of the Company has occurred, shall include any successor to its business and/or assets which assumes and agrees to perform this Agreement by operation of law, or otherwise. (K) "Date of Termination" shall have the meaning set forth in Section 7.2 hereof. (L) "Disability" shall be deemed the reason for the termination by the Company of the Executive's employment, if, as a result of the Executive's incapacity due to physical or mental illness, the Executive shall have been absent from the full-time performance of the Executive's duties with the Company for a period of six (6) consecutive months, the Company shall have given the Executive a Notice of Termination for Disability, and, within thirty (30) days after such Notice of Termination is given, the Executive shall not have returned to the full-time performance of the Executive's duties. (M) "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended from time to time. (N) "Excise Tax" shall mean any excise tax imposed under section 4999 of the Code. (O) "Executive" shall mean the individual named in the first paragraph of this Agreement. (P) "Extension Date" shall have the meaning set forth in Section 2 hereof. 11 (Q) "Good Reason" for termination by the Executive of the Executive's employment shall mean the occurrence (without the Executive's express written consent) after any Change in Control, or prior to a Change in Control under the circumstances described in clauses (ii) and (iii) of the second sentence of Section 6.1 hereof (treating all references in paragraphs (I) through (VII) below to a "Change in Control" as references to a "Potential Change in Control"), of any one of the following acts by the Company, or failures by the Company to act, unless, in the case of any act or failure to act described in paragraph (I), (V), (VI) or (VII) below, such act or failure to act is corrected prior to the Date of Termination specified in the Notice of Termination given in respect thereof: (I) the assignment to the Executive of any duties inconsistent with the Executive's status as a senior executive officer of the Company or a substantial adverse alteration in the nature or status of the Executive's responsibilities from those in effect immediately prior to the Change in Control; (II) a reduction by the Company in the Executive's annual base salary as in effect on the date hereof or as the same may be increased from time to time except for across-the-board salary reductions similarly affecting all senior executives of the Company and all senior executives of any Person in control of the Company; (III) the relocation of the Executive's principal place of employment to a location more than 50 miles from the Executive's principal place of employment immediately prior to the Change in Control or the Company's requiring the Executive to be based anywhere other than such principal place of employment (or permitted relocation thereof) except for required travel on the Company's business to an extent substantially consistent with the Executive's present business travel obligations; (IV) the failure by the Company to pay to the Executive any portion of the Executive's current compensation except pursuant to an across-the-board compensation deferral similarly affecting all senior executives of the Company and all senior executives of any Person in control of the Company, or to pay to the Executive any portion of an installment of deferred compensation under any deferred compensation program of the Company, within seven (7) days of the date such compensation is due; (V) the failure by the Company to continue in effect any compensation plan in which the Executive participates immediately prior to the Change in Control which is material to the Executive's total compensation, including but not limited to the Company's 1993 Stock Option Plan, 1993 Employee Stock Bonus Plan, 1991 Employee Stock Bonus Plan, 1995 Stock Award Plan (and the 1995, 1996 and 1997 Stock Matching Programs thereunder and any subsequent Stock Matching Programs in which the Executive participates), 1987 Convertible Debenture Plan and 1995 Employee Annual Incentive Compensation Plan or any substitute plans adopted prior to the Change in Control, unless an equitable arrangement (embodied in an ongoing substitute or alternative plan) has been made with respect to such plan, or the failure by the Company to continue the Executive's participation therein (or in such substitute or alternative plan) on a basis not materially less favorable, both in terms of the amount or timing of payment of benefits provided and the level of the Executive's participation relative to other participants, as existed immediately prior to the Change in Control; 12 (VI) the failure by the Company to continue to provide the Executive with benefits substantially similar to those enjoyed by the Executive under any of the Company's pension, savings, life insurance, medical, health and accident, or disability plans in which the Executive was participating immediately prior to the Change in Control (except for across the board changes similarly affecting all senior executives of the Company and all senior executives of any Person in control of the Company), the taking of any other action by the Company which would directly or indirectly materially reduce any of such benefits or deprive the Executive of any material fringe benefit or perquisite enjoyed by the Executive at the time of the Change in Control, or the failure by the Company to provide the Executive with the number of paid vacation days to which the Executive is entitled on the basis of years of service with the Company in accordance with the Company's normal vacation policy in effect at the time of the Change in Control; or (VII) any purported termination of the Executive's employment which is not effected pursuant to a Notice of Termination satisfying the requirements of Section 7.1 hereof; for purposes of this Agreement, no such purported termination shall be effective. The Executive's right to terminate the Executive's employment for Good Reason shall not be affected by the Executive's incapacity due to physical or mental illness. The Executive's continued employment shall not constitute consent to, or a waiver of rights with respect to, any act or failure to act constituting Good Reason hereunder. For purposes of any determination regarding the existence of Good Reason, any claim by the Executive that Good Reason exists shall be presumed to be correct unless the Company establishes to the Committee by clear and convincing evidence that Good Reason does not exist. (R) "Gross-Up Payment" shall have the meaning set forth in Section 6.2 hereof. (S) "Notice of Termination" shall have the meaning set forth in Section 7.1 hereof. (T) "Person" shall have the meaning given in Section 3(a)(9) of the Exchange Act, as modified and used in Sections 13(d) and 14(d) thereof, except that such term shall not include (i) the Company or any of its subsidiaries, (ii) a trustee or other fiduciary holding securities under an employee benefit plan of the Company or any of its Affiliates, (iii) an underwriter temporarily holding securities pursuant to an offering of such securities, or (iv) a corporation owned, directly or indirectly, by the stockholders of the Company in substantially the same proportions as their ownership of stock of the Company. (U) "Potential Change in Control" shall be deemed to have occurred if the event set forth in any one of the following paragraphs shall have occurred: (I) the Company enters into an agreement, the consummation of which would result in the occurrence of a Change in Control; (II) the Company or any Person publicly announces an intention to take or to consider taking actions which, if consummated, would constitute a Change in Control; (III) any Person becomes the Beneficial Owner, directly or indirectly, of securities of the Company representing 15% or more of either the then outstanding shares of common stock of the Company or the combined voting power of the Company's then outstanding securities (not including in the securities beneficially owned by such Person 13 any securities acquired directly from the Company or its affiliates); or (IV) the Board adopts a resolution to the effect that, for purposes of this Agreement, a Potential Change in Control has occurred. (V) "Retirement" shall, for purposes of Section 4 hereof, be deemed the reason for the termination by the Executive of the Executive's employment if such employment is terminated after completion of ten (10) years of service with the Company and attainment of age fifty-five (55). (W) "Severance Payments" shall have the meaning set forth in Section 6.1 hereof. (X) "SRP" shall have the meaning set forth in Section 6.1 hereof. (Y) "Tax Counsel" shall have the meaning set forth in Section 6.2 hereof. (Z) "Term" shall mean the period of time described in Section 2 hereof (including any extension, continuation or termination described therein). (AA) "Thrift Plan" shall have the meaning set forth in Section 6.1 hereof. (BB) "Total Payments" shall mean those payments so described in Section 6.2 hereof. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date above first written. BAKER HUGHES INCORPORATED By: /s/ John F. Maher --------------------------------- Name: John F. Maher Title: Chairman - Compensation Committee of the Board of Directors EXECUTIVE /s/ Douglas J. Wall ----------------------------------------- Douglas J. Wall Address: ----------------------------------------- ----------------------------------------- (Please print carefully) 14 AMENDMENT 1 TO SEVERANCE AGREEMENT This Amendment 1 to Severance Agreement ("Amendment 1") is made and entered into effective November 11, 1998, by and between BAKER HUGHES INCORPORATED, A Delaware corporation (the "Company") and DOUGLAS J. WALL (the "Executive"). WHEREAS, the Company and the Executive desire to make certain changes to that certain Severance Agreement dated as of December 3, 1997, by and between the Company and the Executive (the "Severance Agreement"), to take into account the recent Change in Control (as defined in the Severance Agreement) involving Western Atlas Inc.; NOW, THEREFORE, in consideration of the premises and the mutual agreements contained herein, the Company and the Executive hereby agree as follows: Term. The following shall be added to the end of Paragraph 2 of the Severance Agreement: "; and further provided however, that solely with respect to any rights or claims of the Executive in connection with the Change in Control brought about by the merger with Western Atlas, Inc. which occurred on August 10, 1998, the Term shall be deemed to expire on September 1, 2000, but for all other purposes and other events of Change in Control which may occur subsequent to August 10, 1998, this proviso shall have no force or effect." All capitalized terms in this Amendment 1 shall have the definition ascribed to those terms in the Severance Agreement. The Severance Agreement continues in full force and effect, except as amended hereby. This Amendment 1 may be executed in several counterparts, each of which shall be deemed to be an original but all of which together will constitute one and the same instrument. EXECUTED effective the day and year first written above. Company: Baker Hughes Incorporated By: /s/ John F. Maher ---------------------------------------- John F. Maher Chairman-Compensation Committee Of the Board of Directors Executive: /s/ Douglas J. Wall ------------------------------------------- Douglas J. Wall 15 EX-10.41 10 h94456ex10-41.txt FORM OF NONQUALIFIED STOCK OPTION AGMT - OFFICERS EXHIBIT 10.41 BAKER HUGHES INCORPORATED NONQUALIFIED STOCK OPTION AGREEMENT ((NAME)) ((SHARES)) Grantee Shares Granted Pursuant to action taken by the Compensation Committee of the Board of Directors of Baker Hughes Incorporated, a Delaware corporation (the "Company"), for the purposes of administration of the Baker Hughes Incorporated Long Term Incentive Plan, 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 $41.0625 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 24th day of January in each of the years 2002, 2003 and 2004, provided the Grantee remains employed by the Company or its subsidiaries. This option may not be exercised after January 24, 2011, (the "Expiration Date"). The following provisions will apply in the event of Grantee's termination of employment: 1. If Grantee's employment is terminated for any reason (other than 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 that occurs after the Date of Grant noted below), this option will wholly and completely terminate on the date of termination of employment, to the extent it is not then exercisable; however, to the extent the option is exercisable, Grantee shall have three months from the date of termination of employment to exercise the option (but in no event later than the Expiration Date). 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 a 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 the Expiration Date). 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 the Expiration Date). 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 the Expiration Date). 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 occurring on or after the Date of Grant noted below, the Grantee shall have two years from the date of termination of employment to exercise this option (but in no event later than the Expiration Date). In the event that the Company is party to a transaction which is otherwise intended to qualify for "pooling of interests" accounting treatment (i) the provisions of this option shall to the extent practicable, be interpreted so as to permit such accounting treatment, and (ii) to the extent that application of clause (i) of this sentence does not preserve the availability of such accounting treatment, then, to the extent that any of the provisions of this option disqualifies the transaction as a "pooling" transaction, the Board of Directors of the Company may amend any provisions of this option and/or declare this option null and void if and to the extent necessary (including declaring such provision or provisions to be null and void as of the date hereof) so that such transaction may be accounted for as a "pooling of interests." 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 24, 2001 BAKER HUGHES INCORPORATED ------------------------------------- G. S. FINLEY SENIOR VICE PRESIDENT EX-10.42 11 h94456ex10-42.txt FORM OF SEVERANCE AGREEMENT - JAMES R CLARK EXHIBIT 10.42 SEVERANCE AGREEMENT THIS AGREEMENT, dated as of March 1, 2001, is made by and between BAKER HUGHES INCORPORATED, a Delaware corporation (the "Company"), and. ____________________(the "Executive"). WHEREAS, the Company considers it essential to the best interests of its stockholders to foster the continued employment of key management personnel; and WHEREAS, the Board recognizes that, as is the case with many publicly held corporations, the possibility of a Change in Control exists and that such possibility, and the uncertainty and questions which it may raise among management, may result in the departure or distraction of management personnel to the detriment of the Company and its stockholders; and WHEREAS, the Board has determined that appropriate steps should be taken to reinforce and encourage the continued attention and dedication of members of the Company's management, including the Executive, to their assigned duties without distraction in the face of potentially disturbing circumstances arising from the possibility of a Change in Control; NOW, THEREFORE, in consideration of the premises and the mutual covenants herein contained, the Company and the Executive hereby agree as follows: 1. Defined Terms. The definitions of capitalized terms used in this Agreement are provided in the last Section hereof. 2. Term of Agreement. Subject to the provisions of Section 12.2 hereof, the Term of this Agreement shall commence on the date hereof and shall continue in effect through December 31st of the year following the year this Agreement was executed; provided, however, that commencing on the January 1st following the termination date and each January 1 thereafter (an "Extension Date"), the Term shall automatically be extended for one additional year (i.e., resulting in a two-year Term on the Extension Date) unless, not later than September 30 of the year preceding the Extension Date, the Company or the Executive shall have given notice not to extend the Term; and further provided, however, that if a Change in Control shall have occurred during the Term, the Term shall expire no earlier than twenty-four (24) months beyond the month in which such Change in Control occurred. 3. Company's Covenants Summarized. In order to induce the Executive to remain in the employ of the Company and in consideration of the Executive's covenants set forth in Section 4 hereof, the Company agrees, under the conditions described herein, to pay the Executive the Severance Payments and the other payments and benefits described herein. -1- Except as provided in Section 9.1 hereof, no Severance Payments shall be payable under this Agreement unless there shall have been (or, under the terms of the second sentence of Section 6.1 hereof, there shall be deemed to have been) a termination of the Executive's employment with the Company following a Change in Control and during the Term. This Agreement shall not be construed as creating an express or implied contract of employment and, except as otherwise agreed in writing between the Executive and the Company, the Executive shall not have any right to be retained in the employ of the Company. 4. The Executive's Covenants. The Executive agrees that, subject to the terms and conditions of this Agreement, in the event of a Potential Change in Control during the Term, the Executive will remain in the employ of the Company until the earliest of (i) a date which is six (6) months from the date of such Potential Change of Control, (ii) the date of a Change in Control, (iii) the date of termination by the Executive of the Executive's employment for Good Reason or by reason of death, Disability or Retirement, or (iv) the termination by the Company of the Executive's employment for any reason. 5. Compensation Other Than Severance Payments. 5.1 Following a Change in Control and during the Term, during any period that the Executive fails to perform the Executive's full-time duties with the Company as a result of incapacity due to physical or mental illness, the Company shall pay the Executive's full salary to the Executive at the rate in effect at the commencement of any such period, together with all compensation and benefits payable to the Executive under the terms of any compensation or benefit plan, program or arrangement maintained by the Company during such period, until the Executive's employment is terminated by the Company for Disability. 5.2 If the Executive's employment shall be terminated for any reason following a Change in Control and during the Term, the Company shall pay the Executive's full salary to the Executive through the Date of Termination at the rate in effect immediately prior to the Date of Termination or, if higher, the rate in effect immediately prior to the first occurrence of an event or circumstance constituting Good Reason, together with all compensation and benefits payable to the Executive through the Date of Termination under the terms of the Company's compensation and benefit plans, programs or arrangements as in effect immediately prior to the Date of Termination or, if more favorable to the Executive, as in effect immediately prior to the first occurrence of an event or circumstance constituting Good Reason. 5.3 If the Executive's employment shall be terminated for any reason following a Change in Control and during the Term, the Company shall pay to the Executive the Executive's normal post-termination compensation and benefits as such payments become due. Such post-termination compensation and benefits shall be determined under, and paid in accordance with, the Company's retirement, insurance and other compensation or benefit plans, programs and arrangements as in effect immediately prior to the Date of Termination or, if more favorable to the Executive, as in effect immediately prior to the occurrence of the first event or circumstance constituting Good Reason. -2- 5.4 Upon the occurrence of a Change in Control all options to acquire shares of Company stock, all shares of restricted Company stock and all other equity or phantom equity incentives held by the Executive under any plan of the Company (including, but not limited to, the Company's 1995 Stock Award Plan (and the Stock Matching Programs thereunder), 1993 Stock Option Plan, 1993 Stock Bonus Plan and 1991 Stock Bonus Plan) shall become immediately vested, exercisable and nonforfeitable and all conditions thereof (including, but not limited to, any required holding periods) shall be deemed to have been satisfied. 6. Severance Payments. 6.1 If the Executive's employment is terminated following a Change in Control and during the Term, other than (A) by the Company for Cause, (B) by reason of death or Disability, or (C) by the Executive without Good Reason, then, the Company shall pay the Executive the amounts, and provide the Executive the benefits, described in this Section 6.1 ("Severance Payments") and Section 6.2, in addition to any payments and benefits to which the Executive is entitled under Section 5 hereof. For purposes of this Agreement, the Executive's employment shall be deemed to have been terminated following a Change in Control by the Company without Cause or by the Executive with Good Reason, if (i) the Executive's employment is terminated by the Company without Cause prior to a Change in Control (whether or not a Change in Control ever occurs) and such termination was at the request or direction of a Person who has entered into an agreement with the Company the consummation of which would constitute a Change in Control, (ii) the Executive terminates his employment for Good Reason prior to a Change in Control (whether or not a Change in Control ever occurs) and the circumstance or event which constitutes Good Reason occurs at the request or direction of such Person described in clause (i), or (iii) the Executive's employment is terminated by the Company without Cause or by the Executive for Good Reason and such termination or the circumstance or event which constitutes Good Reason is otherwise in connection with or in anticipation of a Change in Control (whether or not a Change in Control ever occurs). For purposes of any determination regarding the applicability of the immediately preceding sentence, any position taken by the Executive shall be presumed to be correct unless the Company establishes to the Committee by clear and convincing evidence that such position is not correct. (A) In lieu of any further salary payments to the Executive for periods subsequent to the Date of Termination and in lieu of any severance benefit otherwise payable to the Executive, the Company shall pay to the Executive a lump sum severance payment, in cash, equal to three times the sum of (i) the Executive's base salary as in effect immediately prior to the Date of Termination or, if higher, in effect immediately prior to the first occurrence of an event or circumstance constituting Good Reason, and (ii) the average annual bonus earned by the Executive pursuant to any annual bonus or incentive plan maintained by the Company in respect -3- of the three fiscal years ending immediately prior to the fiscal year in which occurs the Date of Termination or, if higher, immediately prior to the fiscal year in which occurs the first event or circumstance constituting Good Reason; provided, that if the Executive has not participated in an annual bonus or incentive plan maintained by the Company for the entirety of such three-year period, the amount referred to in this clause (ii) shall be calculated using such lesser number of bonuses as have been actually earned by the Executive in respect of such lesser period. (B) For the thirty-six (36) month period immediately following the Date of Termination, the Company shall arrange to provide the Executive and his dependents life, disability, accident and health insurance benefits and perquisites (including, but not limited to, executive life insurance, club memberships, financial planning and tax preparation and annual physical examination), in each case, substantially similar to those provided to the Executive and his dependents immediately prior to the Date of Termination or, if more favorable to the Executive, those provided to the Executive and his dependents immediately prior to the first occurrence of an event or circumstance constituting Good Reason, at no greater cost to the Executive than the cost to the Executive immediately prior to such date or occurrence; provided, however, that, unless the Executive consents to a different method (after taking into account the effect of such method on the calculation of "parachute payments" pursuant to Section 6.2 hereof), such health insurance benefits shall be provided through a third-party insurer. Benefits otherwise receivable by the Executive pursuant to this Section 6.1(B) shall be reduced to the extent benefits of the same type are received by or made available to the Executive during the thirty-six (36) month period following the Executive's termination of employment (and any such benefits received by or made available to the Executive shall be reported to the Company by the Executive); provided, however, that the Company shall reimburse the Executive for the excess, if any, of the cost of such benefits to the Executive over such cost immediately prior to the Date of Termination or, if more favorable to the Executive, the first occurrence of an event or circumstance constituting Good Reason. (C) Notwithstanding any provision of the Baker Hughes Incorporated 1995 Employee Annual Incentive Compensation Plan (the "Annual Incentive Plan"), the Company shall pay to the Executive a lump sum amount, in cash, equal to the sum of (i) any unpaid incentive compensation which has been allocated or awarded to the Executive for a completed fiscal year or other measuring period preceding the Date of Termination under the Annual Incentive Plan and which, as of the Date of Termination, is contingent only upon the continued employment of the Executive to a subsequent date, and (ii) a pro rata portion to the Date of Termination of the aggregate value of all contingent incentive compensation awards to the Executive for all then uncompleted periods under the Annual Incentive Plan, calculated as to each such award by multiplying the award that the Executive would have earned on the last day of the performance award period, assuming the -4- achievement, at the expected value target level, of the individual and corporate performance goals established with respect to such award, by the fraction obtained by dividing the number of full months and any fractional portion of a month during such performance award period through the Date of Termination by the total number of months contained in such performance award period; provided, however, that if such termination of employment occurs during the same year in which the Change in Control occurs, the pro-rata bonus payment referred to in clause (ii) above shall be offset by any payments received under the Annual Incentive Plan in connection with such Change in Control. (D) In addition to the retirement benefits to which the Executive is entitled under the Company's Thrift Plan (the "Thrift Plan") and the Company's Supplemental Retirement Plan (the "SRP"), the Company shall pay the Executive a lump sum amount, in cash, equal to the present value of the employer-provided contributions, deferrals and allocations the Executive would have received had he continued to participate, after the Date of Termination, in the Thrift Plan and the SRP for three (3) additional years, assuming for this purpose that (i) the Executive earned compensation for purposes of the Thrift Plan and SRP during such three-year period the amount used to calculate the Executive's severance payment under subparagraph (A) of this Section 6.1, and (ii) the percentages of contributions, deferrals and allocations made under the Thrift Plan and the SRP by or on behalf of the Executive during such three-year period are the same percentages of contributions, deferrals and allocations in effect on the date of the Change in Control or the Date of Termination, whichever is more favorable to the Executive. (E) If the Executive would have become entitled to benefits under the Company's post-retirement health care or life insurance plans, as in effect immediately prior to the Date of Termination or, if more favorable to the Executive, as in effect immediately prior to the first occurrence of an event or circumstance constituting Good Reason, had the Executive's employment terminated at any time during the period of thirty-six (36) months after the Date of Termination, the Company shall provide such post-retirement health care or life insurance benefits to the Executive and the Executive's dependents commencing on the later of (i) the date on which such coverage would have first become available and (ii) the date on which benefits described in subsection (B) of this Section 6.1 terminate. (F) The Company shall provide the Executive with outplacement services suitable to the Executive's position for a period of three years or, if earlier, until the first acceptance by the Executive of an offer of employment. 6.2 (A) Whether or not the Executive becomes entitled to the Severance Payments, if any of the payments or benefits received or to be received by the Executive in connection with a Change in Control or the Executive's termination of employment (whether pursuant to the terms of this Agreement or any other plan, arrangement -5- or agreement with the Company, any Person whose actions result in a Change in Control or any Person affiliated with the Company or such Person) (such payments or benefits, excluding the Gross-Up Payment, being hereinafter referred to as the "Total Payments") will be subject to the Excise Tax, the Company shall pay to the Executive an additional amount (the "Gross-Up Payment") such that the net amount retained by the Executive, after deduction of any Excise Tax on the Total Payments and any federal, state and local income and employment taxes and Excise Tax upon the Gross-Up Payment, shall be equal to the Total Payments. (B) For purposes of determining whether any of the Total Payments will be subject to the Excise Tax and the amount of such Excise Tax, (i) all of the Total Payments shall be treated as "parachute payments" (within the meaning of section 280G(b)(2) of the Code) unless, in the opinion of tax counsel ("Tax Counsel") reasonably acceptable to the Executive and selected by the accounting firm which was, immediately prior to the Change in Control, the Company's independent auditor (the "Auditor"), such payments or benefits (in whole or in part) do not constitute parachute payments, including by reason of section 280G(b)(4)(A) of the Code, (ii) all "excess parachute payments" within the meaning of section 280G(b)(l) of the Code shall be treated as subject to the Excise Tax unless, in the opinion of Tax Counsel, such excess parachute payments (in whole or in part) represent reasonable compensation for services actually rendered (within the meaning of section 280G(b)(4)(B) of the Code) in excess of the Base Amount allocable to such reasonable compensation, or are otherwise not subject to the Excise Tax, and (iii) the value of any noncash benefits or any deferred payment or benefit shall be determined by the Auditor in accordance with the principles of sections 280G(d)(3) and (4) of the Code. For purposes of determining the amount of the Gross-Up Payment, the Executive shall be deemed to pay federal income tax at the highest marginal rate of federal income taxation in the calendar year in which the Gross-Up Payment is to be made and state and local income taxes at the highest marginal rate of taxation in the state and locality of the Executive's residence on the Date of Termination (or if there is no Date of Termination, then the date on which the Gross-Up Payment is calculated for purposes of this Section 6.2), net of the maximum reduction in federal income taxes which could be obtained from deduction of such state and local taxes. (C) In the event that the Excise Tax is finally determined to be less than the amount taken into account hereunder in calculating the Gross-Up Payment, the Executive shall repay to the Company, within five (5) business days following the time that the amount of such reduction in the Excise Tax is finally determined, the portion of the Gross-Up Payment attributable to such reduction (plus that portion of the Gross-Up Payment attributable to the Excise Tax and federal, state and local income and employment taxes imposed on the Gross-Up Payment being repaid by the Executive, to the extent that such repayment results in a reduction in the Excise Tax and a dollar-for-dollar reduction in the Executive's taxable income and wages for purposes of federal, state and local income and employment taxes, plus interest on the amount of such repayment at 120% of the rate provided in section 1274(b)(2)(B) of the Code. In the event that the Excise Tax is determined to exceed the amount taken into account hereunder in calculating the Gross-Up Payment (including by reason of any payment the existence or amount of which cannot be determined at the time of the Gross-Up Payment), the Company shall make an additional Gross-Up Payment in respect of such excess (plus any -6- interest, penalties or additions payable by the Executive with respect to such excess) within five (5) business days following the time that the amount of such excess is finally determined. The Executive and the Company shall each reasonably cooperate with the other in connection with any administrative or judicial proceedings concerning the existence or amount of liability for Excise Tax with respect to the Total Payments. 6.3 The payments provided in subsections (A), (C) and (D) of Section 6.1 hereof and in Section 6.2 hereof shall be made not later than the fifth day following the Date of Termination; provided, however, that if the amounts of such payments cannot be finally determined on or before such day, the Company shall pay to the Executive on such day an estimate, as determined in good faith by the Executive or, in the case of payments under Section 6.2 hereof, in accordance with Section 6.2 hereof, of the minimum amount of such payments to which the Executive is clearly entitled and shall pay the remainder of such payments (together with interest on the unpaid remainder (or on all such payments to the extent the Company fails to make such payments when due) at 120% of the rate provided in section 1274(b)(2)(B) of the Code) as soon as the amount thereof can be determined but in no event later than the thirtieth (30th) day after the Date of Termination. In the event that the amount of the estimated payments exceeds the amount subsequently determined to have been due, such excess shall constitute a loan by the Company to the Executive, payable on the fifth (5th) business day after demand by the Company (together with interest at 120% of the rate provided in section 1274(b)(2)(B) of the Code), but only to the extent such amount has not been paid by the Executive pursuant to Section 6.2(C) above. At the time that payments are made under this Agreement, the Company shall provide the Executive with a written statement setting forth the manner in which such payments were calculated and the basis for such calculations including, without limitation, any opinions or other advice the Company has received from Tax Counsel, the Auditor or other advisors or consultants (and any such opinions or advice which are in writing shall be attached to the statement). 6.4 The Company also shall pay to the Executive all legal fees and expenses incurred by the Executive in disputing in good faith any issue hereunder relating to the termination of the Executive's employment, in seeking in good faith to obtain or enforce any benefit or right provided by this Agreement or in connection with any tax audit or proceeding to the extent attributable to the application of section 4999 of the Code to any payment or benefit provided hereunder. Such payments shall be made within five (5) business days after delivery of the Executive's written requests for payment accompanied with such evidence of fees and expenses incurred as the Company reasonably may require. 7. Termination Procedures and Compensation During Dispute. 7.1 Notice of Termination. After a Change in Control and during the Term, any purported termination of the Executive's employment (other than by reason of death) shall be communicated by written Notice of Termination from one party hereto to the other party hereto in accordance with Section 10 hereof. For purposes of this Agreement, a "Notice of Termination" shall mean a notice which shall indicate the specific termination provision in this -7- Agreement relied upon and shall set forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of the Executive's employment under the provision so indicated. Further, a Notice of Termination for Cause is required to include a copy of a resolution duly adopted by the affirmative vote of not less than three-quarters (3/4) of the entire membership of the Board at a meeting of the Board which was called and held for the purpose of considering such termination (after reasonable notice to the Executive and an opportunity for the Executive, together with the Executive's counsel, to be heard before the Board) finding that, in the good faith opinion of the Board, the Executive was guilty of conduct set forth in clause (i) or (ii) of the definition of Cause herein, and specifying the particulars thereof in detail. 7.2 Date of Termination. "Date of Termination," with respect to any purported termination of the Executive's employment after a Change in Control and during the Term, shall mean (i) if the Executive's employment is terminated for Disability, thirty (30) days after Notice of Termination is given (provided that the Executive shall not have returned to the full-time performance of the Executive's duties during such thirty (30) day period), and (ii) if the Executive's employment is terminated for any other reason, the date specified in the Notice of Termination (which, in the case of a termination by the Company, shall not be less than thirty (30) days (except in the case of a termination for Cause) and, in the case of a termination by the Executive, shall not be less than fifteen (15) days nor more than sixty (60) days, respectively, from the date such Notice of Termination is given). 7.3 Dispute Concerning Termination. If within fifteen (15) days after any Notice of Termination is given, or, if later, prior to the Date of Termination (as determined without regard to this Section 7.3), the party receiving such Notice of Termination notifies the other party that a dispute exists concerning the termination, the Date of Termination shall be extended until the earlier of (i) the date on which the Term ends or (ii) the date on which the dispute is finally resolved, either by mutual written agreement of the parties or by a final judgment, order or decree of an arbitrator or a court of competent jurisdiction (which is not appealable or with respect to which the time for appeal therefrom has expired and no appeal has been perfected); provided, however, that the Date of Termination shall be extended by a notice of dispute given by the Executive only if such notice is given in good faith and the Executive pursues the resolution of such dispute with reasonable diligence. 7.4 Compensation During Dispute. If a purported termination occurs following a Change in Control and during the Term and the Date of Termination is extended in accordance with Section 7.3 hereof, the Company shall continue to pay the Executive the full compensation in effect when the notice giving rise to the dispute was given (including, but not limited to, salary) and continue the Executive as a participant in all compensation, benefit and insurance plans in which the Executive was participating when the notice giving rise to the dispute was given or those plans in which the Executive was participating immediately prior to the first occurrence of an event or circumstance giving rise to the Notice of Termination, if more favorable to the Executive, until the Date of Termination, as determined in accordance with Section 7.3 hereof. Amounts paid under this Section 7.4 are in addition to all other -8- amounts due under this Agreement (other than those due under Section 5.2 hereof) and shall not be offset against or reduce any other amounts due under this Agreement. 8. No Mitigation. The Company agrees that, if the Executive's employment with the Company terminates during the Term, the Executive is not required to seek other employment or to attempt in any way to reduce any amounts payable to the Executive by the Company pursuant to Sections 5, 6 or 7.4 hereof. Further, the amount of any payment or benefit provided for in this Agreement (other than Section 6.1(B) hereof but including (but not limited to) Section 7.4 hereof) shall not be reduced by any compensation earned by the Executive as the result of employment by another employer, by retirement benefits, by offset against any amount claimed to be owed by the Executive to the Company, or otherwise. 9. Successors; Binding Agreement. 9.1 In addition to any obligations imposed by law upon any successor to the Company, the Company will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company to expressly assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place. Failure of the Company to obtain such assumption and agreement prior to the effectiveness of any such succession shall be a breach of this Agreement and shall entitle the Executive to compensation from the Company in the same amount and on the same terms as the Executive would be entitled to hereunder if the Executive were to terminate the Executive's employment for Good Reason after a Change in Control, except that, for purposes of implementing the foregoing, the date on which any such succession becomes effective shall be deemed the Date of Termination. 9.2 This Agreement shall inure to the benefit of and be enforceable by the Executive's personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. If the Executive shall die while any amount would still be payable to the Executive hereunder (other than amounts which, by their terms, terminate upon the death of the Executive) if the Executive had continued to live, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to the executors, personal representatives or administrators of the Executive's estate. 10. Notices. For the purpose of this Agreement, notices and all other communications provided for in the Agreement shall be in writing and shall be deemed to have been duly given when delivered or mailed by United States registered mail, return receipt requested, postage prepaid, addressed, if to the Executive, to the address inserted below the Executive's signature on the final page hereof and, if to the Company, to the address set forth below, or to such other address as either party may have furnished to the other in writing in accordance herewith, except that notice of change of address shall be effective only upon actual receipt: -9- To the Company: 3900 Essex Lane Suite 1200 Houston, Texas 77027 Attention: General Counsel 11. Miscellaneous. Except as otherwise specifically provided in Section 12.2 below, no provision of this Agreement may be modified, waived or discharged unless such waiver, modification or discharge is agreed to in writing and signed by the Executive and such officer as may be specifically designated by the Board. No waiver by either party hereto at any time of any breach by the other party hereto of, or of any lack of compliance with, any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. This Agreement supersedes any other agreements or representations, oral or otherwise, express or implied, with respect to the subject matter hereof which have been made by either party; provided, however, that this Agreement shall supersede any agreement setting forth the terms and conditions of the Executive's employment with the Company only in the event that the Executive's employment with the Company is terminated on or following a Change in Control, by the Company other than for Cause or by the Executive other than for Good Reason; and provided further that all agreements otherwise superseded by this Agreement shall be automatically reinstated with full force and effect to the extent this Agreement is terminated or otherwise rendered inapplicable or amended in accordance with Section 12.2 hereof. The validity, interpretation, construction and performance of this Agreement shall be governed by the laws of the State of Texas. All references to sections of the Exchange Act or the Code shall be deemed also to refer to any successor provisions to such sections. Any payments provided for hereunder shall be paid net of any applicable withholding required under federal, state or local law and any additional withholding to which the Executive has agreed. The obligations of the Company and the Executive under this Agreement which by their nature may require either partial or total performance after the expiration of the Term (including, without limitation, those under Sections 6 and 7 hereof) shall survive such expiration. 12. Validity; Pooling. 12.1 Validity. The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement, which shall remain in full force and effect. 12.2 Pooling. In the event that (A) the Company is party to a transaction which is otherwise intended to qualify for "pooling of interests" accounting treatment, (B) such transaction constitutes a Change in Control within the meaning of Section 15(G)(III) and (C) individuals who satisfy the requirements in clauses (i) and (ii) below constitute more than -10- two-thirds (2/3) of the number of directors of the entity surviving such transaction and the parent thereof, if any: individuals who (i) immediately prior to such transaction constitute the Board and (ii) on the date hereof constitute the Board and any new director (other than a director whose initial assumption of office is in connection with an actual or threatened election contest relating to the election of directors of the Company) whose appointment or election by the Board or nomination for election by the Company's stockholders was approved or recommended, by a vote of at least two-thirds (2/3) of the directors then still in office who either were directors on the date hereof or whose appointment, election or nomination for election was previously so approved or recommended then (a) this Agreement shall, to the extent practicable, be interpreted so as to permit such accounting treatment, and (b) to the extent that the application of clause (a) of this Section 12.2 does not preserve the availability of such accounting treatment, then, to the extent that any provision or combination of provisions of the Agreement disqualifies the transaction as a "pooling" transaction (including, if applicable, the entire Agreement), the Board shall have the right, by sending written notice to the Executive prior to the Change in Control, to unilaterally amend (without the consent of the Executive) such provision or provisions if and to the extent necessary (including declaring such provision or provisions to be null and void as of the date hereof) so that such transaction may be accounted for as a "pooling of interests." All determinations under this Section 12.2 shall be made by the Board prior to the Change in Control, based upon the advice of the accounting firm whose opinion with respect to "pooling of interests" is required as a condition to the consummation of such transaction. 13. Counterparts. This Agreement may be executed in several counterparts, each of which shall be deemed to be an original but all of which together will constitute one and the same instrument. 14. Settlement of Disputes; Arbitration. 14.1 All claims by the Executive for benefits under this Agreement shall be directed to and determined by the Committee and shall be in writing. Any denial by the Committee of a claim for benefits under this Agreement shall be delivered to the Executive in writing within thirty (30) days after written notice of the claim is provided to the Company in accordance with Section 10 and shall set forth the specific reasons for the denial and the specific provisions of this Agreement relied upon. The Committee shall afford a reasonable opportunity to the Executive for a review of the decision denying a claim and shall further allow the Executive to appeal to the Committee a decision of the Committee within sixty (60) days after notification by the Committee that the Executive's claim has been denied. 14.2 Any further dispute or controversy arising under or in connection with this Agreement shall be settled exclusively by arbitration in Houston, Texas in accordance with the rules of the American Arbitration Association then in effect; provided, however, that the evidentiary standards set forth in this Agreement shall apply. Judgment may be entered on the arbitrator's award in any court having jurisdiction. Notwithstanding any provision of this Agreement to the contrary, the Executive shall be entitled to seek specific performance of the -11- Executive's right to be paid until the Date of Termination during the pendency of any dispute or controversy arising under or in connection with this Agreement. 15. Definitions. For purposes of this Agreement, the following terms shall have the meanings indicated below: (A) "Affiliate" shall have the meaning set forth in Rule 12b-2 promulgated under Section 12 of the Exchange Act. (B) "Auditor" shall have the meaning set forth in Section 6.2 hereof. (C) "Base Amount" shall have the meaning set forth in section 280G(b)(3) of the Code. (D) "Beneficial Owner" shall have the meaning set forth in Rule 13d-3 under the Exchange Act. (E) "Board" shall mean the Board of Directors of the Company. (F) "Cause" for termination by the Company of the Executive's employment shall mean (i) the willful and continued failure by the Executive to substantially perform the Executive's duties with the Company (other than any such failure resulting from the Executive's incapacity due to physical or mental illness or any such actual or anticipated failure after the issuance of a Notice of Termination for Good Reason by the Executive pursuant to Section 7.1 hereof) after a written demand for substantial performance is delivered to the Executive by the Board, which demand specifically identifies the manner in which the Board believes that the Executive has not substantially performed the Executive's duties, or (ii) the willful engaging by the Executive in conduct which is demonstrably and materially injurious to the Company or its subsidiaries, monetarily or otherwise. For purposes of clauses (i) and (ii) of this definition, (x) no act, or failure to act, on the Executive's part shall be deemed "willful" unless done, or omitted to be done, by the Executive not in good faith and without reasonable belief that the Executive's act, or failure to act, was in the best interest of the Company and (y) in the event of a dispute concerning the application of this provision, no claim by the Company that Cause exists shall be given effect unless the Company establishes to the Committee by clear and convincing evidence that Cause exists. (G) A "Change in Control" shall be deemed to have occurred if the event set forth in any one of the following paragraphs shall have occurred: (I) any Person is or becomes the Beneficial Owner, directly or indirectly, of securities of the Company (not including in the securities beneficially owned by such Person any securities acquired directly from the Company or its affiliates) representing 20% or more of the combined voting power of the Company's then outstanding securities, excluding any Person who becomes such a Beneficial Owner in connection with a transaction described in clause (i) of paragraph (III) below; or -12- (II) the following individuals cease for any reason to constitute a majority of the number of directors then serving: individuals who, on the date hereof, constitute the Board and any new director (other than a director whose initial assumption of office is in connection with an actual or threatened election contest relating to the election of directors of the Company) whose appointment or election by the Board or nomination for election by the Company's stockholders was approved or recommended by a vote of at least two-thirds (2/3) of the directors then still in office who either were directors on the date hereof or whose appointment, election or nomination for election was previously so approved or recommended; or (III) there is consummated a merger or consolidation of the Company or any direct or indirect subsidiary of the Company with any other corporation, other than (i) a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior to such merger or consolidation continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity or any parent thereof), in combination with the ownership of any trustee or other fiduciary holding securities under an employee benefit plan of the Company or any subsidiary of the Company, at least 65% of the combined voting power of the securities of the Company or such surviving entity or any parent thereof outstanding immediately after such merger or consolidation, or (ii) a merger or consolidation effected to implement a recapitalization of the Company (or similar transaction) in which no Person is or becomes the Beneficial Owner, directly or indirectly, of securities of the Company (not including in the securities Beneficially Owned by such Person any securities acquired directly from the Company or its Affiliates other than in connection with the acquisition by the Company or its Affiliates of a business) representing 20% or more of the combined voting power of the Company's then outstanding securities; or (IV) the stockholders of the Company approve a plan of complete liquidation or dissolution of the Company or there is consummated an agreement for the sale or disposition by the Company of all or substantially all of the Company's assets, other than a sale or disposition by the Company of all or substantially all of the Company's assets to an entity, at least 65% of the combined voting power of the voting securities of which are owned by stockholders of the Company in substantially the same proportions as their ownership of the Company immediately prior to such sale. Notwithstanding the foregoing, a "Change in Control" shall not be deemed to have occurred by virtue of the consummation of any transaction or series of integrated transactions immediately -13- following which the record holders of the common stock of the Company immediately prior to such transaction or series of transactions continue to have substantially the same proportionate ownership in an entity which owns all or substantially all of the assets of the Company immediately following such transaction or series of transactions. (H) "Code" shall mean the Internal Revenue Code of 1986, as amended from time to time. (I) "Committee" shall mean (i) the individuals (not fewer than three in number) who, on the date six months before a Change in Control, constitute the Compensation Committee of the Board, plus (ii) in the event that fewer than three individuals are available from the group specified in clause (i) above for any reason, such individuals as may be appointed by the individual or individuals so available (including for this purpose any individual or individuals previously so appointed under this clause (ii)); provided, however, that the maximum number of individuals constituting the Committee shall not exceed six (6). (J) "Company" shall mean Baker Hughes Incorporated and, except in determining under Section 15(G) hereof whether or not any Change in Control of the Company has occurred, shall include any successor to its business and/or assets which assumes and agrees to perform this Agreement by operation of law, or otherwise. (K) "Date of Termination" shall have the meaning set forth in Section 7.2 hereof. (L) "Disability" shall be deemed the reason for the termination by the Company of the Executive's employment, if, as a result of the Executive's incapacity due to physical or mental illness, the Executive shall have been absent from the full-time performance of the Executive's duties with the Company for a period of six (6) consecutive months, the Company shall have given the Executive a Notice of Termination for Disability, and, within thirty (30) days after such Notice of Termination is given, the Executive shall not have returned to the full-time performance of the Executive's duties. (M) "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended from time to time. (N) "Excise Tax" shall mean any excise tax imposed under section 4999 of the Code. (O) "Executive" shall mean the individual named in the first paragraph of this Agreement. (P) "Extension Date" shall have the meaning set forth in Section 2 hereof. (Q) "Good Reason" for termination by the Executive of the Executive's employment shall mean the occurrence (without the Executive's express written consent) after -14- any Change in Control, or prior to a Change in Control under the circumstances described in clauses (ii) and (iii) of the second sentence of Section 6.1 hereof (treating all references in paragraphs (I) through (VII) below to a "Change in Control" as references to a "Potential Change in Control"), of any one of the following acts by the Company, or failures by the Company to act, unless, in the case of any act or failure to act described in paragraph (I), (V), (VI) or (VII) below, such act or failure to act is corrected prior to the Date of Termination specified in the Notice of Termination given in respect thereof: (I) the assignment to the Executive of any duties inconsistent with the Executive's status as a senior executive officer of the Company or a substantial adverse alteration in the nature or status of the Executive's responsibilities from those in effect immediately prior to the Change in Control; (II) a reduction by the Company in the Executive's annual base salary as in effect on the date hereof or as the same may be increased from time to time except for across-the-board salary reductions similarly affecting all senior executives of the Company and all senior executives of any Person in control of the Company; (III) the relocation of the Executive's principal place of employment to a location more than 50 miles from the Executive's principal place of employment immediately prior to the Change in Control or the Company's requiring the Executive to be based anywhere other than such principal place of employment (or permitted relocation thereof) except for required travel on the Company's business to an extent substantially consistent with the Executive's present business travel obligations; (IV) the failure by the Company to pay to the Executive any portion of the Executive's current compensation except pursuant to an across-the-board compensation deferral similarly affecting all senior executives of the Company and all senior executives of any Person in control of the Company, or to pay to the Executive any portion of an installment of deferred compensation under any deferred compensation program of the Company, within seven (7) days of the date such compensation is due; (V) the failure by the Company to continue in effect any compensation plan in which the Executive participates immediately prior to the Change in Control which is material to the Executive's total compensation, including but not limited to the Company's 1993 Stock Option Plan, 1993 Employee Stock Bonus Plan, 1991 Employee Stock Bonus Plan, 1995 Stock Award Plan (and the 1995, 1996 and 1997 Stock Matching Programs thereunder and any subsequent Stock Matching Programs in which the Executive participates), 1987 Convertible Debenture Plan and 1995 Employee -15- Annual Incentive Compensation Plan or any substitute plans adopted prior to the Change in Control, unless an equitable arrangement (embodied in an ongoing substitute or alternative plan) has been made with respect to such plan, or the failure by the Company to continue the Executive's participation therein (or in such substitute or alternative plan) on a basis not materially less favorable, both in terms of the amount or timing of payment of benefits provided and the level of the Executive's participation relative to other participants, as existed immediately prior to the Change in Control; (VI) the failure by the Company to continue to provide the Executive with benefits substantially similar to those enjoyed by the Executive under any of the Company's pension, savings, life insurance, medical, health and accident, or disability plans in which the Executive was participating immediately prior to the Change in Control (except for across the board changes similarly affecting all senior executives of the Company and all senior executives of any Person in control of the Company), the taking of any other action by the Company which would directly or indirectly materially reduce any of such benefits or deprive the Executive of any material fringe benefit or perquisite enjoyed by the Executive at the time of the Change in Control, or the failure by the Company to provide the Executive with the number of paid vacation days to which the Executive is entitled on the basis of years of service with the Company in accordance with the Company's normal vacation policy in effect at the time of the Change in Control; or (VII) any purported termination of the Executive's employment which is not effected pursuant to a Notice of Termination satisfying the requirements of Section 7.1 hereof; for purposes of this Agreement, no such purported termination shall be effective. The Executive's right to terminate the Executive's employment for Good Reason shall not be affected by the Executive's incapacity due to physical or mental illness. The Executive's continued employment shall not constitute consent to, or a waiver of rights with respect to, any act or failure to act constituting Good Reason hereunder. For purposes of any determination regarding the existence of Good Reason, any claim by the Executive that Good Reason exists shall be presumed to be correct unless the Company establishes to the Committee by clear and convincing evidence that Good Reason does not exist. (R) "Gross-Up Payment" shall have the meaning set forth in Section 6.2 hereof. (S) "Notice of Termination" shall have the meaning set forth in Section 7.1 hereof. -16- (T) "Person" shall have the meaning given in Section 3(a)(9) of the Exchange Act, as modified and used in Sections 13(d) and 14(d) thereof, except that such term shall not include (i) the Company or any of its subsidiaries, (ii) a trustee or other fiduciary holding securities under an employee benefit plan of the Company or any of its Affiliates, (iii) an underwriter temporarily holding securities pursuant to an offering of such securities, or (iv) a corporation owned, directly or indirectly, by the stockholders of the Company in substantially the same proportions as their ownership of stock of the Company. (U) "Potential Change in Control" shall be deemed to have occurred if the event set forth in any one of the following paragraphs shall have occurred: (I) the Company enters into an agreement, the consummation of which would result in the occurrence of a Change in Control; (II) the Company or any Person publicly announces an intention to take or to consider taking actions which, if consummated, would constitute a Change in Control; (III) any Person becomes the Beneficial Owner, directly or indirectly, of securities of the Company representing 15% or more of either the then outstanding shares of common stock of the Company or the combined voting power of the Company's then outstanding securities (not including in the securities beneficially owned by such Person any securities acquired directly from the Company or its affiliates); or (IV) the Board adopts a resolution to the effect that, for purposes of this Agreement, a Potential Change in Control has occurred. (V) "Retirement" shall, for purposes of Section 4 hereof, be deemed the reason for the termination by the Executive of the Executive's employment if such employment is terminated after completion of ten (10) years of service with the Company and attainment of age fifty-five (55). (W) "Severance Payments" shall have the meaning set forth in Section 6.1 hereof. (X) "SRP" shall have the meaning set forth in Section 6.1 hereof. (Y) "Tax Counsel" shall have the meaning set forth in Section 6.2 hereof. (Z) "Term" shall mean the period of time described in Section 2 hereof (including any extension, continuation or termination described therein). -17- (AA) "Thrift Plan" shall have the meaning set forth in Section 6.1 hereof. (BB) "Total Payments" shall mean those payments so described in Section 6.2 hereof. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date above first written. Baker Hughes Incorporated By: ------------------------------- Name Title Executive: ------------------------------ [Name of Executive] -18- EX-10.43 12 h94456ex10-43.txt FORM OF NONQUALIFIED STOCK OPTION AGMT - EMPLOYEES EXHIBIT 10.43 BAKER HUGHES INCORPORATED STOCK OPTION AGREEMENT [NAME OF GRANTEE] GRANTEE DATE OF GRANT TOTAL NUMBER OF SHARES GRANTED EXERCISE PRICE PER SHARE EXPIRATION DATE TERM OF AWARD; VESTING SCHEDULE 3 YEARS, WITH VESTING OF 33 1/3% ON THE ANNIVERSARY DATE OF THE DATE OF GRANT IN EACH OF THE YEARS XXXX, XXXX, AND XXXX. OTHER TERMS OF AWARD GRANT OF OPTION Pursuant to action taken by the Compensation Committee of the Board of Directors of Baker Hughes Incorporated, a Delaware corporation (the "Company"), for the purposes of administration of the Baker Hughes Incorporated 1998 Employee Stock Option Plan (the "Plan"), the above-named Grantee is hereby granted an 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 stated above for each share subject to this option, with the exercise price payable at the time of exercise. This option may not be exercised after the Expiration Date. By your acceptance of the option, you agree that the option is granted under and governed by the terms of the Plan, this Stock Option Agreement and the Terms and Conditions of Option Agreements (dated January 30, 2002). BAKER HUGHES INCORPORATED --------------------------------- Name: Title: BAKER HUGHES INCORPORATED TERMS AND CONDITIONS OF OPTION AGREEMENTS (JANUARY 30, 2002) These Terms and Conditions are applicable to options granted pursuant to the Baker Hughes Incorporated 1998 Employee Stock Option Plan, as amended (the "Plan"). 1. TERMINATION OF EMPLOYMENT. The following provisions will apply in the event of Grantee's termination of employment: 1.1 Termination Generally. If Grantee's employment is terminated for any reason other than: (i) a termination covered by Sections 1.2 through 1.7, or (ii) a termination, within two years following a Change in Control (as defined in the Plan) that occurs after the Date of Grant, either (A) by the Company without Cause (as defined in the Plan) or (B) by the Grantee for Good Reason (as defined in the Plan), the 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 the Expiration Date). 1.2 Termination for Cause. If Grantee's employment is terminated for cause, including (without limitation) fraud, theft, embezzlement committed against the Company or any of its affiliated companies or a 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, the option will wholly and completely terminate on the date of termination of employment if such termination occurs (i) prior to a Change of Control that occurs after the Date of Grant or (ii) after the second anniversary of a Change of Control that occurs after the Date of Grant. If Grantee's employment is terminated for Cause (as defined in the Plan), the option will wholly and completely terminate on the date thirty days following such termination (but not later than the Expiration Date) if such termination occurs within two years following a Change of Control that occurs after the Date of Grant. 1.3 Termination without Cause or for Good Reason in Connection with a Change in Control. Notwithstanding any other provision of this Stock Option Agreement, including these Terms and Conditions, to the contrary, if a Change in Control of the Company occurs, the provisions of Article 9 of the Plan shall govern. 1.4 Divestiture of Business Unit. If the Company divests its ownership in a business unit that employs the Grantee, then the option will be deemed to be fully vested on the effective date of the Divestiture of the business unit. The Grantee will have three years in which to exercise the option. A "Divestiture" includes the disposition of any business unit of the Company and its subsidiaries to an entity that the Company does not consolidate in its financial statements, whether the disposition is structured as a sale or transfer of stock, a merger, a consolidation or a sale or transfer of assets, or a combination thereof, provided that a "Divestiture" shall not include a disposition that constitutes a Change in Control. 1.6 Retirement or Disability. In the event of the retirement (such that the Grantee's age plus years of service with the Company equals or exceeds 65) or long-term disability of the Grantee, as long-term disability is determined in the discretion of the Committee (as defined in the Plan), all granted but unvested options shall immediately vest upon the Grantee's retirement or long-term disability. The Grantee shall Option Agreements 1998 ESOP January 30, 2002 have three years from the date of termination of employment due to retirement or long-term disability to exercise the option (but in no event later than the Expiration Date). 1.7 Death. 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 not later than the Expiration Date). 2. PROHIBITED ACTIVITY. Notwithstanding any other provision of this 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 the 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 Committee, the Committee, in its discretion, may suspend the exercisability of the option for up to two months to permit the investigation of such allegation. If it is determined that no Prohibited Activity was engaged in by Grantee, the period of exercisability of the option will be increased by the amount of time of the suspension; however, in no event will the option be exercisable more than ten 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 of 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. 3. CASHLESS EXERCISE. Cashless exercise, in accordance with the terms of the Plan, shall be available to Grantee for the shares subject to the option. 4. TAX WITHHOLDING. To the extent the exercise of the 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. 5. NONTRANSFERABILITY. The 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. 6. LIMIT OF LIABILITY. Under no circumstances will the Company be liable for any indirect, incidental, consequential or special damages (including lost profits) of any form incurred by any person, whether or not foreseeable and regardless of the form of the act in which such a claim may be brought, with respect to the Plan or the Company's role as Plan sponsor. 7. MISCELLANEOUS. The option is granted under and is subject to all of the provisions of the Plan, including amendments to the Plan, if any. In the event of a conflict between these Terms and Conditions and the Plan provisions, the Plan provisions will control. Capitalized terms that are not defined herein shall have the meaning ascribed to such terms in the Plan. Option Agreements 1998 ESOP January 30, 2002 EX-10.44 13 h94456ex10-44.txt FORM OF INCENTIVE STOCK OPTION AGMT FOR EMPLOYEES EXHIBIT 10.44 BAKER HUGHES INCORPORATED STOCK OPTION AGREEMENT [NAME OF GRANTEE] GRANTEE DATE OF GRANT TOTAL NUMBER OF SHARES GRANTED EXERCISE PRICE PER SHARE EXPIRATION DATE TERM OF AWARD; VESTING SCHEDULE 3 YEARS, WITH VESTING OF 33 1/3% ON THE ANNIVERSARY DATE OF THE DATE OF GRANT IN EACH OF THE YEARS XXXX, XXXX, AND XXXX. OTHER TERMS OF AWARD GRANT OF OPTION 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 Long-Term Incentive Plan of Baker Hughes Incorporated (the "Plan"), the above-named Grantee is hereby granted an incentive stock option to purchase the above number of shares of the Company's $1 par value per share common stock at the exercise price stated above for each share subject to this option, with the exercise price payable at the time of exercise. This option may not be exercised after the Expiration Date. By your acceptance of the option, you agree that the option is granted under and governed by the terms of the Plan, this Stock Option Agreement and the Terms and Conditions of Option Agreements (dated January 30, 2002). BAKER HUGHES INCORPORATED --------------------------------- Name: Title: BAKER HUGHES INCORPORATED TERMS AND CONDITIONS OF OPTION AGREEMENTS (JANUARY 30, 2002) These Terms and Conditions are applicable to options granted pursuant to the Long-Term Incentive Plan of Baker Hughes Incorporated, as amended (the "Plan"). 1. TERMINATION OF EMPLOYMENT. The following provisions will apply in the event of Grantee's termination of employment: 1.1 Termination Generally. If Grantee's employment is terminated for any reason other than: (i) a termination covered by Sections 1.2 through 1.7, or (ii) a termination, within two years following a Change in Control (as defined in the Plan) that occurs after the Date of Grant, either (A) by the Company without Cause (as defined in the Plan) or (B) by the Grantee for Good Reason (as defined in the Plan), the 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 the Expiration Date). 1.2 Termination for Cause. If Grantee's employment is terminated for cause, including (without limitation) fraud, theft, embezzlement committed against the Company or any of its affiliated companies or a 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, the option will wholly and completely terminate on the date of termination of employment if such termination occurs (i) prior to a Change of Control that occurs after the Date of Grant or (ii) after the second anniversary of a Change of Control that occurs after the Date of Grant. If Grantee's employment is terminated for Cause (as defined in the Plan), the option will wholly and completely terminate on the date thirty days following such termination (but not later than the Expiration Date) if such termination occurs within two years following a Change of Control that occurs after the Date of Grant. 1.3 Termination without Cause or for Good Reason in Connection with a Change in Control. Notwithstanding any other provision of this Stock Option Agreement, including these Terms and Conditions, to the contrary, if a Change in Control of the Company occurs, the provisions of Article 16 of the Plan shall govern. 1.4 Divestiture of Business Unit. If the Company divests its ownership in a business unit that employs the Grantee, then the option will be deemed to be fully vested on the effective date of the Divestiture of the business unit. The Grantee will have three years in which to exercise the option. A "Divestiture" includes the disposition of any business unit of the Company and its subsidiaries to an entity that the Company does not consolidate in its financial statements, whether the disposition is structured as a sale or transfer of stock, a merger, a consolidation or a sale or transfer of assets, or a combination thereof, provided that a "Divestiture" shall not include a disposition that constitutes a Change in Control. 1.6 Retirement or Disability. In the event of the retirement (such that the Grantee's age plus years of service with the Company equals or exceeds 65) or long-term disability of the Grantee, as long-term disability is determined in the discretion of the Committee (as defined in the Plan), all granted but unvested options shall immediately vest upon the Grantee's retirement or long-term disability. The Grantee shall Option Agreements LTIP January 30, 2002 have three years from the date of termination of employment due to retirement or long-term disability to exercise the option (but not later than the Expiration Date). 1.7 Death. 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 the Expiration Date). 2. PROHIBITED ACTIVITY. Notwithstanding any other provision of this 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 the 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 Committee, the Committee, in its discretion, may suspend the exercisability of the option for up to two months to permit the investigation of such allegation. If it is determined that no Prohibited Activity was engaged in by Grantee, the period of exercisability of the option will be increased by the amount of time of the suspension; however, in no event will the option be exercisable more than ten 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 of 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. 3. CASHLESS EXERCISE. Cashless exercise, in accordance with the terms of the Plan, shall be available to Grantee for the shares subject to the option. 4. TAX WITHHOLDING. To the extent the exercise of the 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. 5. NONTRANSFERABILITY. The 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. 6. LIMIT OF LIABILITY. Under no circumstances will the Company be liable for any indirect, incidental, consequential or special damages (including lost profits) of any form incurred by any person, whether or not foreseeable and regardless of the form of the act in which such a claim may be brought, with respect to the Plan or the Company's role as Plan sponsor. 7. MISCELLANEOUS. The option is granted under and is subject to all of the provisions of the Plan, including amendments to the Plan, if any. In the event of a conflict between these Terms and Conditions and the Plan provisions, the Plan provisions will control. Capitalized terms that are not defined herein shall have the meaning ascribed to such terms in the Plan. Option Agreements LTIP January 30, 2002 EX-10.45 14 h94456ex10-45.txt FORM OF STOCK MATCHING AGREEMENT - JAMES R CLARK EXHIBIT 10.45 STOCK MATCHING AGREEMENT This Stock Matching Agreement (this "Agreement") is made and entered into this 1st day of March , 2001, by and between Baker Hughes Incorporated, a Delaware corporation (the "Company"), and James Roderick Clark (the "Employee"), regarding the award of Matched Shares (defined below) to the Employee pursuant to the Long Term Incentive Plan of Baker Hughes Incorporated (the "Plan"), and further subject to the terms and conditions set forth below: 1. AWARD OF MATCHED SHARES. The Company will reserve for issuance one share of the Company's Common Stock, $1.00 par value per share ("Common Stock"), for each share of Common Stock, up to, but not exceeding, 25,000 shares of Common Stock owned, and held of record, (x) by the Employee and (y) for the benefit of the Employee in an account by (i) a tax-qualified plan maintained by the Company, a Subsidiary or a former employer of the Employee, and/or (ii) an individual retirement account or annuity under Code Section 408 or 408A (with such shares under this clause (y) deemed to be owned by the Employee for purposes of this Agreement) at the close of business on the first anniversary of the Employment Date. Such reserved shares of Common Stock shall be referred to herein as the "Matched Shares." 2. RESERVATION PERIOD. Each Matched Share shall be reserved for issuance by the Company pursuant to this Agreement until the earlier of the date each such share is either (x) fully vested upon the occurrence of an event described in Section 2(I) (a "Vesting Event") or (y) forfeited upon the occurrence of an event described in Section 2(II) (a "Forfeiture Event"). (I) Vesting Events. For purposes of this Agreement, the following are Vesting Events: (a) The Retirement of the Employee; (b) The termination of the Employee's employment by the Company without Non-CIC Cause; (c) The occurrence of a Change in Control; (d) The termination of the Employee's employment: (i) by the Company without CIC Cause prior to a Change in Control (whether or not a Change in Control ever occurs) if such termination was at the request or direction of a Person who has entered into an agreement with the Company, the consummation of which would constitute a Change in Control; (ii) by the Employee for Good Reason prior to a Change in Control (whether or not a Change in Control ever occurs) if the circumstance or event which constitutes Good Reason occurs at the request or direction of the Person described in foregoing clause (i); or (iii) by the Company without CIC Cause or by the Employee for Good Reason if such termination or the circumstance or event which constitutes Good Reason is otherwise in connection with, or in anticipation of, a Change in Control (whether or not a Change in Control ever occurs); or 1 (e) The Employee's death or permanent disability (as determined by the Committee in its sole discretion). (II) Forfeiture Event: For purposes of this Agreement, a Forfeiture Event means the termination of employment of the Employee other than as set forth in Section 2(I) or due to Non-CIC Cause. 3. ISSUANCE OR FORFEITURE OF MATCHED SHARES. If a Vesting Event occurs prior to a Forfeiture Event with respect to the Employee, subject to satisfaction of the certification requirement in Section 5, the Company shall issue an amount of the Matched Shares in a certificate in the name of the Employee (or, in the case of death, in the name of the estate of the Employee) equal to the number of shares of Common Stock owned by the Employee as of the date of the Vesting Event that have been continuously owned by the Employee since the first anniversary of the Employment Date. These certificates shall be issued as soon as administratively practicable following the Vesting Event. The Employee may replace shares of Common Stock that the Employee owned on the first anniversary of the Employment Date with other shares of Common Stock so long as the Employee continuously owns the same number of shares for which the Company will issue Matched Shares from the first anniversary of the Employment Date until the date of the Vesting Event. If a Forfeiture Event occurs prior to a Vesting Event with respect to the Employee, as of the date of the Forfeiture Event all obligations of the Company to issue any Matched Shares pursuant to this Agreement shall cease and immediately terminate, and the Employee shall forfeit any and all rights and have no further claim against or with respect to any Matched Shares or against the Company for any Matched Shares. 4. PAYMENT OF EQUIVALENT DIVIDENDS. The Company shall pay to the Employee an amount of money on a quarterly basis equivalent to any cash dividends that would have been payable on the Matched Shares assuming such shares had been outstanding at the time of any cash dividend payment made on the Common Stock of the Company. 5. CERTIFICATION OF SHARE OWNERSHIP BY THE EMPLOYEE. Within 30 days after the first anniversary of the Employment Date, the Employee shall certify to the Company the number of shares of Common Stock that the Employee owns as of such anniversary date. The Employee's ownership shall be verified, in addition to the certification, by the delivery of copies of any certificates, brokerage or other account statements representing the shares that the Employee owns reflecting that such shares are held of record by the Employee or by the plan or individual retirement account or annuity for the benefit of the Employee (or, if the Employee is required to file ownership reports with the Securities and Exchange Commission, by the filing of copies of such reports with such certificate). Thereafter, subject to verification (as provided herein), within 30 days after each subsequent anniversary of the Employment Date and within 15 days after a Vesting Event, the Employee (or the representative of the Employee's estate in the case of death) shall certify to the Company the number of shares of Common Stock owned by the Employee as of such anniversary or Vesting Event date, and during the period commencing immediately after the anniversary date immediately preceding such date. The certificate and other evidence of stock ownership must be timely presented to the Secretary of the Company for verification. Final 2 determination of sufficient evidence to verify ownership shall be made in the sole discretion of the Committee. 6. LIMITATION OF AWARD. The award of shares of Common Stock to the Employee pursuant to this Agreement is being made only with respect to the shares owned on the first anniversary of the Employment Date. No future award of shares is being authorized pursuant hereto and may only be made by the Committee in its sole discretion at such time in the future. If the Employee should sell any of the shares of Common Stock held by him on the first anniversary of the Employment Date in order that the number of shares owned by the Employee is reduced to a number below the amount held on such date, the number of Matched Shares reserved for the Employee shall be reduced on a share-for-share basis. No increase in shares subsequent to the first anniversary of the Employment Date shall create a right to an increase in the number of Matched Shares 7. ADJUSTMENTS. If the Company should declare a stock dividend or authorize a split of shares of the Common Stock of the Company, the Matched Shares shall be adjusted to reflect and to take into such account such stock dividend or stock split, as the case may be. The additional shares to be reserved as a result of such stock dividend or stock split shall be deemed to be a portion of the Matched Shares reserved for issuance by the Company pursuant to this Agreement. 8. RELATIONSHIP TO THE PLAN; DEFINITIONS. This award of Matched Shares is granted under the Plan and is subject to all of the terms, conditions and provisions of the Plan and administrative interpretations thereunder, if any, which have been adopted by the Committee thereunder and are in effect on the date hereof. Capitalized terms that are not defined in this Agreement shall have the same meanings ascribed to them under the Plan. For purposes of this Agreement: (a) "CIC Cause" means Cause as defined in the Plan. (b) "Employment Date" means March 1, 2001. (c) "Retirement" means the termination of employment after attaining age 55 with not less than 5 years of continuous employment since the Employment Date with the Company; provided, however, that such termination is not due to CIC Cause or Non-CIC Cause. (d) "Non-CIC Cause" means fraud, theft, embezzlement committed against the Company or an Affiliate or a customer of the Company or an Affiliate, or conflict of interest, unethical conduct, dishonesty affecting the assets, properties or businesses of the Company or any of its Affiliates, willful misconduct, or continued material dereliction of duties. 9. WITHHOLDING. To the extent the issuance of the Matched Shares under this Agreement results in taxable income to the Employee, the Company is authorized to withhold from any remuneration payable to the Employee any tax required to be withheld by reason of such taxable income. 3 IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written. BAKER HUGHES INCORPORATED By /s/ ANDREW J. SZESCILA ------------------------------- Name: Andrew J. Szescila Title: Senior Vice President and Chief Operating Officer 4 ACKNOWLEDGMENT, ACCEPTANCE AND CONSENT BY THE EMPLOYEE The undersigned Employee, James Roderick Clark, hereby agrees to, and accepts, the terms and provisions of the foregoing Agreement, subject to the terms and provisions of the Plan and administrative interpretations thereof referred to above. The undersigned further hereby acknowledges that he has received a copy of the Long Term Incentive Plan of Baker Hughes Incorporated and that he has been advised by the Company to consult with and rely upon only his own tax, legal and financial advisors regarding the consequences and risks of this award. August 10, 2001 /s/ JAMES RODERICK CLARK - -------------------- --------------------------------- Date Name: James Roderick Clark Address: 10 Crownberry Court The Woodlands, TX 77381 CONSENT OF SPOUSE OF THE EMPLOYEE The undersigned spouse of the Employee has read and hereby approves the terms and conditions of the foregoing Agreement and the Plan. In consideration of the Company's awarding the Employee the Matched Shares, as set forth in the Agreement, the undersigned hereby agrees and consents to be irrevocably bound by the terms and conditions of the Agreement and the Plan and further agrees that any community property interest shall be similarly bound. The undersigned hereby appoints the undersigned's spouse as attorney-in-fact for the undersigned with respect to any amendment or exercise of rights under the Agreement and the Plan. /s/ JAN M. CLARK ---------------------- Spouse of the Employee 5 AMENDMENT 1 TO STOCK MATCHING AGREEMENT This Amendment 1 to Stock Matching Agreement ("Amendment 1") is made and entered into effective March 6, 2002, by and between BAKER HUGHES INCORPORATED, a Delaware corporation (the "Company") and JAMES RODERICK CLARK (the "Executive"). WHEREAS, the Board of Directors of the Company and the Executive desire to make certain changes to that certain Stock Matching Agreement dated as of March 1, 2001, by and between the Company and the Executive (the "Stock Matching Agreement"), providing the Executive with additional time to purchase the Company's Common Stock; NOW, THEREFORE, in consideration of the premises and the mutual agreements contained herein, the Company and the Executive hereby agree as follows: the phrase "at the close of business on the first anniversary of the Employment Date" be changed to read "at the close of business on September 2, 2002" in Sections 1, 3,5 and 6 of the Stock Matching Agreement. All capitalized terms in this Amendment 1 shall have the definition ascribed to those terms in the Stock Matching Agreement. The Stock Matching Agreement continues in full force and effect, except as amended hereby. This Amendment 1 may be executed in counterparts, each of which shall be deemed to be an original but all of which together will constitute one and the same instrument. EXECUTED effective as of the day and year first written above. Company: Executive: - ------- --------- BAKER HUGHES INCORPORATED By: ------------------------------- ------------------------- Andrew J. Szecila, , JAMES RODERICK CLARK Senior Vice President and Chief Operating Officer 6 EX-21.1 15 h94456ex21-1.txt SUBSIDIARIES OF REGISTRANT EXHIBIT 21.1 BAKER HUGHES INCORPORATED SIGNIFICANT SUBSIDIARIES December 31, 2001
PERCENTAGE SUBSIDIARY JURISDICTION OWNERSHIP ---------- ------------ ----------- 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 (Deutschland) Holding GmbH Germany 100% Baker Hughes (Deutschland) GmbH Germany 100% Baker Hughes INTEQ GmbH Germany 100% Baker Hughes Asia Pacific Ltd. Cayman Islands 100% Baker Hughes EHO Ltd. Bermuda 100% Brassco (Cayman) Ltd. Cayman 100% Brass Exploration Unlimited Nigeria 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 Hughes Espana, S.L. Spain 100% Baker Hughes SRL Venezuela 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. 94.07% Other subsidiaries 5.93% (2) Baker Hughes International Branches, Inc. Baker Hughes Oilfield Operations, Inc. 96.83% Other subsidiaries 3.17%
EX-23.1 16 h94456ex23-1.txt CONSENT OF DELOITTE & TOUCHE LLP EXHIBIT 23.1 INDEPENDENT AUDITORS' CONSENT Baker Hughes Incorporated: We consent to the incorporation by reference 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. 33-51295 on Form S-8, in Registration Statement No. 33-57759 on Form S-8, 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, in Post-Effective Amendment No. 1 to Registration Statement No. 333-87829 on Form S-3, and in Registration Statement No. 333-41982 on Form S-8 of our report dated February 13, 2002 (which report expresses an unqualified opinion and includes an explanatory paragraph relating to the Company's adoption of Statement of Financial Accounting Standards Nos. 133, 137 and 138 which establishes a new method of accounting for derivatives instruments and hedging activities) appearing in this Annual Report on Form 10-K of Baker Hughes Incorporated for the year ended December 31, 2001. Houston, Texas March 13, 2002 -----END PRIVACY-ENHANCED MESSAGE-----