UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Form 10K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 19397
Baker Hughes Incorporated
Delaware
(State or other jurisdiction of incorporation or organization) |
760207995
(IRS Employer Identification No.) |
3900 Essex Lane, Suite 1200, Houston, Texas
(Address of principal executive offices) |
770275177
(Zip Code) |
Registrants telephone number, including area code: (713) 4398600
Securities Registered Pursuant to Section 12(b) of the Act:
Title of Each Class
Name of Each Exchange
On Which Registered
Common Stock, $1 Par Value Per Share
New York Stock Exchange
Pacific Exchange
SWX 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 SK is not contained herein, and will not be contained, to the best of registrants knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10K or any amendment to this Form 10K. [X]
Indicate by check mark whether the registrant is an accelerated filer (as defined in the Exchange Act Rule 12b2). YES [X] NO [ ]
The aggregate market value of the voting and nonvoting Common Stock held by nonaffiliates as of the last business day of the registrants most recently completed second fiscal quarter (based on the closing price on June 27, 2003 reported by the New York Stock Exchange) was approximately $10,762,427,000.
At March 3, 2004, the registrant has outstanding 332,602,611 shares of Common Stock, $1 par value per share.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of Registrants 2003 Proxy Statement for the Annual Meeting of Stockholders to be held April 28, 2004 are incorporated by reference into Part III of this Form 10K.
Baker Hughes Incorporated
INDEX
Page | ||||||||
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Part I | |||||||
Item 1.
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Business | 2 | ||||||
Item 2.
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Properties | 13 | ||||||
Item 3.
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Legal Proceedings | 14 | ||||||
Item 4.
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Submission of Matters to a Vote of Security Holders | 15 | ||||||
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Part II | |||||||
Item 5.
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Market for Registrants Common Equity and Related Stockholder Matters | 15 | ||||||
Item 6.
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Selected Financial Data | 16 | ||||||
Item 7.
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Managements Discussion and Analysis of Financial Condition and Results of Operations | 18 | ||||||
Item 7A.
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Quantitative and Qualitative Disclosures About Market Risks | 34 | ||||||
Item 8.
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Financial Statements and Supplementary Data | 36 | ||||||
Item 9.
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Changes in and Disagreements with Accountants on Accounting and Financial Disclosure | 68 | ||||||
Item 9A.
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Controls and Procedures | 68 | ||||||
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Part III | |||||||
Item 10.
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Directors and Executive Officers of the Registrant | 68 | ||||||
Item 11.
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Executive Compensation | 68 | ||||||
Item 12.
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Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters | 68 | ||||||
Item 13.
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Certain Relationships and Related Transactions | 71 | ||||||
Item 14.
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Principal Accounting Fees and Services | 71 | ||||||
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Part IV | |||||||
Item 15.
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Exhibits, Financial Statement Schedules and Reports on Form 8K | 71 |
1
PART I
ITEM 1. BUSINESS
Baker Hughes Incorporated (Baker Hughes, Company, we, our or us)
is a Delaware corporation engaged in the oilfield services industry. Baker
Hughes is a major supplier of wellborerelated products and technology services
and systems to the oil and natural gas industry on a worldwide basis, including
products and services for drilling, formation evaluation, completion and
production of oil and natural gas wells. We conduct part or all of our
operations through subsidiaries, affiliates, ventures, partnerships or
alliances.
Baker Hughes was formed in April 1987 in connection with the combination
of Baker International Corporation and Hughes Tool Company. We acquired
Western Atlas Inc. in a merger completed on August 10, 1998.
As used herein, Baker Hughes, Company, we, our and us may refer
to Baker Hughes Incorporated or its subsidiaries. The use of these terms is
not intended to connote any particular corporate status or relationships.
Our annual reports on Form 10K, quarterly reports on Form 10Q, current
reports on Form 8K and amendments to those reports filed or furnished pursuant
to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended
(the Exchange Act), are made available free of charge on our Internet website
at www.bakerhughes.com as soon as reasonably practicable after these reports
have been electronically filed with, or furnished to, the Securities and
Exchange Commission (the SEC).
We have adopted a Business Code of Conduct to provide guidance to our
directors, officers and employees on matters of business conduct and ethics,
including compliance standards and procedures. We have also required our
principal executive officer, principal financial officer and principal
accounting officer to sign a Code of Ethical Conduct Certification. Our
Business Code of Conduct and Code of Ethical Conduct Certification are
available on the Investor Relations section of our website at
www.bakerhughes.com. We intend to promptly disclose on our website information
about any waiver of these codes with respect to our executive officers and
directors. Our Corporate Governance Guidelines and the charters of our
Audit/Ethics Committee, Governance Committee, Finance Committee, Executive
Committee and Compensation Committee also are available on the Investor
Relations section of our website at www.bakerhughes.com. In addition, a copy
of our Business Code of Conduct, Code of Ethical Conduct Certification,
Corporate Governance Guidelines and the charters of the Committees referenced
above are available in print at no cost to any stockholder who requests them by
writing or telephoning us at the following address or telephone number:
Baker Hughes Incorporated
Information contained on or connected to our website is not incorporated
by reference into this annual report on Form 10K and should not be considered
part of this report or any other filing that we make with the SEC.
We have six operating divisions Baker Atlas, Baker Oil Tools, Baker
Petrolite, Centrilift, Hughes Christensen and INTEQ that have been aggregated
to comprise the Oilfield segment because they have similar economic
characteristics and because the longterm financial performance of these
divisions is affected by similar economic conditions. These operating
divisions manufacture and sell products and provide services used in the oil
and natural gas industry, including drilling, completion, production of oil and
natural gas wells and in reservoir measurement and evaluation. The principal
markets include all major oil and natural gas producing regions of the world,
including North America, South America, Europe, Africa, the Middle East and the
Far East. The Oilfield segment also includes our 30% interest in WesternGeco,
a seismic venture between the Company and Schlumberger Limited
(Schlumberger), as well as other similar businesses.
For additional industry segment information for the three years ended
December 31, 2003, see Note 13 of the Notes to Consolidated Financial
Statements in Item 8 herein.
2
Baker Atlas
Baker Atlas is a leading provider of formation evaluation and perforating
services for oil and natural gas wells.
Formation Evaluation.
Formation evaluation involves measuring and
analyzing specific physical properties of the rock (petrophysical properties)
in the immediate vicinity of a wellbore to determine an oil or natural gas
reservoirs boundaries, volume of hydrocarbons and ability to produce fluids to
the surface. Electronic sensor instrumentation is run through the wellbore to
measure porosity and density (how much open space there is in the rock),
permeability (how well connected the spaces in the rock are) and resistivity
(is there oil, natural gas or water in the spaces). At the surface,
measurements are recorded digitally and can be displayed on a continuous graph,
or well log, which shows how each parameter varies along the length of the
wellbore. Formation evaluation tools can also be used to record formation
pressures and take samples of formation fluids to be further evaluated on the
surface.
Formation evaluation instrumentation can be run in the well in several
ways and at different times over the life of the well. The two most common
methods of data collection are wireline logging (performed by Baker Atlas) and
loggingwhiledrilling (LWD) (performed by INTEQ). Wireline logging is
conducted by pulling or pushing instruments through the wellbore after it is
drilled, while LWD instruments are attached to the drill string and take
measurements while the well is drilled. Wireline logging measurements can be
made before the wells protective steel casing is set (open hole logging),
after casing has been set (cased hole logging) or during production (production
logging).
Perforating Services.
Baker Atlas (and Baker Oil Tools) also provide
perforating services, which involve puncturing a wells steel casing and cement
sheath with explosive charges. This creates a fracture in the formation and
provides a path for hydrocarbons in the formation to enter the wellbore and be
produced.
Baker Atlas services allow oil and natural gas companies to define,
manage and reduce their exploration and production risk. As such, the main
driver of customer purchasing decisions is the value added by formation
evaluation and perforating services. Specific opportunities for competitive
differentiation include:
Baker Atlas primary formation evaluation and perforating competitors are
Schlumberger, Halliburton Company (Halliburton) and Precision Drilling
Corporation.
Key business drivers for Baker Atlas include the number of drilling and
workover rigs operating as well as the current and expected future price of
both oil and natural gas.
Baker Oil Tools
Baker Oil Tools is a leading provider of downhole completion, workover and
fishing equipment and services.
Completions.
The economic success of a well depends in large part on how
the well is completed. Completions are the equipment installed in a well after
it is drilled to allow the efficient and safe production of oil and natural gas
to the surface. Baker Oil Tools completion systems are matched to the
formation and reservoir for optimum production and can employ a variety of
products and services including:
3
Workovers.
Workover products and services seek to improve, maintain or
restore economical production from an already producing well. In this area,
Baker Oil Tools provides service tools and inflatable products to repair and
stimulate new and existing wells. Service tools function as surfaceactivated,
downhole sealing and anchoring devices to isolate a portion of the wellbore.
Service tool applications range from treating and cleaning to testing
components from the wellhead to the perforations. Service tools also refer to
tools and systems that are used for temporary or permanent well abandonment.
An inflatable packer expands to set in pipe that is much larger than the
outside diameter of the packer itself, so it can run through a restriction in
the well and then set in the larger diameter below. Inflatable packers can
also set in open hole, versus conventional tools, which can only be set
inside casing. Thrutubing inflatables enable remedial operations in live
wells. This results in cost savings as rig requirements are lower and
workovers can occur without having to remove the completion, which can be very
costly.
Fishing.
Baker Oil Tools is a leading provider of specialized fishing
services and equipment that are used to locate, dislodge and retrieve damaged
or stuck pipe, tools or other objects from inside the wellbore, often thousands
of feet below the surface. Other fishing services include cleaning wellbores
and milling windows in the casing to drill a sidetrack or multilateral well.
The main drivers of customer purchasing decisions in completions,
workovers and fishing are superior wellsite service execution and valueadding
technologies that improve production rates, protect the reservoir from damage
and reduce cost. Specific opportunities for competitive differentiation
include:
Baker Oil Tools primary competitors in completions are Halliburton,
Schlumberger, Weatherford International Ltd. (Weatherford) and BJ Services
Company and in workovers, its primary competitors are Halliburton, Schlumberger
and Weatherford. Its major competitors in fishing are Smith International,
Inc. (Smith) and Weatherford.
Key business drivers for Baker Oil Tools include the number of drilling
and workover rigs operating as well as the current and expected future price of
both oil and natural gas.
Baker Petrolite
Baker Petrolite is a leading provider of specialty chemicals to a number
of industries, primarily oil and natural gas production, but also including
refining, pipeline transportation, petrochemical, agricultural and iron and
steel manufacturing. Additionally, Baker Petrolite provides polymerbased
products to a broad range of industrial and consumer markets.
Baker Petrolite provides oilfield chemical programs for drilling, well
stimulation, production, pipeline transportation and maintenance programs. The
divisions products provide measurable productivity increases, operating and
maintenance cost reductions and solutions to environmental problems. Examples
of specialty oilfield chemical programs include:
4
For the refining industry, Baker Petrolite offers various process and
water treatment programs, as well as finished fuel additives. Examples include
programs to remove salt from crude oil and environmentally friendly cleaners
that decontaminate refinery equipment and petrochemical vessels at a lower cost
than other methods.
Through its Pipeline Management Group (PMG), Baker Petrolite also offers
a variety of products and services for the pipeline transportation industry.
To improve efficiency, Baker Petrolite offers custom turnkey cleaning programs
that combine chemical treatments with brush and scraper usage. Efficiency can
also be improved by adding polymerbased drag reduction agents to reduce the
slowing effects of friction between the pipeline walls and the fluids within,
thus increasing throughput and pipeline capacity. Additional services allow
pipelines to operate more safely. These include inspection and internal
corrosion assessment technologies, which physically confirm the structural
integrity of the pipeline. In addition, PMGs flowmodeling capabilities can
identify highrisk segments of a pipeline to ensure proper mitigation programs
are in place.
Baker Petrolite also provides chemical technology solutions to other
industrial markets throughout the world including petrochemicals, fuel
additives, plastics, imaging, adhesives, steel and crop protection.
The main driver of customer purchasing decisions in specialty chemicals is
superior application of technology and service delivery. Opportunities for
competitive differentiation based on chemical system performance include:
Baker Petrolites primary competitors are GE Water Technologies, Nalco
Company and Champion Servo.
Key business drivers for Baker Petrolite include oil and natural gas
production levels as well as the current and expected future price of both oil
and natural gas.
5
Centrilift
Centrilift is a leading manufacturer and supplier of electrical
submersible pump systems (ESPs) and progressing cavity pump systems (PCPs).
Electrical Submersible Pump Systems.
ESPs lift high quantities of oil or
oil and water from wells that do not flow under their own pressure. These
artificial lift systems consist of a centrifugal pump and electric motor
installed in the wellbore, armored electric cabling to provide power to the
downhole motor and a surface controller. Centrilift designs, manufactures,
markets and installs all the components of ESP systems and also offers modeling
software to size ESPs and simulate operating performance. ESPs may be used in
onshore or offshore applications and are primarily used in mature oil producing
reservoirs.
Progressing Cavity Pump Systems.
PCPs are a form of artificial lift
comprised of a downhole progressing cavity pump powered by either a downhole
electric motor or a rod turned by a motor on the surface. PCP systems are
preferred when the fluid to be lifted is viscous or when the volume is
significantly less than could be economically lifted with an ESP system.
Opportunities for competitive differentiation for both ESP and PCP systems
include:
Centrilifts primary competitors in the ESP market are Schlumberger and
John Wood Group PLC and in the PCP market are Weatherford and Robbins & Myers,
Inc.
Key business drivers for Centrilift include oil production levels as well
as the current and expected future oil prices.
Hughes Christensen
Hughes Christensen is a leading manufacturer and supplier of drill bit
products, primarily Tricone® roller cone bits and fixed polycrystalline diamond
compact (PDC) cutter bits, to the worldwide oil and natural gas, mining and
geothermal industries. The primary objective of drill bits is to create a hole
as efficiently as possible.
Tricone® Bits.
Tricone® drill bits employ either hardened steel teeth or
tungsten carbide insert cutting structures mounted on three rotating cones.
These bits work by crushing and shearing the formation rock as they are turned.
Tricone® drill bits have a wide application range.
PDC Bits.
PDC (also known as Diamond) bits use fixed position cutters
that shear the formation rock with a milling action as they are turned. In
many softer and less variable applications, PDC bits offer higher penetration
rates and longer life than Tricone® bits. A rental market is developing for
PDC bits as improvements in bit life and bit repairs allow a bit to be used to
drill multiple wells.
The main driver of customer purchasing decisions in drill bits is the
value added, usually measured in terms of savings in total operating costs per
distance drilled. Specific opportunities for competitive differentiation
include:
Hughes Christensens primary competitors in the oil and natural gas drill
bit market are Smith, Halliburton and Grant Prideco, Inc. and in the mining and
geothermal bit markets are Sandvik Smith AB and Varel International, Inc.
6
Key business drivers for Hughes Christensen include the number of drilling
rigs operating as well as the current and expected future price of both oil and
natural gas.
INTEQ
INTEQ is a leading supplier of drilling and evaluation services, which
include directional drilling, measurementwhiledrilling (MWD) and LWD
services. In addition, INTEQ is a major supplier of drilling fluids.
Directional Drilling
. Directional drilling services are used to guide a
well along a predetermined path to optimally recover hydrocarbons from the
reservoir. These services are used to accurately drill vertical wells,
deviated or directional wells (which deviate from vertical by a planned angle
and direction), horizontal wells (which are sections of wells drilled
perpendicular or nearly perpendicular to vertical) and extended reach wells.
INTEQ is a leading supplier of both conventional and rotary based
directional drilling systems. Conventional directional drilling systems employ
a downhole motor which turns the drill bit independently of drill string
rotation from the surface. Placed just above the bit, a steerable motor
assembly has a bend in its housing that is oriented to steer the wells course.
During the rotary mode, the entire drill string is rotated from the surface,
negating the effect of this bend and causing the bit to drill on a straight
course. During the sliding mode, drill string rotation is stopped and a
mud motor (which converts hydraulic energy from the drilling fluids being
pumped through the drill string into rotational energy at the bit) allows the
bit to drill in the direction that it is oriented due to its angled housing,
gradually guiding the wellbore through an arc.
INTEQ was a pioneer and is a leader in the development and use of rotary
steerable technology. In rotary steerable environments, the entire drill
string is turned from the surface to supply energy to the bit. Unlike
conventional systems, INTEQs AutoTrak® rotary steerable system changes the
trajectory of the well using three pads that push against the wellbore from a
nonrotating sleeve.
MeasurementWhileDrilling.
Directional drilling systems need realtime
measurements of the location and orientation of the bottom hole assembly to
operate effectively. INTEQs MWD systems are downhole tools that provide this
directional information, which is necessary to adjust the drilling process and
guide the wellbore to a specific target. The AutoTrak® rotary steerable system
has these MWD systems built in, allowing the tool to automatically alter its
course based on a planned trajectory.
LoggingWhileDrilling.
LWD is a variation of MWD in which the LWD tool
gathers information on the petrophysical properties of the rocks through which
the wellbore is being drilled. Many LWD measurements are the same as those
taken via wireline; however, taking them in realtime often allows for greater
accuracy as measurements occur before any damage has been sustained by the
reservoir as a result of the drilling process. Realtime measurements also
allow geosteering where geological markers identified by LWD tools are used
to guide the bit and assure placement of the wellbore in the optimal location.
In both MWD and LWD systems, communication with the tool is achieved
through mudpulse telemetry, which uses pulse signals (pressure changes in the
drilling fluid traveling through the drill string) to communicate the operating
conditions and location of the bottom hole assembly to the surface. The
information transmitted is used to maximize the efficiency of the drilling
process, update and refine the reservoir model and steer the well into the
optimal location in the reservoir.
The main drivers of customer purchasing decisions in these areas are the
value added by technology and the reliability and durability of the tools used
in these operations. Specific opportunities for competitive differentiation
include:
Drilling and Completion Fluids.
INTEQ is also a major provider of
drilling fluids (also called mud) and completion fluids (also called
brines). Drilling fluid is an important component of the drilling process.
It is pumped from the surface through the drill string, exiting nozzles in the
drill bit and traveling back up the wellbore where it is recycled. This
process cleans the bottom of the well by transporting the cuttings to the
surface while also cooling and lubricating the bit and drill string. Drilling
fluids typically
7
contain barite or bentonite to give them weight which allows the fluid to
hold the wellbore open and stabilize it. Additionally, the fluid controls
downhole pressures and seals porous sections of the wellbore. To insure
maximum efficiency and wellbore stability, drilling fluid is often customized
by the wellsite engineer. For drilling through the reservoir itself, INTEQs
drillin or completion fluids possess properties that minimize formation
damage.
As part of INTEQs mud logging services, engineers monitor the interaction
between the drilling fluid and the formation, perform laboratory analysis of
drilling fluids and examinations of the drill cuttings to detect the presence
of hydrocarbons and identify the different geological layers penetrated by the
drill bit.
INTEQ also provides equipment and services to separate the drill cuttings
from the drilling fluids and reinject the processed cuttings into a specially
prepared well, or transport and dispose of the cuttings by other means.
In fluids, the main driver of customer purchasing decisions is cost
efficiency. Performancebased opportunities for competitive differentiation
include:
INTEQs primary competitors in drilling and evaluation services are
Halliburton and Schlumberger and in drilling and completion fluids are
Halliburton and MI, LLC.
Key business drivers for INTEQ include the number of drilling rigs
operating as well as the current and expected future price of both oil and
natural gas.
WesternGeco
WesternGeco is a provider of seismic data acquisition and processing
services to assist oil and natural 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 down through the
earth 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 natural gas may be trapped in or
moving through those formations. This analysis is known as a seismic survey.
WesternGeco maintains a library of such seismic surveys.
WesternGeco conducts seismic surveys on land and, with its marine seismic
fleet, in deep water and across shallowwater transition zones worldwide.
These seismic surveys encompass highresolution, twodimensional and
threedimensional surveys for delineating exploration targets. WesternGeco
also conducts timelapse, fourdimensional 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. WesternGecos major competitors in providing these services are
Compagnie Generale de Geophysique, Veritas DGC, Inc. and Petroleum GeoServices
ASA.
MARKETING, COMPETITION AND ECONOMIC CONDITIONS
We market our products and services on a product line basis primarily
through our own sales organizations, although certain of our products and
services are marketed through supply stores, independent distributors or sales
representatives. We ordinarily provide technical and advisory services to
assist in our customers use of our products and services. Stock points and
service centers for our products and services are located in areas of drilling
and production activity throughout the world. In certain areas outside the
United States, we utilize licensees, sales representatives, agents and
distributors.
Our products and services are sold in highly competitive markets, and
revenues and earnings can be affected by changes in competitive prices,
fluctuations in the level of drilling, workover and completion activity in
major markets, general economic conditions, foreign exchange fluctuations and
governmental regulation. We compete with the oil and natural gas industrys
largest diversified oilfield services providers, as well as many small
companies. We believe that the principal competitive factors in our industries
are product and service quality; availability and reliability; health, safety
and environmental standards; technical proficiency and price.
8
Further information is contained in Item 7. Managements Discussion and
Analysis of Financial Condition and Results of Operations.
INTERNATIONAL OPERATIONS
We operate in over 80 countries worldwide, and our operations are subject
to the risks inherent in doing business in multiple countries with various laws
and differing political environments. These risks include, but are not limited
to, war, boycotts, political and economic changes, corruption, terrorism,
expropriation, foreign currency controls, taxes and changes in currency
exchange rates. Although it is impossible to predict the likelihood of such
occurrences or their effect on the Company, division and corporate management
evaluate these risks periodically and take appropriate actions to mitigate the
risks where possible. 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 our
operations.
Further information is contained in Item 7. Managements Discussion and
Analysis of Financial Condition and Results of Operations.
RESEARCH AND DEVELOPMENT; PATENTS
We are 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, processes and services. For information regarding the amounts of
research and development expense in each of the three years in the
period ended December 31,
2003, see Note 17 of the Notes to Consolidated Financial Statements in Item 8
herein.
We have 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. We believe our patents and trademarks to be
adequate for the conduct of our business, and aggressively pursue protection of
our patents against patent infringement worldwide. While we regard patent and
trademark protection as important to our business and future prospects, we
consider our established reputation, the reliability and quality of our
products and the technical skills of our personnel to be more important. No
single patent or trademark is considered to be of a critical nature to our
business.
RAW MATERIALS
We purchase various raw materials for use in manufacturing our products.
The principal raw materials we purchase are steel alloys (including chromium
and nickel), titanium, beryllium, copper, tungsten carbide, synthetic and
natural diamonds, printed circuit boards and other electronic components and
hydrocarbon based chemical feed stocks. All of these materials are available
from numerous sources. We have not experienced any significant shortages of
raw materials and normally do not carry inventories of such raw materials in
excess of those reasonably required to meet our production schedules. We do
not expect any interruptions in supply, but there can be no assurance that
there will be no price or supply issues over the longterm.
OTHER DEVELOPMENTS
In December 2002, we entered into exclusive negotiations for the sale of
our interest in our oil producing operations in West Africa for $32.0 million
in proceeds. The transaction was effective as of January 1, 2003, and resulted
in a gain on sale of $4.1 million, net of a tax benefit of $0.2 million,
recorded in the first quarter of 2003. We received $10.0 million as a deposit
in 2002 and the remaining $22.0 million in April 2003.
In the third quarter of 2003, our Board of Directors approved and
management initiated a plan to sell BIRD, the remaining operating division of
our former Process segment. In October 2003, we entered into a definitive
agreement for the sale of BIRD. Accordingly, we classified BIRD as a
discontinued operation and recorded charges totaling $37.4 million, net of tax
of $10.9 million, which consisted of a loss of $13.5 million on the writedown
of BIRD to fair value, $6.2 million of severance and warranty accruals and a
loss of $17.7 million related to the recognition of cumulative foreign currency
translation adjustments into earnings. The sale closed in January 2004, and we
received proceeds of $5.6 million, which is subject to adjustment pending final
completion of the purchase price. We retained certain accounts receivable,
inventories and other assets.
In
February 2004, we completed the sale of our minority interest in
Petreco International and received proceeds of $35.8 million, of
which $7.4 million is held in escrow pending the outcome of
potential indemnification obligations pursuant to the sales agreement. We do not believe the transaction
is material to our financial condition or results of
operations.
9
EMPLOYEES
At December 31, 2003, we had approximately 26,650 employees, as compared
with approximately 26,500 employees at December 31, 2002. Approximately 2,400
of these employees are represented under collective bargaining agreements or
similartype labor arrangements, of which the majority are outside the U.S.
Based upon the geographic diversification of these employees, we believe any
risk of loss from employee strikes or other collective actions would not be
material to the conduct of our operations taken as a whole. We believe that
our relations with our employees are good.
EXECUTIVE OFFICERS
The following table shows as of March 3, 2004, the name of each of our
executive officers, together with his age and all offices presently held.
10
There are no family relationships among our executive officers.
ENVIRONMENTAL MATTERS
Our past and present operations include activities which are subject to
domestic (including U. S. federal, state and local) and international
regulations with regard to air and water quality and other environmental
matters. We believe we are 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 us and our customers to modify, supplement or
replace equipment or facilities or to change or discontinue present methods of
operation. We are committed to the health and safety of people, protection of
the environment and compliance with laws, regulations and our policies.
We are involved in voluntary remediation projects at some of our present
and former manufacturing facilities, the majority of which relate to properties
obtained in acquisitions or to sites we no longer actively use in operations.
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. For sites
where we are primarily responsible for the remediation, our estimates of costs
are developed based on internal evaluations and are not discounted. Such
accruals are recorded when it is probable that we 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, we accrue 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, such as
obtaining environmental permits, installation of pollution control equipment
and waste disposal, are expensed as incurred.
The Comprehensive Environmental Response, Compensation and Liability Act
(known as Superfund or CERCLA) 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. We have been identified as a
potentially responsible party (PRP) in remedial activities related to various
Superfund sites, and we accrue our share of the estimated remediation costs of
the site based on the ratio of the estimated volume of waste contributed to the
site by us to the total volume of waste at the site. With the joint and
several liability imposed under Superfund, a PRP may be required to pay more
than its proportional share of such costs.
11
During the year ended December 31, 2003, we spent approximately $21.8
million to comply with domestic and international standards regulating the
discharge of materials into the environment or otherwise relating to the
protection of the environment (collectively, Environmental Regulations). In
2004, we expect to spend approximately $24.0 million to comply with
Environmental Regulations. Based upon current information, we believe that our
compliance with Environmental Regulations will not have a material adverse
effect upon our capital expenditures, earnings or competitive position because
we have either made adequate reserves for those compliance expenditures or the
cost to us for that compliance is not expected to be material to our financial
condition or results of operations.
During the year ended December 31, 2003, we incurred approximately $3.6
million in capital expenditures for environmental control equipment and we
estimate that we will incur approximately $4.0 million during 2004. We believe
that these capital expenditures for environmental control equipment will not
have a material adverse effect upon our financial condition or results of
operations because the aggregate amount of these expenditures is not expected
to be material.
We and several of our 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. For the sites detailed
below, we estimate remediation costs of approximately $6.1 million, of which we
had spent $1.8 million as of December 31, 2003. When used in the descriptions
of the sites below, the word
de minimis
means less than a 1% contribution rate.
12
In addition to the sites mentioned above, there are four sites for which
the remedial work has been completed and which are in the groundwater recovery
and monitoring phase. This phase of the remediation is expected to continue
for a period of 3 to 28 years, and our aggregate cost for these sites is
estimated to be approximately $0.1 million over this period of time.
While PRPs in Superfund actions have joint and several liability for all
costs of remediation, it is not possible at this time to quantify our ultimate
exposure because some of the projects are either in the investigative or early
remediation stage. Based upon current information, we do not believe that
probable or reasonably possible expenditures in connection with the sites
described above are likely to have a material adverse effect on our financial
condition because we have established adequate reserves to cover the estimate
we presently believe will be our ultimate liability with respect to the matter,
other PRPs involved in the sites have substantial assets and may reasonably be
expected to pay their share of the cost of remediation, and, in some
circumstances, we have insurance coverage or contractual indemnities from third
parties to cover the ultimate liability.
We are subject to various other governmental proceedings and regulations,
including foreign regulations, relating to environmental matters, but we do not
believe that any of these matters is likely to have a material adverse effect
on our financial condition or results of operations. See Note 16 of the Notes
to Consolidated Financial Statements in Item 8 herein for further discussion of
environmental matters.
Environmental Matters contains forwardlooking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Exchange Act (each a ForwardLooking Statement). The words
will, believe, to be, expect, estimate and similar expressions are
intended to identify forwardlooking statements. Our expectations regarding
our compliance with Environmental Regulations and our expenditures to comply
with Environmental Regulations, including (without limitation) our capital
expenditures on environmental control equipment, are only our 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 we have been named as a PRP, including (without limitation) the sites
described above; the discovery of new sites of which we are not aware and where
additional expenditures may be required to comply with Environmental
Regulations; an unexpected discharge of hazardous materials in the course of
our business or operations; an acquisition of one or more new businesses; a
catastrophic event causing discharges into the environment of hydrocarbons; and
a material change in the allocation to us of the volume of discharge and a
resulting change in our liability as a PRP with respect to a site.
3900 Essex Lane, Suite 1200
Houston, TX 77027
Attention: Investor Relations
Telephone: (713) 4398039
Table of Contents
data acquisition efficiency,
the sophistication and accuracy of measurements and
the ability to interpret the information gathered to quantify the hydrocarbons producible from the formation.
Liner hangers, which suspend a section of steel casing (also called a
liner) inside the bottom of the previous section of casing. Its
expandable slips grip the inside of the casing and support the weight of
the liner below.
Packers, which seal the annular space between the steel production
tubing and the casing. These tools control the flow of fluids in the
well and protect the casing above from reservoir pressures and corrosive
formation fluids.
Flow control equipment, which controls and adjusts the flow of
downhole fluids. Typical flow control devices include sliding sleeves,
which can be opened or closed to allow or limit production from a
particular portion of a reservoir. Flow control can be accomplished
from the surface via wireline or downhole via hydraulic or electric
motorbased automated systems.
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Subsurface safety valves, which shut off all flow of fluids to the
surface in the event of an emergency, thus saving the well and
preventing pollution of the environment. These valves are required in
substantially all offshore wells.
Sand control equipment, which includes gravel pack tools, sand
screens and fracturing fluids. These tools and related services are
used in loosely consolidated formations to prevent the production of
formation sand with the hydrocarbons.
Advanced completion technologies, which include multilateral systems,
intelligent well systems and expandable metal technologies.
Multilateral completion systems enable production from more than one
zone in a conventional vertical well, from multiple lateral zones, or
even from multiple reservoirs in a field. Intelligent Completions® use
realtime, remotely operated downhole systems to control the flow of
hydrocarbons from one or more zones. Expandable metal technology
involves the permanent downhole expansion of a variety of tubular
products used in drilling, completion and well remediation applications.
the engineering and manufacturing of superior quality products,
reduced well construction costs,
enhanced production and ultimate recovery,
minimized risks and
reliable performance over the life of the well particularly in harsh environments and critical wells.
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Hydrate inhibitors Natural gas hydrates are solid icelike crystals
that can form in production flowlines and tubing, causing shutdowns and
system maintenance. Especially susceptible to hydrates are subsea wells
and flowlines, particularly in deepwater environments.
Paraffin inhibitors The liquid hydrocarbons produced from many oil
and natural gas reservoirs become unstable soon after leaving the
formation. Changing conditions, including decreases in temperature and
pressure, can cause certain solid hydrocarbons in the produced fluids to
crystallize and deposit on the walls of the wells tubing, flow lines
and surface equipment. These deposits are commonly referred to as
paraffin. Baker Petrolite offers solvents that remove the deposits, as
well as inhibitors that prevent new deposits from forming.
Scale inhibitors Unlike paraffin deposits that originate from
organic material in the produced hydrocarbons, scale deposits come from
mineralbased contaminants in water that are produced from the formation
as the water undergoes changes in temperature or pressure. Similar to
paraffin, scale deposits can clog the production system. Treatments
prevent and remove deposits in production systems.
Corrosion inhibitors Another problem caused by water mixed with
downhole hydrocarbons is corrosion of the wells tubulars and other
production equipment. Corrosion can also be caused by dissolved
hydrogen sulfide (H
2
S) gas which reacts with iron in tubulars, valves
and other system equipment. The H
2
S eats away at the iron source,
potentially causing failures and leaks. Additionally, the reaction
creates iron sulfide which can impair treating systems and cause
blockages. Baker Petrolite offers a variety of corrosion inhibitors and
H
2
S scavengers.
Emulsion breakers While water and oil typically do not mix, water
present in the reservoir and coproduced with oil can often become
emulsified, or mixed, causing many problems for oil and natural gas
producers. Baker Petrolite offers emulsion breakers which allow the
water component of the emulsion to be separated from the oil.
improved levels of production or throughput,
reduced maintenance costs and frequency,
lower treatment costs,
lower treatment intervals and
successful resolution of environmental issues.
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system reliability,
system runlife,
operating efficiency and
service delivery.
improving the rate of penetration,
extending bit life and
selecting the optimal bit for each section to be drilled.
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the sophistication and accuracy of measurements,
the efficiency of the drilling process,
equipment reliability,
the optimal placement of the wellbore in the reservoir and
the quality of the wellbore.
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improvements in drilling efficiency,
minimizing formation damage and
the environmentally safe handling and disposal of drilling fluids and cuttings.
Table of Contents
Table of Contents
Name
Age
Michael E. Wiley
53
Chairman of the Board and Chief Executive
Officer of the Company since August 2000.
Also served as President of the Company from
August 2000 to February 2004. Employed by
Atlantic Richfield Company as President and
Chief Operating Officer from 1998 to 2000 and
as Executive Vice President from 1997 to 1998.
Employed by Vastar Resources, Inc. as
President and Chief Executive Officer from
1994 to 1997 and served as Chairman of the
Board from 1997 to 2000. Employed by the
Company in 2000.
James R. Clark
53
President and Chief Operating Officer of the
Company since February 2004. Vice President,
Marketing and Technology of the Company from
August 2003 to February 2004. Vice President
of the Company and President of Baker
Petrolite Corporation from 2001 to 2003.
President and Chief Executive Officer of
Consolidated Equipment Companies, Inc. from
2000 to 2001 and President of SperrySun from
1996 to 1999. Employed by the Company in
2001.
G. Stephen Finley
53
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.
52
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
52
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
49
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.
Ray A. Ballantyne
54
Vice President of the Company since 1998 and
President, 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.
David H. Barr
54
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 positions 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,
Table of Contents
Name
Age
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.
Trevor M. Burgess
49
Vice President of the Company since 1999, and
President Hughes Christensen since 2003.
Employed as Vice President, Marketing and
Technology from 2000 to 2003 and Vice
President, Sales for the Company from 1999 to
2000. Served as Vice President Marketing,
Camco International in 1999; Vice President
Marketing, Schlumberger Oilfield Services from
1998 to 1999; Vice President Business
Development, Wireline and Testing, Schlumberger
from 1997 to 1998. Mr. Burgess served as
Marketing Manager, Wireline and Testing,
Schlumberger from 1996 to 1997 and Vice
President, Marketing, Anadrill from 1990 to
1996. He also served in various other
positions at Schlumberger from 1979 to 1990.
Employed by the Company in 1999.
William P. Faubel
48
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
the Company in 1977.
Edwin C. Howell
56
Vice President of the Company since 1995 and
President of Baker Petrolite Corporation since
2003. President of Baker Oil Tools from 1992
to 2003. 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
51
Vice President of the Company and President of
Baker Oil Tools since 2003. President of
Hughes Christensen from 1997 to 2003. Served
as President and Chief Executive Officer of
Western Rock Bit Company Limited, Hughes
Christensens former distributor in Canada,
from 1991 to 1997. Previously employed as
General Manager of Century Valve Company from
1989 to 1991 and Vice President, Contracts and
Marketing, of Adeco Drilling & Engineering from
1980 to 1989. Employed by the Company in 1997.
Table of Contents
(a)
Baker Petrolite, Hughes Christensen, an 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
Commission on Environmental Quality (TCEQ) is overseeing the remedial
work at this site. The Sheridan Site Trust was formed to manage the
site remediation, and we participate as a member. Sheridan Site Trust
officials estimate the total remedial and administrative costs to be
approximately $30 million, of which our estimated contribution is
approximately 1.8%.
(b)
In December 1987, one of our former subsidiaries was named a
respondent in an EPA Administrative Order for Remedial Design and
Remedial Action associated with the MiddlefieldEllisWhisman (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. As a result of our environmental
investigations and a resulting report delivered to the EPA in September
1991, the EPA has informed us that no further work needs to be performed
on the site, and further, the EPA has indicated that it does not believe
there is a contaminant source on the property. We are in settlement
negotiations with the other PRPs. It is expected to settle in 2004.
The settlement is not expected to be material.
(c)
In 1997, Baker Hughes and Prudential Insurance Company (Prudential)
entered into a settlement agreement regarding cost recovery for the San
Fernando Valley Glendale Superfund. A Baker Hughes predecessor
operated on the Prudential property in Glendale. Prudential was
identified as a PRP for the Glendale Superfund. Prudential instituted
legal proceedings against us for cost recovery under CERCLA. Without
any admission of liability, we agreed to pay 40% of the cost, which is
limited to $260,000 under our agreement with Prudential, attributed to
the cleanup of the site. The first phase of groundwater investigation
and the interim remedy have been presented to the EPA.
(d)
In June 1999, the EPA named a Hughes Christensen predecessor as a PRP
at the Li Tungsten Site in Glen Cove, New York. We believe we have
contributed a
de minimis
amount of hazardous substance to the site and
have responded to the EPAs inquiry. The Department of Defense, a major
PRP, is attempting to settle with the City of Glen Cove separately from
the rest of the PRP group. The PRP group led by the former site
operator, Teledyne, is commenting on this settlement. The cleanup for
the site is estimated at $40 million.
(e)
In January 1999, Baker Oil Tools, Baker Petrolite and predecessor
entities of Baker Petrolite were named as PRPs by the State of
Californias Department of Toxic Substances Control for the Gibson site
in Bakersfield, California. The cost estimate for remediation of the
site is approximately $14 million. The combined volume that our
companies contributed to the site is estimated to be less than 0.5%.
(f)
In 2001, a Hughes Christensen predecessor, Baker Oil Tools, INTEQ and
one of our former subsidiaries were named as PRPs in the Force Road
State Superfund Site located in Brazoria County, Texas. The TCEQ is
overseeing the investigation and remediation at the Force Road State
Site. Although the investigation of the site is incomplete, preliminary
cost estimates for the closure of the site are approximately $3 million.
We estimate our total contribution to be in the range of 55% to 60% of
that cost.
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(g)
In 2002, Baker Petrolite predecessors, Hughes Christensen
predecessors and two of our former subsidiaries, Lynes, Inc. and Baker
Tubular Services, were identified as PRPs for the Malone site located on
Campbell Bayou Road in Texas City, Texas. The EPA is overseeing the
investigation and remediation of the Malone site. The EPA has engaged
in some emergency removal actions at the site. A PRP group has been
formed and is evaluating the next steps for the site. Although the
investigation has not been completed, the initial estimate for cleanup
at the Malone site is $82 million. Our total contribution is estimated
at approximately 1.7%.
(h)
In January 2003, Western Atlas International, Inc., its predecessor
companies and Baker Hughes Oilfield Operations, Inc. were identified as
PRPs in the Gulf Nuclear Superfund site in Odessa, Texas. The EPA
conducted an emergency removal from the site in 2000. The EPA has
estimated total investigation and cleanup costs to be $24 million. At
this time, there is insufficient information to estimate our potential
contribution to the investigation and cleanup costs at this site.
(i)
In September 2003, the Company was identified as a
de minimis
PRP by
the EPA for the Operating Industries, Inc. (OII) Superfund site in
Monterrey Park, California. The EPA will propose a settlement to all
de
minimis
parties in March 2004. The EPA and Steering Committee estimate
cleanup costs in excess of $650 million. At this time, there is
insufficient information to estimate our potential contribution to
cleanup costs.
(j)
In October 2003, Baker Petrolite was notified by the EPA of their
potential involvement at the Cooper Drum Superfund site located in South
Gate, California. At this time there is no estimate available for
cleanup costs and, accordingly, there is insufficient information to
estimate our potential contribution to cleanup costs.
ITEM 2. PROPERTIES
We are headquartered in Houston, Texas and operate 40 principal manufacturing plants, ranging in size from approximately 4,600 to 349,000 square feet of manufacturing space. The total area of the plants is more than 3.2 million square feet, of which approximately 2.2 million square feet (68%) are located in the United States, 0.3 million square feet (10%) are located in Canada and South America, 0.7 million square feet (22%) are located in Europe and a minimal amount of space is located in the Far East. These manufacturing plants by geographic area appear in the table below. Our principal manufacturing plants are located as follows: United
13
States Houston, Texas; Tulsa, Oklahoma; Lafayette, Louisiana; South
America various cities in Venezuela and Buenos Aires, Argentina; and Europe
Aberdeen and East Kilbride, Scotland; Kirkby, England; Celle, Germany; Belfast,
Ireland. We also own or lease and operate numerous service centers, shops and
sales and administrative offices throughout the geographic areas in which we
operate.
Number of
Principal
Geographic Area
Plants
United States
27
Canada and South America
5
Europe
7
Far East
1
Total
40
We believe that our manufacturing facilities are well maintained and suitable for their intended purposes. We also have a significant investment in service vehicles, rental tools and manufacturing and other equipment.
ITEM 3. LEGAL PROCEEDINGS
We are involved in litigation or proceedings that have arisen in our ordinary business activities. We insure against these risks to the extent deemed prudent by our management, but no assurance can be given that the nature and amount of that insurance will be sufficient to fully indemnify us against liabilities arising out of pending and future legal proceedings. Many of these insurance policies contain deductibles or selfinsured retentions in amounts we deem prudent and for which we are responsible for payment. In determining the amount of selfinsurance, it is our policy to selfinsure those losses that are predictable, measurable and recurring in nature, such as claims for automobile liability, general liability and workers compensation. We record accruals for the uninsured portion of losses related to these types of claims. The accruals for losses are calculated by estimating losses for claims using historical claim data, specific loss development factors and other information as necessary.
On September 12, 2001, the Company, without admitting or denying the factual allegations contained in the Order, consented with the Securities and Exchange Commission (SEC) to the entry of an Order making Findings and Imposing a CeaseandDesist Order (the Order) for violations of Section 13(b)(2)(A) and Section 13(b)(2)(B) of the Exchange Act. Among the findings included in the Order were the following: In 1999, we discovered that certain of our officers had authorized an improper $75,000 payment to an Indonesian tax official, after which we embarked on a corrective course of conduct, including voluntarily and promptly disclosing the misconduct to the SEC and the Department of Justice (the DOJ). In the course of our investigation of the Indonesia matter, we learned that we had made payments in the amount of $15,000 and $10,000 in India and Brazil, respectively, to our agents, without taking adequate steps to ensure that none of the payments would be passed on to foreign government officials. The Order found that the foregoing payments violated Section 13(b)(2)(A). The Order also found the Company in violation of Section 13(b)(2)(B) because it did not have a system of internal controls to determine if payments violated the Foreign Corrupt Practices Act (FCPA). The FCPA makes it unlawful for U.S. issuers, including the Company, or anyone acting on their behalf, to make improper payments to any foreign official in order to obtain or retain business. In addition, the FCPA establishes accounting control requirements for U.S. issuers. We cooperated with the SECs investigation.
By the Order, dated September 12, 2001 (previously disclosed by us and incorporated by reference in this annual report as Exhibit 99.1), we agreed to cease and desist from committing or causing any violation and any future violation of Section 13(b)(2)(A) and Section 13(b)(2)(B) of the Exchange Act. Such Sections of the Exchange Act require issuers to (x) make and keep books, records and accounts, which, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the issuer and (y) devise and maintain a system of internal accounting controls sufficient to provide reasonable assurances that: (i) transactions are executed in accordance with managements general or specific authorization; and (ii) transactions are recorded as necessary: (I) to permit preparation of financial statements in conformity with generally accepted accounting principles or any other criteria applicable to such statements, and (II) to maintain accountability for assets.
On March 25, 2002, a former employee alleging improper activities relating to Nigeria filed a civil complaint against the Company in the 281st District Court in Harris County, Texas, seeking back pay and damages, including future lost wages. On August 2, 2002, the same former employee filed substantially the same complaint against the Company in the federal district court for the Southern District of Texas. Through our insurer, we finalized a settlement agreement with the former employee. Final settlement documents were fully executed on December 2, 2003, and the case was formally dismissed, with prejudice, by order of the federal court on December 19, 2003. The state court case had been previously dismissed. The settlement was not material to the Company.
14
On March 29, 2002, we announced that we had been advised that the SEC and the DOJ are conducting investigations into allegations of violations of law relating to Nigeria and other related matters. The SEC has issued a formal order of investigation into possible violations of provisions under the FCPA regarding antibribery, books and records and internal controls, and the DOJ has asked to interview current and former employees. On August 6, 2003, the SEC issued a subpoena seeking information about our operations in Angola and Kazakhstan as part of its ongoing investigation. We are providing documents to and cooperating fully with the SEC and the DOJ. In addition, we are conducting internal investigations into these matters. The SEC and the DOJ have a broad range of sanctions they may seek to impose in appropriate circumstances including, but not limited to, injunctive relief, disgorgement, fines and penalties, and modifications to business practices and compliance programs, as well as civil or criminal charges against individuals. It is not possible to accurately predict at this time when such investigations will be completed, what, if any, actions may be taken by the SEC, DOJ or other authorities and the effect thereof on the Company.
Our ongoing internal investigation with respect to certain operations in Nigeria has identified apparent deficiencies in our books and records and internal controls, and potential liabilities to governmental authorities in Nigeria. The investigation was substantially completed during the first quarter of 2003. Based upon current information, we do not expect that any such potential liabilities will have a material adverse effect on our results of operations or financial condition.
The Department of Commerce, Department of the Navy and DOJ (the U.S. agencies) are investigating compliance with certain export licenses issued to Western Geophysical from 1994 through 2000 for export of seismic equipment leased by the Peoples Republic of China. We acquired Western Geophysical in August 1998 and subsequently transferred related assets to WesternGeco in December 2000. Under the joint venture formation agreement with WesternGeco, we owe indemnity to WesternGeco for certain matters. We are cooperating fully with the U.S. agencies. Based on current information, we cannot predict the outcome of the investigation or any effect it may have on our financial condition.
For additional information see Item 1. Business Environmental Matters.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR REGISTRANTS COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our Common Stock, $1.00 par value per share (the Common Stock), is principally traded on the New York Stock Exchange. Our Common Stock is also traded on the Pacific Exchange and the SWX Swiss Exchange. At March 3, 2004, there were approximately 71,000 stockholders and approximately 22,627 stockholders of record.
For information regarding quarterly high and low sales prices on the New York Stock Exchange for our Common Stock during the two years ended December 31, 2003 and information regarding dividends declared on our Common Stock during the two years ended December 31, 2003, see Note 18 of the Notes to Consolidated Financial Statements in Item 8 herein.
Information concerning securities authorized for issuance under equity compensation plans is set forth in Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Equity Compensation Plan Information.
15
ITEM 6. SELECTED FINANCIAL DATA
The Selected Financial Data should be read in conjunction with Item 7.
Managements Discussion and Analysis of Financial Condition and Results of
Operations and with Item 8. Financial Statements and Supplementary Data
herein.
Year Ended December 31,
(In millions, except per share amounts)
2003
2002
2001
2000
1999
$
5,292.8
$
4,901.7
$
5,037.6
$
4,833.1
$
4,854.8
3,854.9
3,525.2
3,564.5
3,726.7
3,957.1
830.1
811.5
755.1
693.4
752.2
45.3
(1.6
)
(1.1
)
(4.2
)
7.0
44.3
(2.4
)
67.9
(54.8
)
4,729.2
4,336.7
4,313.0
4,495.0
4,697.2
563.6
565.0
724.6
338.1
157.6
(137.8
)
(69.7
)
45.8
(4.6
)
7.0
(103.1
)
(111.1
)
(126.3
)
(179.9
)
(167.0
)
5.5
5.3
11.9
4.4
5.1
14.1
31.5
328.2
389.5
656.0
172.1
34.2
(148.1
)
(159.9
)
(223.6
)
(100.2
)
(9.4
)
180.1
229.6
432.4
71.9
24.8
(45.6
)
(18.2
)
6.3
30.4
8.5
134.5
211.4
438.7
102.3
33.3
(1.5
)
(5.6
)
(42.5
)
0.8
$
128.9
$
168.9
$
438.0
$
102.3
$
33.3
$
0.54
$
0.68
$
1.29
$
0.22
$
0.08
0.54
0.68
1.28
0.22
0.08
0.46
0.46
0.46
0.46
0.46
$
1,222.0
$
1,487.5
$
1,650.6
$
1,693.9
$
1,280.4
6,302.2
6,400.8
6,676.2
6,489.1
7,182.1
1,133.0
1,424.3
1,682.4
2,049.6
2,706.0
3,350.4
3,397.2
3,327.8
3,046.7
3,071.1
NOTES TO SELECTED FINANCIAL DATA
(1) | Discontinued operations. The selected financial data has been reclassified to reflect BIRD Machine (BIRD), EIMCO Process Equipment (EIMCO) and the Companys oil producing operations in West Africa as discontinued operations. The results of operations for BIRD and EIMCO are not reflected as discontinued operations for 1999 as data is not available for that year because BIRD and EIMCO were components of a larger operating unit during that year. See Note 2 of the Notes to Consolidated Financial Statements in Item 8 herein for additional information regarding discontinued operations. | |
(2) | WesternGeco. In November 2000, the Company and Schlumberger Limited (Schlumberger) created the WesternGeco venture into which were transferred the seismic fleets, data processing assets, exclusive and nonexclusive multiclient surveys and other assets of the Companys Western Geophysical division and Schlumbergers GecoPrakla business unit. The Company and Schlumberger own 30% and 70% of the venture, respectively. The Company accounts for this investment using the equity method of accounting. |
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(3) | Restructuring charges (reversals). See Note 4 of the Notes to Consolidated Financial Statements in Item 8 herein for a description of the restructuring charge reversals in 2003 and 2001. During 2000, the Company recorded a restructuring charge of $29.5 million related to the Companys plan to substantially exit the oil and natural gas exploration business. The major actions included in this restructuring were a reduction in workforce, costs to settle contractual obligations and a loss on the writeoff of the Companys undeveloped exploration properties in certain foreign jurisdictions. In 2000, the Company also recorded a $6.0 million restructuring charge in connection with the formation of WesternGeco and recorded a reversal of $28.5 million of restructuring charges recorded in 1999. | |
During 1999, the Company developed a plan to downsize its seismic operations as a result of low activity levels combined with significant excess operational capacity experienced in the seismic industry. Accordingly, the Company recorded a restructuring charge of $122.8 million primarily related to its seismic operations, of which $72.1 million was recorded in cost of revenues. The major actions included in this restructuring were a reduction in workforce, terminating leases on certain vessels, the impairment of property and sale or abandonment of certain vessels. The Company also recorded a reversal in 1999 of $11.4 million of restructuring charges recorded in prior years, of which $5.0 million was recorded in selling, general and administrative expense. | ||
(4) | (Gain) loss on disposal of assets. During 2000, the Company recorded a loss of $75.5 million on the sale of its interests in certain oil and natural gas properties and recorded gains of $7.6 million on the sale of various product lines. In 1999, the Company recorded gains on disposal of assets of $54.8 million related to the sale of two large excess real estate properties and the sale of certain assets related to its previous divestiture of a joint venture. | |
(5) | Cumulative effect of accounting change. See Note 1 of the Notes to Consolidated Financial Statements in Item 8 herein for descriptions of the cumulative effect of accounting changes in 2003 and 2001. See Note 10 of the Notes to Consolidated Financial Statements in Item 8 herein for a description of the cumulative effect of accounting change in 2002. |
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ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Managements 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, 2003, 2002 and 2001 and the related Notes to Consolidated Financial Statements contained in Item 8 herein.
EXECUTIVE SUMMARY
We are engaged in the oilfield services industry and operate through six divisions Baker Atlas, Baker Oil Tools, Baker Petrolite, Centrilift, Hughes Christensen and INTEQ that we aggregate and refer to as the Oilfield segment. We manufacture and sell products and provide services used in the oil and natural gas industry, including drilling, formation evaluation, completion and production of oil and natural gas wells. We have operations in over 80 countries around the world, with headquarters in Houston, Texas. Previously we operated a Process segment, which manufactured and sold process equipment for separating solids from liquids and liquids from liquids. During 2003, we signed a definitive agreement for the sale of BIRD Machine (BIRD), the remaining division in this segment. We have reclassified the operating results for BIRD as discontinued operations and no longer operate in this segment.
Our products and services are sold in highly competitive markets, and our revenues and earnings can be affected by changes in competitive prices, fluctuations in the level of activity in major markets, general economic conditions, foreign exchange fluctuations and governmental regulation. We compete with the oil and natural gas industrys largest diversified oilfield services providers, as well as many small companies. We believe that the principal competitive factors in our industry are product and service quality; availability and reliability; health, safety and environmental standards; technical proficiency and price. We consider our key business drivers to include the rig count, oil and natural gas production levels and current and expected future energy prices.
In 2003, we reported revenues of $5,292.8 million, an 8.0% increase compared with 2002. Income from continuing operations for 2003 was $180.1 million, compared with $229.6 million in 2002. Included in income from continuing operations for 2003 are charges, net of tax, of $105.9 million related to our share of the WesternGeco restructuring charge and $45.3 million related to the impairment of our investment in WesternGeco. Included in income from continuing operations for 2002 is a charge, net of tax, of $86.8 million related to our share of the WesternGeco restructuring charge.
The increase in revenue was achieved despite cautious investment by our customers, shifting markets and strong competition. Even though oil and natural gas prices were relatively high in 2003, oil and natural gas companies invested cautiously because of the conflict in the Middle East and ongoing concerns about the economy. On a worldwide basis, the average rig count for 2003 increased 16.9% compared with the average rig count for 2002. Most of this increase came from land rigs drilling for natural gas in North America. Drilling activity in the Gulf of Mexico and the North Sea, historically among our strongest markets, declined during 2003 as deepwater operators reevaluated projects and the large diversified oil and natural gas companies in the North Sea and Gulf of Mexico focused on new opportunities in other resource areas.
We believe that our critical success factors include having sufficient financial liquidity and resources to fund the various requirements of the business; managing our overall global manufacturing capacity to ensure proper production levels; ensuring workforce and asset levels are in place and in line with business needs; maximizing efficiencies in our manufacturing and service delivery processes; identifying, evaluating and implementing profit improvement strategies; introducing new technology; flawless execution at the well site; delivering unmatched value to our customers and overall cost management.
As 2004 begins, we remain focused on cost management and the introduction of new products. We have created a longterm strategy that is aimed at creating value for our stockholders throughout the business cycle and growing our business faster while achieving superior margins compared with our major competitors. We share a common high performance culture, and we are aligning to execute our longterm strategy. Our six divisions will continue to provide BestinClass technology, serving our traditional markets and new ones, while delivering unmatched value for our customers and maximizing returns for our stockholders.
BUSINESS ENVIRONMENT
Our business environment and its corresponding operating results are significantly affected by the level of energy industry spending for the exploration and production of oil and natural gas reserves. An indicator for this spending is the rig count. When drilling and workover rigs are active, many of the products and services provided by the oilfield services industry are required. Our products and services are used during the drilling and workover phases, as well as when the oil and natural gas wells are completed and during actual production of the hydrocarbons. This spending by oil and natural gas companies is, in turn, influenced strongly by
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expectations about the supply and demand for oil and natural gas products and by current and expected prices for both oil and natural gas. Rig counts therefore generally reflect the relative strength and stability of energy prices.
Rig Counts
We have been providing rig counts to the public since 1944. We gather all relevant data through our field service personnel, who obtain the necessary data from routine visits to the various rigs, customers, contractors or other outside sources. This data is then compiled and distributed to various wire services and trade associations and is published on our website. Rig counts are compiled weekly for the U.S. and Canada and monthly for all international and U.S. workover rigs. Published international rig counts do not include rigs drilling in certain countries, such as Russia and onshore China, because this information is extremely difficult to obtain.
North American rigs are counted as active if, on the day the count is taken, the well being drilled has been started, drilling has not been completed and the well is anticipated to be of sufficient depth to be a potential customer of our drill bits. In most international areas, rigs are counted as active if drilling operations have taken place for at least 15 days during the month and if the well has not reached the target depth. Rigs that are in transit from one location to another, are rigging up, have been drilling less than 15 days of the month, are being used in nondrilling activities including production testing, completion and workover, or are not significant consumers of oilfield products and services are not included in the rig count. In some active international areas where better data is available, a weekly or daily average of active rigs is taken.
Our rig counts are summarized in the table below as averages for each of
the periods indicated.
2003
2002
2001
924
717
1,003
108
113
153
332
263
341
1,364
1,093
1,497
244
214
262
46
52
56
38
36
39
54
58
53
211
201
179
177
171
157
770
732
746
2,134
1,825
2,243
1,129
1,010
1,211
U.S. land and Canadian rig counts increased 28.9% and 26.2%, respectively, in 2003 compared with 2002 due to the increase in drilling for natural gas. The U.S. offshore rig count decreased 4.4% in 2003 compared with 2002 primarily related to a reduced level of spending by major diversified oil and natural gas companies who redirected a portion of their spending towards larger international projects.
Outside North America, rig counts increased 5.2% in 2003 compared with 2002. The rig count in Latin America increased 14.0% as spending by the Mexican national oil company, PEMEX, drove rig count increases in Mexico, offsetting strikerelated decreases attributed to the Venezuelan national oil company, PDVSA. The North Sea rig count in 2003 decreased 11.5% compared with 2002 following a 7.1% decrease in 2002 compared with 2001 primarily driven by a decline in drilling activity in the U.K. sector. Major diversified oil and natural gas companies redirected spending towards other larger international projects, especially in Russia and the Caspian. Activity in the Middle East continued to rise steadily with a 5.0% increase in the 2003 rig count, following a 12.3% increase in 2002 compared with 2001. Rig counts in Africa declined 6.9% in 2003 compared with 2002 primarily as a result of political disruptions in Nigeria and project delays in other parts of West Africa. Rig activity in the Asia Pacific region was up 3.5% in 2003 compared with 2002 primarily due to activity increases in India.
Oil and Natural Gas Prices
Generally, changes in the current price and expected future prices of oil or natural gas drive both customers expectations about their prospects from oil and natural gas sales and their expenditures to explore for or produce oil and natural gas. Accordingly, changes in these expenditures will normally result in increased or decreased demand for our products and services. Oil (Bloomberg
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West Texas Intermediate (WTI) Cushing Crude Oil Spot Price) and natural
gas (Bloomberg Henry Hub Natural Gas Spot Price) prices are summarized in the
table below as averages of the daily closing prices during each of the periods
indicated.
2003
2002
2001
$
31.06
$
26.17
$
25.96
5.49
3.37
3.96
Oil prices averaged $31.06/Bbl in 2003, the highest annual average in more than a decade. Oil prices rose to a high of $37.83/Bbl in early March due to low inventories, seasonally colder than normal weather, the disruption of Venezuelan production by a general strike and concerns about the potential for significant supply disruptions as a result of military operations in the Middle East. Oil prices fell to a low of $25.24/Bbl in late April as significant supply disruptions did not occur and the market reacted to the possibility of a more rapid than expected recovery in Iraqi oil production. Oil prices then increased to and remained between $30/Bbl and $32/Bbl through the balance of the year, excluding September. In September, concern rose again about a quicker than anticipated recovery in Iraqi production in the fourth quarter of 2003 and early 2004 and oil prices dropped below $27/Bbl. The Organization of Petroleum Exporting Countries (OPEC) reacted with a surprise 0.9 million barrels per day quota cut in late September which sustained oil prices of $30/Bbl to $32/Bbl through the end of 2003. In early 2004, oil prices are averaging between $32/Bbl and $38/Bbl due to colder than normal weather, low inventories and improving Chinese and U.S. economic growth expectations. In February 2004, OPEC again surprised the market with a 1.0 million barrels per day quota cut and pledged to further reduce the current level of production in excess of agreed quotas by another 1.5 million barrels per day.
During 2003, natural gas prices averaged $5.49/mmBtu, the highest level in two decades. In early 2003, natural gas traded between $5.00/mmBtu and $6.50/mmBtu, except for a two week period in late February 2003 when prices spiked to $19.38/mmBtu. Natural gas storage levels at the beginning of the injection season, which runs from April to November, were at record low levels but high summer natural gas prices resulted in reduced industrial demand and allowed storage levels to increase. Natural gas prices remained above $5/mmBtu until early July 2003, when it became apparent that storage injections during the summer of 2003 could approach record levels and that storage would likely be full by the beginning of the winter withdrawal season. Prices weakened through the remainder of the injection season to a low of $3.99/mmBtu in late October. Natural gas prices increased over the remainder of 2003 and are trading between $5/mmBtu and $7/mmBtu in early 2004.
Key Risk Factors
Our business is focused on providing products and services to the worldwide oil and natural gas industry; therefore, our risk factors are centered on those factors that impact the markets for oil and natural gas. Key risk factors currently influencing the worldwide oil and natural gas markets that could impact our outlook are discussed below.
| Production control the degree to which individual OPEC nations and other large oil and natural gas producing countries, including, but not limited to, Mexico, Norway and Russia, are willing and able to control production and exports of oil, to decrease or increase supply and to support their targeted oil price while meeting their market share objectives. Key measures of production control include actual production levels compared with target or quota production levels, oil price compared with targeted oil price and changes in each countrys market share. | |
| Global economic growth particularly the impact of the U.S. and Western European economies and the economic activity in Japan, China, South Korea and the developing areas of Asia where the correlation between economic growth and energy demand is strong. The strength of the U.S. economy and economic growth in developing Asia, particularly China, will be important in 2004. Key measures include U.S. and international economic output, global energy demand and forecasts of future demand by governments and private organizations. | |
| Oil and natural gas storage inventory levels a measure of the balance between supply and demand. A key measure of U.S. natural gas inventories is the storage level reported weekly by the U.S. Department of Energy compared with historic levels. Key measures for oil inventories include U.S. inventory levels reported by the U.S. Department of Energy and American Petroleum Institute and worldwide estimates reported by the International Energy Agency. | |
| Ability to produce natural gas the amount of natural gas that can be produced is a function of the number of new wells drilled, completed and connected to pipelines as well as the rate of production and resulting depletion of existing wells. Advanced technologies, such as horizontal drilling, improve total recovery but also result in a more rapid production decline. Key measures include government and private surveys of natural gas production, company reported production, estimates of reservoir depletion rates and drilling and completion activity. |
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| Technological progress the design and application of new products that allow oil and natural gas companies to drill fewer wells and to drill, complete and produce wells faster, recover more hydrocarbons and/or lower costs. Key measures also include the overall level of research and engineering spending by oilfield services companies and the pace at which new technology is both introduced commercially and accepted by customers. | |
| Maturity of the resource base the growing necessity for increased levels of investment and activity to support production from an area the longer it is developed. Key measures include changes in undeveloped hydrocarbon reserves in mature areas like the North Sea, the U.S., Canada and Latin America. | |
| Pace of new investment the amount oil and natural gas companies choose to invest in emerging markets and any impact it has on their spending in areas where they already have an established presence. | |
| Access to capital the ability of oil and natural gas companies to access the funds necessary to carry out their exploration and production (E&P) plans. Access to capital is particularly important for smaller independent oil and natural gas companies. Key measures of access to capital include cash flow, interest rates, analysis of oil and natural gas company leverage and equity offering activity. | |
| Energy prices and price volatility the impact of widely fluctuating commodity prices on the stability of the market and subsequent impact on customer spending. While current energy prices are important contributors to positive cash flow at E&P companies, expectations for future prices and price volatility are generally more important for determining future E&P spending. While higher commodity prices generally lead to higher levels of E&P spending, sustained high energy prices can be an impediment to economic growth. | |
| Impact of energy prices and price volatility on demand for hydrocarbons shortterm price changes can result in companies switching to the most economic sources of fuel, prompting a temporary curtailment of demand, while longterm price changes can lead to permanent changes in demand. This results in the oilfield services industry being cyclical in nature. Key indicators include hydrocarbon prices on a Btu equivalent basis and indicators of hydrocarbon demand, such as electricity generation or industrial production. | |
| Access to prospects the ability of oil and natural gas companies to develop economically attractive projects based on their expectations of future energy prices, required investments and resulting returns. Access to prospects may be limited because host governments do not allow access to the reserves or because another oil and natural gas company owns the rights to develop the prospect. | |
| Supply disruptions the loss of production and/or delay of activity from key oil exporting countries, including but not limited to, Iraq, Saudi Arabia and other Middle Eastern countries, Nigeria and Venezuela, due to political instability, civil unrest, labor issues or military activity. In addition, adverse weather such as hurricanes could impact production facilities, causing supply disruptions. | |
| Weather the impact of variations in temperatures as compared with normal weather patterns and the related effect on demand for oil and natural gas. A key measure of the impact of weather on energy demand is populationweighted heating and cooling degree days as reported by the U.S. Department of Energy and forecasts of warmer than normal or cooler than normal temperatures. | |
| Government regulations the costs incurred by oil and natural gas companies to conform to and comply with government regulations, including environmental regulations, may limit the quantity of oil and natural gas that may be economically produced. |
Industry Outlook
Caution is advised that the factors described in Forward Looking Statements and Business Environment could negatively impact our expectation for oil and natural gas demand, oil and natural gas prices and drilling activity.
Oil Inventories of crude oil and products were at record low levels as 2004 began, supporting oil prices of $32/Bbl to $38/Bbl. Oil prices are expected to decline throughout 2004 and average between $26/Bbl and $34/Bbl. Factors which could support prices at the upper end of this range include stronger than expected worldwide economic growth, especially in China and the U.S., the potential for supply disruptions in the Middle East, Africa or Venezuela, the slower growth of Russian exports due to export capacity bottlenecks and OPECs desire and ability to maintain a higher price target to stabilize their purchasing power. Factors which could
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result in oil prices at the lower end of the range include slower than expected economic growth in the U.S. and China, sooner than expected increases in Iraqi production growth and increased production from OPEC members Algeria, Libya and Nigeria, challenging the Persian Gulf members of OPEC to act as the swing producers.
Natural Gas In 2004, prices are expected to trade between $4/mmBtu and $7/mmBtu. Natural gas could trade at the top of this range if weather is colder than normal, the U.S. economy, particularly the industrial sector, exhibits greater than expected growth and continued levels of customer spending are not sufficient to support the growth of natural gas production. Prices could move to the bottom of this range if the U.S. economic recovery is weaker than expected or weather is milder than expected. During the summer, natural gas prices are expected to trade at a level necessary to curtail price sensitive demand and allow storage to refill.
Customer Spending Based upon our discussions with major customers, review of published industry reports and our outlook for oil and natural gas prices described above, anticipated customer spending trends are as follows:
| North America Spending in North America, primarily towards developing natural gas supplies, is expected to increase approximately 7% to 9% in 2004 compared with 2003. | ||
| Outside North America Customer spending, primarily directed at developing oil supplies, is expected to increase 4% to 6% in 2004 compared with 2003. | ||
| Total spending is expected to increase 5% to 7% in 2004 compared with 2003. |
Drilling Activity Based upon our outlook for oil and natural gas prices and customer spending described above, our outlook for drilling activity, as measured by the Baker Hughes rig count, is as follows:
| The North American rig count is expected to increase approximately 6% to 9% in 2004 compared with 2003. | ||
| Drilling activity outside of North America is expected to increase approximately 4% to 6% compared with 2003. |
COMPANY OUTLOOK
We expect that 2004 will be a stronger year than 2003, with revenues increasing 5% to 7%. In our outlook for 2004, we took into account the factors described herein. In 2003, 2002 and 2001, revenues outside North America were 57.6%, 59.9% and 55.1% of total revenues, respectively. In 2004, we expect revenues outside North America to continue this trend and to be between 55% and 60% of total revenues.
Growth in our revenues should mirror the growth in customer spending. Our assumptions regarding overall growth in customer spending assume strong economic growth in the U.S. and China and OPEC discipline, resulting in an oil price exceeding $26/Bbl. Our assumptions regarding customer spending in North America assume strong economic growth in the U.S. and natural gas prices exceeding $4/mmBtu.
In North America, we expect revenues to increase 7% to 9% in 2004 compared with 2003, with the majority of the increase occurring in the second half of 2004. We expect spending on land based projects to continue to increase in 2004 following the trend evident in 2003. We also expect offshore spending in the Gulf of Mexico to be flat in 2004 compared with 2003. The normal weatherdriven seasonal decline in U.S. and Canadian spending in the first half of the year should result in sequentially softer revenues in the first and second quarters of 2004.
Outside North America, we expect revenues to increase 5% to 7% in 2004 compared with 2003, continuing the multiyear trend of modest growth in customer spending. Spending on large projects from national oil companies will reflect established seasonality trends, resulting in softer revenues in the first half of the year and stronger revenues in the second half. In addition, customer spending should be affected by weatherrelated reductions in the North Sea in the first and second quarters of 2004. The Middle East, Latin America, Caspian regions and Russia are expected to demonstrate above average spending increases, resulting in increased revenue, while growth in revenues from the North Sea may be below average. Our expectations for spending and revenue growth could decrease if prices fall below $26/Bbl for oil or $4/mmBtu for natural gas or if there are disruptions in key oil and natural gas production markets, such as Venezuela or Nigeria.
In prior years, our profitability has been negatively affected by our share of WesternGecos operating results, which have been adversely affected by the continued weakness in the seismic industry. We expect the operating results of WesternGeco to improve in 2004 as compared with prior years; however, based on the trend of operating losses and weakness in the seismic industry in prior
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years, there is uncertainty regarding the future operating results of WesternGeco. Information regarding WesternGecos profitability in 2004 is based on information that WesternGeco has provided to us. Should this information not be accurate, our forecasts for profitability could be impacted, either positively or negatively.
Based on the above forecasts, we believe that earnings per share in 2004 from continuing operations will be in the range of $1.20 to $1.35. This does not anticipate material changes in the prices that we charge for our products. Significant price increases or significantly better than expected results from WesternGeco could cause earnings per share to reach the upper end of this range. Conversely, significant price decreases or significantly worse than expected results at WesternGeco could result in earnings per share being at or below the bottom of this range. Our ability to improve pricing is dependent on demand for our products and services and our competitors strategies of managing capacity. While the commercial introduction of new technology is an important factor in realizing price improvement, without pricing discipline throughout the industry as a whole, meaningful improvements in our prices are not likely to be realized. Additionally, significant changes in drilling activity outside our expectations could impact operating results positively or negatively.
We do business in approximately 80 countries including about onehalf of the 34 countries having the worst scores in Transparency Internationals Corruption Perception Index (CPI) survey for 2003. We devote significant resources to the development, maintenance and enforcement of our Business Code of Conduct policy, our Foreign Corrupt Practices Act (the FCPA) policy, our internal control processes and procedures and other compliance related policies. Notwithstanding the devotion of such resources, and in part as a consequence thereof, from time to time we discover or receive information alleging potential violations of the FCPA and our policies, processes and procedures. We conduct internal investigations of these potential violations and take appropriate action depending upon the outcome of the investigation. We anticipate that the devotion of significant resources to compliance related issues, including the necessity for such internal investigations, will continue to be an aspect of doing business in a number of the countries in which oil and natural gas exploration, development and production take place and in which we are requested to conduct operations. In order to provide products and services in some of these countries, we may in the future utilize joint ventures, sell products to distributors or otherwise modify our business approach in order to improve our ability to conduct our business in accordance with our Business Code of Conduct.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. Our significant accounting policies are described in the Notes to Consolidated Financial Statements. In certain respects, the application of our significant accounting policies in the preparation of the consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosures about contingent assets and liabilities. We base these estimates and judgments on historical experience and other assumptions and information that are believed to be reasonable under the circumstances. Estimates and assumptions about future events and their effects cannot be perceived with certainty and accordingly, these estimates may change as new events occur, as more experience is acquired, as additional information is obtained and as the business environment in which we operate changes.
We have defined a critical accounting policy or estimate as one that is both important to the portrayal of our financial condition and results of operations and requires us to make difficult, subjective or complex judgments or estimates about matters that are uncertain. We believe the following are the critical accounting policies used in the preparation of our consolidated financial statements as well as the significant estimates and judgments and uncertainties affecting the application of these policies. We have discussed the development and selection of these critical accounting policies and estimates with the Audit/Ethics Committee of our Board of Directors and the Audit/Ethics Committee has reviewed the disclosure presented below.
Allowance for Doubtful Accounts
The determination of the collectibility of amounts due from our customers requires us to use estimates and make judgments regarding future events and trends, including monitoring our customers payment history and current credit worthiness to determine that collectibility is reasonably assured, as well as consideration of the overall business climate in which our customers operate. Inherently, these uncertainties require us to make frequent judgments and estimates regarding our customers ability to pay amounts due us in order to determine the appropriate amount of valuation allowances required for doubtful accounts. Provisions for doubtful accounts are recorded when it becomes evident that the customer will not be able to make the required payments at either contractual due dates or in the future. Over the last five years, reserves for doubtful accounts, as a percentage of total accounts receivable before reserves, have ranged from 5.2% to 7.1%. At December 31, 2003 and 2002, reserves for doubtful accounts totaled $62.8 million, or 5.2%, and $67.2 million, or 5.7%, of total accounts receivable before reserves, respectively. We believe that our reserve for doubtful accounts is adequate to cover anticipated losses under current conditions; however, uncertainties regarding changes in the financial
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condition of our customers, either adverse or positive, could impact the amount and timing of any additional provisions for doubtful accounts that may be required. A one percentage point change in this reserve would have had a pretax impact of approximately $12.1 million in 2003.
Inventory Reserves
Inventory is a significant component of current assets and is stated at the lower of cost or market. This requires us to record provisions and maintain reserves for excess or obsolete inventory. To determine these reserve amounts, we regularly review inventory quantities on hand and compare them to estimates of future product demand, market conditions, production requirements and technological developments. These estimates and forecasts inherently include uncertainties and require us to make judgments regarding potential outcomes. Over the last five years, inventory reserves, as a percentage of total inventories before reserves, have ranged from 18.2% to 19.6%. At December 31, 2003 and 2002, inventory reserves totaled $232.5 million, or 18.5%, and $235.9 million, or 19.1%, of gross inventory, respectively. We believe that our reserves are adequate to cover anticipated losses under current conditions; however, significant or unanticipated changes to our estimates and forecasts, either adverse or positive, could impact the amount and timing of any additional provisions for excess or obsolete inventory that may be required. A one percentage point change in this reserve would have had a pre tax impact of approximately $12.6 million in 2003.
Impairment of LongLived Assets
Longlived assets, which include property, goodwill, intangible assets, investments in affiliates and certain other assets, comprise a significant amount of our total assets. We make judgments and estimates in conjunction with accounting for these assets, including depreciation and amortization methods and useful lives. Additionally, the carrying values of these assets are reviewed for impairment periodically, and at least annually for goodwill, 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 us to make judgments regarding longterm forecasts of future revenues and costs related to the assets subject to review. In turn, these forecasts are uncertain in that they require assumptions about demand for our 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. Given the nature of these evaluations and their application to specific assets and specific times, it is not possible to reasonably quantify the impact of changes in these assumptions; however, based upon our evaluation of the current business climate in which we operate, we do not currently anticipate that any significant asset impairment losses will be necessary.
Income Taxes
The liability method is used for determining our 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. Valuation allowances are established to reduce deferred tax assets when it is more likely than not that some portion or all of the deferred tax assets will not be realized. In determining the need for valuation allowances, we have considered and made judgments and estimates regarding estimated future taxable income and ongoing prudent and feasible tax planning strategies. These estimates and judgments include some degree of uncertainty and changes in these estimates and assumptions could require us to adjust the valuation allowances for our deferred tax assets. Historically, changes to valuation allowances have been caused by major changes in the business cycle in certain countries and changes in local country law. The ultimate realization of the deferred tax assets depends on the generation of sufficient taxable income in the applicable taxing jurisdictions.
We operate in more than 80 countries under many legal forms. As a result, we are subject to the jurisdiction of numerous domestic and foreign tax authorities, as well as to tax agreements and treaties among these governments. Our operations in these different jurisdictions are taxed on various bases: actual income before taxes, deemed profits (which are generally determined using a percentage of revenues rather than profits) and withholding taxes based on revenue. 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 such as the amount, timing and character of deductions, permissible revenue recognition methods under the tax law and the sources and character of income and tax credits. Changes in tax laws, regulations, agreements and treaties, foreign currency exchange restrictions or our level of operations or profitability in each taxing jurisdiction could have an impact on the amount of income taxes that we provide during any given year.
Our tax filings are subjected to audit by the tax authorities in most jurisdictions where we conduct business. These audits may result in assessments of additional taxes that are resolved with the authorities or potentially through the courts. We believe that these assessments may occasionally be based on erroneous and even arbitrary interpretations of local tax law. Resolution of these situations
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inevitably includes some degree of uncertainty; accordingly we provide taxes only for the amounts we believe will ultimately result from these proceedings. We do not believe it is possible to reasonably estimate the potential impact of changes to the assumptions and estimates identified because the resulting change to our tax liability, if any, is dependent on numerous factors which cannot be reasonably estimated. These include, among others, the amount and nature of additional taxes potentially asserted by local tax authorities; the willingness of local tax authorities to negotiate a fair settlement through an administrative process; the impartiality of the local courts; the sheer number of countries in which we do business; and the potential for changes in the tax paid to one country to either produce, or fail to produce, an offsetting tax change in other countries. Our experience has been that the estimates and assumptions we have used to provide for future tax assessments have proven to be appropriate. However, past experience is only a guide, and the potential exists, however limited, that the tax resulting from the resolution of current and potential future tax controversies may differ materially from the amount accrued.
DISCONTINUED OPERATIONS
In the third quarter of 2003, our Board of Directors approved and management initiated a plan to sell BIRD, the last remaining division of our former Process segment. In October 2003, we signed a definitive agreement for the sale of BIRD and recorded charges totaling $37.4 million, net of tax of $10.9 million, which consisted of a loss of $13.5 million on the writedown of BIRD to fair value, $6.2 million of severance and warranty accruals and a loss of $17.7 million related to the recognition of cumulative foreign currency translation adjustments into earnings. The sale closed in January 2004 and we received $5.6 million in proceeds, which is subject to adjustment pending final completion of the purchase price. We retained certain accounts receivable, inventories and other assets.
In December 2002, we entered into exclusive negotiations for the sale of our interest in oil producing operations in West Africa for $32.0 million in proceeds. The transaction was effective as of January 1, 2003, and resulted in a gain on sale of $4.1 million, net of a tax benefit of $0.2 million, recorded in the first quarter of 2003. We received $10.0 million as a deposit in 2002 and the remaining $22.0 million in April 2003.
In November 2002, we sold EIMCO Process Equipment (EIMCO), a division of our former Process segment, and recorded a loss on disposal of $22.3 million, net of tax of $1.2 million, which consisted of a loss of $2.3 million on the writedown to fair value and a loss of $20.0 million related to the recognition of cumulative foreign currency translation adjustments into earnings. We received total proceeds of $48.9 million, of which $4.9 million was held in escrow pending completion of final adjustments of the purchase price. In 2003, all purchase price adjustments were completed, resulting in the release of the escrow balance, of which $2.9 million was returned to the buyer and $2.0 million was received by us. In 2003, we also recorded an additional loss on sale due to purchase price adjustments of $2.5 million, net of tax of $1.3 million.
We have reclassified the consolidated financial statements for all prior
periods presented to reflect these operations as discontinued. See Note 2 of
the Notes to Consolidated Financial Statements in Item 8 herein for additional
information regarding discontinued operations.
RESULTS OF OPERATIONS
The discussions below relating to significant line items are based on
available information and represent our analysis of significant changes or
events that impact the comparability of reported amounts. Where appropriate,
we have identified specific events and changes that affect comparability or
trends and, where possible and practical, have quantified the impact of such
items.
The table below details certain consolidated statement of operations data
and their percentage of revenues for 2003, 2002 and 2001, respectively.
Revenues
Revenues for 2003 were $5,292.8 million, an increase of 8.0% compared with
2002 reflecting a 16.9% increase in rig counts. Rig counts act as a leading
indicator for our revenues because when rigs are active, many of our products
and services are required. Our products and services are used during drilling
operations and then subsequently during completion of the wells and also during
production of the hydrocarbons. Revenues in North America, which accounted for
42.4% of total revenues, increased 14.0% compared with 2002. This increase
reflects increased drilling activity in the U.S. and Canada, as evidenced by a
24.8% increase in the
25
North American rig count. Revenues outside North America, which accounted
for 57.6% of total revenues, increased 3.9% compared with 2002. This increase
reflects the improvement in international drilling activity, as evidenced by
the 5.2% increase in rig counts outside North America, primarily in Latin
America and the Middle East, partially offset by decreased drilling activity in
the North Sea and Africa. During 2003, pricing was not a significant
contributor to our revenue growth, as deterioration in prices for certain
product lines at our INTEQ division were partially offset by pricing
improvement realized from our other product lines.
Revenues for 2002 were $4,901.7 million, a decrease of 2.7% compared with
2001. Revenues in North America, which accounted for 40.1% of total revenues,
decreased 12.9% compared with 2001. This decrease reflects lower activity in
the U.S. land and offshore operations and Canada, as evidenced by a 27.0%
decrease in the North American rig count. Inclement weather in the Gulf of
Mexico, including Tropical Storm Isidore and Hurricane Lili, also contributed
to the decline. Revenues outside North America, which accounted for 59.9% of
total revenues, increased 5.6% compared with 2001. This increase reflects the
improvement in drilling activity, particularly in the Middle East and Asia
Pacific, partially offset by weaker revenues in Latin America due to the
political and economic environments in Argentina and Venezuela and the impact
of a labor strike in Norway.
Cost of Revenues
Cost of revenues for 2003 was $3,854.9 million, an increase of 9.4%
compared with 2002. Cost of revenues as a percentage of revenues was 72.8% and
71.9% for 2003 and 2002, respectively. The increase in cost of revenues as a
percentage of revenues is primarily related to our INTEQ division. In 2003,
INTEQ experienced the highest revenue growth of our divisions; however, margins
deteriorated as they were impacted by increased downward pricing trends,
increased repairs and maintenance (R&M) costs for newly developed downhole
rental tools and other nonrecurring costs. We anticipate margins at INTEQ will
improve in 2004 as a result of a stabilized pricing environment and improved
cost control measures. In addition, corrective action was taken related to the
increased R&M costs, which we anticipate will result in lower R&M costs in
2004. A change in the geographic and product mix from the sale of our products
and services also contributed to the increase in the cost of revenues as a
percentage of revenues. During 2003, our revenue increases came predominantly
from North America and our margins on revenues generated in North America are
typically lower than margins generated outside of North America.
Cost of revenues for 2002 was $3,525.2 million, a decrease of 1.1%
compared with 2001. Cost of revenues as a percentage of revenues was 71.9% and
70.8% for 2002 and 2001, respectively. The increase in cost of revenues as a
percentage of revenues was the result of our strategy not to significantly
reduce our work force to match the reduced activity levels and a change in the
geographic and product mix from the sale of our products and services.
Selling, General and Administrative
Selling, general and administrative (SG&A) expenses for 2003 were $830.1
million, an increase of $18.6 million, or 2.3% compared with 2002. This
increase was primarily due to an $8.9 million increase in net costs related to
corporate activities and an increase of approximately $17.0 million in costs
related to our self insurance programs that are not expected to recur in the
future, offset by improvement in the impact of foreign exchange activity of
$18.7 million. In 2004, we anticipate corporate costs will continue to trend
upward primarily due to compliance related expenditures.
SG&A expenses for 2002 were $811.5 million, an increase of $56.4 million,
or 7.5%, compared with 2001. This increase was primarily due to the impact of
the weakening U.S. dollar resulting in increased foreign exchange losses of
$14.8 million, increased depreciation of the cost associated with the now
substantially completed implementation of SAP R/3, an enterprisewide
accounting and business application software system, of $15.2 million, and our
strategy not to significantly reduce our work force to match current market
activity levels.
Reversals of Restructuring Charge
In October 2000, our Board of Directors approved a plan to substantially
exit the oil and natural gas exploration business and we recorded restructuring
charges of $29.5 million, consisting of $5.5 million of severance, $7.8 million
for costs to settle contractual obligations and a $16.2 million loss for the
writeoff of our undeveloped exploration properties in certain foreign
jurisdictions. The severance charges were for approximately 50 employees, all
of which have been terminated as of December 31, 2003. All of the accrued
severance has been paid as of December 31, 2003.
Included in the costs to settle contractual obligations was $1.1 million
related to an oil and natural gas property in Angola. The property was sold in
2003 and we reversed the liability related to this contractual obligation.
Also included in the costs to settle contractual obligations was $4.5 million
for the minimum amount of our share of project costs relating to our interest
in an oil and natural gas property in Colombia. After unsuccessful attempts to
negotiate a settlement with our joint venture partner, we decided to
26
abandon further involvement in this project. Subsequently, in 2001, a
third party agreed to assume the remaining obligations in exchange for our
interest in the project. Accordingly, we reversed $4.2 million related to this
obligation. All contractual obligations associated with this plan have been
paid as of December 31, 2003.
Impairment of Investment in Affiliate
As a result of the continuing weakness in the seismic industry, we
evaluated the carrying value of our investment in WesternGeco and recorded an
impairment loss of $45.3 million in 2003 to writedown the investment to its
fair value. The fair value was determined using a combination of a market
value and discounted cash flows approach. We were assisted in the
determination of the fair value by an independent third party. Although not
anticipated, further declines in the fair value of the investment in
WesternGeco would result in additional impairments. We cannot predict if
additional impairments of our investment in WesternGeco will be necessary in
the future because the environment in the seismic industry
continues to be uncertain.
Equity in Income (Loss) of Affiliates
Equity in income (loss) of affiliates relates to our share of the income
(loss) of affiliates accounted for using the equity method of accounting. Our
most significant equity method investment is our 30% interest in WesternGeco.
During 2003, the operating results of WesternGeco continued to be adversely
affected by the continuing weakness in the seismic industry. As a result of
this weakness, WesternGeco recorded certain impairment and restructuring charges of
$452.0 million for impairment of its multiclient seismic library and
rationalization of its marine seismic fleet. Our portion of these
charges was
$135.7 million and is recorded in equity in income (loss) of affiliates.
Equity in income (loss) of affiliates decreased $115.5 million for 2002
compared with 2001. The decrease is primarily related to a $300.7 million
restructuring charge recorded by WesternGeco for impairment of its multiclient
library, reductions in workforce, closing landbased seismic operations in the
U.S. lower 48 states and Canada and reducing its marine seismic fleet. Our
portion of this charge was $90.2 million and was recorded in equity in income
(loss) of affiliates.
Operating results for WesternGeco are expected to improve in 2004;
however, based on the trend of operating losses and weakness in the seismic
industry in prior years, there is uncertainty regarding the future operating
performance of WesternGeco.
Included
in equity in income (loss) of affiliates for 2001 was $7.9 million
related to the amortization of goodwill associated with equity method
investments. In conjunction with the adoption of Statement of Financial
Accounting Standards (SFAS) No. 142,
Goodwill and Other Intangible Assets
, we
discontinued the amortization of goodwill associated with equity method
investments effective January 1, 2002.
Interest Expense
Interest expense for 2003 decreased $8.0 million compared with 2002 due to
lower total debt levels, lower weighted average interest rates on our
commercial paper and money market borrowings and increased amortization of
deferred gains related to terminated interest rate swap agreements. Total debt
levels decreased $63.4 million primarily due to the repayment of $100.0 million
of longterm debt in February 2003. The approximate weighted average interest
rate on our commercial paper and money market borrowings was 1.2% in 2003
compared with 1.8% for 2002. The amortization of deferred gains related to
terminated interest rate swap agreements reduced interest expense by $9.9
million in 2003 compared with $6.0 million in 2002.
Interest expense for 2002 decreased $15.2 million compared with 2001 due
to lower total debt levels resulting from cash flows from operations coupled
with lower weighted average interest rates on our shortterm debt, commercial
paper and interest rate swaps. The approximate weighted average interest rate
on shortterm debt and commercial paper was 1.8% for 2002 compared with 4.0%
for 2001.
Income Taxes
Our effective tax rates differ from the statutory income tax rate of 35%
due to state income taxes, differing rates of tax on international operations
and higher taxes within the WesternGeco venture.
During 2003, we recognized an incremental effect of $36.3 million of
additional taxes attributable to our portion of the operations of WesternGeco.
Of this amount, $15.9 million related to the reduction in the carrying value of
our equity investment in WesternGeco for which there was no tax benefit. The
remaining $20.4 million arose from operations of the venture due to: (i) the
venture being taxed in certain foreign jurisdictions based on a deemed profit
basis, which is a percentage of revenues rather than profits and (ii) unbenefitted foreign losses of the venture, which are operating losses and
impairment and restructuring charges in certain foreign
27
jurisdictions where
there was no current tax benefit and where a deferred tax asset was not
recorded due to the uncertainty of realization. In 2002 and 2001, the amount
of additional taxes resulting from operations of the venture was $40.2 million
and $14.8 million, respectively.
During 2003, a current year benefit of $3.3 million was recognized as the
result of various refund claims filed in the U.S. During 2002, a $14.4 million
benefit was recognized as the result of the settlement of an IRS examination
related to our September 30, 1996 through September 30, 1998 tax years. In
2001, a benefit of $23.5 million was recognized as a result of the settlement
of the IRS examination of certain 1994 through 1997 preacquisition tax returns
and related refund claims of Western Atlas Inc.
Our tax filings for various periods are subjected to audit by tax
authorities in most jurisdictions where we conduct business. These audits may
result in assessments of additional taxes that are resolved with the
authorities or potentially through the courts. We believe that these
assessments may occasionally be based on erroneous and even arbitrary
interpretations of local tax law. We have received tax assessments from
various taxing authorities and are currently at varying stages of appeals and
/or litigation regarding these matters. We have provided for the amounts we
believe will ultimately result from these proceedings. We believe we have
substantial defenses to the questions being raised and will pursue all legal
remedies should an unfavorable outcome result. However, resolution of these
matters involves uncertainties and there are no assurances that the outcomes
will be favorable.
Cumulative Effect of Accounting Change
On January 1, 2003, we adopted SFAS No. 143,
Accounting for Asset
Retirement Obligations
. SFAS No. 143 addresses financial accounting and
reporting for obligations associated with the retirement of longlived assets.
SFAS No. 143 requires that the fair value of a liability associated with an
asset retirement obligation (ARO) be recognized in the period in which it is
incurred if a reasonable estimate can be made. The liability for the ARO is
revised each subsequent period due to the passage of time and changes in
estimates. The associated retirement costs are capitalized as part of the
carrying amount of the longlived asset and subsequently depreciated over the
estimated useful life of the asset.
The adoption of SFAS No. 143 in 2003 resulted in a charge of $5.6 million,
net of tax of $2.8 million, recorded as the cumulative effect of accounting
change in the consolidated statement of operations. In conjunction with the
adoption, we recorded ARO liabilities of $11.4 million primarily for
anticipated costs of obligations associated with the future disposal of power
source units at certain of our divisions and refurbishment costs associated
with certain leased facilities in Europe and with a fleet of leased railcars
and tanks.
On January 1, 2002, we adopted SFAS No. 142,
Goodwill and Other Intangible
Assets
. The adoption of SFAS No. 142 required us to cease amortizing goodwill
and to perform a transitional test of goodwill in each of our reporting units
as of January 1, 2002. The reporting units were based on our organizational
and reporting structure. Corporate and other assets and liabilities were
allocated to the reporting units to the extent that they related to the
operations of these reporting units. Valuations of the reporting units were
performed by an independent third party. The goodwill in both the EIMCO and
BIRD operating divisions of the former Process segment was determined to be
impaired using a combination of a market value and discounted cash flows
approach to estimate fair value. Accordingly, we recognized transitional
impairment losses of $42.5 million, net of tax of $20.4 million in 2002 as the
cumulative effect of accounting change in the consolidated statement of
operations.
LIQUIDITY AND CAPITAL RESOURCES
Our objective in appropriately financing our business is to maintain
adequate financial resources and access to additional liquidity. During the
last three years, cash flows from operations have been our principal source of
funding. We anticipate that this trend will continue in 2004. We also have
a $500.0 million threeyear committed revolving credit facility that would
provide an ample source of backup liquidity that would be available in the
event of an unanticipated significant demand on cash flow that could not be
funded by operations or shortterm borrowings.
Our capital planning process is focused on utilizing cash flows generated
from operations in ways that enhance the value of the Company. In 2003, we
used cash for a mix of activities including working capital needs, payment of
dividends, repayment of debt, repurchase of common stock and capital
expenditures. In 2004, we expect that this trend will continue, as we do not
anticipate any additional material demands, commitments or other events that
would require significant outlays of cash.
28
Cash Flows
Cash flows provided (used) by continuing operations by type of activity
were as follows for the years ended December 31:
Cash flow statements for companies with international operations that are
local currency functional exclude the effects of the changes in foreign
currency exchange rates that occur during any given year, as these are
considered to be noncash changes and, as such, changes reflected in certain
accounts on the cash flow statements may not reflect the changes in
corresponding accounts on the consolidated balance sheets. During 2003, 2002
and 2001, these changes in foreign currency exchange rates were significant and
resulted in corresponding changes in the foreign currency translation
adjustment account.
During 2003, we revised our capital expenditure reporting procedures for
certain rental tools and engineering prototype tools. Previously, amounts for
these items were reported as transfers from inventory to property, plant and
equipment; however, they will now be reported as capital expenditures. In
addition, depreciation related to certain of these tools that had not
previously been included in total depreciation and amortization expense is now
included in this caption. The consolidated statements of cash flows for the
years ended December 31, 2002 and 2001 have been reclassified to give effect to
this change. There was no impact to the consolidated statements of operations
or the consolidated balance sheets for any of the periods presented.
Operating Activities
Cash flows from operating activities have been relatively consistent
during the last three years and we expect this trend to continue in 2004. We
attribute the stability in our cash flow to successful management of working
capital and consistent levels of income from continuing operations adjusted for
noncash items.
Cash flows from operating activities from continuing operations increased
$32.2 million in 2003 compared with 2002. The primary reason for this increase
was improved operating performance, attributable to our increased revenues. In
addition, working capital decreased with the effect of increasing cash flows
from operating activities.
The underlying drivers of the changes in working capital are as follows:
Our pension contributions in 2003 were approximately $28.0 million, an
increase of approximately $19.0 million compared with the prior year, due to
the formation of a new U.S. pension plan in 2002. In 2004, we expect pension
contributions to increase and to be between $35.0 million and $40.0 million.
Cash flows from operating activities from continuing operations decreased
$24.3 million in 2002 compared with 2001 primarily due to decreased operating
performance attributable to our decreased revenues. In addition, working
capital increased with the effect of decreasing cash flows from operating
activities.
The underlying drivers of the changes in working capital are as follows:
29
Investing Activities
Our principal recurring investing activity is the funding of capital
expenditures to improve the productivity of operations. Expenditures for
capital assets totaled $405.2 million, $356.4 million and $326.0 million for
2003, 2002 and 2001, respectively. The increase in capital expenditures in
2003 compared with 2002 is due to expenditures necessary to support our growth
and operations. The majority of these expenditures were for machinery and
equipment and rental tools.
We made two acquisitions in 2003 having an aggregate purchase price of
$16.9 million, of which $9.5 million was paid in cash. As a result of these
acquisitions, we recorded approximately $3.9 million of goodwill and $9.6
million of intangible assets through December 31, 2003. The purchase prices
are allocated based on fair values of the acquisitions and may be subject to
change based on the final determination of the purchase price allocation. In
addition, during 2003, we invested $38.1 million in affiliates, of which $30.1
million related to the Companys 50% interest in the QuantX Wellbore
Instrumentation venture, which is engaged in the permanent inwell monitoring
market.
During 2002, we made three acquisitions having an aggregate cash purchase
price of $39.7 million, net of cash acquired. As a result of these
acquisitions, we recorded approximately $28.4 million of goodwill. In
addition, during 2002, we invested $16.5 million in Luna Energy, L.L.C. (Luna
Energy), a venture formed to develop, manufacture, commercialize, sell, market
and distribute downhole fiber optic and other sensors for oil and natural gas
exploration, production, transportation and refining applications. We have a
40% ownership interest in Luna Energy and account for this investment using the
equity method of accounting.
In 2003, we completed the sale of our interest in an oil producing
property in West Africa for $32.0 million in proceeds. We received a deposit
of $10.0 million in 2002 and the remaining $22.0 million in 2003. During 2002,
we also disposed of our EIMCO division for $48.9 million in proceeds. We
received $44.0 million in proceeds in 2002, with the remainder of the sales
price held in escrow pending completion of final adjustments of the purchase
price. In 2003, all purchase price adjustments were completed, resulting in
the release of the escrow balance. We received $2.0 million and $2.9 million
was returned to the buyer.
Proceeds from disposal of assets were $66.8 million, $77.7 million and
$77.6 million for 2003, 2002 and 2001, respectively. These disposals relate to
machinery, rental tools and equipment no longer used in operations that were
sold throughout the year.
In January 2004, we completed the sale of BIRD and received $5.6 million
in proceeds, which is subject to adjustment pending final completion of the
purchase price. In addition, in February 2004, we completed the sale
of our minority interest in Petreco International and received
proceeds of $35.8 million, of which $7.4 million is held in
escrow pending the outcome of potential indemnification obligations
pursuant to the sales agreement. We do not believe the transaction is material to
our financial
condition or results of operations.
Financing Activities
We had net borrowings of commercial paper and other shortterm debt of
$4.5 million during 2003 compared with net repayments of $163.7 million and
$67.9 million in 2002 and 2001, respectively. We also repaid the $100.0
million 5.8% Notes due February 2003. The repayment was funded with cash on
hand, cash flow from operations and the issuance of commercial paper.
Total debt outstanding at December 31, 2003 was $1,484.4 million, a
decrease of $63.4 million compared with December 31, 2002. The total debt to
total capitalization (defined as total debt plus stockholders equity) ratio
was 0.31 at December 31, 2003 and 2002.
At different times during 2003, we entered into three separate interest
rate swap agreements, each for a notional amount of $325.0 million, associated
with our 6.25% Notes due January 2009. These agreements had been designated
and had qualified as fair value hedging instruments. Due to our outlook for
interest rates, we terminated the three agreements and received payments
totaling $26.9 million. Each of the three agreements was terminated prior to
entering into a new agreement. The deferred gains are being amortized as a
reduction of interest expense over the remaining life of the underlying debt
security, which matures in January 2009.
30
During 2002, we terminated two interest rate swap agreements that had been
entered into in prior years. These agreements had been designated and had
qualified as fair value hedging instruments. Upon termination, we received
proceeds totaling $15.8 million. The deferred gains of $4.8 million and $11.0
million are being amortized as a reduction of interest expense over the
remaining lives of the underlying debt securities, which mature in June 2004
and January 2009, respectively.
We received proceeds of $61.8 million, $38.3 million and $50.1 million
from the issuance of common stock in 2003, 2002 and 2001, respectively, from
the exercise of stock options and the issuance of stock through our employee
stock purchase plan.
During 2002, we were authorized by our Board of Directors to repurchase up
to $275.0 million of our common stock. During 2003, we repurchased 6.3 million
shares at an average price of $28.78 per share, for a total of $181.4 million.
During 2002, we repurchased 1.8 million shares at an average price of $27.52
per share, for a total of $49.1 million. Upon repurchase, the shares were
retired.
We paid dividends of $154.3 million, $154.9 million and $154.4 million in
2003, 2002 and 2001, respectively.
Available Credit Facilities
At December 31, 2003, we had $930.2 million of credit facilities with
commercial banks, of which $500.0 million is a threeyear committed revolving
credit facility (the facility) that expires in July 2006. The facility
contains certain covenants which, among other things, require the maintenance
of a funded indebtedness to total capitalization ratio (a defined formula per
the facility) of less than or equal to 0.50, limit the amount of subsidiary
indebtedness and restrict the sale of significant assets, defined as 10% or
more of total consolidated assets. At December 31, 2003, we were in compliance
with all the facility covenants, including the funded indebtedness to total
capitalization ratio, which was 0.30. There were no direct borrowings under
the facility during the year ended December 31, 2003; however, to the extent we
have outstanding commercial paper, our ability to borrow under the facility is
reduced. At December 31, 2003, we had no outstanding commercial paper.
If market conditions were to change and revenues were to be significantly
reduced or operating costs could not be controlled, our cash flows and
liquidity could be reduced. Additionally, it could cause the rating agencies
to lower our credit rating. We do not have any ratings triggers in the
facility that would accelerate the maturity of any borrowings under the
facility. However, a downgrade in our credit ratings could increase the cost
of borrowings under the facility. Also, a downgrade in our credit ratings
could limit or preclude our ability to issue commercial paper. Should this
occur, we would seek alternative sources of funding, including borrowing under
the facility.
Cash Requirements
We believe operating cash flows combined with shortterm borrowings, as
needed, will provide us with sufficient capital resources and liquidity to
manage our operations, meet contractual obligations, fund capital expenditures,
repurchase common stock and support the development of our shortterm and
longterm operating strategies.
We currently expect that 2004 capital expenditures will be between $320.0
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 our business and operations.
In 2004, we will repay the $100.0 million 8% Notes due May 2004 and the
$250.0 million 7.875% Notes due June 2004. These repayments are expected to be
funded with one or more of the following: cash flows from operations,
available cash on hand and commercial paper borrowings. In 2004, we also
expect to make interest payments of approximately $85.0 million to $95.0
million. This is based on our current expectations of debt levels during 2004.
We have authorization remaining to repurchase up to $44.5 million in
common stock. We may continue to repurchase our common stock in 2004 depending
on the price of our common stock, our liquidity and other considerations. We
anticipate paying dividends of $0.46 per share of common stock in 2004.
However, our Board of Directors is free to change the dividend policy at any
time.
During 2004, we estimate that we will contribute approximately $35.0
million to $40.0 million to our pension plans and make benefit payments related
to postretirement welfare plans of approximately $14.0 million.
We anticipate making income tax payments of approximately $150.0 million
to $180.0 million in 2004.
31
We do not believe that there are any other material trends, demands,
commitments, events or uncertainties that would have, or are reasonably likely
to have, a material impact on our financial condition and liquidity. Other
than previously discussed, we currently have no information that would create a
reasonable likelihood that the reported levels of revenues and cash flows from
operations in 2003 are not indicative of what we can expect in the future.
The following table summarizes our aggregate contractual cash obligations
as of December 31, 2003 (in millions):
OffBalance Sheet Arrangements
In the normal course of business with customers, vendors and others, we
are contingently liable for performance under letters of credit and other bank
issued guarantees which totaled approximately $284.9 million at December 31,
2003. In addition, at December 31, 2003, we have guaranteed debt and other
obligations of third parties totaling up to $34.1 million, including $15.0 million relating to Petreco.
This guarantee was terminated in conjunction with the sale of Petreco in February 2004.
Other than normal operating leases, we do not have any offbalance sheet
financing arrangements such as securitization agreements, liquidity trust
vehicles, synthetic leases or special purpose entities. As such, we are not
materially exposed to any financing, liquidity, market or credit risk that
could arise if we had engaged in such financing arrangements.
NEW ACCOUNTING STANDARDS
Effective January 1, 2003, we adopted SFAS No. 143,
Accounting for Asset
Retirement Obligations
. SFAS No. 143 addresses financial accounting and
reporting for obligations associated with the retirement of longlived assets.
SFAS No. 143 requires that the fair value of a liability associated with an
asset retirement obligation (ARO) be recognized in the period in which it is
incurred if a reasonable estimate of fair value can be made. The liability for
the ARO is revised each subsequent period due to the passage of time and
changes in estimates. The associated retirement costs are capitalized as part
of the carrying amount of the longlived asset and subsequently depreciated
over the life of the asset.
The adoption of SFAS No. 143 in 2003 resulted in a charge of $5.6 million,
net of tax of $2.8 million, recorded as the cumulative effect of accounting
change in the consolidated statement of operations. In conjunction with the
adoption, we recorded ARO liabilities of $11.4 million primarily for
anticipated costs of obligations associated with the future disposal of power
source units at certain of our divisions and refurbishment costs associated
with certain leased facilities in Europe and with a fleet of leased railcars
and tanks.
32
In November 2002, the Financial Accounting Standards Board (FASB) issued
FASB Interpretation No. 45 (FIN 45),
Guarantors Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of
Others
. FIN 45 requires disclosures by a guarantor in its financial statements
about obligations under certain guarantees that it has issued and requires a
guarantor to recognize, at the inception of certain guarantees, a liability for
the fair value of the obligation undertaken in issuing the guarantee. The
adoption of the provisions of FIN 45 relating to the initial recognition and
measurement of guarantor liabilities, which were effective for qualifying
guarantees entered into or modified after December 31, 2002, did not have an
impact on our consolidated financial statements. We adopted the new disclosure
requirements in 2002.
In January 2003, the FASB issued FASB Interpretation No. 46 (FIN 46),
Consolidation of Variable Interest Entities
. An entity is subject to the
consolidation rules of FIN 46 and is referred to as a variable interest entity
(VIE) if the entitys equity investors lack the characteristics of a
controlling financial interest or do not have sufficient equity at risk for the
entity to finance its operations without additional financial support. In
December 2003, the FASB issued modifications to FIN 46 (FIN 46R), resulting
in multiple effective dates based on the nature as well as the creation date of
a VIE. We are completing our evaluation of the provisions of the original FIN
46 and FIN 46R and do not expect the adoption to have an impact on our
consolidated financial statements.
In April 2003, the FASB issued SFAS No. 149,
Amendment of Statement 133 on
Derivative Instruments and Hedging Activities
, which amends and clarifies the
accounting for derivative instruments, including certain derivative instruments
embedded in other contracts, and for hedging activities under SFAS No. 133.
SFAS No. 149 is effective for contracts entered into or modified after June 30,
2003, with some exceptions for hedging relationships designated after June 30,
2003. The adoption of SFAS No. 149 on July 1, 2003 had no impact on our
consolidated financial statements.
In May 2003, the FASB issued SFAS No. 150,
Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity
,
which modifies the accounting for certain financial instruments. SFAS No. 150
requires that these financial instruments be classified as liabilities and
applies immediately for financial instruments entered into or modified after
May 31, 2003, and otherwise is effective at the beginning of the first interim
period beginning after June 15, 2003. The adoption of SFAS No. 150 on July 1,
2003 had no impact on our consolidated financial statements.
In December 2003, the FASB revised SFAS No. 132,
Employers Disclosures
about Pensions and Other Postretirement Benefits
. The new SFAS No. 132
requires additional disclosures about the assets, obligations, cash flows and
net periodic benefit cost of defined benefit pension plans and other defined
benefit postretirement plans, of which certain disclosures are not required
until 2004. We have adopted the disclosure requirements that were effective
for 2003.
In January 2004, the FASB issued FASB Staff Position No. FAS 1061 (FSP
1061),
Accounting and Disclosure Requirements Related to the Medicare
Prescription Drug, Improvement and Modernization Act of 2003
, which provides
temporary guidance concerning the recently enacted Medicare Prescription Drug,
Improvement and Modernization Act of 2003 (the Act). SFAS No. 106,
Employers Accounting for Postretirement Benefits Other Than Pensions
, requires
presently enacted changes in laws that will take effect in future periods to be
taken into account in measuring current period postretirement benefit cost and
the accumulated projected benefit obligation (APBO). FSP 1061 allows
companies that sponsor affected postretirement benefit plans to elect to defer
recognizing the effects of the Act on postretirement benefit expense and on the
APBO pursuant to SFAS No. 106. We have elected to defer accounting for the
effects of the Act until 2004.
RELATED PARTY TRANSACTIONS
In conjunction with the formation of WesternGeco in November 2000, we
entered into an agreement with Schlumberger whereby a cash trueup payment will
be made by either of the parties to the venture based on a formula comparing
the ratio of the net present value of sales revenue from each partys
contributed multiclient seismic libraries during the fouryear 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 the event that
future sales from the contributed libraries continue in the same relative
percentages incurred through December 31, 2003, we currently estimate that
Schlumberger will make a payment to us in the range of $5.0 million to $10.0
million. Any payment to be received by us will be recorded as an adjustment to
the carrying value of our investment in WesternGeco. In November 2000, we also
entered into an agreement with WesternGeco whereby WesternGeco subleased a
facility from us for a period of ten years at then current market rates. In
2003 and 2002, we received payments of $5.0 million and $5.5 million,
respectively, from WesternGeco related to this lease. In conjunction with the
formation of WesternGeco, we transferred a lease on a seismic vessel to the
venture. We were the sole guarantor of this lease obligation. During 2003,
the lease and guarantee were terminated as a result of the purchase of the
seismic vessel by WesternGeco.
At December 31, 2003 and 2002, net accounts receivable from affiliates
totaled $0.7 million and $16.1 million, respectively. There were no other
significant related party transactions.
33
FORWARDLOOKING STATEMENTS
MD&A and certain statements in the Notes to Consolidated Financial
Statements include forwardlooking 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 ForwardLooking Statement). The
words anticipate, believe, ensure, expect, if, intend, estimate,
project, forecasts, outlook, aim, will, could, should, would,
may, likely and similar expressions, and the negative thereof, are intended
to identify forwardlooking statements. Our expectations regarding our
business outlook, customer spending, oil and natural gas prices and our
business environment and the industry in general are only our forecasts
regarding these matters. These forecasts may be substantially different from
actual results, which are affected by the following risk factors: the level of
petroleum industry exploration and production expenditures; drilling rig and
oil and natural gas industry manpower and equipment availability; our ability
to implement and effect price increases for our products and services; our
ability to control our costs; the availability of sufficient raw materials,
manufacturing capacity and subcontracting capacity at forecasted costs to meet
our revenue goals; the effect of competition, particularly our ability to
introduce new technology on a forecasted schedule and at forecasted costs; the
ability of our competitors to capture market share; our ability to retain or
increase our market share; potential impairment of longlived assets; world
economic conditions; the price of, and the demand for, crude oil and natural
gas; drilling activity; seasonal and other weather conditions that affect the
demand for energy and severe weather conditions, such as hurricanes, that
affect exploration and production activities; the legislative and regulatory
environment in the U.S. and other countries in which we operate; outcome of
government and internal investigations and legal proceedings; OPEC policy and
the adherence by OPEC nations to their production quotas; war, military action
or extended period of international conflict, particularly involving the U.S.,
Middle East or other major petroleumproducing or consuming regions; any future
acts of war, armed conflicts or terrorist activities; civil unrest or
incountry security concerns where we operate; expropriation; the development
of technology by us or our competitors that lowers overall finding and
development costs; new laws and regulations that could have a significant
impact on the future operations and conduct of all businesses; laborrelated
actions, including strikes, slowdowns and facility occupations; the condition
of the capital and equity markets in general; adverse foreign exchange
fluctuations and adverse changes in the capital markets in international
locations where we operate; and the timing of any of the foregoing. See Key
Risk Factors for a more detailed discussion of certain of these risk factors.
Our expectations regarding our level of capital expenditures described in
Liquidity and Capital Resources are only our forecasts regarding these
matters. In addition to the factors described in the previous paragraph, in
Business Environment, and in Item 1. BusinessEnvironmental Matters, these
forecasts may be substantially different from actual results, which are
affected by the following factors: the accuracy of our estimates regarding our
spending requirements; regulatory, legal and contractual impediments to
spending reduction measures; the occurrence of any unanticipated acquisition or
research and development opportunities; changes in our strategic direction; and
the need to replace any unanticipated losses in capital assets.
2003
2002
2001
$
%
$
%
$
%
$
5,292.8
100.0
%
$
4,901.7
100.0
%
$
5,037.6
100.0
%
3,854.9
72.8
3,525.2
71.9
3,564.5
70.8
830.1
15.7
811.5
16.6
755.1
15.0
Table of Contents
Table of Contents
Table of Contents
Table of Contents
2003
2002
2001
$
660.9
$
628.7
$
653.0
(362.0
)
(280.9
)
(239.4
)
(342.5
)
(313.6
)
(474.0
)
An increase in accounts receivable in 2003 used $15.4 million in
cash. This was due to increases in revenue offset by a reduction in
days sales outstanding (defined as the average number of days our
accounts receivable are outstanding) of approximately two days.
A decrease in inventory in 2003 provided $21.5 million in cash as we
increased our focus on improving the utilization of inventory on hand.
An increase in accounts payable and accrued compensation and other
accrued liabilities provided $31.8 million in cash. This was due to
increased activity, increased employee compensation accruals, better
management of our accounts payable and increased accruals for our self
insurance programs. These changes were partially offset by $59.8
million more in income tax payments in 2003 compared with 2002.
A decrease in accounts receivable in 2002 provided $87.2 million in
cash primarily due to decreases in revenues as days sales outstanding
remained unchanged in 2002 compared with 2001.
Table of Contents
A decrease in inventory in 2002 provided $17.5 million in cash as we
increased our focus on improving the utilization of inventory on hand.
A decrease in accounts payable and accrued compensation and other
accrued liabilities in 2002 used $219.5 million in cash. This was due
to decreased activity, decreased employee compensation accruals and the
payment of $31.0 million more in income taxes in 2002 compared with
2001.
Table of Contents
Table of Contents
Payments Due by Period
Less Than
1 3
4 5
After
Total
1 year
Years
Years
5 Years
$
1,464.0
$
350.4
$
38.6
$
$
1,075.0
300.3
67.3
92.7
34.0
106.3
102.0
80.2
17.3
4.3
0.2
28.2
4.8
12.8
8.8
1.8
$
1,894.5
$
502.7
$
161.4
$
47.1
$
1,183.3
(1)
Amounts represent the expected cash payments for our longterm debt and do
not include any unamortized discounts, deferred issuance costs or deferred
gains on terminated interest rate swap agreements.
(2)
Purchase obligations include agreements to purchase goods or services
that are enforceable and legally binding and that specify all significant
terms, including: fixed or minimum quantities to be purchased; fixed,
minimum or variable price provisions; and the approximate timing of the
transaction. Purchase obligations exclude agreements that are cancelable
at anytime without penalty.
(3)
Amounts represent other longterm liabilities reflected in our
consolidated balance sheet where both the timing and amount of payment
streams are known. Amounts include: payments for certain environmental
remediation liabilities, payments for deferred compensation, payouts under
acquisition agreements and payments for certain asset retirement
obligations. Amounts do not include: payments for pension contributions
and payments for various postretirement welfare plans and postemployment
benefit plans, as such amounts have not been determined beyond 2004.
Table of Contents
Table of Contents
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
We are exposed to certain market risks that are inherent in our financial instruments that arise in the normal course of business. We may enter into derivative financial instrument transactions to manage or reduce market risk but do not enter into derivative financial instrument transactions for speculative purposes. A discussion of our primary market risk exposure in financial instruments is presented below.
INDEBTEDNESS
We are subject to interest rate risk on our longterm fixed interest rate debt. Commercial paper borrowings, other shortterm borrowings and variable rate longterm 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 debt with a fixed interest rate will increase as interest rates fall and 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, 2003, we had fixed rate debt aggregating $1,425.6 million and variable rate debt aggregating $38.4 million. The following table sets forth, as of December 31, 2003 and 2002, the principal cash flow requirements for our indebtedness, 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 (dollar amounts in millions).
34
2003
2004
2005
2006
2007
2008
Thereafter
Total
$
$
350.4
$
$
0.2
$
$
$
1,075.0
$
1,425.6
7.21
%
(2)
6.12
%
6.16
%
(2)
6.41
%
(2)
$
100.3
$
350.3
$
0.1
$
0.2
$
$
$
1,075.0
$
1,525.9
6.08
%
7.22
%
(2)
4.15
%
6.50
%
6.71
%
(2)
6.79
%
(2)
(1) | Fair market value of fixed rate longterm debt was $1,570.8 million at December 31, 2003 and $1,679.9 million at December 31, 2002. | |
(2) | Includes the effect of the amortization of deferred gains on terminated interest rate swap agreements. |
INTEREST RATE SWAP AGREEMENTS
At different times during 2003, we entered into three separate interest rate swap agreements, each for a notional amount of $325.0 million, associated with our 6.25% Notes due January 2009. These agreements had been designated and had qualified as fair value hedging instruments. Due to our outlook for interest rates, we terminated the three agreements and received payments totaling $26.9 million. Each of the three agreements was terminated prior to entering into a new agreement. The deferred gains are being amortized as a reduction of interest expense over the remaining life of the underlying debt security, which matures in January 2009.
During 2002, we terminated two interest rate swap agreements that had been entered into in prior years. These agreements had been designated and had qualified as fair value hedging instruments. Upon termination, we received proceeds totaling $15.8 million. The deferred gains of $4.8 million and $11.0 million are being amortized as a reduction of interest expense over the remaining lives of the underlying debt securities, which mature in June 2004 and January 2009, respectively.
FOREIGN CURRENCY AND FOREIGN CURRENCY FORWARD CONTRACTS
We conduct operations around the world in a number of different currencies. The majority of our significant 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 our functional currencies. To minimize the need for foreign currency forward contracts to hedge this exposure, our objective is to manage 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, 2003, we had entered into several foreign currency forward contracts with notional amounts aggregating $62.5 million to hedge exposure to currency fluctuations in various foreign currencies, including the British Pound Sterling, the Norwegian Krone, the Euro, the Brazilian Real and the Argentine Peso. The contracts are designated and qualify as fair value hedging instruments. Based on quoted market prices as of December 31, 2003 for contracts with similar terms and maturity dates, we recorded a gain of $1.5 million to adjust these foreign currency forward contracts to their fair market value. This gain offsets designated foreign exchange losses resulting from the underlying exposures and is included in selling, general and administrative expense in the consolidated statement of operations.
At December 31, 2002, we had entered into a foreign currency forward contract with a notional amount of $20.0 million to hedge exposure to fluctuations in the British Pound Sterling. The contract was a cash flow hedge. Based on yearend quoted market prices for contracts with similar terms and maturity dates, no asset or liability was recorded as the forward price was substantially the same as the contract price.
The counterparties to the 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, our exposure is limited to the foreign currency rate differential.
35
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 on Form 10K. The consolidated financial statements have been prepared in conformity with generally accepted accounting principles and include amounts that are based on managements informed judgments and estimates.
In fulfilling its responsibilities for the integrity of financial information, management maintains and relies on the Companys 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 managements authorization and accounting records are reliable as a basis for the preparation of the consolidated financial statements. The concept of reasonable assurance is based on the recognition that there are inherent limitations in all systems of internal control, and that the cost of such systems should not exceed the benefits to be derived there from. Management believes that, as of December 31, 2003, the Companys 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 has also established and maintains a system of disclosure controls designed to provide reasonable assurance that information required to be disclosed is accumulated and reported in an accurate and timely manner. A Disclosure Control and Internal Control Committee is in place to oversee this process and management believes that these controls are effective.
Management recognizes its responsibility for fostering a strong ethical climate so that the Companys affairs are conducted according to the highest standards of personal and corporate conduct. This responsibility is characterized and reflected in the Companys Business Code of Conduct which is distributed throughout the Company. Management maintains a systematic program to assess compliance with the policies included in the Business Code of Conduct.
The Board of Directors, through its Audit/Ethics Committee composed solely of nonemployee directors, reviews the Companys financial reporting, accounting and ethical practices. In 2003, the Audit/Ethics Committee engaged the Companys independent public accountants, Deloitte & Touche LLP, and approved 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 and | Senior Vice President | Vice President and | ||
Chief Executive Officer | Finance and Administration, | Controller | ||
and Chief Financial Officer |
36
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, 2003 and 2002, and
the related consolidated statements of operations, stockholders equity and
cash flows for each of the three years in the period ended December 31, 2003.
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 Companys 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, 2003 and 2002, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2003, 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, 2003, the Company adopted Statement of Financial Accounting
Standards No. 143, which established new accounting and reporting standards for
asset retirement obligations; effective as of January 1, 2002, the Company
adopted Statement of Financial Accounting Standards No. 142, which established
new accounting and reporting standards for the recording, amortization and
impairment of goodwill and other intangibles; and effective as of January 1,
2001, the Company adopted Statement of Financial Accounting Standards No. 133,
as amended, which established new accounting and reporting standards for
derivative instruments and hedging activities.
/s/ DELOITTE & TOUCHE LLP
Houston, Texas
37
February 11, 2004
Table of Contents
Baker Hughes Incorporated
Consolidated Statements of Operations
(In millions, except per share amounts)
Year Ended December 31,
2003
2002
2001
$
5,292.8
$
4,901.7
$
5,037.6
3,854.9
3,525.2
3,564.5
830.1
811.5
755.1
45.3
(1.1
)
(4.2
)
(2.4
)
4,729.2
4,336.7
4,313.0
563.6
565.0
724.6
(137.8
)
(69.7
)
45.8
(103.1
)
(111.1
)
(126.3
)
5.5
5.3
11.9
328.2
389.5
656.0
(148.1
)
(159.9
)
(223.6
)
180.1
229.6
432.4
(45.6
)
(18.2
)
6.3
134.5
211.4
438.7
(1.5
)
(5.6
)
(42.5
)
0.8
$
128.9
$
168.9
$
438.0
$
0.54
$
0.68
$
1.29
(0.14
)
(0.06
)
0.02
(0.02
)
(0.12
)
$
0.38
$
0.50
$
1.31
$
0.54
$
0.68
$
1.28
(0.14
)
(0.06
)
0.02
(0.02
)
(0.12
)
$
0.38
$
0.50
$
1.30
See Notes to Consolidated Financial Statements
38
Baker Hughes Incorporated
Consolidated Balance Sheets
(In millions, except par value)
December 31,
2003
2002
$
98.4
$
143.9
1,149.2
1,101.9
1,023.6
996.5
170.8
134.2
58.3
69.7
23.6
122.1
2,523.9
2,568.3
691.3
872.0
1,402.4
1,343.2
1,239.4
1,226.6
163.4
135.5
281.8
255.2
$
6,302.2
$
6,400.8
$
387.6
$
377.1
351.4
123.5
278.9
247.9
257.3
256.4
26.7
75.9
1,301.9
1,080.8
1,133.0
1,424.3
127.1
166.7
311.1
263.0
78.7
68.8
332.0
335.8
2,998.6
3,111.6
170.9
196.3
(151.1
)
(246.5
)
3,350.4
3,397.2
$
6,302.2
$
6,400.8
See Notes to Consolidated Financial Statements
39
Baker Hughes Incorporated
Consolidated Statements of Stockholders Equity
(In millions, except per share amounts)
Accumulated Other
Comprehensive
Income (Loss)
Capital
Retained
Foreign
in Excess
Earnings
Currency
Pension
Common
of
(Accumulated
Translation
Liability
Stock
Par Value
Deficit)
Adjustment
Adjustment
Total
$
333.7
$
3,065.7
$
(101.3
)
$
(245.1
)
$
(6.3
)
$
3,046.7
438.0
(52.5
)
(5.9
)
379.6
(154.4
)
(154.4
)
2.3
53.6
55.9
336.0
3,119.3
182.3
(297.6
)
(12.2
)
3,327.8
168.9
20.0
74.5
(31.2
)
232.2
(154.9
)
(154.9
)
1.6
39.6
41.2
(1.8
)
(47.3
)
(49.1
)
335.8
3,111.6
196.3
(203.1
)
(43.4
)
3,397.2
128.9
17.7
95.6
(17.9
)
224.3
(154.3
)
(154.3
)
2.5
62.1
64.6
(6.3
)
(175.1
)
(181.4
)
$
332.0
$
2,998.6
$
170.9
$
(89.8
)
$
(61.3
)
$
3,350.4
See Notes to Consolidated Financial Statements
40
Baker Hughes Incorporated
Consolidated Statements of Cash Flows
(In millions)
Year Ended December 31,
2003
2002
2001
$
180.1
$
229.6
$
432.4
349.2
321.6
339.5
(35.5
)
(3.5
)
77.1
(30.1
)
(45.8
)
(34.9
)
45.3
137.8
69.7
(45.8
)
(15.4
)
87.2
(81.8
)
21.5
17.5
(154.0
)
16.1
(57.0
)
101.2
15.7
(65.3
)
101.4
(4.1
)
18.0
(7.7
)
(19.7
)
56.7
(74.4
)
660.9
628.7
653.0
1.8
79.0
95.1
662.7
707.7
748.1
(405.2
)
(356.4
)
(326.0
)
(9.5
)
(39.7
)
(38.1
)
(16.5
)
24.0
54.0
9.0
66.8
77.7
77.6
(362.0
)
(280.9
)
(239.4
)
(0.1
)
(2.2
)
(16.7
)
(362.1
)
(283.1
)
(256.1
)
4.5
(163.7
)
(67.9
)
(100.0
)
(301.8
)
26.9
15.8
61.8
38.3
50.1
(181.4
)
(49.1
)
(154.3
)
(154.9
)
(154.4
)
(342.5
)
(313.6
)
(474.0
)
(342.5
)
(313.6
)
(474.0
)
(3.6
)
(5.8
)
(3.7
)
(45.5
)
105.2
14.3
143.9
38.7
24.4
$
98.4
$
143.9
$
38.7
$
188.5
$
128.7
$
97.7
$
116.2
$
111.8
$
122.2
See Notes to Consolidated Financial Statements
41
Baker Hughes Incorporated
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations
Baker Hughes Incorporated (Baker Hughes) is engaged in the oilfield services industry. Baker Hughes is a major supplier of wellbore related products and technology services and systems to the oil and natural gas industry on a worldwide basis and provides products and services for drilling, formation evaluation, completion and production of oil and natural gas wells.
Basis of Presentation
The consolidated financial statements include the accounts of Baker Hughes 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 judgments 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. The Company bases its estimates and judgments on historical experience and on various other assumptions and information that are believed to be reasonable under the circumstances. Estimates and assumptions about future events and their effects cannot be perceived with certainty and, accordingly, these estimates may change as new events occur, as more experience is acquired, as additional information is obtained and as the Companys operating environment changes. 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 longlived assets, useful lives used in depreciation and amortization, income taxes and related valuation allowances, and insurance, environmental and legal accruals.
Revenue Recognition
The Companys 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 and tool rentals are rendered and only when collectibility is reasonably assured. 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 determined using the firstin, firstout (FIFO) method or the average cost method, which approximates FIFO, 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 straightline 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. Once the tool is complete, the cost of the tool is reflected in capital expenditures and the tool is classified as rental tools and equipment in property. Significant improvements and betterments are capitalized if they extend the useful life of the asset.
42
Baker Hughes Incorporated
Notes to Consolidated Financial Statements (continued)
The Company had an interest in an oil producing property in West Africa that was sold effective January 2003 and is classified as a discontinued operation. The Company used the fullcost method of accounting for this property. Under this method, the Company capitalized all acquisition, exploration and development costs incurred for the purpose of finding oil reserves. In accordance with full cost accounting rules, the Company performed ceiling tests on the carrying value of its oil properties. During 2001, the Company recorded a charge of $2.2 million related to the ceiling test. During 2002, there was no ceiling test charge recorded. Depreciation, depletion and amortization of oil properties were computed using the unitofproduction method based upon production and estimates of proved reserves and totaled $16.6 million and $16.5 million in 2002 and 2001, respectively. No costs were excluded from the full cost amortization pool. At December 31, 2002, the Companys only cost center related to these properties was in West Africa.
Goodwill, Intangible Assets and Amortization
On January 1, 2002, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 142, Goodwill and Other Intangible Assets . Goodwill, including goodwill associated with equity method investments, and intangible assets with indefinite lives are not amortized. Intangible assets with finite useful lives are amortized either on a straightline basis over the assets estimated useful life or on a basis that reflects the pattern in which the economic benefits of the intangible assets are realized. In 2001, goodwill was amortized using the straightline method over the lesser of its expected useful life or 40 years.
Impairment of LongLived Assets
Property, intangible assets and certain other assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. The determination of recoverability is made based upon the estimated undiscounted future net cash flows, excluding interest expense. The amount of impairment loss, if any, is determined by comparing the fair value, as determined by a discounted cash flow analysis, with the carrying value of the related assets.
The Company performs its annual impairment test of goodwill as of October 1, or more frequently if circumstances indicate that impairment may exist. Investments in affiliates are also reviewed for impairment whenever events or changes in circumstances indicate that impairment may exist. The determination of impairment is made by comparing the carrying amount with its fair value, which is calculated using a combination of a market value and discounted cash flows approach.
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 nonU.S. subsidiaries in operations outside the U.S.; accordingly, the Company does not provide U.S. income taxes for such earnings.
The Company operates in more than 80 countries under many legal forms. As a result, the Company is subject to the jurisdiction of numerous domestic and foreign tax authorities, as well as to tax agreements and treaties among these governments. The Companys operations in these different jurisdictions are taxed on various bases: actual income before taxes, deemed profits (which are generally determined using a percentage of revenues rather than profits) and withholding taxes based on revenue. 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, such as the amount, timing and character of deductions, permissible revenue recognition methods under the tax law and the sources and character of income and tax credits. Changes in tax laws, regulations, agreements and treaties, foreign currency exchange restrictions or the Companys 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.
The Companys and its subsidiaries tax filings for various periods are subjected to audit by tax authorities in most jurisdictions where they conduct business. These audits may result in assessments of additional taxes that are resolved with the authorities or potentially through the courts. The Company believes that these assessments may occasionally be based on erroneous and even arbitrary interpretations of local tax law. The Company has received tax assessments from various taxing authorities and is currently
43
Baker Hughes Incorporated
Notes to Consolidated Financial Statements (continued)
at varying stages of appeals and/or litigation regarding these matters. In these situations, the Company provides only for the amount the Company believes will ultimately result from these proceedings. The Company believes it has substantial defenses to the questions being raised and will pursue all legal remedies should an unfavorable outcome result. However, resolution of these matters involves uncertainties and there are no assurances that the outcomes will be favorable.
Product Warranties
The Company sells certain of its products to customers with a product warranty that provides that customers can return a defective product during a specified warranty period following the purchase in exchange for a replacement product, repair at no cost to the customer or the issuance of a credit to the customer. The Company accrues its estimated exposure to warranty claims based upon current and historical product sales data, warranty costs incurred and any other related information known to the Company.
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. For sites where the Company is primarily responsible for the remediation, the Companys estimates of costs are developed based on internal evaluations and are not discounted. 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, such as obtaining environmental permits, installation of pollution control equipment and waste disposal, are expensed as incurred. Where the Company has been identified as a potentially responsible party in a United States federal or state 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.
Foreign Currency Translation
The majority of the Companys significant 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 Companys policies do not permit the use of derivative financial instruments for speculative purposes. The Company uses foreign currency forward contracts to hedge certain firm commitments and transactions denominated in foreign currencies. The Company uses interest rate swaps to manage interest rate risk.
On January 1, 2001, the Company adopted SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities , as amended by SFAS Nos. 137 and 138 (collectively referred to as SFAS No. 133). 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. 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.
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.
44
Baker Hughes Incorporated
Notes to Consolidated Financial Statements (continued)
StockBased Compensation
As allowed under SFAS No. 123, Accounting for StockBased Compensation , the Company has elected to account for its stockbased compensation using the intrinsic value method of accounting in accordance with Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees . Under this method, no compensation expense is recognized when the number of shares granted is known and the exercise price of the stock option at the time of grant is equal to or greater than the market price of the Companys common stock. Reported net income does not include any compensation expense associated with stock options but does include compensation expense associated with restricted stock awards.
If the Company had recognized compensation expense as if the fair value
based method had been applied to all awards as provided for under SFAS No. 123,
the Companys pro forma net income, earnings per share (EPS) and stockbased
compensation cost would have been as follows for the years ended December 31:
2003
2002
2001
$
128.9
$
168.9
$
438.0
1.9
2.1
1.5
(23.1
)
(23.3
)
(21.2
)
$
107.7
$
147.7
$
418.3
$
0.38
$
0.50
$
1.31
0.32
0.44
1.25
$
0.38
$
0.50
$
1.30
0.32
0.44
1.24
These pro forma calculations may not be indicative of future amounts since additional awards in future years are anticipated.
Under SFAS No. 123, the fair value of stockbased awards 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 Companys
calculations were made using the BlackScholes option pricing model with the
following weighted average assumptions:
Assumptions
RiskFree
Expected
Dividend
Expected
Interest
Life
Yield
Volatility
Rate
(in years)
1.6
%
45.0
%
2.5
%
3.8
1.4
%
45.0
%
3.5
%
3.8
1.1
%
53.0
%
3.4
%
3.1
The weighted average fair values of options granted in 2003, 2002 and 2001 were $10.25, $10.24 and $15.04 per share, respectively.
New Accounting Standards
Effective January 1, 2003, the Company adopted SFAS No. 143, Accounting for Asset Retirement Obligations . SFAS No. 143 addresses financial accounting and reporting for obligations associated with the retirement of longlived assets. SFAS No. 143 requires that the fair value of a liability associated with an asset retirement obligation (ARO) be recognized in the period in which it is incurred if a reasonable estimate of fair value can be made. The liability for the ARO is revised each subsequent period due to the passage of time and changes in estimates. The associated retirement costs are capitalized as part of the carrying amount of the longlived asset and subsequently depreciated over the life of the asset.
45
Baker Hughes Incorporated
Notes to Consolidated Financial Statements (continued)
The adoption of SFAS No. 143 in 2003 resulted in a charge of $5.6 million, net of tax of $2.8 million, recorded as the cumulative effect of accounting change in the consolidated statement of operations. In conjunction with the adoption, the Company recorded ARO liabilities of $11.4 million primarily for anticipated costs of obligations associated with the future disposal of power source units at certain of its divisions and refurbishment costs associated with certain leased facilities in Europe and with a fleet of leased railcars and tanks. The Company has not presented pro forma ARO disclosures as pro forma net income and earnings per share would not be materially different from the Companys actual results.
In November 2002, the Financial Accounting Standards Board (FASB) issued FASB Interpretation No. 45 (FIN 45), Guarantors Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others . FIN 45 requires disclosures by a guarantor in its financial statements about obligations under certain guarantees that it has issued and requires a guarantor to recognize, at the inception of certain guarantees, a liability for the fair value of the obligation undertaken in issuing the guarantee. The adoption of the provisions of FIN 45 relating to the initial recognition and measurement of guarantor liabilities, which were effective for qualifying guarantees entered into or modified after December 31, 2002, did not have an impact on the consolidated financial statements of the Company. The Company adopted the new disclosure requirements in 2002.
In January 2003, the FASB issued FASB Interpretation No. 46 (FIN 46), Consolidation of Variable Interest Entities . An entity is subject to the consolidation rules of FIN 46 and is referred to as a variable interest entity (VIE) if the entitys equity investors lack the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its operations without additional financial support. In December 2003, the FASB issued modifications to FIN 46 (FIN 46R), resulting in multiple effective dates based on the nature as well as the creation date of a VIE. The Company is currently evaluating the provisions of the original FIN 46 and FIN 46R for any potential VIEs created prior to February 1, 2003, but does not expect the adoption to have a material impact, if any, on the consolidated financial statements.
In April 2003, the FASB issued SFAS No. 149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities , which amends and clarifies the accounting for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities under SFAS No. 133. SFAS No. 149 is effective for contracts entered into or modified after June 30, 2003, with some exceptions for hedging relationships designated after June 30, 2003. The adoption of SFAS No. 149 on July 1, 2003 had no impact on the consolidated financial statements.
In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity , which modifies the accounting for certain financial instruments. SFAS No. 150 requires that these financial instruments be classified as liabilities and applies immediately for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. The adoption of SFAS No. 150 on July 1, 2003 had no impact on the consolidated financial statements.
In December 2003, the FASB revised SFAS No. 132, Employers Disclosures about Pensions and Other Postretirement Benefits . The new SFAS No. 132 requires additional disclosures about the assets, obligations, cash flows and net periodic benefit cost of defined benefit pension plans and other defined benefit postretirement plans, of which certain disclosures are not required until 2004. The Company has adopted the disclosure requirements that were effective for 2003.
In January 2004, the FASB issued FASB Staff Position No. FAS 1061 (FSP 1061). Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003 , which provides temporary guidance concerning the recently enacted Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the Act). SFAS No. 106, Employers Accounting for Postretirement Benefits Other Than Pensions , requires presently enacted changes in laws that will take effect in future periods to be taken into account in measuring current period postretirement benefit cost and the accumulated projected benefit obligation (APBO). FSP 1061 allows companies that sponsor affected postretirement benefit plans to elect to defer recognizing the effects of the Act on postretirement benefit expense and on the APBO pursuant to SFAS No. 106. The Company has elected to defer accounting for the effects of the Act until 2004.
Reclassifications
Certain reclassifications have been made to the prior years consolidated financial statements to conform with the current year presentation.
46
Baker Hughes Incorporated
Notes to Consolidated Financial Statements (continued)
NOTE 2. DISCONTINUED OPERATIONS
In the third quarter of 2003, the Companys Board of Directors approved and management initiated a plan to sell BIRD Machine (BIRD), the remaining division of the former Process segment. In October 2003, the Company signed a definitive agreement for the sale of BIRD and recorded charges totaling $37.4 million, net of tax of $10.9 million, which consisted of a loss of $13.5 million on the writedown of BIRD to fair value, $6.2 million of severance and warranty accruals and a loss of $17.7 million related to the recognition of cumulative foreign currency translation adjustments into earnings. The sale closed in January 2004 and the Company received $5.6 million in proceeds, which is subject to adjustment pending final completion of the purchase price. The Company retained certain accounts receivable, inventories and other assets.
In 2000, the Company decided to substantially exit the oil and natural gas exploration business and proceeded to dispose of its various oil and natural gas properties. In December 2002, the Company entered into exclusive negotiations for the sale of the Companys interest in its oil producing operations in West Africa for $32.0 million in proceeds. The transaction was effective as of January 1, 2003, and resulted in a gain on sale of $4.1 million, net of a tax benefit of $0.2 million, recorded in the first quarter of 2003. The Company received $10.0 million as a deposit in 2002 and the remaining $22.0 million in April 2003.
In November 2002, the Company sold EIMCO Process Equipment (EIMCO), a division of the former Process segment, and recorded a loss on disposal of $22.3 million, net of tax of $1.2 million, which consisted of a loss of $2.3 million on the writedown to fair value and a loss of $20.0 million related to the recognition of cumulative foreign currency translation adjustments into earnings. The Company received total proceeds of $48.9 million, of which $4.9 million was held in escrow pending completion of final adjustments of the purchase price. In 2003, all purchase price adjustments were completed, resulting in the release of the escrow balance, of which $2.9 million was returned to the buyer and $2.0 million was received by the Company. In 2003, the Company also recorded an additional loss on sale due to purchase price adjustments of $2.5 million, net of tax of $1.3 million.
The Company has reclassified the consolidated financial statements for all
prior periods presented to reflect these operations as discontinued.
Summarized financial information from discontinued operations is as follows for
the years ended December 31:
2003
2002
2001
$
94.2
$
118.7
$
102.0
4.2
49.1
61.5
138.0
181.1
$
98.4
$
305.8
$
344.6
$
(16.9
)
$
(9.1
)
$
(22.1
)
1.8
19.7
27.8
(1.5
)
(15.1
)
9.1
5.7
6.0
3.2
7.8
(0.7
)
(8.7
)
(7.2
)
0.5
5.3
(5.0
)
0.6
(10.9
)
(5.9
)
(14.3
)
1.1
11.0
20.6
(1.0
)
(9.8
)
4.1
6.3
(37.4
)
4.1
(2.5
)
(22.3
)
(35.8
)
(22.3
)
$
(45.6
)
$
(18.2
)
$
6.3
47
Baker Hughes Incorporated
Assets and liabilities of discontinued operations are as follows for the
years ended December 31:
Notes to Consolidated Financial Statements (continued)
2003
2002
$
$
3.2
6.0
17.7
11.2
37.6
0.7
2.0
5.7
60.3
1.3
$
23.6
$
122.1
$
12.0
$
14.9
5.4
9.0
7.6
28.1
20.3
1.7
3.6
$
26.7
$
75.9
NOTE 3. ACQUISITIONS
In 2003, the Company made two acquisitions having an aggregate purchase price of $16.9 million, of which $9.5 million was paid in cash. As a result of these acquisitions, the Company recorded approximately $3.9 million of goodwill and $9.6 million of intangible assets through December 31, 2003. The purchase prices are allocated based on fair values of the acquisitions. Pro forma results of operations have not been presented because the effects of these acquisitions were not material to the Companys consolidated financial statements on either an individual or aggregate basis.
In 2002, the Company made three acquisitions having an aggregate cash purchase price of $39.7 million, net of cash acquired. As a result of these acquisitions, the Company recorded approximately $28.4 million of goodwill. The purchase prices were allocated based on fair values of the acquisitions. Pro forma results of operations have not been presented because the effects of these acquisitions were not material to the Companys consolidated financial statements on either an individual or aggregate basis.
NOTE 4. REVERSALS OF RESTRUCTURING CHARGE
In 2000, the Companys Board of Directors approved the Companys plan to
substantially exit the oil and natural gas exploration business and recorded a
restructuring charge of $29.5 million. Included in the restructuring charge
was $1.1 million for a contractual obligation related to an oil and natural gas
property in Angola. The property was sold in 2003 and the Company reversed the
liability related to this contractual obligation. Also included in the
restructuring charge was $4.5 million for the minimum amount of the Companys
share of project costs relating to the Companys interest in an oil and natural
gas property in Colombia. After unsuccessful attempts to negotiate a
settlement with its joint venture partner, the Company decided to abandon
further involvement in this project. Subsequently, in 2001, a third party
approached the Company and agreed to assume the remaining obligations in
exchange for the Companys interest in the project. Accordingly, the Company
reversed $4.2 million related to this obligation.
NOTE 5. INCOME TAXES
The provision for income taxes is comprised of the following for the years
ended December 31:
2003
2002
2001
$
11.1
$
21.2
$
7.7
172.5
142.2
138.8
183.6
163.4
146.5
(45.6
)
6.1
76.8
10.1
(9.6
)
0.3
(35.5
)
(3.5
)
77.1
$
148.1
$
159.9
$
223.6
48
Baker Hughes Incorporated
The geographic sources of income from continuing operations before income
taxes are as follows for the years ended December 31:
Notes to Consolidated Financial Statements (continued)
2003
2002
2001
$
(132.0
)
$
54.8
$
229.7
460.2
334.7
426.3
$
328.2
$
389.5
$
656.0
Tax benefits of $1.5 million, $1.4 million and $5.5 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, 2003, 2002 and 2001, respectively.
The provision for income taxes differs from the amount computed by
applying the U.S. statutory income tax rate to income from continuing
operations before income taxes for the reasons set forth below for the years
ended December 31:
2003
2002
2001
$
114.9
$
136.3
$
229.6
36.3
40.2
14.8
(5.8
)
(14.4
)
4.9
10.0
(7.4
)
8.5
4.0
2.7
2.7
(3.3
)
(14.4
)
(23.5
)
(2.9
)
(0.5
)
(1.1
)
$
148.1
$
159.9
$
223.6
During 2003, the Company recognized an incremental effect of $36.3 million of additional taxes attributable to its portion of the operations of WesternGeco. Of this amount, $15.9 million related to the reduction in the carrying value of the Companys equity investment in WesternGeco, for which there was no tax benefit. The remaining $20.4 million arose from operations of the venture due to: (i) the venture being taxed in certain foreign jurisdictions based on a deemed profit basis, which is a percentage of revenues rather than profits, and (ii) unbenefitted foreign losses of the venture, which are operating losses and impairment and restructuring charges in certain foreign jurisdictions where there was no current tax benefit and where a deferred tax asset was not recorded due to the uncertainty of realization. In 2002 and 2001, the amount of additional taxes resulting from operations of the venture was $40.2 million and $14.8 million, respectively.
In 2003, the Company recognized a current year benefit of $3.3 million as the result of refund claims filed in the U.S. In 2002, a $14.4 million benefit was recognized as the result of the settlement of an Internal Revenue Service (IRS) examination related to the Companys September 30, 1996 through September 30, 1998 tax years. In 2001, a benefit of $23.5 million was recognized as a result of the settlement of the IRS examination of certain 1994 through 1997 preacquisition tax returns and related refund claims of Western Atlas Inc.
The Company has received tax assessments from various taxing authorities and is currently at varying stages of appeals and /or litigation regarding these matters. The Company believes it has substantial defenses to the questions being raised and will pursue all legal remedies should an unfavorable outcome result. The Company has provided for the amounts it believes will ultimately result from these proceedings.
49
Baker Hughes Incorporated
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 Companys temporary
differences and carryforwards are as follows at December 31:
Notes to Consolidated Financial Statements (continued)
2003
2002
$
15.4
$
9.4
122.8
106.9
27.3
27.5
45.1
43.0
77.3
69.4
79.8
95.8
87.8
48.9
15.6
9.2
471.1
410.1
(54.1
)
(45.9
)
417.0
364.2
138.8
151.6
47.0
78.3
99.9
85.7
19.6
24.0
68.0
57.1
373.3
396.7
$
43.7
$
(32.5
)
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 nonU.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, 2003, the Company had approximately $31.0 million of
foreign tax credits and $36.1 million of general business credits available to
offset future payments of federal income taxes, expiring in varying amounts
between 2009 and 2024. The Companys $12.7 million alternative minimum tax
credits 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.
NOTE 6. EARNINGS PER SHARE
A reconciliation of the number of shares used for the basic and diluted
EPS computations is as follows for the years ended December 31:
2003
2002
2001
334.9
336.8
335.6
1.0
1.1
1.8
335.9
337.9
337.4
6.8
5.0
4.6
50
Baker Hughes Incorporated
NOTE 7. INVENTORIES
Inventories are comprised of the following at December 31:
Notes to Consolidated Financial Statements (continued)
2003
2002
$
853.7
$
816.5
98.8
91.9
71.1
88.1
$
1,023.6
$
996.5
NOTE 8. 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 WesternGeco, a seismic venture between the Company and Schlumberger Limited (Schlumberger). The Company and Schlumberger own 30% and 70% of the venture, respectively.
In conjunction with the formation of WesternGeco in November 2000, the Company and Schlumberger entered into an agreement whereby the Company or Schlumberger will make a cash trueup payment to the other party based on a formula comparing the ratio of the net present value of sales revenue from each partys contributed multiclient seismic data libraries during the fouryear 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 the event that future sales from the contributed libraries continue in the same relative percentages incurred through December 31, 2003, the Company currently estimates that Schlumberger will make a payment to the Company in the range of $5.0 million to $10.0 million. Any payment to be received by the Company will be recorded as an adjustment to the carrying value of its investment in WesternGeco. In November 2000, the Company also entered into an agreement with WesternGeco whereby WesternGeco subleased a facility from the Company for a period of ten years at then current market rates. During 2003, 2002 and 2001, the Company received payments of $5.0 million, $5.5 million and $4.6 million, respectively, from WesternGeco related to this lease. In conjunction with the formation of WesternGeco venture, the Company transferred a lease on a seismic vessel to the venture. The Company was the sole guarantor of this lease obligation. During 2003, the lease and guarantee were terminated as a result of the purchase of the seismic vessel by WesternGeco.
Included in the caption Equity in income (loss) of affiliates in the Companys consolidated statement of operations for 2003 is $135.7 million for the Companys share of $452.0 million of certain impairment and restructuring charges taken by WesternGeco in 2003. The charges related to the impairment of WesternGecos multiclient seismic library and rationalization of WesternGecos marine seismic fleet. In addition, as a result of the continuing weakness in the seismic industry, the Company evaluated the value of its investment in WesternGeco and recorded an impairment loss of $45.3 million in 2003 to writedown the investment to its fair value. The fair value was determined using a combination of a market value and discounted cash flows approach. The Company was assisted in the determination of the fair value by an independent third party. Included in the caption Equity in income (loss) of affiliates for 2002 and 2001 are $90.2 million for the Companys share of a $300.7 million restructuring charge related to impairment of assets, reductions in workforce, closing certain operations and reducing its marine seismic fleet and $10.3 million for asset impairment charges, respectively, both associated with WesternGeco.
During 2003, the Company invested $30.1 million for a 50% interest in the QuantX Wellbore Instrumentation venture (QuantX) with Expro International (Expro). The venture is engaged in the permanent inwell monitoring market and was formed by combining Expros permanent monitoring business with one of the Companys product lines. The Company accounts for its ownership in QuantX using the equity method of accounting.
During 2002, the Company invested $16.5 million for a 40% interest in Luna Energy, L.L.C. (Luna Energy), a venture formed to develop, manufacture, commercialize, sell, market and distribute down hole fiber optic and other sensors for oil and natural gas exploration, production, transportation and refining applications. During 2003, the Company invested an additional $8.0 million in Luna Energy.
During 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, which were subsequently exchanged for preferred stock of Petreco during 2002. 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
51
Baker Hughes Incorporated
Notes to Consolidated Financial Statements (continued)
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 Companys material continued involvement in the operations of Petreco. In February 2004, the Company completed the sale of its minority interest in Petreco and received proceeds of $35.8 million, of which $7.4 million is held in escrow pending the outcome of potential indemnification obligations pursuant to the sales agreement. The Company does not believe the transaction is material to its financial condition or results of operations.
Summarized unaudited combined financial information for all equity method
affiliates is as follows as of December 31:
2003
2002
$
1,349.3
$
1,550.6
(457.9
)
(228.9
)
(478.1
)
(320.2
)
$
550.2
$
589.2
1,321.3
1,968.3
$
1,871.5
$
2,557.5
$
573.7
$
765.5
112.7
125.8
1,185.1
1,666.2
$
1,871.5
$
2,557.5
At December 31, 2003 and 2002, net accounts receivable from unconsolidated
affiliates totaled $0.7 million and $16.1 million, respectively. As of
December 31, 2003 and 2002, the excess of the Companys investment over the
Companys equity in affiliates is $298.2 million and $310.2 million,
respectively. In conjunction with the adoption of SFAS No. 142, the Company
discontinued the amortization of goodwill associated with equity method
investments effective January 1, 2002. Amortization expense for the year ended
December 31, 2001 of $7.9 million is included in the Companys equity in income
(loss) of affiliates.
NOTE 9. PROPERTY
Property is comprised of the following at December 31:
Depreciation
Period
2003
2002
$
40.4
$
39.4
5 40 years
608.7
562.4
2 15 years
1,936.2
1,701.7
1 10 years
1,056.0
936.1
3,641.3
3,239.6
(2,238.9
)
(1,896.4
)
$
1,402.4
$
1,343.2
NOTE 10. GOODWILL AND INTANGIBLE ASSETS
On January 1, 2002, the Company adopted SFAS No. 142 that required the Company to cease amortizing goodwill and to perform a transitional impairment test of goodwill in each of its reporting units as of January 1, 2002. The Companys reporting units were based on its organizational and reporting structure. Corporate and other assets and liabilities were allocated to the reporting units to the extent that they related to the operations of those reporting units. The Company was assisted in the determination of the fair value by an independent third party. The goodwill in both the EIMCO and BIRD operating divisions of the Companys former Process segment was determined to be impaired using a combination of a market value and discounted cash flows approach to estimate fair value. Accordingly, the Company recognized transitional impairment losses of $42.5 million, net of taxes of $20.4 million. The transitional impairment losses were recorded in the first quarter of 2002 as the cumulative effect of accounting change in the consolidated statement of operations. The Company performs its annual impairment test as of October 1. There were no impairments in 2003 or 2002 related to the annual impairment test.
52
Baker Hughes Incorporated
The changes in the carrying amount of goodwill (net of accumulated
amortization) are as follows:
Notes to Consolidated Financial Statements (continued)
$
1,197.5
28.4
0.7
1,226.6
3.9
8.9
$
1,239.4
Intangible assets, which are amortized, are comprised of the following for
the years ended December 31:
2003
2002
Gross
Gross
Carrying
Accumulated
Carrying
Accumulated
Amount
Amortization
Net
Amount
Amortization
Net
$
183.5
$
(46.8
)
$
136.7
$
167.2
$
(36.5
)
$
130.7
21.9
(5.0
)
16.9
4.7
(2.2
)
2.5
11.2
(2.9
)
8.3
5.7
(4.8
)
0.9
0.6
(0.1
)
0.5
0.6
(0.1
)
0.5
2.0
(1.0
)
1.0
2.1
(1.2
)
0.9
$
219.2
$
(55.8
)
$
163.4
$
180.3
$
(44.8
)
$
135.5
In 2003, a joint venture that had been accounted for using the equity method of accounting was dissolved by mutual agreement between the Company and the venture partner. The carrying value of the Companys investment in the joint venture included goodwill resulting from prior purchase accounting. In connection with the dissolution of the joint venture, the Company received the rights to market certain products previously held by the joint venture. As a result, the Company reclassified $21.2 million of such equity method goodwill to contract based, technology based and marketing related intangibles.
The adoption of SFAS No. 142 also required the Company to reevaluate the remaining useful lives of its intangible assets to determine whether the remaining useful lives were appropriate. The Company also reevaluated the amortization methods of its intangible assets to determine whether the amortization reflects the pattern in which the economic benefits of the intangible assets are consumed. In performing these evaluations, the Company reduced the remaining life of one of its marketing related intangibles and changed the method of amortization of one of its technology based intangibles.
Amortization expense included in net income for the years ended December 31, 2003, 2002 and 2001 was $13.5 million, $10.9 million and $56.1 million, respectively. Estimated amortization expense for each of the subsequent five fiscal years is expected to be within the range of $10.9 million to $13.2 million.
53
Baker Hughes Incorporated
In accordance with SFAS No. 142, the Company discontinued the amortization
of goodwill and goodwill associated with equity method investments effective
January 1, 2002. The pro forma results of operations of the Company, giving
effect to SFAS No. 142 as if it were adopted on January 1, 2001, are as follows
for the year ended December 31:
Notes to Consolidated Financial Statements (continued)
2001
$
438.0
46.8
0.4
$
485.2
$
1.31
0.14
$
1.45
$
1.30
0.14
$
1.44
54
Baker Hughes Incorporated
NOTE 11. INDEBTEDNESS
Total debt consisted of the following at December 31:
Notes to Consolidated Financial Statements (continued)
2003
2002
$
$
23.2
100.0
99.9
99.8
251.1
253.3
356.9
333.6
199.1
199.0
147.4
147.3
391.0
390.8
39.0
0.8
1,484.4
1,547.8
351.4
123.5
$
1,133.0
$
1,424.3
At December 31, 2003, the Company had $930.2 million of credit facilities with commercial banks, of which $500.0 million is a threeyear committed revolving credit facility (the facility) that expires in July 2006. The facility contains certain covenants which, among other things, require the maintenance of a funded indebtedness to total capitalization ratio (a defined formula per the facility) of less than or equal to 0.50, limit the amount of subsidiary indebtedness and restrict the sale of significant assets, defined as 10% or more of total consolidated assets. At December 31, 2003, the Company was in compliance with all the facility covenants, including the funded indebtedness to total capitalization ratio, which was 0.30. There were no direct borrowings under the facility during the year ended December 31, 2003; however, to the extent that the Company has outstanding commercial paper, available borrowings under the facility are reduced. As of December 31, 2003, the Company has classified $38.4 million of debt due within one year as longterm debt because the Company has the ability under the facility and the intent to maintain these obligations for longer than one year.
The Company realized gains as a result of terminating various interest
rate swap agreements prior to their scheduled maturities. The deferred gains
are being amortized as a reduction of interest expense over the remaining life
of the underlying debt securities. The unamortized deferred gains included in
certain debt securities above and reported in longterm debt in the
consolidated balance sheets are as follows at December 31:
2003
2002
$
1.3
$
4.0
33.5
10.4
55
Baker Hughes Incorporated
Notes to Consolidated Financial Statements (continued)
Maturities of debt at December 31, 2003 are as follows: 2004 $351.4 million; 2005 $0.0 million; 2006 $38.6 million; 2007 $0.0 million; 2008 $0.0 million and $1,094.4 million thereafter.
NOTE 12. FINANCIAL INSTRUMENTS
Fair Value of Financial Instruments
The Companys financial instruments include cash and shortterm investments, receivables, payables, debt and foreign currency forward contracts. Except as described below, the estimated fair value of such financial instruments at December 31, 2003 and 2002 approximate their carrying value as reflected in the consolidated balance sheets. The fair value of the Companys debt and foreign currency forward contracts has been estimated based on yearend quoted market prices.
The estimated fair value of the Companys debt at December 31, 2003 and 2002 was $1,609.8 million and $1,703.0 million, respectively, which differs from the carrying amounts of $1,484.4 million and $1,547.8 million, respectively, included in the consolidated balance sheets.
Interest Rate Swaps
At different times during 2003, the Company entered into three separate interest rate swap agreements, each for a notional amount of $325.0 million, associated with the Companys 6.25% Notes due January 2009. These agreements had been designated and had qualified as fair value hedging instruments. Due to the Companys outlook for interest rates, the Company terminated the three agreements and received payments totaling $26.9 million. Each of the three agreements was terminated prior to entering into a new agreement. The deferred gains are being amortized as a reduction of interest expense over the remaining life of the underlying debt security, which matures in January 2009.
During 2002, the Company terminated two interest rate swap agreements that had been entered into in prior years. These agreements had been designated and had qualified as fair value hedging instruments. Upon termination, the Company received proceeds totaling $15.8 million. The deferred gains of $4.8 million and $11.0 million are being amortized as a reduction of interest expense over the remaining lives of the underlying debt securities, which mature in June 2004 and January 2009, respectively.
Foreign Currency Forward Contracts
At December 31, 2003, the Company had entered into several foreign currency forward contracts with notional amounts aggregating $62.5 million to hedge exposure to currency fluctuations in the British Pound Sterling, the Norwegian Krone, the Euro, the Brazilian Real and the Argentine Peso. These contracts are designated and qualify as fair value hedging instruments. Based on quoted market prices as of December 31, 2003 for contracts with similar terms and maturity dates, the Company recorded a gain of $1.5 million to adjust these foreign currency forward contracts to their fair market value. This gain offsets designated foreign exchange losses resulting from the underlying exposures and is included in selling, general and administrative expense in the consolidated statement of operations.
During 2003 and 2002, the Company entered into foreign currency forward contracts to hedge exposure to currency fluctuations for specific transactions or balances. The impact on the consolidated statements of operations was not significant for these contracts either individually or in the aggregate.
The counterparties to the Companys 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 Companys exposure is limited to the foreign currency rate differential.
Concentration of Credit Risk
The Company sells its products and services to numerous companies in the oil and natural gas industry. Although this concentration could affect the Companys 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.
56
Baker Hughes Incorporated
Notes to Consolidated Financial Statements (continued)
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 13. SEGMENT AND RELATED INFORMATION
The Company operates through six divisions Baker Atlas, Baker Oil Tools, Baker Petrolite, Centrilift, Hughes Christensen and INTEQ that have been aggregated into the Oilfield segment because they have similar economic characteristics and because the longterm financial performance of these divisions is affected by similar economic conditions. The consolidated results are evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance. During 2003, the Company had a Process segment that manufactured and sold process equipment for separating solids from liquids and liquids from liquids. The Company reclassified the operating results for this segment as discontinued operations, as the Company sold EIMCO in 2002 and BIRD in 2004. The Company no longer operates in this segment.
These operating divisions manufacture and sell products and provide services used in the oil and natural gas exploration industry, including drilling, completion, production of oil and natural gas wells and in reservoir measurement and evaluation. They also operate in the same markets and have substantially the same customers. The principal markets include all major oil and natural gas producing regions of the world, including North America, South America, Europe, Africa, the Middle East and the Far East. Customers include major multinational, independent and stateowned oil companies. The Oilfield segment also includes the Companys 30% interest in WesternGeco and other similar businesses.
The accounting policies of the Oilfield segment are the same as those described in Note 1 of Notes to Consolidated Financial Statements. The Company evaluates the performance of the Oilfield segment based on segment profit (loss), which is defined as income (loss) from continuing operations before income taxes, accounting changes, restructuring charges or reversals, impairment of assets and interest income and expense.
Summarized financial information is shown in the following table. The
Corporate and Other column includes corporaterelated items, results of
insignificant operations and, as it relates to segment profit (loss), income
and expense not allocated to the Oilfield segment, including restructuring
charges and reversals and impairment of assets. The Corporate and Other
column also includes results of operations relating to the former Process
segment and assets of discontinued operations.
Corporate
Oilfield
and Other
Total
$
5,292.7
$
0.1
$
5,292.8
(8.6
)
(129.2
)
(137.8
)
752.4
(424.2
)
328.2
5,802.3
499.9
6,302.2
662.9
28.4
691.3
401.9
3.3
405.2
321.9
27.3
349.2
$
4,901.5
$
0.2
$
4,901.7
18.5
(88.2
)
(69.7
)
730.4
(340.9
)
389.5
5,756.0
644.8
6,400.8
843.5
28.5
872.0
351.6
4.8
356.4
294.6
27.0
321.6
$
5,001.9
$
35.7
$
5,037.6
56.0
(10.2
)
45.8
902.9
(246.9
)
656.0
5,797.8
878.4
6,676.2
902.8
26.2
929.0
303.8
22.2
326.0
324.6
14.9
339.5
57
Baker Hughes Incorporated
For the
years ended December 31, 2003, 2002 and 2001, there were no
revenues attributable to one customer that accounted for more than
10% of total revenues.
The following table presents the details of Corporate and Other segment
loss for the years ended December 31:
Notes to Consolidated Financial Statements (continued)
2003
2002
2001
$
(146.7
)
$
(144.9
)
$
(128.8
)
(97.6
)
(105.8
)
(114.4
)
(45.3
)
1.1
4.2
2.4
(135.7
)
(90.2
)
(10.3
)
$
(424.2
)
$
(340.9
)
$
(246.9
)
The following table presents the details of Corporate and Other total
assets at December 31:
2003
2002
2001
$
35.7
$
25.6
$
76.3
134.7
157.7
180.5
50.0
65.5
74.9
107.5
88.8
90.1
28.4
28.5
26.2
23.6
122.0
341.7
120.0
156.7
88.7
$
499.9
$
644.8
$
878.4
The following table presents consolidated revenues by country based on the
location of the use of the products or services for the years ended December
31:
2003
2002
2001
$
1,897.0
$
1,713.4
$
1,972.4
345.1
253.5
291.6
329.1
302.3
310.5
296.6
352.2
324.1
130.5
143.6
232.6
2,294.5
2,136.7
1,906.4
$
5,292.8
$
4,901.7
$
5,037.6
The following table presents net property by country based on the location
of the asset at December 31:
2003
2002
2001
$
797.3
$
781.6
$
780.9
143.4
130.1
108.4
54.8
39.5
35.4
47.5
52.7
48.1
43.3
34.0
20.7
23.1
26.6
37.4
293.0
278.7
255.5
$
1,402.4
$
1,343.2
$
1,286.4
NOTE 14. EMPLOYEE STOCK PLANS
The Company has stock option plans that provide for the issuance of incentive and nonqualified 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, 2003, 15.2 million shares were available for future option grants.
58
Baker Hughes Incorporated
The following table summarizes the activity for the Companys stock option
plans:
Notes to Consolidated Financial Statements (continued)
Weighted
Number
Average
of Shares
Exercise Price
(in thousands)
Per Share
10,652
$
28.80
1,850
40.97
(2,291
)
22.05
(344
)
30.01
9,867
32.61
2,064
28.80
(876
)
21.35
(187
)
39.50
10,868
32.68
2,481
30.92
(1,005
)
21.44
(515
)
38.97
11,829
$
32.99
7,611
$
33.80
6,802
$
33.29
6,284
$
32.13
The following table summarizes information for stock options outstanding
at December 31, 2003:
Outstanding
Exercisable
Weighted
Average
Remaining
Weighted
Weighted
Contractual
Average
Average
Range of Exercise
Shares
Life
Exercise
Shares
Exercise
Prices
(in thousands)
(in years)
Price
(in thousands)
Price
102
2.0
$
11.06
83
$
10.23
1,896
4.4
20.82
1,894
20.82
1,740
7.1
24.03
1,107
23.51
4,413
8.0
32.56
1,399
35.34
3,678
5.0
44.62
3,128
45.24
11,829
6.3
$
32.99
7,611
$
33.80
The Company also has an employee stock purchase plan whereby eligible employees may purchase shares of the Companys common stock at a price equal to 85% of the lower of the closing price of the Companys common stock on the first or last trading day of the calendar year. A total of 4.9 million shares are remaining for issuance under the plan. Employees purchased 0.8 million shares in 2003, 0.8 million shares in 2002 and 0.6 million shares in 2001.
The Company has awarded restricted stock to directors and certain
executive officers. The fair value of the restricted stock on the date of
grant is amortized ratably over the vesting period. The following table
summarizes the restricted stock awarded during the years ended December 31:
2003
2002
2001
10
97
25
$
0.3
$
2.8
$
1.0
59
Baker Hughes Incorporated
Notes to Consolidated Financial Statements (continued)
NOTE 15. EMPLOYEE BENEFIT PLANS
Defined Benefit Pension Plans
The Company has noncontributory defined benefit pension plans (Pension Benefits) 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 measurements of plan assets and obligations are as of October 1 of each year presented.
The reconciliation of the beginning and ending balances of the projected
benefit obligations (PBO) and fair value of plan assets and the funded status
of the plans are as follows for the years ended December 31:
U.S. Pension Benefits
NonU.S. Pension Benefits
2003
2002
2003
2002
$
138.9
$
124.4
$
205.1
$
152.0
16.6
13.8
5.4
4.0
9.1
8.4
12.1
10.5
0.2
19.6
2.2
22.9
21.1
(8.8
)
(9.9
)
(3.2
)
(1.6
)
26.9
19.1
175.6
138.9
269.2
205.1
179.7
206.7
107.9
108.1
44.6
(20.5
)
10.9
(19.5
)
22.4
3.4
5.9
5.2
(8.8
)
(9.9
)
(2.8
)
(1.2
)
13.3
15.3
237.9
179.7
135.2
107.9
62.3
40.8
(134.0
)
(97.2
)
69.4
85.9
98.5
71.9
0.4
0.2
0.8
0.5
132.1
126.9
(34.7
)
(24.8
)
0.6
0.7
2.0
1.0
$
132.7
$
127.6
$
(32.7
)
$
(23.8
)
The Company reports prepaid benefit cost in other assets and accrued
benefit and minimum liabilities in pensions and postretirement benefit
obligations in the consolidated balance sheet. The amounts recognized in the
consolidated balance sheet are as follows at December 31:
U.S. Pension Benefits
NonU.S. Pension Benefits
2003
2002
2003
2002
$
154.8
$
152.8
$
1.3
$
0.8
(22.1
)
(25.2
)
(34.0
)
(24.6
)
(13.9
)
(8.7
)
(75.7
)
(58.6
)
0.2
0.2
0.5
0.3
13.7
8.5
75.2
58.3
$
132.7
$
127.6
$
(32.7
)
$
(23.8
)
Weighted average assumptions used to determine benefit obligations for
these plans are as follows:
U.S. Pension Benefits
NonU.S. Pension Benefits
2003
2002
2003
2002
6.25
%
6.75
%
5.48
%
5.82
%
3.50
%
4.00
%
3.36
%
3.40
%
60
Baker Hughes Incorporated
Notes to Consolidated Financial Statements (continued)
The accumulated benefit obligation (ABO) is the actuarial present value of pension benefits attributed to employee service to date and present compensation levels. The ABO differs from the PBO in that the ABO does not include any assumptions about future compensation levels. The ABO for all U.S. plans was $174.6 million and $138.4 million at December 31, 2003 and 2002, respectively. The ABO for all nonU.S. plans was $245.0 million and $188.9 million at December 31, 2003 and 2002, respectively.
Information for the plans with ABOs in excess of plan assets are as
follows at December 31:
U.S. Pension Benefits
NonU.S. Pension Benefits
2003
2002
2003
2002
$
56.3
$
33.4
$
264.1
$
202.2
55.2
32.9
240.8
186.2
19.0
0.4
129.7
104.2
The components of net periodic benefit cost are as follows for the years
ended December 31:
U.S. Pension Benefits
NonU.S. Pension Benefits
2003
2002
2001
2003
2002
2001
$
16.6
$
13.8
$
$
5.4
$
4.0
$
4.9
9.1
8.4
8.6
12.1
10.5
8.8
(15.0
)
(18.3
)
(21.7
)
(8.1
)
(9.4
)
(9.1
)
0.5
(0.1
)
(0.1
)
6.5
2.1
0.5
2.9
1.5
$
17.2
$
6.5
$
(12.7
)
$
12.2
$
6.6
$
4.6
Weighted average assumptions used to determine net costs for these plans
are as follows for the years ended December 31:
U.S. Pension Benefits
NonU.S. Pension Benefits
2003
2002
2001
2003
2002
2001
6.75
%
7.00
%
7.75
%
5.82
%
5.83
%
6.17
%
8.50
%
9.00
%
9.00
%
7.41
%
7.38
%
7.75
%
4.00
%
4.50
%
3.40
%
3.41
%
3.75
%
In selecting the expected longterm rate of return on assets, the Company considered the average rate of earnings expected on the funds invested or to be invested to provide for the benefits of these plans. This included considering the trusts asset allocation and the expected returns likely to be earned over the life of the plans. This basis is consistent with the prior year.
The weightedaverage asset allocations by asset category for the Companys
U.S. plans are as follows:
Percentage of
U.S. Plan Assets at
December 31,
Asset Category
2003
2002
59.0
%
53.0
%
27.0
%
33.0
%
11.0
%
12.0
%
3.0
%
2.0
%
100.0
%
100.0
%
The Company has an investment committee that meets quarterly to review the portfolio returns and to determine assetmix targets based on asset/liability studies. A nationally recognized thirdparty investment consultant assisted the Company in developing an asset allocation strategy to determine the Companys expected rate of return and expected risk for various investment portfolios. The investment committee considered these studies in the formal establishment of the current assetmix targets based on the projected risk and return levels for each asset class.
61
Baker Hughes Incorporated
Notes to Consolidated Financial Statements (continued)
In 2004, the Company expects to contribute between $24.0 million and $27.0 million to the U.S. pension plans and between $11.0 million to $13.0 million to the non-U.S. plans.
Postretirement Welfare Benefits
The Company provides certain postretirement health care and life insurance
benefits (postretirement welfare benefits) to substantially all U.S.
employees who retire and have met certain age and service requirements. The
plan is unfunded. The measurement of plan obligations is as of October 1 of
each year presented. The reconciliation of the beginning and ending balances
of benefit obligations and the funded status of the plan is as follows for the
years ended December 31:
2003
2002
$
158.7
$
143.7
4.8
4.4
10.3
9.5
12.3
14.9
(11.3
)
(13.8
)
174.8
158.7
(174.8
)
(158.7
)
42.9
31.7
8.5
9.1
(123.4
)
(117.9
)
4.2
3.0
(119.2
)
(114.9
)
(18.6
)
(16.6
)
$
(100.6
)
$
(98.3
)
Weighted average discount rates of 6.25% and 6.75% were used to determine postretirement welfare benefit obligations for the plan for the years ended December 31, 2003 and 2002, respectively.
The components of net periodic benefit costs are as follows for the years
ended December 31:
2003
2002
2001
$
4.8
$
4.4
$
1.6
10.3
9.5
8.9
0.6
0.6
(0.5
)
1.1
0.2
$
16.8
$
14.7
$
10.0
Weighted average discount rates of 6.75%, 7.00% and 7.75% were used to determine net postretirement welfare benefit costs for the plan for the years ended December 31, 2003, 2002 and 2001, respectively.
Assumed health care cost trend rates have a significant effect on the
amounts reported for the postretirement welfare benefits plan. The assumed
health care cost trend rate used in measuring the accumulated benefit
obligation for postretirement welfare benefits was adjusted in 2003. As of
December 31, 2003, the health care cost trend rate was 10.0% for employees
under age 65 and 7.5% 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 2008. A one percentage point change in assumed
health care cost trend rates would have had the following effects on 2003:
One Percentage
One Percentage
Point Increase
Point Decrease
$
0.6
$
(0.6
)
10.0
(9.4
)
62
Baker Hughes Incorporated
Notes to Consolidated Financial Statements (continued)
In December 2003, the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the Act) was signed into law. The Act expanded Medicare to include, for the first time, coverage for prescription drugs. The Company expects that this legislation will eventually reduce the Companys postretirement welfare benefit costs. The Company has elected to defer accounting for effects of the Act until 2004 in accordance with FSP No. 1061.
In 2004, the Company expects to make benefit payments of approximately $14.0 million.
Defined Contribution Plans
During the periods reported, generally all of the Companys 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 Thrift Plan allows eligible employees to elect to contribute from 1% to 50% 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 employees 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 employees 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 Companys contributions to the Thrift Plan and several other nonU.S. defined contribution plans amounted to $67.7 million, $62.8 million and $63.7 million in 2003, 2002 and 2001, respectively.
For certain nonU.S. employees who are not eligible to participate in the Thrift Plan, the Company provides a nonqualified defined contribution plan that provides basically the same benefits as the Thrift Plan. In addition, the Company provides a nonqualified supplemental retirement plan (SRP) for certain officers and employees whose benefits under both the Thrift Plan and the Pension 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 nonqualified plans are fully funded and invested through trusts, and the assets and corresponding liabilities are included in the Companys consolidated balance sheet. The Companys contributions to these nonqualified plans were $5.5 million, $6.0 million and $4.2 million for 2003, 2002 and 2001, respectively.
Postemployment Benefits
The Company provides certain postemployment disability income, medical and other benefits to substantially all qualifying former or inactive U.S. employees. During part of 2002, income benefits for longterm disability (Disability Benefits) were provided through a qualified selfinsured plan which was funded by contributions from the Company and employees. Effective July 1, 2002, the Company converted to a fullyinsured plan for all future longterm Disability Benefits. The Disability Benefits for employees who were disabled as of July 1, 2002, were sold to a disability insurance company. The continuation of medical and life insurance benefits while on disability (Continuation Benefits) are provided through a qualified selfinsured plan. The accrued postemployment liability for Continuation Benefits at December 31, 2003 and 2002 was $27.2 million and $30.3 million, respectively, and are included in other liabilities in the consolidated balance sheet.
NOTE 16. COMMITMENTS AND CONTINGENCIES
Leases
At December 31, 2003, the Company had longterm noncancelable 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, 2008 are $67.3 million, $56.6 million, $36.1 million, $19.4 million and $14.6 million, respectively, and $106.3 million in the aggregate thereafter. The Company has not entered into any significant capital leases.
Litigation
The Company and its subsidiaries are involved in litigation or proceedings that have arisen in the Companys 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 deductibles or selfinsured retentions in amounts the Company deems prudent, and for which the Company is responsible for payment. In determining the amount of selfinsurance, it is the Companys policy to selfinsure those losses that are predictable, measurable and recurring in nature, such as claims for
63
Baker Hughes Incorporated
Notes to Consolidated Financial Statements (continued)
automobile liability, general liability and workers compensation. The Company records accruals for the uninsured portion of losses related to these types of claims. The accruals for losses are calculated by estimating losses for claims using historical claim data, specific loss development factors and other information as necessary.
On September 12, 2001, the Company, without admitting or denying the factual allegations contained in the Order, consented with the Securities and Exchange Commission (SEC) to the entry of an Order making Findings and Imposing a CeaseandDesist Order (the Order) for violations of Section 13(b)(2)(A) and Section 13(b)(2)(B) of the Exchange Act. Among the findings included in the Order were the following: In 1999, the Company discovered that certain of its officers had authorized an improper $75,000 payment to an Indonesian tax official, after which the Company embarked on a corrective course of conduct, including voluntarily and promptly disclosing the misconduct to the SEC and the Department of Justice (the DOJ). In the course of the investigation of the Indonesia matter, the Company learned that the Company had made payments in the amount of $15,000 and $10,000 in India and Brazil, respectively, to its agents, without taking adequate steps to ensure that none of the payments would be passed on to foreign government officials. The Order found that the foregoing payments violated Section 13(b)(2)(A). The Order also found the Company in violation of Section 13(b)(2)(B) because it did not have a system of internal controls to determine if payments violated the Foreign Corrupt Practices Act (FCPA). The FCPA makes it unlawful for U.S. issuers, including the Company, or anyone acting on their behalf, to make improper payments to any foreign official in order to obtain or retain business. In addition, the FCPA establishes accounting control requirements for U.S. issuers. The Company cooperated with the SECs investigation.
By the Order, dated September 12, 2001, the Company agreed to cease and desist from committing or causing any violation and any future violation of Section 13(b)(2)(A) and Section 13(b)(2)(B) of the Exchange Act. Such Sections of the Exchange Act require issuers to (x) make and keep books, records and accounts, which, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the issuer and (y) devise and maintain a system of internal accounting controls sufficient to provide reasonable assurances that: (i) transactions are executed in accordance with managements general or specific authorization; and (ii) transactions are recorded as necessary: (I) to permit preparation of financial statements in conformity with generally accepted accounting principles or any other criteria applicable to such statements, and (II) to maintain accountability for assets.
On March 25, 2002, a former employee alleging improper activities relating to Nigeria filed a civil complaint against the Company in the 281 st District Court in Harris County, Texas, seeking back pay and damages, including future lost wages. On August 2, 2002, the same former employee filed substantially the same complaint against the Company in the federal district court for the Southern District of Texas. Through the Companys insurer, the Company finalized a settlement agreement with the former employee. Final settlement documents were fully executed on December 2, 2003, and the case was formally dismissed, with prejudice, by order of the federal court on December 19, 2003. The state court case had been previously dismissed. The settlement was not material to the Company.
On March 29, 2002, the Company announced that it had been advised that the SEC and the DOJ are conducting investigations into allegations of violations of law relating to Nigeria and other related matters. The SEC has issued a formal order of investigation into possible violations of provisions under the Foreign Corrupt Practices Act (FCPA) regarding antibribery, books and records and internal controls, and the DOJ has asked to interview current and former employees. On August 6, 2003, the SEC issued a subpoena seeking information about the Companys operations in Angola and Kazakhstan as part of its ongoing investigation. The Company is providing documents to and cooperating fully with the SEC and DOJ. In addition, the Company is conducting internal investigations into these matters. The SEC and the DOJ have a broad range of sanctions they may seek to impose in appropriate circumstances including, but not limited to, injunctive relief, disgorgement, fines and penalties and modifications to business practices and compliance programs, as well as civil and criminal charges against individuals. It is not possible to accurately predict at this time when such investigations will be completed, what, if any, actions may be taken by the SEC, DOJ or other authorities and the effect thereof on the Company.
The Companys ongoing internal investigation with respect to certain operations in Nigeria has identified apparent deficiencies in its books and records and internal controls, and potential liabilities to governmental authorities in Nigeria. The investigation was substantially completed during the first quarter of 2003. Based upon current information, the Company does not expect that any such potential liabilities will have a material adverse effect on the Companys results of operations or financial condition.
The Department of Commerce, Department of the Navy and DOJ (the U.S. agencies) are investigating compliance with certain export licenses issued to Western Geophysical from 1994 through 2000 for export of seismic equipment leased by the Peoples Republic of China. The Company acquired Western Geophysical in August 1998 and subsequently transferred related assets to WesternGeco in December 2000. Under the joint venture formation agreement with WesternGeco, the Company owes indemnity to WesternGeco for certain matters. The Company is cooperating fully with the U.S. agencies. Based on current information, the Company cannot predict the outcome of the investigation or any effect it may have on its financial condition.
64
Baker Hughes Incorporated
Notes to Consolidated Financial Statements (continued)
Environmental Matters
The Companys past and present operations include activities which are subject to extensive domestic (including U.S. federal, state and local) and international environmental regulations. The Companys environmental policies and practices are designed to ensure compliance with existing laws and regulations and to minimize the possibility of significant environmental damage.
The Company is involved in voluntary remediation projects at some of its present and former manufacturing facilities, the majority of which are due to acquisitions made by the Company or sites the Company no longer actively uses in its operations. The estimate of remediation costs for these voluntary remediation projects is developed using currently available facts, existing permits and technology and presently enacted laws and regulations. Remediation cost estimates include direct costs related to the investigation, external consulting costs, governmental oversight fees, treatment equipment costs and costs associated with longterm maintenance and monitoring of a remediation project.
The Company has also been identified as a potentially responsible party (PRP) in remedial activities related to various Superfund sites. The Company participates in the process set out in the Joint Participation and Defense Agreement to negotiate with government agencies, identify other PRPs, determine each PRPs allocation and estimate remediation costs. The Company has accrued what it believes to have been its prorata share of the total estimated cost of remediation of these Superfund sites based upon 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. 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. No accrual has been made under the joint and several liability concept for those Superfund sites where the Companys participation is minor 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. For those Superfund sites where the Company is a major PRP, remediation costs are estimated to include recalcitrant parties. In some cases, the Company has insurance coverage or contractual indemnities from third parties to cover the ultimate liability.
At December 31, 2003 and 2002, the Companys total accrual for environmental remediation was $15.6 million and $17.7 million, respectively, including $4.3 million for remediation costs for the various Superfund sites for both years. 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 which totaled approximately $284.9 million at
December 31, 2003. The Company also had commitments outstanding for purchase
obligations related to capital expenditures and inventory under purchase orders
and contracts of approximately $102.0 million at December 31, 2003. In
addition, at December 31, 2003, the Company has guaranteed debt of third
parties totaling up to $34.1 million, including $15.0 million
relating to Petreco. This guarantee was terminated in conjunction
with the sale of Petreco in February 2004. 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.
NOTE 17. OTHER SUPPLEMENTAL INFORMATION
Supplemental consolidated statement of operations information is as
follows for the years ended December 31:
2003
2002
2001
$
111.8
$
98.4
$
85.5
173.3
164.4
127.0
65
Baker Hughes Incorporated
The formation of Petreco included the following cash and noncash amounts
for the year ended December 31:
Notes to Consolidated Financial Statements (continued)
2001
$
1.8
1.3
33.5
(1.0
)
(0.5
)
35.1
(9.0
)
$
26.1
The changes in the aggregate product warranty liability are as follows:
$
6.3
(3.8
)
4.7
7.2
(4.3
)
6.6
1.0
$
10.5
The changes in the asset retirement obligation liability are as follows:
$
11.4
0.5
(0.3
)
0.2
(0.4
)
0.1
$
11.5
66
Baker Hughes Incorporated
NOTE 18. QUARTERLY DATA (UNAUDITED)
Notes to Consolidated Financial Statements (continued)
First
Second
Third
Fourth
Total
Quarter
Quarter
Quarter
Quarter
Year
$
1,200.1
$
1,314.8
$
1,338.4
$
1,439.5
$
5,292.8
300.7
367.4
362.1
407.7
1,437.9
50.1
82.9
(59.5
)
106.6
180.1
44.5
81.6
(98.8
)
101.6
128.9
0.15
0.25
(0.18
)
0.32
0.54
0.13
0.24
(0.30
)
0.31
0.38
0.15
0.25
(0.18
)
0.32
0.54
0.13
0.24
(0.29
)
0.30
0.38
0.11
0.12
0.11
0.12
0.46
33.38
35.94
34.16
32.56
28.50
27.21
29.61
27.10
$
1,176.1
$
1,211.9
$
1,251.1
$
1,262.6
$
4,901.7
324.4
338.1
366.0
348.0
1,376.5
72.8
68.0
88.8
229.6
33.3
72.4
64.7
(1.5
)
168.9
0.22
0.20
0.26
0.68
0.10
0.21
0.19
(0.01
)
0.50
0.22
0.20
0.26
0.68
0.10
0.21
0.19
(0.01
)
0.50
0.11
0.12
0.11
0.12
0.46
39.42
38.84
32.51
33.91
30.98
33.48
22.80
26.51
* | See Note 4 for reversals of restructuring charge. | |
** | Represents revenues less cost of revenues. |
67
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
As of the end of the period covered by this annual report, we have evaluated the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Rule 13a15 of the Exchange Act. This evaluation was carried out under the supervision and with the participation of our management, including our principal executive officer and principal financial officer. Based on this evaluation, these officers have concluded that, as of December 31, 2003, our disclosure controls and procedures are functioning effectively to provide reasonable assurance that the information required to be disclosed by us in reports filed under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SECs rules and forms. There has been no change in our internal controls over financial reporting during the quarter ended December 31, 2003 that has materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting.
Disclosure controls and procedures are our controls and other procedures that are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act, such as this annual report, is recorded, processed, summarized and reported, within the time periods specified in the SECs rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in the reports that we file under the Exchange Act is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information concerning our directors is set forth in the sections entitled Proposal No. 1, Election of Directors, Information Concerning Directors Not Standing for Election and Corporate Governance Committees of the Board Audit/Ethics Committee in our Proxy Statement for the Annual Meeting of Stockholders to be held April 28, 2004 (Proxy Statement), which sections are incorporated herein by reference. For information regarding our executive officers, see Item 1. Business Executive Officers in this annual report on Form 10K. Additional information regarding compliance by directors and executive officers with Section 16(a) of the Exchange Act is set forth under the section entitled Compliance with Section 16(a) of the Securities Exchange Act of 1934 in our Proxy Statement, which section is incorporated herein by reference. For information concerning our code of ethics, see Item 1. Business in this annual report on Form 10K.
ITEM 11. EXECUTIVE COMPENSATION
Information for this item is set forth in the sections entitled Executive Compensation Summary Compensation Table, Corporate Governance Board of Directors, Stock Options Granted During 2003, Aggregated Option Exercises During 2003 and Option Values at December 31, 2003, LongTerm Incentive Plan Awards During 2003, Pension Plan Table, Employment, Severance and Indemnification Agreements, Compensation Committee Report, Compensation Committee Interlocks and Insider Participation, and Corporate Performance Graph in our Proxy Statement, which sections are incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
Information concerning security ownership of certain beneficial owners and our management is set forth in the sections entitled Voting Securities and Security Ownership of Management in our Proxy Statement, which sections are incorporated herein by reference.
Our Board of Directors has approved procedures for use under our Securities Trading and Disclosure Policy to permit our employees, officers and directors to enter into written trading plans complying with Rule 10b51 under the Exchange Act. Rule 10b51 provides criteria under which such an individual may establish a prearranged plan to buy or sell a specified number of shares of a companys stock over a set period of time. Any such plan must be entered into in good faith at a time when the individual is not in possession of material, nonpublic information. If an individual establishes a plan satisfying the requirements of Rule 10b51, such individuals subsequent receipt of material, nonpublic information will not prevent transactions under the plan from being executed.
68
Equity Compensation Plan Information
The information in the following table is presented as of December 31,
2003 with respect to shares of our Common Stock that may be issued under our
existing equity compensation plans, including the Baker Hughes Incorporated
1993 Stock Option Plan, the Baker Hughes Incorporated LongTerm Incentive Plan
and the Baker Hughes Incorporated 2002 Directors & Officers LongTerm Incentive
Plan, all of which have been approved by our stockholders.
(In millions of shares)
(c)
Number of Securities
(a)
(b)
Remaining Available for
Number of Securities
Weighted-Average
Future Issuance Under
to be Issued Upon
Exercise Price of
Equity Compensation
Exercise of
Outstanding
Plans (excluding
Outstanding Options,
Options, Warrants
securities reflected in
Equity Compensation Plan Category
Warrants and Rights
and Rights
column (a))
5.4
(2)
$
32.99
5.9
5.7
31.89
10.0
11.1
32.42
(3)
15.9
4.9
11.1
(4)
20.8
(1) | The table includes the nonstockholderapproved plans: the Companys 1998 Employee Stock Option Plan, the 1998 Special Employee Stock Option Plan, the 2002 Employee LongTerm Incentive Plan and the Director Compensation Deferral Plan. A description of each of these plans is set forth below. | |
(2) | The table includes approximately 1.3 million shares of our Common Stock that would be issuable upon the exercise of the outstanding options under our 1993 Stock Option Plan, which expired in 2003. No additional options may be granted under the 1993 Stock Option Plan. | |
(3) | For options in the Baker Hughes Incorporated Employee Stock Purchase Plan, the exercise price is determined in accordance with Section 423 of the Code, as amended, as 85% of the lower of the fair market value on the date of grant or the date of exercise. Based on option exercises of approximately 5.2 million shares occurring from 1998 through 2003, the weighted average exercise price for the Employee Stock Purchase Plan was $23.03. | |
(4) | The table does not include shares subject to outstanding options assumed by the Company in connection with certain mergers and acquisitions of entities which originally granted those options. When we acquired the stock of Western Atlas Inc. in a transaction completed in August 1998, we assumed the options granted under the Western Atlas Director Stock Option Plan and the Western Atlas 1993 Stock Incentive Plan. As of December 31, 2003, 68,171 shares and 3,836 shares of our Common Stock would be issuable upon the exercise of outstanding options previously granted under the Western Atlas Director Stock Option Plan and the Western Atlas 1993 Stock Incentive Plan, with a weighted average exercise price per share of $22.54 and $26.07, respectively. |
Our nonstockholderapproved plans are described below:
1998 Employee Stock Option Plan
The Baker Hughes Incorporated 1998 Employee Stock Option Plan (the 1998 ESOP) was adopted effective as of October 1, 1998. The number of shares authorized for issuance under the 1998 ESOP is 3.5 million shares. Options may be granted under the 1998 ESOP to employees of the Company and its subsidiaries, and the options granted are nonqualified stock options. The exercise price of the options will be equal to the fair market value per share of our Common Stock on the date of grant, and option terms may be up to ten years. Under the terms and conditions of the option award agreements for options issued under the 1998 ESOP, options generally vest and become exercisable in installments over the optionees period of service with the Company, and the options vest on an accelerated basis in the event of a change in control of the Company. As of December 31, 2003, options covering approximately 2.9 million shares of our Common Stock were outstanding under the 1998 ESOP, options covering approximately 0.6 million shares were exercised during fiscal year 2003 and approximately 1.2 million shares remained available for future options.
1998 Special Employee Stock Option Plan
The Baker Hughes Incorporated 1998 Special Employee Stock Option Plan (the 1998 SESOP) was adopted effective as of October 22, 1997. The number of shares authorized for issuance upon the exercise of options granted under the 1998 SESOP is 2.5 million shares. Under the 1998 SESOP, the Compensation Committee of our Board of Directors has the authority to grant nonqualified stock options to purchase shares of our Common Stock to a broadbased group of employees. The exercise price of the
69
options will be equal to the fair market value per share of our Common Stock at the time of the grant, and option terms may be up to ten years. Stock option grants of 100 shares, with an exercise price of $47.813 per share, were issued to all of our U.S. employees in October 1997 and to our international employees in May 1998. As of December 31, 2003, options covering approximately 0.6 million shares of our Common Stock were outstanding under the 1998 SESOP, no options were exercised during fiscal year 2003 and approximately 1.9 million shares remained available for future options.
2002 Employee LongTerm Incentive Plan
The Baker Hughes Incorporated 2002 Employee LongTerm Incentive Plan (the 2002 Employee LTIP) was adopted effective as of March 6, 2002. The 2002 Employee LTIP permits the grant of awards as nonqualified stock options, stock appreciation rights, restricted stock, restricted stock units, performance shares, performance units, stock awards and cashbased awards to our corporate officers and key employees. The number of shares authorized for issuance under the 2002 Employee LTIP is 9.5 million, with no more than 3.0 million available for grant as awards other than options (the number of shares is subject to adjustment for changes in our Common Stock).
The 2002 Employee LTIP is the companion plan to the Baker Hughes Incorporated 2002 Director & Officer LongTerm Incentive Plan, which was approved by our stockholders in 2002. The rationale for the two companion plans was to discontinue the use of the remaining older option plans and to have only two plans from which we would issue compensation awards.
Options. The exercise price of the options will not be less than the fair market value of the shares of our Common Stock on the date of grant, and options terms may be up to ten years. The maximum number of shares of our Common Stock that may be subject to options granted under the 2002 Employee LTIP to any one employee during any one fiscal year of the Company will not exceed 3.0 million, subject to adjustment under the antidilution provisions of the 2002 Employee LTIP. Under the terms and conditions of the stock option awards for options issued under the 2002 Employee LTIP, options generally vest and become exercisable in installments over the optionees period of service with the Company, and the options vest on an accelerated basis in the event of a change in control of the Company or certain terminations of employment. As of December 31, 2003, stock option grants covering approximately 2.2 million shares of our Common Stock were outstanding under the 2002 Employee LTIP, options covering 14,561 shares were exercised during fiscal year 2003 and approximately 7.3 million shares remained available for future options.
Performance Shares and Units; CashBased Awards. Performance shares may be granted to employees in the amounts and upon the terms determined by the Compensation Committee of our Board of Directors, but must be limited to no more than 1.0 million shares to any one employee in any one fiscal year of the Company. Performance shares will have an initial value equal to the fair market value of our Common Stock at the date of the award. Performance units and cashbased awards may be granted to employees in amounts and upon the terms determined by the Compensation Committee, but must be limited to no more than $10.0 million for any one employee in any one fiscal year of the Company. The performance measures that may be used to determine the extent of the actual performance payout or vesting include, but are not limited to, net earnings; earnings per share; return measures; cash flow return on investments (net cash flows divided by owners equity); earnings before or after taxes, interest, depreciation and/or amortization; share price (including growth measures and total shareholder return) and Baker Value Added (a Company metric that measures operating profit after tax less the cost of capital employed).
Restricted Stock and Restricted Stock Units. With respect to awards of restricted stock and restricted stock units, the Compensation Committee will determine the conditions or restrictions on the awards, including whether the holders of the restricted stock or restricted stock units will exercise full voting rights or receive dividends and other distributions during the restriction period. At the time the award is made, the Compensation Committee will determine the right to receive unvested restricted stock or restricted units after termination of service. Awards of restricted stock are limited to 1.0 million shares in any one year to any one individual.
Stock Appreciation Rights. Stock appreciation rights may be granted under the 2002 Employee LTIP on the terms and conditions determined by the Compensation Committee. The grant price of a freestanding stock appreciation right will not be less than the fair market value of our Common Stock on the date of grant. The maximum number of shares of our Common Stock that may be utilized for purposes of determining an employees compensation under stock appreciation rights granted under the 2002 Employee LTIP during any one fiscal year of the Company will not exceed 3.0 million shares, subject to adjustment under the antidilution provisions of the 2002 Employee LTIP.
Administration; Amendment and Termination . The Compensation Committee shall administer the 2002 Employee LTIP, and in the absence of the Compensation Committee, the Board will administer the Plan. The Compensation Committee will have full and exclusive power to interpret the provisions of the 2002 Employee LTIP as the Committee may deem necessary or proper, with the powers exercised in the best interests of the Company and in keeping with the objectives of the Plan. The Board may alter, amend, modify, suspend or terminate the 2002 Employee LTIP, except that no amendment, modification, suspension or termination that
70
would adversely affect in any material way the rights of a participant under any award previously granted under the Plan may be made without the written consent of the participant or to the extent stockholder approval is otherwise required by applicable legal requirements.
Director Compensation Deferral Plan
The Baker Hughes Incorporated Director Compensation Deferral Plan, as amended and restated effective July 24, 2002 (the Deferral Plan), is intended to provide a means for members of our Board of Directors to defer compensation otherwise payable and provide flexibility with respect to our compensation policies. Under the provisions of the Deferral Plan, directors may elect to defer income with respect to each calendar year. The compensation deferrals may be stock optionrelated deferrals or cashbased deferrals. The stock optionrelated deferrals may be either marketpriced stock options or discounted stock options. The number of shares to be issued for the marketpriced stock option deferral is calculated on a quarterly basis by multiplying the deferred compensation by 4.4 and then dividing by the fair market value of our Common Stock on the last day of the quarter. The number of shares to be issued for the discounted stock option deferral is calculated on a quarterly basis by dividing the deferred compensation by the discounted price of our Common Stock on the last day of the quarter. The discounted price is 50% of the fair market value of our Common Stock on the valuation date. Stock options granted under the Deferral Plan vest on the first anniversary of the date of grant and must be exercised within 10 years of the date of grant. If a directors directorship terminates for any reason, any options outstanding will expire 3 years after the termination of the directorship. The maximum aggregate number of shares of our Common Stock that may be issued under the Deferral Plan is 0.5 million. As of December 31, 2003, stock option grants of 3,313 had been made under the Deferral Plan, no options were exercised during fiscal 2003 and approximately 0.5 million shares remained available for future options.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information concerning certain relationships and related transactions with our management is set forth in the section entitled Certain Relationships and Related Transactions in our Proxy Statement, which section is incorporated herein by reference.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
Information concerning principal accounting fees and services is set forth in the section entitled Fees Paid to Deloitte & Touche LLP in our Proxy Statement, which section is incorporated herein by reference.
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8K
(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 10K. | |||
(2) | Financial Statement Schedules |
| Schedule II Valuation and Qualifying Accounts | ||
| The audited combined financial statements and supplemental combining information of WesternGeco, an unconsolidated significant subsidiary reported on the equity method, as set forth in Exhibit 99.2 of this Annual Report. |
(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 10K. Exhibits designated with a + are identified as management contracts or compensatory plans or arrangements. Exhibits previously filed as indicated below are incorporated by reference. |
3.1 | Restated Certificate of Incorporation (filed as Exhibit 3.1 to Quarterly Report of Baker Hughes Incorporated on Form 10Q for the quarter ended June 30, 2002). |
71
3.2
Bylaws of Baker Hughes Incorporated restated as of October 22,
2003 (filed as Exhibit 3.1 to Quarterly Report of Baker Hughes
Incorporated on Form 10Q for the quarter ended September 30, 2003).
4.1
Rights of Holders of the Companys LongTerm Debt. The Company
has no longterm 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 longterm debt instruments to the SEC
upon request.
4.2
Restated Certificate of Incorporation (filed as Exhibit 3.1 to
Quarterly Report of Baker Hughes Incorporated on Form 10Q for the
quarter ended June 30, 2002).
4.3
Bylaws of Baker Hughes Incorporated restated as of October 31,
2003 (filed as Exhibit 3.1 to Quarterly Report of Baker Hughes
Incorporated on Form 10Q for the quarter ended September 30, 2003).
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 10K 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 10Q 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 10Q 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 10.3 to
Annual Report of Baker Hughes Incorporated on Form 10K for the year
ended December 31, 2002).
10.4*+
Form of Indemnification Agreement dated as of December 3, 2003
between Baker Hughes Incorporated and each of the directors and
certain executive officers.
10.5+
Form of Amendment 1 to Severance Agreement between Baker
Hughes Incorporated and G. Stephen Finley effective November 11, 1998
(filed as Exhibit 10.2 to Quarterly Report of Baker Hughes
Incorporated on
Form 10Q for the quarter ended June 30, 2003).
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 10K for the year
ended December 31, 2000).
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 10K for the year
ended December 31, 2000).
10.8*+
Form of Change in Control Severance Plan.
10.9+
Form of Baker Hughes Incorporated 2002 Director & Officer
LongTerm Incentive Plan (filed as Exhibit 10.2 to Quarterly Report
on Form 10Q for the quarter ended September 30, 2003).
10.10*+
Baker Hughes Incorporated Director Retirement Policy for Certain
Members of the Board of Directors.
10.11
Baker Hughes Incorporated Supplemental Retirement Plan, as
amended and restated effective as of January 1, 2003 (filed as
Exhibit 10.12 to Annual Report of Baker Hughes Incorporated on Form
10K for the year ended December 31, 2002).
10.12+
Baker Hughes Incorporated Executive Severance Plan (effective
November 1, 2002) (filed as Exhibit 10.13 to Annual Report of Baker
Hughes Incorporated on Form 10K for the year ended December 31,
2002).
72
10.13
1993 Stock Option Plan, as amended by Amendment No. 19971 to
the 1993 Stock Option Plan and as amended by Amendment No. 19991 to
the 1993 Stock Option Plan (filed as Exhibit 10.14 to Annual Report
of Baker Hughes Incorporated on Form 10K for the year ended December
31, 2002).
10.14
1993 Employee Stock Bonus Plan, as amended by Amendment No.
19971 to the 1993 Employee Stock Bonus Plan and as amended by
Amendment No. 19991 to the 1993 Employee Stock Bonus Plan (filed as
Exhibit 10.15 to Annual Report of Baker Hughes Incorporated on Form
10K for the year ended December 31, 2002).
10.15+
Baker Hughes Incorporated Director Compensation Deferral Plan, as
amended and restated effective as of July 24, 2002 (filed as Exhibit
10.16 to Annual Report of Baker Hughes Incorporated on Form 10K for
the year ended December 31, 2002).
10.16
1995 Employee Annual Incentive Compensation Plan, as amended
by Amendment No. 19971 to the 1995 Employee Annual Incentive
Compensation Plan and as amended by Amendment No. 19991 to the 1995
Employee Annual Incentive Compensation Plan (filed as Exhibit 10.17
to Annual Report of Baker Hughes Incorporated on Form 10K for the
year ended December 31, 2002).
10.17
Long Term Incentive Plan, as amended by Amendment No. 19991
to Long Term Incentive Plan (filed as Exhibit 10.18 to Annual Report
of Baker Hughes Incorporated on Form 10K for the year ended December
31, 2002).
10.18
Baker Hughes Incorporated 1998 Employee Stock Option Plan, as
amended by Amendment No. 19991 to 1998 Employee Stock Option Plan
(filed as Exhibit 10.3 to Quarterly Report of Baker Hughes
Incorporated on
Form 10Q for the quarter ended June 30, 2003).
10.19
Form of Credit Agreement, dated as of July 7, 2003, among
Baker Hughes Incorporated and thirteen banks for $500,000,000, in the
aggregate for all banks (filed as Exhibit 10.5 to Quarterly Report of
Baker Hughes Incorporated on Form 10Q for the quarter ended
September 30, 2003).
10.20+
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 10K for the year ended December 31, 2000).
10.21+
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 10K for the year ended December 31,
2000).
10.22
Form of Nonqualified Stock Option Agreement for employees
effective October 1, 1998 (filed as Exhibit 10.4 to Quarterly Report
of Baker Hughes Incorporated on Form 10Q for the quarter ended June
30, 2003).
10.23+
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 10K for the year ended December 31,
2000).
10.24+
Form of Nonqualified Stock Option Agreement for directors effective
October 25, 1995 (filed as Exhibit 10.26 to Annual Report of Baker
Hughes Incorporated on Form 10K for the year ended December 31,
2001).
10.25
Form of Nonqualified Stock Option Agreement for employees
effective October 25, 1995, (filed as Exhibit 10.27 to Annual Report
of Baker Hughes Incorporated on Form 10K for the year ended December
31, 2001).
10.26
Form of Incentive Stock Option Agreement for employees
effective October 25, 1995, (filed as Exhibit 10.28 to Annual Report
of Baker Hughes Incorporated on Form 10K for the year ended December
31, 2001).
10.27
Interest Rate Swap Confirmation, dated as of April 8, 2003,
and Schedule to the Master Agreement (MulticurrencyCross Border),
dated March 6, 2000 (filed as Exhibit 10.2 to Quarterly Report on
Form 10Q for the quarter ended March 31, 2003).
10.28
Interest Rate Swap Confirmation, dated July 30, 2003, and
Schedule to the Master Agreement (MulticurrencyCross Border), dated
July 30, 2003 (filed as Exhibit 10.6 to Quarterly Report on Form 10Q
for the quarter ended June 30, 2003).
73
10.29
Interest Rate Swap Confirmation, dated October 16, 2003 (filed
as Exhibit 10.3 to Quarterly Report on Form 10Q for the quarter
ended September 30, 2003).
10.30*
Agreement and Plan of Merger among Baker Hughes Incorporated, Baker
Hughes Delaware I, Inc. and Western Atlas Inc. dated as of May 10,
1998.
10.31*
Tax Sharing Agreement dated October 31, 1997, between Western Atlas Inc. and UNOVA, Inc.
10.32*
Employee Benefits Agreement dated October 31, 1997, between Western Atlas Inc. and UNOVA, Inc.
10.33
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 8K dated September 7, 2000).
10.34
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
8K dated November 30, 2000).
10.35
Baker Hughes Incorporated Employee Stock Purchase Plan, as
amended and restated, effective as of March 3, 2003 (filed as Exhibit
10.1 to Quarterly Report on Form 10Q for the quarter ended March 31,
2003).
10.36+
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 (filed as Exhibit
10.38 to Annual Report of Baker Hughes Incorporated on Form 10K for
the year ended December 31, 2001).
10.37+
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
(filed as Exhibit 10.39 to Annual Report of Baker Hughes Incorporated
on Form 10K for the year ended December 31, 2001).
10.38+
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
(filed as Exhibit 10.40 to Annual Report of Baker Hughes Incorporated
on Form 10K for the year ended December 31, 2001).
10.39+
Form of Baker Hughes Incorporated Nonqualified Stock Option
Agreement for executive officers, dated January 24, 2001 (filed as
Exhibit 10.41 to Annual Report of Baker Hughes Incorporated on Form
10K for the year ended December 31, 2001).
10.40+
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) (filed as Exhibit 10.42 to Annual Report of Baker Hughes
Incorporated on Form 10K for the year ended December 31, 2001).
10.41
Form of Baker Hughes Incorporated Nonqualified Stock Option
Agreement for employees, dated January 30, 2002 (filed as Exhibit
10.43 to Annual Report of Baker Hughes Incorporated on Form 10K for
the year ended December 31, 2001).
10.42
Form of Baker Hughes Incorporated Incentive Stock Option
Agreement for employees, dated January 30, 2002 (filed as Exhibit
10.44 to Annual Report of Baker Hughes Incorporated on Form 10K for
the year ended December 31, 2001).
10.43*+
Amended and Restated Stock Matching Agreement dated as of December
3, 2003 between Baker Hughes Incorporated and James R. Clark.
10.44+
Form of Baker Hughes Incorporated Stock Option Award Agreements,
dated July 24, 2002, with Terms and Conditions for employees and for
directors and officers (filed as Exhibit 10.46 to Annual Report of
Baker Hughes Incorporated on Form 10K for the year ended December
31, 2002).
74
10.45+
Form of Baker Hughes Incorporated Stock Option Award Agreements,
dated January 29, 2003, with Terms and Conditions for employees and
for directors and officers (filed as Exhibit 10.47 to Annual Report
of Baker Hughes Incorporated on Form 10K for the year ended December
31, 2002).
10.46+
Form of Baker Hughes Incorporated Performance Award Agreements,
dated January 29, 2003, for executive officers (filed as Exhibit
10.48 to Annual Report of Baker Hughes Incorporated on Form 10K for
the year ended December 31, 2002).
10.47
Baker Hughes Incorporated Pension Plan effective as of January
1, 2002, as amended by First Amendment, effective January 1, 2002
(filed as Exhibit 10.51 to Annual Report of Baker Hughes Incorporated
on Form 10K for the year ended December 31, 2002).
10.48+
First Amendment to Baker Hughes Incorporated Supplemental
Retirement Plan, effective July 23, 2003 (filed as Exhibit 10.1 to
Quarterly Report on Form 10Q filed for the quarter ended September
30, 2003).
10.49+
Form of Baker Hughes Incorporated Stock Option Award Agreement,
dated July 22, 2003, for employees and for directors and officers
(filed as Exhibit 10.1 to Quarterly Report on Form 10Q for the
quarter ended June 30, 2003).
10.50*+
Form of Baker Hughes Incorporated Stock Option Award Agreements,
dated January 28, 2004, with Terms and Conditions for employees and
for directors and officers.
10.51
Baker Hughes Incorporated 2002 Employee Long-Term Incentive Plan
(filed as Exhibit 4.4 to Registration Statement No. 333-87372 on Form
S-8 filed May 1, 2002).
21.1*
Subsidiaries of Registrant.
23.1*
Consent of Deloitte & Touche LLP.
23.2*
Consent of PricewaterhouseCoopers LLP.
31.1*
Certification of Michael E. Wiley, Chief Executive Officer,
dated March 3, 2004, pursuant to Rule 13a14(a) of the Securities
Exchange Act of 1934, as amended.
31.2*
Certification of G. Stephen Finley, Chief Financial Officer,
dated March 3, 2004, pursuant to Rule 13a14(a) of the Securities
Exchange Act of 1934, as amended.
32*
Statement of Michael E. Wiley, Chief Executive Officer, and G.
Stephen Finley, Chief Financial Officer, dated March 3, 2004,
furnished pursuant to Rule 13a14(b) of the Securities Exchange Act
of 1934, as amended.
99.1
Administrative Proceeding, File No. 310572, dated September
12, 2001, as issued by the Securities and Exchange Commission (filed
as Exhibit 99.1 to Current Report on Form 8-K filed on September 19,
2001).
99.2*
Audited combined financial statements and supplemental
combining information of WesternGeco for each of the three years in
the period ended December 31, 2003.
(b)
Reports on Form 8K
A Current Report on Form 8K was filed with the SEC on October 20, 2003, (a)
to report under Item 5. Other Events and Regulation FD Disclosure the
issuance of a press release whereby the Company announced that it had reached
a proposed settlement agreement with a former employee who had made
allegations of improper activities relating to operations in Nigeria and (b) to furnish under Item 12. Results of Operations and Financial
Condition the Companys issuance of a press release whereby the Company
announced that it had signed a definitive agreement for the sale of BIRD
Machine.
A Current Report on Form 8K was filed with the SEC on October 23, 2003, to
furnish under Item 12. Results of Operations and Financial Condition the
Companys announcement of financial results for the third quarter of 2003.
75
A Current Report on Form 8-K was filed with the SEC on October 30, 2003, to report under Item 5. Other Events and Regulation FD Disclosure the issuance of a press release whereby the Company announced the retirement of its Chief Operating Officer. | ||
A Current Report on Form 8K was filed with the SEC on January 14, 2004, to furnish under Item 12. Results of Operations and Financial Condition the Companys issuance of a press release whereby the Company announced that it had completed the sale of BIRD Machine. | ||
A Current Report on Form 8K was filed with the SEC on January 30, 2004, to furnish under Item 9. Regulation FD Disclosure the Companys issuance of a press release whereby the Company announced that a letter of intent had been signed to sell Petreco International, in which the Company has a minority interest. | ||
A Current Report on Form 8K was filed with the SEC on February 5, 2004, to report under Item 5. Other Events and Regulation FD Disclosure the Companys issuance of a press release whereby the Company announced the appointment of a new President and Chief Operating Officer. | ||
A Current Report on Form 8K was filed with the SEC on February 12, 2004, to furnish under Item 12. Results of Operations and Financial Condition the Companys announcement of financial results for the fourth quarter and year end of 2003. |
76
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 3rd day of March, 2004.
BAKER HUGHES
INCORPORATED
By /s/MICHAEL E. WILEY |
|
(Michael E. Wiley, Chairman of the Board and
Chief Executive Officer) |
77
KNOWN ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Michael E. Wiley and G. Stephen Finley, each of whom may act without joinder of the other, as their true and lawful attorneysinfact and agents, each with full power of substitution and resubstitution, for such person and in his or her name, place and stead, in any and all capacities, to sign any and all amendments to this Annual Report on Form 10K, and to file the same, with all exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneysinfact and agents full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneysinfact and agents, or their substitutes, may lawfully do or cause to be done by virtue hereof.
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
(Michael E. Wiley) |
Chairman of the Board and Chief Executive Officer
(principal executive officer) |
March 3, 2004 | ||
/s/G. STEPHEN FINLEY
(G. Stephen Finley) |
Senior Vice President Finance and Administration
and Chief Financial Officer (principal financial officer) |
March 3, 2004 | ||
/s/ALAN J. KEIFER
(Alan J. Keifer) |
Vice President and Controller
(principal accounting officer) |
March 3, 2004 | ||
/s/CLARENCE P. CAZALOT, JR.
(Clarence P. Cazalot, Jr.) |
Director | March 3, 2004 | ||
/s/EDWARD P. DJEREJIAN
(Edward P. Djerejian) |
Director | March 3, 2004 | ||
/s/ANTHONY G. FERNANDES
(Anthony G. Fernandes) |
Director | March 3, 2004 | ||
/s/CLAIRE W. GARGALLI
(Claire W. Gargalli) |
Director | March 3, 2004 | ||
/s/RICHARD D. KINDER
(Richard D. Kinder) |
Director | March 3, 2004 | ||
/s/JAMES A. LASH
(James A. Lash) |
Director | March 3, 2004 | ||
/s/JAMES F. MCCALL
(James F. McCall) |
Director | March 3, 2004 | ||
/s/J. LARRY NICHOLS
(J. Larry Nichols) |
Director | March 3, 2004 | ||
/s/H. JOHN RILEY, JR.
(H. John Riley, Jr.) |
Director | March 3, 2004 | ||
/s/CHARLES L. WATSON
(Charles L. Watson) |
Director | March 3, 2004 |
78
Baker Hughes Incorporated
Schedule II Valuation and Qualifying Accounts
Deductions
Additions
Balance at
Charged to
Reversal of
Charged to
Balance at
Beginning
Cost and
Prior
Other
End of
(In millions)
of Period
Expenses
Deductions
Writeoffs
Accounts
Period
(a)
(b)
(c)
$
67.2
$
18.8
$
(10.2
)
$
(13.5
)
$
0.5
$
62.8
235.9
23.2
(36.2
)
9.6
232.5
66.5
23.0
(3.4
)
(19.5
)
0.6
67.2
221.8
39.4
(27.8
)
2.5
235.9
68.3
19.0
(0.8
)
(18.7
)
(1.3
)
66.5
199.3
48.5
(22.1
)
(3.9
)
221.8
(a) | Represents the reversals of prior accruals as receivables collected. | |
(b) | Represents the elimination of accounts receivable and inventory deemed uncollectible or worthless. | |
(c) | Represents reclasses, currency translation adjustments and divestitures. |
79
Index to 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 10K. Exhibits designated with a + are identified as management contracts or compensatory plans or arrangements. Exhibits previously filed as indicated below are incorporated by reference. |
3.1 | Restated Certificate of Incorporation (filed as Exhibit 3.1 to Quarterly Report of Baker Hughes Incorporated on Form 10Q for the quarter ended June 30, 2002). | |
3.2 | Bylaws of Baker Hughes Incorporated restated as of October 22, 2003 (filed as Exhibit 3.1 to Quarterly Report of Baker Hughes Incorporated on Form 10Q for the quarter ended September 30, 2003). | |
4.1 | Rights of Holders of the Companys LongTerm Debt. The Company has no longterm 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 longterm debt instruments to the SEC upon request. | |
4.2 | Restated Certificate of Incorporation (filed as Exhibit 3.1 to Quarterly Report of Baker Hughes Incorporated on Form 10Q for the quarter ended June 30, 2002). | |
4.3 | Bylaws of Baker Hughes Incorporated restated as of October 31, 2003 (filed as Exhibit 3.1 to Quarterly Report of Baker Hughes Incorporated on Form 10Q for the quarter ended September 30, 2003). | |
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 10K 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 10Q 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 10Q 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 10.3 to Annual Report of Baker Hughes Incorporated on Form 10K for the year ended December 31, 2002). | |
10.4*+ | Form of Indemnification Agreement dated as of December 3, 2003 between Baker Hughes Incorporated and each of the directors and certain executive officers. | |
10.5+ | Form of Amendment 1 to Severance Agreement between Baker Hughes Incorporated and G. Stephen Finley effective November 11, 1998 (filed as Exhibit 10.2 to Quarterly Report of Baker Hughes Incorporated on Form 10Q for the quarter ended June 30, 2003). | |
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 10K for the year ended December 31, 2000). | |
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 10K for the year ended December 31, 2000). | |
10.8*+ | Form of Change in Control Severance Plan. | |
10.9+ | Form of Baker Hughes Incorporated 2002 Director & Officer LongTerm Incentive Plan (filed as Exhibit 10.2 to Quarterly Report on Form 10Q for the quarter ended September 30, 2003). |
10.10*+
Baker Hughes Incorporated Director Retirement Policy for Certain
Members of the Board of Directors.
10.11
Baker Hughes Incorporated Supplemental Retirement Plan, as
amended and restated effective as of January 1, 2003 (filed as
Exhibit 10.12 to Annual Report of Baker Hughes Incorporated on Form
10K for the year ended December 31, 2002).
10.12+
Baker Hughes Incorporated Executive Severance Plan (effective
November 1, 2002) (filed as Exhibit 10.13 to Annual Report of Baker
Hughes Incorporated on Form 10K for the year ended December 31,
2002).
10.13
1993 Stock Option Plan, as amended by Amendment No. 19971 to
the 1993 Stock Option Plan and as amended by Amendment No. 19991 to
the 1993 Stock Option Plan (filed as Exhibit 10.14 to Annual Report
of Baker Hughes Incorporated on Form 10K for the year ended December
31, 2002).
10.14
1993 Employee Stock Bonus Plan, as amended by Amendment No.
19971 to the 1993 Employee Stock Bonus Plan and as amended by
Amendment No. 19991 to the 1993 Employee Stock Bonus Plan (filed as
Exhibit 10.15 to Annual Report of Baker Hughes Incorporated on Form
10K for the year ended December 31, 2002).
10.15+
Baker Hughes Incorporated Director Compensation Deferral Plan, as
amended and restated effective as of July 24, 2002 (filed as Exhibit
10.16 to Annual Report of Baker Hughes Incorporated on Form 10K for
the year ended December 31, 2002).
10.16
1995 Employee Annual Incentive Compensation Plan, as amended
by Amendment No. 19971 to the 1995 Employee Annual Incentive
Compensation Plan and as amended by Amendment No. 19991 to the 1995
Employee Annual Incentive Compensation Plan (filed as Exhibit 10.17
to Annual Report of Baker Hughes Incorporated on Form 10K for the
year ended December 31, 2002).
10.17
Long Term Incentive Plan, as amended by Amendment No. 19991
to Long Term Incentive Plan (filed as Exhibit 10.18 to Annual Report
of Baker Hughes Incorporated on Form 10K for the year ended December
31, 2002).
10.18
Baker Hughes Incorporated 1998 Employee Stock Option Plan, as
amended by Amendment No. 19991 to 1998 Employee Stock Option Plan
(filed as Exhibit 10.3 to Quarterly Report of Baker Hughes
Incorporated on
Form 10Q for the quarter ended June 30, 2003).
10.19
Form of Credit Agreement, dated as of July 7, 2003, among
Baker Hughes Incorporated and thirteen banks for $500,000,000, in the
aggregate for all banks (filed as Exhibit 10.5 to Quarterly Report of
Baker Hughes Incorporated on Form 10Q for the quarter ended
September 30, 2003).
10.20+
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 10K for the year ended December 31, 2000).
10.21+
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 10K for the year ended December 31,
2000).
10.22
Form of Nonqualified Stock Option Agreement for employees
effective October 1, 1998 (filed as Exhibit 10.4 to Quarterly Report
of Baker Hughes Incorporated on Form 10Q for the quarter ended June
30, 2003).
10.23+
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 10K for the year ended December 31,
2000).
10.24+
Form of Nonqualified Stock Option Agreement for directors effective
October 25, 1995 (filed as Exhibit 10.26 to Annual Report of Baker
Hughes Incorporated on Form 10K for the year ended December 31,
2001).
10.25
Form of Nonqualified Stock Option Agreement for employees
effective October 25, 1995, (filed as Exhibit 10.27 to Annual Report
of Baker Hughes Incorporated on Form 10K for the year ended December
31, 2001).
10.26
Form of Incentive Stock Option Agreement for employees
effective October 25, 1995, (filed as Exhibit 10.28 to Annual Report
of Baker Hughes Incorporated on Form 10K for the year ended December
31, 2001).
10.27
Interest Rate Swap Confirmation, dated as of April 8, 2003,
and Schedule to the Master Agreement (MulticurrencyCross Border),
dated March 6, 2000 (filed as Exhibit 10.2 to Quarterly Report on
Form 10Q for the quarter ended March 31, 2003).
10.28
Interest Rate Swap Confirmation, dated July 30, 2003, and
Schedule to the Master Agreement (MulticurrencyCross Border), dated
July 30, 2003 (filed as Exhibit 10.6 to Quarterly Report on Form 10Q
for the quarter ended June 30, 2003).
10.29
Interest Rate Swap Confirmation, dated October 16, 2003 (filed
as Exhibit 10.3 to Quarterly Report on Form 10Q for the quarter
ended September 30, 2003).
10.30*
Agreement and Plan of Merger among Baker Hughes Incorporated, Baker
Hughes Delaware I, Inc. and Western Atlas Inc. dated as of May 10,
1998.
10.31*
Tax Sharing Agreement dated October 31, 1997, between Western Atlas Inc. and UNOVA, Inc.
10.32*
Employee Benefits Agreement dated October 31, 1997, between Western Atlas Inc. and UNOVA, Inc.
10.33
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 8K dated September 7, 2000).
10.34
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
8K dated November 30, 2000).
10.35
Baker Hughes Incorporated Employee Stock Purchase Plan, as
amended and restated, effective as of March 3, 2003 (filed as Exhibit
10.1 to Quarterly Report on Form 10Q for the quarter ended March 31,
2003).
10.36+
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 (filed as Exhibit
10.38 to Annual Report of Baker Hughes Incorporated on Form 10K for
the year ended December 31, 2001).
10.37+
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
(filed as Exhibit 10.39 to Annual Report of Baker Hughes Incorporated
on Form 10K for the year ended December 31, 2001).
10.38+
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
(filed as Exhibit 10.40 to Annual Report of Baker Hughes Incorporated
on Form 10K for the year ended December 31, 2001).
10.39+
Form of Baker Hughes Incorporated Nonqualified Stock Option
Agreement for executive officers, dated January 24, 2001 (filed as
Exhibit 10.41 to Annual Report of Baker Hughes Incorporated on Form
10K for the year ended December 31, 2001).
10.40+
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) (filed as Exhibit 10.42 to Annual Report of Baker Hughes
Incorporated on Form 10K for the year ended December 31, 2001).
10.41
Form of Baker Hughes Incorporated Nonqualified Stock Option
Agreement for employees, dated January 30, 2002 (filed as Exhibit
10.43 to Annual Report of Baker Hughes Incorporated on Form 10K for
the year ended December 31, 2001).
10.42
Form of Baker Hughes Incorporated Incentive Stock Option
Agreement for employees, dated January 30, 2002 (filed as Exhibit
10.44 to Annual Report of Baker Hughes Incorporated on Form 10K for
the year ended December 31, 2001).
10.43*+
Amended and Restated Stock Matching Agreement dated as of December
3, 2003 between Baker Hughes Incorporated and James R. Clark.
10.44+
Form of Baker Hughes Incorporated Stock Option Award Agreements,
dated July 24, 2002, with Terms and Conditions for employees and for
directors and officers (filed as Exhibit 10.46 to Annual Report of
Baker Hughes Incorporated on Form 10K for the year ended December
31, 2002).
10.45+
Form of Baker Hughes Incorporated Stock Option Award Agreements,
dated January 29, 2003, with Terms and Conditions for employees and
for directors and officers (filed as Exhibit 10.47 to Annual Report
of Baker Hughes Incorporated on Form 10K for the year ended December
31, 2002).
10.46+
Form of Baker Hughes Incorporated Performance Award Agreements,
dated January 29, 2003, for executive officers (filed as Exhibit
10.48 to Annual Report of Baker Hughes Incorporated on Form 10K for
the year ended December 31, 2002).
10.47
Baker Hughes Incorporated Pension Plan effective as of January
1, 2002, as amended by First Amendment, effective January 1, 2002
(filed as Exhibit 10.51 to Annual Report of Baker Hughes Incorporated
on Form 10K for the year ended December 31, 2002).
10.48+
First Amendment to Baker Hughes Incorporated Supplemental
Retirement Plan, effective July 23, 2003 (filed as Exhibit 10.1 to
Quarterly Report on Form 10Q filed for the quarter ended September
30, 2003).
10.49+
Form of Baker Hughes Incorporated Stock Option Award Agreement,
dated July 22, 2003, for employees and for directors and officers
(filed as Exhibit 10.1 to Quarterly Report on Form 10Q for the
quarter ended June 30, 2003).
10.50*+
Form of Baker Hughes Incorporated Stock Option Award Agreements,
dated January 28, 2004, with Terms and Conditions for employees and
for directors and officers.
10.51
Baker Hughes Incorporated 2002 Employee Long-Term Incentive Plan
(filed as Exhibit 4.4 to Registration Statement No. 333-87372 on
Form S-8 filed May 1, 2002).
21.1*
Subsidiaries of Registrant.
23.1*
Consent of Deloitte & Touche LLP.
23.2*
Consent of PricewaterhouseCoopers LLP.
31.1*
Certification of Michael E. Wiley, Chief Executive Officer,
dated March 3, 2004, pursuant to Rule 13a14(a) of the Securities
Exchange Act of 1934, as amended.
31.2*
Certification of G. Stephen Finley, Chief Financial Officer,
dated March 3, 2004, pursuant to Rule 13a14(a) of the Securities
Exchange Act of 1934, as amended.
32*
Statement of Michael E. Wiley, Chief Executive Officer, and G.
Stephen Finley, Chief Financial Officer, dated March 3, 2004,
furnished pursuant to Rule 13a14(b) of the Securities Exchange Act
of 1934, as amended.
99.1
Administrative Proceeding, File No. 310572, dated September
12, 2001, as issued by the Securities and Exchange Commission (filed
as Exhibit 99.1 to Current Report on Form 8-K filed on September 19,
2001).
99.2*
Audited combined financial statements and supplemental
combining information of WesternGeco for each of the three years in
the period ended December 31, 2003.
Exhibit 10.4
INDEMNIFICATION AGREEMENT
INDEMNIFICATION AGREEMENT, made and executed as of this 3rd day of December, 2003 (this "Agreement"), by and between BAKER HUGHES INCORPORATED, a Delaware corporation (the "Company"), and _____________________, an individual resident of the State of Texas (the "Indemnitee").
WHEREAS, the Company is aware that, in order to induce highly competent persons to serve the Company as directors or officers or in other capacities, the Company must provide such persons with adequate protection through insurance and indemnification against inordinate risks of claims and actions against them arising out of their service to and activities on behalf of the Company;
WHEREAS, the Company recognizes that the increasing difficulty in obtaining directors' and officers' liability insurance, the increasing cost of such insurance and the general reductions in coverage of such insurance have made attracting and retaining such persons more difficult;
WHEREAS, the Company recognizes the substantial increase in corporate litigation in general, subjecting directors and officers to expensive litigation risks at the same time as the availability and coverage of liability insurance has been severely limited;
WHEREAS, the Board of Directors of the Company has determined that it is in the best interests of the Company's stockholders that the Company act to assure such persons that there will be increased certainty of such protection in the future;
WHEREAS, it is reasonable, prudent and necessary for the Company to contractually obligate itself to indemnify such persons to the fullest extent permitted by applicable law so that they will continue to serve the Company free from undue concern that they will not be so indemnified; and
WHEREAS, the Indemnitee is willing to serve, continue to serve and take on additional service for or on behalf of the Company or any of its direct or indirect wholly-owned subsidiaries on the condition that he/she be so indemnified.
NOW, THEREFORE, in consideration of the premises and the mutual promises and covenants contained herein, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Company and the Indemnitee do hereby agree as follows:
1. DEFINITIONS. For purposes of this Agreement:
(a) "Change in Control" shall mean a change in control of the Company occurring after the date hereof of a nature that would be required to be reported in response to Item 6(e) of Schedule 14A of Regulation 14A (or in response to any similar item on any similar schedule or form) promulgated under
the Securities Exchange Act of 1934, as amended (the "Act"), whether or
not the Company is then subject to such reporting requirement;
provided, however, that, without limitation, a Change in Control shall
include the following: (i) the acquisition (other than from the
Company) by any person, entity or "group" within the meaning of Section
13(d)(3) or 14(d)(2) of the Act (excluding, for this purpose, the
Company or its subsidiaries, any employee benefit plan of the Company
or its subsidiaries which acquires beneficial ownership of voting
securities of the Company and any qualified institutional investor who
meets the requirements of Rule 13d-1(b)(1) promulgated under the Act)
of beneficial ownership (within the meaning of Rule 13d-3 promulgated
under the Act), directly or indirectly, of 30% or more of the combined
voting power of the Company's then outstanding securities, excluding
any person, entity or group that becomes a beneficial owner in
connection with a transaction described in clause (iii)(A) below; (ii)
individuals who, as of the date hereof, constitute the Board of
Directors of the Company (the "Incumbent Board") ceasing for any reason
to constitute at least a majority of the Board of Directors; provided
that, any person becoming a director subsequent to the date hereof
whose appointment or election by the Board of Directors of the Company
or nomination for election by the Company's stockholders was approved
or recommended by a vote of at least 2/3 of the directors then
comprising the Incumbent Board or whose appointment, election or
nomination for election was previously so approved or recommended
(other than an election or nomination of an individual whose initial
assumption of office is in connection with an actual or threatened
election contest relating to the election of the directors of the
Company) shall be, for purposes of this Agreement, considered as though
such person were a member of the Incumbent Board; (iii) the
consummation of a merger or consolidation of the Company or any direct
or indirect subsidiary of the Company with any other corporation, (A)
with respect to which persons who were the stockholders of the Company
immediately prior to such merger or consolidation, in combination with
the ownership of any trustee or other fiduciary holding securities
under an employee benefit plan of the Company or any "affiliate"
(within the meaning of Rule 12b-2 of the General Rules and Regulations
of the Act), do not, immediately thereafter, own at least 50% of the
combined voting power of the securities of the Company or such
surviving entity or any parent thereof outstanding, or (B) which is
effected to implement a recapitalization of the Company (or similar
transaction) in which no person, entity or group becomes the beneficial
owner, directly or indirectly, of securities of the Company (not
including in the securities beneficially owned by this person, entity
or group 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 30% or more of the
combined voting power of the Company's then outstanding securities;
(iv) the consummation of a merger or consolidation of the Company or
any direct or indirect subsidiary of the Company with any other
corporation, other than a merger or consolidation immediately following
which the individuals who comprise the Incumbent Board constitute at
least a majority of the Board of Directors of the Company, the entity
surviving such merger or any parent thereof (or a majority plus one
member
where such board comprises and odd number of members); or (v) the stockholders of the Company approving a plan of complete liquidation or dissolution of the Company or the consummation of an agreement for the sale or disposition by the Company of all or substantially all of the assets of the Company, other than (A) a sale or disposition of all or substantially all of the assets of the Company to an entity, at least 50% of the combined voting power of the voting securities of which are owned by the stockholders of the Company in substantially the same proportions as their ownership of the Company immediately prior to such sale (B) or where the individuals who comprise the Incumbent Board constitute at least a majority of the board of directors of such entity or any parent thereof (or a majority plus one member where such board is comprised of an odd number of members). 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 that owns all or substantially all of the assets of the Company immediately following such transaction or series of transactions.
(b) "Disinterested Director" shall mean a director of the Company who is not or was not a party to the action, suit, investigation or proceeding in respect of which indemnification is being sought by the Indemnitee.
(c) "Expenses" shall include all attorneys' fees, retainers, court costs, transcript costs, fees of experts, witness fees, travel expenses, duplicating costs, printing and binding costs, telephone charges, postage, delivery service fees, and all other disbursements or expenses incurred in connection with prosecuting, defending, preparing to prosecute or defend, investigating or being or preparing to be a witness in any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative in nature.
(d) "Independent Counsel" shall mean a law firm or a member of a law firm that neither is presently nor in the past five years has been retained to represent (i) the Company or the Indemnitee in any matter material to either such party or (ii) any other party to the action, suit, investigation or proceeding giving rise to a claim for indemnification hereunder. Notwithstanding the foregoing, the term "Independent Counsel" shall not include any person who, under the applicable standards of professional conduct then prevailing, would have a conflict of interest in representing either the Company or the Indemnitee in an action to determine the Indemnitee's right to indemnification under this Agreement.
2. SERVICE BY THE INDEMNITEE. The Indemnitee agrees to serve as a director or officer of the Company and will discharge his/her duties and responsibilities to the best of his/her ability so long as the Indemnitee is duly elected or qualified in accordance with the provisions of the Restated Certificate of Incorporation, as amended (the "Certificate"), and the Bylaws, as amended (the "Bylaws"), of the Company and the General Corporation Law of the State of
Delaware, as amended (the "DGCL"), or until his/her earlier death, retirement, resignation or removal. The Indemnitee may at any time and for any reason resign from such position (subject to any other obligation, whether contractual or imposed by operation of law), in which event this Agreement shall continue in full force and effect after such resignation. Nothing in this Agreement shall confer upon the Indemnitee the right to continue in the employ of the Company or as a director of the Company, or affect the right of the Company to terminate, in the Company's sole discretion (with or without cause) and at any time, the Indemnitee's employment, in each case, subject to any contractual rights of the Indemnitee created or existing otherwise than under this Agreement.
3. INDEMNIFICATION. The Company shall indemnify the Indemnitee and advance Expenses to the Indemnitee as provided in this Agreement to the fullest extent permitted by the Certificate, the Bylaws in effect as of the date hereof and the DGCL or other applicable law in effect on the date hereof and to any greater extent that the DGCL or applicable law may in the future from time to time permit. Without diminishing the scope of the indemnification provided by this Section 3, the rights of indemnification of the Indemnitee provided hereunder shall include, but shall not be limited to, those rights hereinafter set forth, except that no indemnification shall be paid to the Indemnitee:
(a) on account of any action, suit or proceeding in which judgment is rendered against the Indemnitee for disgorgement of profits made from the purchase or sale by the Indemnitee of securities of the Company pursuant to the provisions of Section 16(b) of the Act or similar provisions of any federal, state or local statutory law;
(b) on account of conduct of the Indemnitee which is finally adjudged by a court of competent jurisdiction to have been knowingly fraudulent or to constitute willful misconduct;
(c) in any circumstance where such indemnification is expressly prohibited by applicable law;
(d) with respect to liability for which payment is actually made to the Indemnitee under a valid and collectible insurance policy or under a valid and enforceable indemnity clause, Bylaw or agreement (other than this Agreement), except in respect of any liability in excess of payment under such insurance, clause, Bylaw or agreement;
(e) if a final decision by a court having jurisdiction in the matter shall determine that such indemnification is not lawful (and, in this respect, both the Company and the Indemnitee have been advised that it is the position of the Securities and Exchange Commission that indemnification for liabilities arising under the federal securities laws is against public policy and is, therefore, unenforceable, and that claims for indemnification should be submitted to the appropriate court for adjudication); or
(f) in connection with any action, suit or proceeding by the Indemnitee against the Company or any of its direct or indirect wholly-owned subsidiaries or the directors, officers, employees or other Indemnitees of the Company or any of its direct or indirect wholly-owned subsidiaries, (i) unless such indemnification is expressly required to be made by law, (ii) unless the action, suit or proceeding was previously authorized by a majority of the Board of Directors of the Company, (iii) unless such indemnification is provided by the Company, in its sole discretion, pursuant to the powers vested in the Company under applicable law or (iv) except as provided in Sections 12 and 14 hereof.
4. ACTIONS OR PROCEEDINGS OTHER THAN AN ACTION BY OR IN THE RIGHT OF THE COMPANY. The Indemnitee shall be entitled to the indemnification rights provided in this Section 4 if the Indemnitee was or is a party or is threatened to be a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative in nature, other than an action by or in the right of the Company, by reason of the fact that the Indemnitee is or was a director, officer or employee, agent or fiduciary of the Company, or any of its direct or indirect wholly-owned subsidiaries, or is or was serving at the request of the Company, or any of its direct or indirect wholly-owned subsidiaries, as a director, officer or employee of any other entity, including, but not limited to, another corporation, partnership, limited liability company, employee benefit plan, joint venture, trust or other enterprise, or by reason of any act or omission by him/her in such capacity. Pursuant to this Section 4, the Indemnitee shall be indemnified against all Expenses, judgments, penalties (including excise and similar taxes), fines and amounts paid in settlement which were actually and reasonably incurred by the Indemnitee in connection with such action, suit or proceeding (including, but not limited to, the investigation, defense or appeal thereof), if the Indemnitee acted in good faith and in a manner the Indemnitee reasonably believed to be in or not opposed to the best interests of the Company, and, with respect to any criminal action or proceeding, had no reasonable cause to believe his/her conduct was unlawful.
5. ACTIONS BY OR IN THE RIGHT OF THE COMPANY. The Indemnitee shall be entitled to the indemnification rights provided in this Section 5 if the Indemnitee was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding brought by or in the right of the Company to procure a judgment in its favor by reason of the fact that the Indemnitee is or was a director, officer or employee, agent or fiduciary of the Company, or any of its direct or indirect wholly-owned subsidiaries, or is or was serving at the request of the Company, or any of its direct or indirect wholly-owned subsidiaries, as a director, officer or employee of another entity, including, but not limited to, another corporation, partnership, limited liability company, employee benefit plan, joint venture, trust or other enterprise, or by reason of any act or omission by him/her in any such capacity. Pursuant to this Section 5, the Indemnitee shall be indemnified against all Expenses actually and reasonably incurred by him/her in connection with the defense or settlement of such action, suit or proceeding (including, but not limited to the investigation, defense or appeal thereof), if the Indemnitee acted in good faith and in a manner the Indemnitee reasonably believed to be in or not opposed to the best interests of the Company; provided, however, that no such indemnification shall be made in respect of any claim, issue or matter as to which the Indemnitee shall have been adjudged to be liable to the Company, unless and only to the extent that the Court of Chancery of the State of Delaware or the court in which such action, suit or proceeding was brought shall
determine upon application that, despite the adjudication of liability but in view of all the circumstances of the case, the Indemnitee is fairly and reasonably entitled to indemnity for such Expenses which such court shall deem proper.
6. GOOD FAITH DEFINITION. For purposes of this Agreement, the Indemnitee shall be deemed to have acted in good faith and in a manner the Indemnitee reasonably believed to be in or not opposed to the best interests of the Company, or, with respect to any criminal action or proceeding, to have had no reasonable cause to believe the Indemnitee's conduct was unlawful, if such action was based on any of the following: (a) the records or books of the account of the Company or other enterprise, including financial statements; (b) information supplied to the Indemnitee by the officers of the Company or other enterprise in the course of his/her duties; (c) the advice of legal counsel for the Company or other enterprise; or (d) information or records given in reports made to the Company or other enterprise by an independent certified public accountant or by an appraiser or other expert selected with reasonable care by the Company or other enterprise.
7. INDEMNIFICATION FOR EXPENSES OF SUCCESSFUL PARTY. Notwithstanding the other provisions of this Agreement, to the extent that the Indemnitee has served on behalf of the Company, or any of its direct or indirect wholly-owned subsidiaries, as a witness or other participant in any class action or proceeding, or has been successful, on the merits or otherwise, in defense of any action, suit or proceeding referred to in Sections 4 and 5 hereof, or in defense of any claim, issue or matter therein, including, but not limited to, the dismissal of any action without prejudice, the Indemnitee shall be indemnified against all Expenses actually and reasonably incurred by the Indemnitee in connection therewith.
8. PARTIAL INDEMNIFICATION. If the Indemnitee is entitled under any provision of this Agreement to indemnification by the Company for some or a portion of the Expenses, judgments, fines and amounts paid in settlement actually and reasonably incurred by the Indemnitee in connection with the investigation, defense, appeal or settlement of such suit, action, investigation or proceeding described in Sections 4 and 5 hereof, but is not entitled to indemnification for the total amount thereof, the Company shall nevertheless indemnify the Indemnitee for the portion of such Expenses, judgments, penalties, fines and amounts paid in settlement actually and reasonably incurred by the Indemnitee to which the Indemnitee is entitled.
9. PROCEDURE FOR DETERMINATION OF ENTITLEMENT TO INDEMNIFICATION.
(a) To obtain indemnification under this Agreement, the Indemnitee shall submit
to the Company a written request, including documentation and information which
is reasonably available to the Indemnitee and is reasonably necessary to
determine whether and to what extent the Indemnitee is entitled to
indemnification. The Secretary of the Company shall, promptly upon receipt of a
request for indemnification, advise the Board of Directors in writing that the
Indemnitee has requested indemnification. Any Expenses incurred by the
Indemnitee in connection with the Indemnitee's request for indemnification
hereunder shall be borne by the Company. The Company hereby indemnifies and
agrees to hold the Indemnitee harmless for any Expenses incurred by the
Indemnitee under the immediately preceding sentence irrespective of the outcome
of the determination of the Indemnitee's entitlement to indemnification.
(b) Upon written request by the Indemnitee for indemnification pursuant to Sections 4 and 5 hereof, the entitlement of the Indemnitee to indemnification pursuant to the terms of this Agreement shall be determined by the following person or persons, who shall be empowered to make such determination: (i) if a Change in Control shall have occurred, by Independent Counsel (unless the Indemnitee shall request in writing that such determination be made by the Board of Directors (or a committee thereof) in the manner provided for in clause (b)(ii) of this Section 9) in a written opinion to the Board of Directors, a copy of which shall be delivered to the Indemnitee; (ii) if a Change in Control shall not have occurred, (A) by the Board of Directors of the Company, by a majority vote of a quorum consisting of Disinterested Directors, or (B) if a quorum consisting of Disinterested Directors is not obtainable, or if a majority vote of a quorum consisting of Disinterested Directors so directs, by Independent Counsel in a written opinion to the Board of Directors, a copy of which shall be delivered to the Indemnitee; or (iii) in any event, by the stockholders pursuant to the Bylaws of the Company. The Independent Counsel shall be selected by the Board of Directors and approved by the Indemnitee. Upon failure of the Board of Directors to so select, or upon failure of the Indemnitee to so approve, the Independent Counsel shall be selected by the Chancellor of the State of Delaware or such other person as the Chancellor shall designate to make such selection. Such determination of entitlement to indemnification shall be made not later than 45 days after receipt by the Company of a written request for indemnification. If the person making such determination shall determine that the Indemnitee is entitled to indemnification as to part (but not all) of the application for indemnification, such person shall reasonably prorate such part of indemnification among such claims, issues or matters. If it is so determined that Indemnitee is entitled to indemnification, payment to Indemnitee shall be made within 10 days after such determination.
10. PRESUMPTIONS AND EFFECT OF CERTAIN PROCEEDINGS. (a) In making a determination with respect to entitlement to indemnification, the Indemnitee shall be presumed to be entitled to indemnification hereunder and the Company shall have the burden of proof in the making of any determination contrary to such presumption.
(b) If the Board of Directors, or such other person or persons empowered pursuant to Section 9 to make the determination of whether the Indemnitee is entitled to indemnification, shall have failed to make a determination as to entitlement to indemnification within 45 days after receipt by the Company of such request, the requisite determination of entitlement to indemnification shall be deemed to have been made and the Indemnitee shall be absolutely entitled to such indemnification, absent actual and material fraud in the request for indemnification or a prohibition of indemnification under applicable law. The termination of any action, suit, investigation or proceeding described in Sections 4 or 5 hereof by judgment, order, settlement or conviction, or upon a plea of nolo contendere or its equivalent, shall not, of itself: (i) create a presumption that the Indemnitee did not act in good faith and in a manner which he/she reasonably believed to be in or not opposed to the best interests of the Company, or, with respect to any criminal action or proceeding, that the Indemnitee has reasonable cause to believe that the Indemnitee's conduct was unlawful; or (ii) otherwise adversely affect the rights of the Indemnitee to indemnification, except as may be provided herein.
11. ADVANCEMENT OF EXPENSES. Subject to applicable law, all reasonable Expenses actually incurred by the Indemnitee in connection with any threatened or pending action, suit
or proceeding shall be paid by the Company in advance of the final disposition of such action, suit or proceeding, if so requested by the Indemnitee, within 20 days after the receipt by the Company of a statement or statements from the Indemnitee requesting such advance or advances. The Indemnitee may submit such statements from time to time. The Indemnitee's entitlement to such Expenses shall include those incurred in connection with any proceeding by the Indemnitee seeking an adjudication or award in arbitration pursuant to this Agreement. Such statement or statements shall reasonably evidence the Expenses incurred by the Indemnitee in connection therewith and shall include or be accompanied by a written affirmation by the Indemnitee of the Indemnitee's good faith belief that the Indemnitee has met the standard of conduct necessary for indemnification under this Agreement and an undertaking by or on behalf of the Indemnitee to repay such amount if it is ultimately determined that the Indemnitee is not entitled to be indemnified against such Expenses by the Company pursuant to this Agreement or otherwise. Each written undertaking to pay amounts advanced must be an unlimited general obligation but need not be secured, and shall be accepted without reference to financial ability to make repayment.
12. REMEDIES OF THE INDEMNITEE IN CASES OF DETERMINATION NOT TO INDEMNIFY OR TO ADVANCE EXPENSES. In the event that a determination is made that the Indemnitee is not entitled to indemnification hereunder or if the payment has not been timely made following a determination of entitlement to indemnification pursuant to Sections 9 and 10, or if Expenses are not advanced pursuant to Section 11, the Indemnitee shall be entitled to a final adjudication in an appropriate court of the State of Delaware or any other court of competent jurisdiction of the Indemnitee's entitlement to such indemnification or advance. Alternatively, the Indemnitee may, at the Indemnitee's option, seek an award in arbitration to be conducted by a single arbitrator chosen by the Indemnitee and approved by the Company, which approval shall not be unreasonably withheld or delayed. If the Indemnitee and the Company do not agree upon an arbitrator within 30 days following notice to the Company by the Indemnitee that it seeks an award in arbitration, the arbitrator will be chosen pursuant to the rules of the American Arbitration Association (the "AAA"). The arbitration will be conducted pursuant to the rules of the AAA and an award shall be made within 60 days following the filing of the demand for arbitration. The arbitration shall be held in Houston, Harris County, Texas. The Company shall not oppose the Indemnitee's right to seek any such adjudication or award in arbitration or any other claim. Such judicial proceeding or arbitration shall be made de novo, and the Indemnitee shall not be prejudiced by reason of a determination (if so made) that the Indemnitee is not entitled to indemnification. If a determination is made or deemed to have been made pursuant to the terms of Section 9 or Section 10 hereof that the Indemnitee is entitled to indemnification, the Company shall be bound by such determination and shall be precluded from asserting that such determination has not been made or that the procedure by which such determination was made is not valid, binding and enforceable. The Company further agrees to stipulate in any such court or before any such arbitrator that the Company is bound by all the provisions of this Agreement and is precluded from making any assertions to the contrary. If the court or arbitrator shall determine that the Indemnitee is entitled to any indemnification hereunder, the Company shall pay all reasonable Expenses actually incurred by the Indemnitee in connection with such adjudication or award in arbitration (including, but not limited to, any appellate proceedings).
13. NOTIFICATION AND DEFENSE OF CLAIM. Promptly after receipt by the Indemnitee of notice of the commencement of any action, suit or proceeding, the Indemnitee will, if a claim in respect thereof is to be made against the Company under this Agreement, notify the Company in
writing of the commencement thereof. The omission by the Indemnitee to so notify the Company will not relieve the Company from any liability that it may have to the Indemnitee under this Agreement or otherwise, except to the extent that the Company may suffer material prejudice by reason of such failure. Notwithstanding any other provision of this Agreement, with respect to any such action, suit or proceeding as to which the Indemnitee gives notice to the Company of the commencement thereof:
(a) The Company will be entitled to participate therein at its own expense.
(b) Except as otherwise provided in this Section 13(b), to the extent that it may wish, the Company, jointly with any other indemnifying party similarly notified, shall be entitled to assume the defense thereof with counsel reasonably satisfactory to the Indemnitee. After notice from the Company to the Indemnitee of its election to so assume the defense thereof, the Company shall not be liable to the Indemnitee under this Agreement for any legal or other Expenses subsequently incurred by the Indemnitee in connection with the defense thereof other than reasonable costs of investigation or as otherwise provided below. The Indemnitee shall have the right to employ the Indemnitee's own counsel in such action, suit or proceeding, but the fees and Expenses of such counsel incurred after notice from the Company of its assumption of the defense thereof shall be at the expense of the Indemnitee unless (i) the employment of counsel by the Indemnitee has been authorized by the Company, (ii) the Indemnitee shall have reasonably concluded that there may be a conflict of interest between the Company and the Indemnitee in the conduct of the defense of such action and such determination by the Indemnitee shall be supported by an opinion of counsel, which opinion shall be reasonably acceptable to the Company, or (iii) the Company shall not in fact have employed counsel to assume the defense of the action, in each of which cases the fees and Expenses of counsel shall be at the expense of the Company. The Company shall not be entitled to assume the defense of any action, suit or proceeding brought by or on behalf of the Company or as to which the Indemnitee shall have reached the conclusion provided for in clause (ii) above.
(c) The Company shall not be liable to indemnify the Indemnitee under this Agreement for any amounts paid in settlement of any action, suit or proceeding affected without its written consent, which consent shall not be unreasonably withheld. The Company shall not be required to obtain the consent of the Indemnitee to settle any action, suit or proceeding which the Company has undertaken to defend if the Company assumes full and sole responsibility for such settlement and such settlement grants the Indemnitee a complete and unqualified release in respect of any potential liability.
14. OTHER RIGHT TO INDEMNIFICATION. The indemnification and advancement of Expenses provided by this Agreement are cumulative, and not exclusive, and are in addition to any other rights to which the Indemnitee may now or in the future be entitled under any provision of the Bylaws or Certificate of the Company, the Certificate or Bylaws or other
governing documents of any direct or indirect wholly-owned subsidiary of the Company, any vote of the stockholders or Disinterested Directors, any provision of law or otherwise. Except as required by applicable law, the Company shall not adopt any amendment to its Bylaws or Certificate the effect of which would be to deny, diminish or encumber the Indemnitee's right to indemnification under this Agreement.
15. DIRECTOR AND OFFICER LIABILITY INSURANCE. The Company shall, from time to time, make the good faith determination whether or not it is practicable for the Company to obtain and maintain a policy or policies of insurance with reputable insurance companies providing the officers and directors of the Company, and any direct or indirect wholly-owned subsidiary of the Company, with coverage for losses from wrongful acts, or to ensure the Company's performance of its indemnification obligations under this Agreement. Among other considerations, the Company will weigh the costs of obtaining such insurance coverage against the protection afforded by such coverage. Notwithstanding the foregoing, the Company shall have no obligation to obtain or maintain such insurance if the Company determines in good faith that such insurance is not necessary or is not reasonably available, if the premium costs for such insurance are disproportionate to the amount of coverage provided, if the coverage provided by such insurance is limited by exclusions so as to provide an insufficient benefit or if the Indemnitee is covered by similar insurance maintained by a direct or indirect wholly-owned subsidiary of the Company. However, the Company's decision whether or not to adopt and maintain such insurance shall not affect in any way its obligations to indemnify its officers and directors under this Agreement or otherwise. In all policies of director and officer liability insurance, the Indemnitee shall be named as an insured in such a manner as to provide the Indemnitee the same rights and benefits as are accorded to the most favorably insured of the Company's directors, if the Indemnitee is a director; or of the Company's officers, if the Indemnitee is not a director of the Company, but is an officer. The Company agrees that the provisions of this Agreement shall remain in effect regardless of whether liability or other insurance coverage is at any time obtained or retained by the Company; except that any payments made to, or on behalf of, the Indemnitee under an insurance policy shall reduce the obligations of the Company hereunder.
16. SPOUSAL INDEMNIFICATION. The Company will indemnify the Indemnitee's spouse to whom the Indemnitee is legally married at any time the Indemnitee is covered under the indemnification provided in this Agreement (even if the Indemnitee did not remain married to him or her during the entire period of coverage) against any pending or threatened action, suit, proceeding or investigation for the same period, to the same extent and subject to the same standards, limitations, obligations and conditions under which the Indemnitee is provided indemnification herein, if the Indemnitee's spouse (or former spouse) becomes involved in a pending or threatened action, suit, proceeding or investigation solely by reason of his or her status as the Indemnitee's spouse, including, without limitation, any pending or threatened action, suit, proceeding or investigation that seeks damages recoverable from marital community property, jointly-owned property or property purported to have been transferred from the Indemnitee to his/her spouse (or former spouse). The Indemnitee's spouse or former spouse also may be entitled to advancement of Expenses to the same extent that the Indemnitee is entitled to advancement of Expenses herein. The Company may maintain insurance to cover its obligation hereunder with respect to the Indemnitee's spouse (or former spouse) or set aside assets in a trust or escrow funds for that purpose.
17. INTENT. This Agreement is intended to be broader than any statutory indemnification rights applicable in the State of Delaware and shall be in addition to any other rights the Indemnitee may have under the Company's Certificate, Bylaws, applicable law or otherwise. To the extent that a change in applicable law (whether by statute or judicial decision) permits greater indemnification by agreement than would be afforded currently under the Company's Certificate, Bylaws, applicable law or this Agreement, it is the intent of the parties that the Indemnitee enjoy by this Agreement the greater benefits so afforded by such change.
18. ATTORNEY'S FEES AND OTHER EXPENSES TO ENFORCE AGREEMENT. In the event that the Indemnitee is subject to or intervenes in any proceeding in which the validity or enforceability of this Agreement is at issue or seeks an adjudication or award in arbitration to enforce the Indemnitee's rights under, or to recover damages for breach of, this Agreement the Indemnitee, if he/she prevails in whole or in part in such action, shall be entitled to recover from the Company and shall be indemnified by the Company against any actual expenses for attorneys' fees and disbursements reasonably incurred by the Indemnitee.
19. SUBROGATION. In the event of payment under this Agreement, the Company shall be subrogated to the extent of such payment to all of the rights of recovery of the Indemnitee, who shall execute all documents required and shall do all acts that may be necessary to secure such rights and to enable the Company effectively to bring suit to enforce such rights.
20. EFFECTIVE DATE. The provisions of this Agreement shall cover claims, actions, suits or proceedings whether now pending or hereafter commenced and shall be retroactive to cover acts or omissions or alleged acts or omissions which heretofore have taken place. The Company shall be liable under this Agreement, pursuant to Sections 4 and 5 hereof, for all acts of the Indemnitee while serving as a director and/or officer, notwithstanding the termination of the Indemnitee's service, if such act was performed or omitted to be performed during the term of the Indemnitee's service to the Company.
21. DURATION OF AGREEMENT. This Agreement shall continue until and terminate upon the later of: (a) ten years after the Indemnitee has ceased to occupy any of the positions or have any relationships described in Sections 4 and 5 of this Agreement and (b) the final termination of all pending or threatened actions, suits, proceedings or investigations to which the Indemnitee may be subject by reason of the fact that he/she is or was a director, officer, employee, agent or fiduciary of the Company, or any direct or indirect wholly-owned subsidiary of the Company, or is or was serving at the request of the Company as a director, officer, employee of any other entity, including, but not limited to, another corporation, partnership, limited liability company, employee benefit plan, joint venture, trust or other enterprise, or by reason of any act or omission by the Indemnitee in any such capacity. The indemnification provided under this Agreement shall continue as to the Indemnitee even though he/she may have ceased to be a director or officer of the Company, or any direct or indirect wholly-owned subsidiary of the Company. This Agreement shall be binding upon the Company and its successors and assigns, including, without limitation, any corporation or other entity which may have acquired all or substantially all of the Company's assets or business or into which the Company may be consolidated or merged, and shall inure to the benefit of the Indemnitee and his/her spouse, successors, assigns, heirs, devisees, executors, administrators or other legal representations. The Company shall require any successor or assignee (whether direct or
indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company, by written agreement in form and substance reasonably satisfactory to the Company and the Indemnitee, expressly to assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform if no such succession or assignment had taken place.
22. DISCLOSURE OF PAYMENTS. Except as expressly required by any federal securities laws or other federal or state law, neither party hereto shall disclose any payments under this Agreement unless prior approval of the other party is obtained.
23. SEVERABILITY. If any provision or provisions of this Agreement shall be held invalid, illegal or unenforceable for any reason whatsoever, (a) the validity, legality and enforceability of the remaining provisions of this Agreement (including, but not limited to, all portions of any Sections of this Agreement containing any such provision held to be invalid, illegal or unenforceable) shall not in any way be affected or impaired thereby and (b) to the fullest extent possible, the provisions of this Agreement (including, but not limited to, all portions of any paragraph of this Agreement containing any such provision held to be invalid, illegal or unenforceable, that are not themselves invalid, illegal or unenforceable) shall be construed so as to give effect to the intent manifest by the provision held invalid, illegal or unenforceable.
24. COUNTERPARTS. This Agreement may be executed by one or more counterparts, each of which shall for all purposes be deemed to be an original but all of which together shall constitute one and the same agreement. Only one such counterpart signed by the party against whom enforceability is sought shall be required to be produced to evidence the existence of this Agreement.
25. CAPTIONS. The captions and headings used in this Agreement are inserted for convenience only and shall not be deemed to constitute part of this Agreement or to affect the construction thereof.
26. ENTIRE AGREEMENT, MODIFICATION AND WAIVER. This Agreement constitutes the entire agreement and understanding of the parties hereto regarding the subject matter hereof, and no supplement, modification or amendment of this Agreement shall be binding unless executed in writing by both parties hereto. No waiver of any of the provisions of this Agreement shall be deemed or shall constitute a waiver of any other provisions hereof (whether or not similar) nor shall such waiver constitute a continuing waiver. No supplement, modification or amendment to this Agreement shall limit or restrict any right of the Indemnitee under this Agreement in respect of any act or omission of the Indemnitee prior to the effective date of such supplement, modification or amendment unless expressly provided therein.
27. NOTICES. All notices, requests, demands or other communications hereunder shall be in writing and shall be deemed to have been duly given if (a) delivered by hand with receipt acknowledged by the party to whom said notice or other communication shall have been directed, (b) mailed by certified or registered mail, return receipt requested with postage prepaid, on the date shown on the return receipt or (c) delivered by facsimile transmission on the date shown on the facsimile machine report:
(a) If to the Indemnitee to:
Facsimile:
(b) If to the Company, to:
Baker Hughes Incorporated Attn: General Counsel 3900 Essex Lane, Suite 1200 Houston, Texas 77027-5177 Facsimile: (713) 439-8472
or to such other address as may be furnished to the Indemnitee by the Company or to the Company by the Indemnitee, as the case may be.
28. GOVERNING LAW. The parties hereto agree that this Agreement shall be governed by, and construed and enforced in accordance with, the laws of the State of Delaware, applied without giving effect to any conflicts of law principles.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement on the day and year first above written.
BAKER HUGHES INCORPORATED
By_________________________________
Michael E. Wiley
Chairman, President and
Chief Executive Officer
INDEMNITEE:
By_________________________________
EXHIBIT 10.8
BAKER HUGHES INCORPORATED
CHANGE IN CONTROL SEVERANCE PLAN
(EFFECTIVE DECEMBER 3, 2003)
BAKER HUGHES INCORPORATED
CHANGE IN CONTROL SEVERANCE PLAN
WHEREAS, Baker Hughes Incorporated, a corporation organized and existing under the laws of the State of Delaware recognizes that one of its most valuable assets is its key management executives; and
WHEREAS, Baker Hughes Incorporated would like to provide severance benefits in the event that the employment of a key management executive is involuntarily terminated in conjunction with a change in control.
NOW, THEREFORE, Baker Hughes Incorporated adopts the Baker Hughes Incorporated Change in Control Severance Plan, effective December 3, 2003.
TABLE OF CONTENTS
PAGE 1. ESTABLISHMENT AND OBJECTIVE....................................................................1 1.1 Establishment.........................................................................1 1.2 Objective.............................................................................1 2. DEFINITIONS....................................................................................1 2.1 Capitalized Terms.....................................................................1 2.2 Number and Gender.....................................................................9 2.3 Headings..............................................................................9 3. ELIGIBILITY....................................................................................9 4. BENEFITS......................................................................................10 4.1 Equity Based Compensation............................................................10 4.2 Compensation and Benefits During Incapacity and Prior to Termination of Employment...10 4.3 Benefits Following Termination of Employment.........................................10 4.4 Tax Gross-Up Payments................................................................13 4.5 Legal Fees...........................................................................14 5. TIME OF BENEFITS PAYMENTS.....................................................................15 6. TERMINATION PROCEDURES AND COMPENSATION DURING DISPUTE........................................15 6.1 Notice of Termination................................................................15 6.2 Employment Termination Date..........................................................15 6.3 Dispute Concerning Termination.......................................................16 6.4 Compensation During Dispute..........................................................16 7. WITHHOLDING...................................................................................16 8. DEATH OF PARTICIPANT..........................................................................16 9. AMENDMENT AND TERMINATION.....................................................................17 10. ADOPTION OF PLAN BY OTHER EMPLOYERS...........................................................17 11. MISCELLANEOUS.................................................................................17 11.1 Plan Not an Employment Contract......................................................17 11.2 Alienation Prohibited................................................................17 11.3 Severability.........................................................................17 11.4 Binding Effect.......................................................................17 |
TABLE OF CONTENTS
(continued)
PAGE 11.5 Settlement of Disputes Concerning Benefits Under the Plan; Arbitration...............18 11.6 Guaranty of Payment, Performance, and Observance by Baker Hughes.....................18 11.7 No Mitigation........................................................................19 11.8 Other Amounts Due....................................................................19 11.9 Notices..............................................................................19 11.10 Governing Law........................................................................20 |
BAKER HUGHES INCORPORATED
CHANGE IN CONTROL SEVERANCE PLAN
1. ESTABLISHMENT AND OBJECTIVE
1.1 ESTABLISHMENT. Baker Hughes Incorporated, a Delaware corporation, hereby establishes a plan for certain designated employees to be known as the "Baker Hughes Incorporated Change in Control Severance Plan" (the "Plan").
1.2 OBJECTIVE. The Plan is designed to attract and retain certain designated employees of the Company (defined below) and to reward such employees of the Company by providing replacement income and certain benefits in conjunction with a Change in Control (defined below).
2. DEFINITIONS
2.1 CAPITALIZED TERMS. Whenever used in the Plan, the following capitalized terms in this Section 2.1 shall have the meanings set forth below:
"AFFILIATE" means any entity which is a member of (i) the same controlled group of corporations within the meaning of section 414(b) of the Code with Baker Hughes, (ii) a trade or business (whether or not incorporated) which is under common control (within the meaning of section 414(c) of the Code) with Baker Hughes or (iii) an affiliated service group (within the meaning of section 414(m) of the Code) with Baker Hughes.
"ANNUAL INCENTIVE PLAN" means the Baker Hughes Incorporated 1995 Employee Annual Incentive Compensation Plan, as amended from time to time, any guidelines issued pursuant to such plan, and any other incentive compensation plans adopted by the Company from time to time which are in replacement of or in addition to such plan.
"ASSETS" means assets of any kind owned by Baker Hughes, including but not limited to securities of Baker Hughes' direct and indirect subsidiaries and Affiliates.
"BAKER HUGHES" means Baker Hughes Incorporated, a Delaware corporation, and any successor by merger or otherwise.
"BASE COMPENSATION" means a Participant's base salary or wages (as defined in section 3401(a) of the Code for purposes of federal income tax withholding) from the Company, modified by including any portion thereof that such Participant could have received in cash in lieu of any elective deferrals made by the Participant pursuant to the Supplemental Retirement Plan (other than deferrals of bonuses) or pursuant to a qualified cash or deferred arrangement described in section 401(k) of the Code and any elective contributions under a cafeteria plan described in section 125, and modified further by excluding any bonus, incentive compensation (including but not limited to equity-based compensation), commissions, expense reimbursements or other expense allowances, fringe benefits (cash and noncash), moving expenses, deferred compensation (other than elective deferrals by the Participant under a qualified cash or deferred arrangement described in section 401(k) of the Code or the Supplemental Retirement Plan that are
expressly included in "Base Compensation" under the foregoing provisions of this definition), welfare benefits as defined in ERISA, overtime pay, special performance compensation amounts and severance compensation.
"BENEFICIAL OWNER" or "BENEFICIAL OWNERSHIP" shall have the meaning ascribed to those terms in Rule 13d-3 of the General Rules and Regulations under the Exchange Act.
"BOARD " means the Board of Directors of Baker Hughes or other governing body of Baker Hughes or its direct or indirect parent.
"BONUS" means each annual incentive bonus, if any, paid in cash by the Company to or for the benefit of an Employee for services rendered or labor performed while an Employee. Annual bonuses are generally paid with respect to a completed fiscal year by the Company to its employees pursuant to the Annual Incentive Plan. An Employee's Bonus shall be determined by including any portion thereof that such Participant could have received in cash in lieu of (i) any elective deferrals made by such Participant pursuant to the Supplemental Retirement Plan or (ii) elective contributions made on such Participant's behalf by the Company pursuant to a qualified cash or deferred arrangement (as defined in section 401(k) of the Code) or pursuant to a plan maintained under section 125 of the Code.
"CAUSE" means (i) the willful and continued failure by the Employee to substantially perform the Employee's duties with the Company (other than any such failure resulting from the Employee's incapacity due to physical or mental illness) after a written demand for substantial performance is delivered to the Employee by the Board (or by a delegate appointed by the Board), which demand specifically identifies the manner in which the Board believes that the Employee has not substantially performed the Employee's duties, or (ii) the willful engaging by the Employee in conduct which is demonstrably and materially injurious to the Company or any of its Affiliates, monetarily or otherwise. For purposes of Sections (i) and (ii) of this definition, (A) no act, or failure to act, on the Employee's part shall be deemed "willful" if done, or omitted to be done, by the Employee in good faith and with reasonable belief that the act, or failure to act, was in the best interest of the Company and (B) 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 Board by clear and convincing evidence that Cause exists.
"CHANGE IN CONTROL" means the occurrence of any of the following events:
(a) the individuals who are Incumbent Directors cease for any reason to constitute a majority of the members of the Board;
(b) the consummation of a Merger of Baker Hughes or an Affiliate of Baker Hughes with another Entity, unless the individuals and Entities who were the Beneficial Owners of the Voting Securities
of Baker Hughes outstanding immediately prior to such Merger own, directly or indirectly, at least 50 percent of the combined voting power of the Voting Securities of any of Baker Hughes, the surviving Entity or the parent of the surviving Entity outstanding immediately after such Merger;
(c) any Person, other than a Specified Owner, becomes a Beneficial Owner, directly or indirectly, of securities of Baker Hughes representing 30 percent or more of the combined voting power of Baker Hughes' then outstanding Voting Securities;
(d) a sale, transfer, lease or other disposition of all or substantially all of Baker Hughes' Assets is consummated (an "Asset Sale"), unless:
(1) the individuals and Entities who were the Beneficial Owners of the Voting Securities of Baker Hughes immediately prior to such Asset Sale own, directly or indirectly, 50 percent or more of the combined voting power of the Voting Securities of the Entity that acquires such Assets in such Asset Sale or its parent immediately after such Asset Sale in substantially the same proportions as their ownership of Baker Hughes' Voting Securities immediately prior to such Asset Sale; or
(2) the individuals who comprise the Board immediately prior to such Asset Sale constitute a majority of the board of directors or other governing body of either the Entity that acquired such Assets in such Asset Sale or its parent (or a majority plus one member where such board or other governing body is comprised of an odd number of directors); or
(e) The stockholders of Baker Hughes approve a plan of complete liquidation or dissolution of Baker Hughes.
"CODE" means the Internal Revenue Code of 1986, as amended, or any successor act.
"COMMITTEE" means, prior to a Change in Control or a Potential
Change in Control, the Compensation Committee of the Board. After a
Change in Control or a Potential Change in Control, "Committee" means
(i) the individuals (not fewer than three (3) in number) who, on the
date six months prior to the Change in Control constitute the
Compensation Committee of the Board, plus, (ii) in the event that fewer
than three (3) 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 after a Change in Control or
Potential Change in Control shall not exceed six (6).
"COMPANY" means Baker Hughes or an Employer.
"DISABILITY" means the Participant's incapacity due to physical or mental illness that has caused the Participant to be absent from full-time performance of his duties with the Company for a period of six (6) consecutive months.
"EFFECTIVE DATE" means December 3, 2003, the date on which the Plan is adopted.
"EMPLOYEE" means an individual (i) who is employed in the services of the Company on the Company's active payroll, and (ii) who is also a United States-based executive salary grade system employee (under the Company's then current payroll system categories), or any comparable executive designations in any system that replaces the United States-based salary grade system. Notwithstanding the foregoing, the Committee may from time to time designate other individuals who may be selected for participation in the Plan.
"EMPLOYER" means any Affiliate that adopts the Plan pursuant to the provisions of Section 10.
"EMPLOYMENT TERMINATION DATE" means the date as of which a Participant incurs a Termination of Employment determined in accordance with the provisions of Section 6.2.
"ENTITY" means any corporation, partnership, association, joint-stock company, limited liability company, trust, unincorporated organization or other business entity.
"ERISA" means the Employee Retirement Income Security Act of 1974, as amended, or any successor act.
"EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended, or any successor act.
"EXCISE TAX" means the excise tax imposed by section 4999 of the Code or any similar tax payable under any United States federal, state, or local statute.
"EXPIRATION DATE" shall have the meaning specified in the definition of the "Term of the Plan".
"GOOD REASON" for termination by the Employee of his
employment means the occurrence (without the Employee'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 paragraph of the definition of Termination of Employment
(treating all references to "Change in Control" in paragraphs (a)
through (f) below 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 (a), (e), (f) or (g) below, such act or failure
to act is corrected prior to the effective date of the Employee's
termination for Good Reason:
(a) the assignment to the Employee of any duties or responsibilities which are substantially diminished as compared to the Employee's duties and responsibilities immediately prior to a Change in Control or a material change in the Employee's reporting responsibilities, titles or offices as an Employee and as in effect immediately prior to the Change in Control.
(b) a reduction by the Company in the Employee's annual Base Compensation as in effect on the date hereof or as the same may be increased from time to time, except for across-the-board salary reductions similarly affecting all individuals having a similar level of
authority and responsibility with the Company and all individuals having a similar level of authority and responsibility with any Person in control of the Company;
(c) the relocation of the Employee's principal place of employment to a location outside of a 50-mile radius from the Employee's principal place of employment immediately prior to the Change in Control or the Company's requiring the Employee to be based anywhere other than such principal place of employment (or permitted relocation thereof) except for required travel on the Company's business to an extent substantially consistent with the Employee's business travel obligations immediately prior to a Change in Control;
(d) the failure by the Company to pay to the Employee any portion of the Employee's current compensation except pursuant to an across-the-board compensation deferral similarly affecting all individuals having a similar level of authority and responsibility with the Company and all individuals having a similar level of authority and responsibility with any Person in control of the Company, or to pay to the Employee 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;
(e) the failure by the Company to continue in effect any compensation plan in which the Employee participates immediately prior to the Change in Control which is material to the Employee's total compensation, unless an equitable arrangement (embodied in an ongoing substitute or alternative plan) has been made with respect to such plan, or the failure by the Company to continue the Employee's participation therein (or in such substitute or alternative plan) on a basis not materially less favorable, both in terms of the amount or timing of payment of benefits provided and the level of the Employee's participation relative to other participants, as existed immediately prior to the Change in Control;
(f) the failure by the Company to continue to provide the Employee with benefits substantially similar to those enjoyed by the Employee under any of the Company's pension, savings, life insurance, medical, health and accident, or disability plans in which the Employee was participating immediately prior to the Change in Control (except for across the board changes similarly affecting all individuals having a similar level of authority and responsibility with the Company and all individuals having a similar level of authority and responsibility with any Person in control of the Company), the taking of any other action by the Company which would directly or indirectly materially reduce any of such benefits or deprive the Employee of any material fringe benefit or Perquisite enjoyed by the Employee at the time of the Change in Control, or the failure by the Company to provide the Employee with the number of paid vacation days to which the Employee is entitled on the basis of years of service with the Company in accordance with the Company's normal vacation policy in effect immediately prior to the time of the Change in Control; or
(g) any purported termination of the Employee's employment which is not
effected pursuant to a notice of termination satisfying the requirements of
Section 6.1 hereof.
The Employee's right to terminate his employment for Good Reason shall not be affected by the Employee's incapacity due to physical or mental illness. The Employee's
continued employment shall not constitute consent to, or a waiver of any rights with respect to, any act or failure to act constituting Good Reason hereunder.
For purposes of any determination regarding the existence of Good Reason, any claim by the Employee 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. The Committee's determination regarding the existence of Good Reason shall be conclusive and binding upon all parties unless the Committee's determination is arbitrary and capricious.
"GROSS-UP PAYMENT" means the additional amount paid to a Participant pursuant to Section 4.4.
"HIGHEST BASE COMPENSATION" means the Participant's annualized Base Compensation in effect immediately prior to (1) a Change in Control, (2) the first event or circumstance constituting Good Reason, or (3) the Participant's Termination of Employment, whichever is greatest.
"INCUMBENT DIRECTOR" means -
(a) a member of the Board on the Effective Date; or
(b) an individual-
(1) who becomes a member of the Board after the Effective Date;
(2) whose appointment or election by the Board or nomination for election by Baker Hughes' stockholders is approved or recommended by a vote of at least two-thirds of the then serving Incumbent Directors (as defined herein); and
(3) whose initial assumption of service on the Board is not in connection with an actual or threatened election contest.
"MERGER" means a merger, consolidation or similar transaction.
"PARTICIPANT" means an individual who is eligible to participate in the Plan under the provisions of Section 3.
"PENSION PLAN" means the Baker Hughes Incorporated Pension Plan, as amended from time to time.
"PERQUISITES" means benefits such as any airline VIP club memberships; country club and/ or health club membership dues and expenses related to the use of the country club and/ or health club; supplemental life insurance; financial consulting; and office equipment for use in the home (e.g., cellular telephones, personal digital assistance, home computers and office accessories similar to the office accessories available to the Employee in his employment office and monthly Internet connection fees) that may be provided by the Company from time to time.
"PERSON" shall have the meaning ascribed to the term in
Section 3(a)(9) of the Exchange Act and used in Sections 13(d) and
14(d) thereof, including a "group" as defined in Section 13(d) thereof,
except that the term shall not include (a) the Company or any of its
Affiliates, (b) a trustee or other fiduciary holding Company securities
under an employee benefit plan of the Company or any of its Affiliates,
(c) an underwriter temporarily holding securities pursuant to an
offering of those securities or (d) 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.
"PLAN" means the Baker Hughes Incorporated Change in Control Severance Plan, as it may be amended from time to time.
"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:
(a) the Company enters into an agreement, the consummation of which would result in the occurrence of a Change in Control;
(b) 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;
(c) any Person becomes the Beneficial Owner, directly or indirectly, of securities of the Company representing 15 percent 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
(d) the Board adopts a resolution to the effect that, for purposes of the Plan, a Potential Change in Control has occurred.
"RENEWAL DATE" shall have the meaning specified in the definition of the "Term of the Plan."
"SPECIFIED OWNER" means any of the following:
(a) Baker Hughes;
(b) an Affiliate of Baker Hughes;
(c) an employee benefit plan (or related trust) sponsored or maintained by Baker Hughes or any Affiliate of Baker Hughes;
(d) a Person that becomes a Beneficial Owner of Baker Hughes' outstanding Voting Securities representing 30 percent or more of the combined voting power of Baker Hughes' then outstanding Voting Securities as a result of the acquisition of securities directly from Baker Hughes and/or its Affiliates; or
(e) a Person that becomes a Beneficial Owner of Baker Hughes' outstanding Voting Securities representing 30 percent or more of the combined voting power of Baker Hughes' then outstanding Voting Securities as a result of a Merger if the individuals and Entities who were the Beneficial Owners of the Voting Securities of Baker Hughes outstanding immediately prior to such Merger own, directly or indirectly, at least 50 percent of the combined voting power of the Voting Securities of any of Baker Hughes, the surviving Entity or the parent of the surviving Entity outstanding immediately after such Merger in substantially the same proportions as their ownership of the Voting Securities of Baker Hughes outstanding immediately prior to such Merger.
"SUPPLEMENTAL RETIREMENT PLAN" means the Baker Hughes Incorporated Supplemental Retirement Plan, as amended from time to time.
"TERM OF THE PLAN" means the period commencing on the Effective Date and ending on:
(a) the last day of the three-year period beginning on the Effective Date if no Change in Control shall have occurred during that three-year period (such last day being the "Expiration Date"); or
(b) if a Change in Control shall have occurred during (i) the three-year period beginning on the Effective Date or (ii) any period for which the Term of the Plan shall have been automatically extended pursuant to the second sentence of this definition, the two-year period beginning on the date on which the Change in Control occurred.
After the expiration of the time period described in subsection (a) of this definition and in the absence of a Change in Control (as described in subsection (b) of this definition) the Term of the Plan shall be automatically extended for successive two-year periods beginning on the day immediately following the Expiration Date (the beginning date of each successive two-year period being a "Renewal Date"), unless, not later than 18 months prior to the Expiration Date or applicable Renewal Date, the Company shall give notice to Participants that the Term of the Plan will not be extended.
"TERMINATION OF EMPLOYMENT" means the termination of an individual's employment relationship with the Company (i) by the Company without Cause after a Change in Control occurs, or (ii) by the individual for Good Reason after a Change in Control occurs.
For purposes of this definition, an individual's employment
shall be deemed to have been terminated after a Change in Control, if
(i) the individual'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
individual terminates his employment for Good Reason prior to a Change
in Control (whether nor not a Change in Control ever occurs) and the
circumstance or event which constitutes Good Reason occurs 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; or (iii) the individual's employment is terminated by the Company without Cause or by the individual 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 Participant shall be presumed to be correct unless the Company establishes to the Committee by clear and convincing evidence that such position is not correct.
Termination of Employment does not include (i) a termination of employment due to the individual's death or Disability, or (ii) a termination of employment by the individual without Good Reason.
"THRIFT PLAN" means the Baker Hughes Incorporated Thrift Plan, as amended from time to time.
"VOTING SECURITIES" means the outstanding securities entitled to vote generally in the election of directors or other governing body.
2.2 NUMBER AND GENDER. As used in the Plan, unless the context otherwise expressly requires to the contrary, references to the singular include the plural, and vice versa; references to the masculine include the feminine and neuter; references to "including" mean "including (without limitation)"; and references to Sections and clauses mean the sections and clauses of the Plan.
2.3 HEADINGS. The headings of Sections herein are included solely for convenience, and if there is any conflict between such headings and the text of the Plan, the text shall control.
3. ELIGIBILITY
The individuals who shall be eligible to participate in the Plan shall be those Employees who are selected by the Committee. The Committee shall notify an Employee who has been selected for participation of his eligibility to participate in the Plan by furnishing him a written notification of participation that specifies whether he is a Level 1 or Level 2 executive for purposes of the Plan.
Notwithstanding any other provision of the Plan, an Employee shall not be eligible to participate in the Plan if there is in effect an individual severance agreement (including an employment agreement that provides for severance benefits) or change in control agreement between the Employee and the Company.
Notwithstanding any other provision of the Plan, the Board may discontinue an individual's eligibility to participate in the Plan by providing him written advance notice (the "Notice"), no later than 18 months prior to the Expiration Date or a Renewal Date (as defined in the definition of "Term of the Plan" in Section 2.1), that he shall no longer participate in the Plan; provided, however, that should a Change in Control occur during such 18-month advance
notification period, the Notice shall be void and of no effect, and the Participant shall be eligible to participate in the Plan as if the Notice were never given.
4. BENEFITS
4.1 EQUITY BASED COMPENSATION. Upon the occurrence of a Change in Control, all options to acquire Baker Hughes stock, all shares of restricted Baker Hughes stock, all other equity or phantom equity incentives and any awards the value of which is determined by reference to or based upon the value of Baker Hughes stock, held by the Participant under any plan of the Company 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.
4.2 COMPENSATION AND BENEFITS DURING INCAPACITY AND PRIOR TO TERMINATION OF EMPLOYMENT. Following a Change in Control and during the Term of the Plan, during any period in which the Participant fails to perform the Participant's full-time duties with the Company as a result of incapacity due to physical or mental illness, the Company shall pay the Participant's full salary to the Participant at the rate in effect at the commencement of any such period, together with all compensation and benefits payable to the Participant under the terms of any compensation or benefit plan, program or arrangement maintained by the Company during such period, until the Participant's employment is terminated by the Company for Disability.
4.3 BENEFITS FOLLOWING TERMINATION OF EMPLOYMENT. If a Participant incurs a Termination of Employment during the Term of the Plan, the Company shall provide the Participant the benefits described below. Further details of the benefits described in this Section 4.3 are provided in Exhibit A.
(a) SEVERANCE PAYMENT BASED UPON BASE COMPENSATION. The Company will pay the Participant a cash severance benefit based on the applicable multiple of the Employee's Highest Base Compensation. The "applicable multiple" shall be determined in accordance with the relevant provisions of Exhibit A. A Participant's severance payment under this paragraph (a) will be paid in accordance with the provisions of Section 5.
(b) SEVERANCE PAYMENT BASED UPON BONUSES. The Company will pay the Participant a cash severance benefit in an amount equal to the sum of (1) and (2) where (1) is an amount equal to the product of (A) the expected value target percentage under the Participant's Bonus for the Baker Hughes' fiscal year in which the Participant's Termination of Employment occurs, (B) the Participant's Highest Base Compensation and (C) a fraction, the numerator of which is the number of full months and any fractional portion of a month during the performance period through the Participant's Employment Termination Date and the denominator of which is the total number of months during such performance period; and (2) is an amount equal to the product of (A) the expected value target percentage under the Participant's Bonus for the Baker Hughes' fiscal year in which the Participant's Termination of Employment occurs, (B) the Participant's Highest Base Compensation and (C) the applicable multiple determined in accordance with the relevant provisions of Exhibit A. However, if the Participant's Employment Termination Date occurs during the same calendar year in which a Change in Control occurs, the pro-rata bonus payment described in clause (1) of the preceding
sentence shall be offset by any payments received by the Participant under the Baker Hughes Incorporated 1995 Employee Annual Incentive Compensation Plan in connection with the Change in Control. A Participant's severance payment under this paragraph (b) will be paid in accordance with the provisions of Section 5.
(c) OUTPLACEMENT. The Company will provide the Participant
outplacement services suitable to the Participant's position for the period of
time specified in the relevant provisions of Exhibit A. In lieu of such
outplacement services, if the Participant so elects, the Company shall pay the
Participant in cash the amount specified in the relevant provisions of Exhibit
A. Any such cash payment in lieu of outplacement services will be paid in
accordance with the provisions of Section 5.
(d) PENSION, THRIFT AND SUPPLEMENTAL RETIREMENT PLANS. In addition to the retirement benefits to which the Participant is entitled under the Thrift Plan, the Pension Plan and the Supplemental Retirement Plan, the Company shall pay the Participant a single sum cash payment in an amount equal to the undiscounted value of (A) the employer-provided accruals under the Pension Plan that the Participant would have earned and (B) the employer contributions the Company would have made to the Thrift Plan and the Supplemental Retirement Plan (including but not limited to matching and base contributions) on behalf of the Participant had the Participant continued in the employ of the Company for a period of time determined in accordance with the relevant provisions of Exhibit A, assuming for this purpose that (i) the Participant's earned compensation per year during the relevant period of time provided in Exhibit A is the sum of (1) the Participant's Highest Base Compensation and (2) the product of (A) the expected value target percentage under the Participant's Bonus for the Baker Hughes' fiscal year in which the Participant's Termination of Employment occurs, (B) the Participant's Highest Base Compensation, and (C) is the applicable multiple specified in Exhibit A for purposes of paragraph (b) of this Section 4.3; and (ii) contribution, deferral, credit and accrual percentages made under the Pension Plan, the Thrift Plan and the Supplemental Retirement Plan, by and on behalf of the Participant during the relevant period of time provided in Exhibit A, are the same percentages in effect on the date of the Change in Control or the Participant's Employment Termination Date, whichever is more favorable for the Participant. The payment required under this paragraph (d) will be made in accordance with the provisions of Section 5.
(e) ACCIDENT AND HEALTH INSURANCE BENEFITS. For the period of time following the Participant's Employment Termination Date specified in Exhibit A (the "Continuation Period"), the Company shall arrange to provide the Participant and his dependents accident and health insurance benefits, in each case, substantially similar to those provided to the Participant and his dependents immediately prior to the Employment Termination Date or, if more favorable to the Participant, those provided to the Participant and his dependents immediately prior to the first occurrence of an event or circumstance constituting Good Reason, at no greater cost to the Participant than the cost to the Participant immediately prior to such date or occurrence. Benefits otherwise receivable by the Participant pursuant to this Section 4.3(f) shall be reduced to the extent benefits of the same type are received by or made available to the Participant during the Continuation Period (and any such benefits received by or made available to the Participant shall be reported to the Company by the Participant); provided, however, that the Company shall reimburse the Participant for the excess, if any, of the cost of such benefits to
the Participant over such cost immediately prior to the Employment Termination Date or, if more favorable to the Participant, the first occurrence of an event or circumstance constituting Good Reason.
(f) LIFE INSURANCE. A Participant shall be entitled to a single sum cash payment in an amount equivalent to the product of (1) the monthly basic life insurance premium applicable to the Participant's basic life insurance coverage on his Employment Termination Date and (2) the period of time determined in accordance with the relevant provisions of Exhibit A. The single sum cash payment will be made in accordance with the provisions of Section 5. A Participant may, at his option, convert his basic life insurance coverage to an individual policy after his Employment Termination Date by completing the forms required by the Company.
(g) PERQUISITES. A Participant shall be entitled to a single sum cash payment which shall be an amount equal to the sum of (1) the cost of the Participant's Perquisites in effect prior to his Termination of Employment for the remainder of the calendar year in which the Employment Termination Date occurs; plus (2) the cost of the Participant's Perquisites in effect prior to his Termination of Employment for an additional period of time determined in accordance with the relevant provisions of Exhibit A. The payment required under this paragraph (f) will be made in accordance with the provisions of Section 5. A Participant may, at his option, purchase any of his club memberships held in the Company's name for fair market value and on the terms mutually agreed by the Participant and the Committee.
(h) RETIREE MEDICAL. If the Participant would have become
entitled to benefits under the Company's post-retirement health care insurance
plans, as in effect immediately prior to the Employment Termination Date or, if
more favorable to the Participant as in effect immediately prior to the first
occurrence of an event or circumstance constituting Good Reason, had the
Participant's employment terminated at any time during the period of thirty-six
(36) months after the Employment Termination Date, the Company shall provide
such post-retirement health care insurance benefits to the Participant and the
Participant'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 the
applicable benefits described in paragraph (e) of this Section 4.3 terminate.
4.4 TAX GROSS-UP PAYMENTS.
If any payments or benefits received or to be received by the Participant (whether pursuant to the terms of the Plan, or any other plan 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 the Participant an additional amount (the "Gross-Up Payment") such that the net amount retained by the Participant after the 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. The purpose of this Section is to place the Participant in the same economic position such
Participant would have been in had no Excise Tax been imposed with respect to the Total Payments.
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 (the "Tax Counsel") reasonably acceptable to the Participant 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 the 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" (within the meaning of section 280G(b)(3) of the Code) 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 Participant 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 Participant's residence on the Employment Termination Date (or if there is no Employment Termination Date, then the date on which the Gross-Up Payment is calculated for purposes of this Section 4.4), net of the maximum reduction in federal income taxes which could be obtained from deduction of such state and local taxes.
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 Participant shall repay to the Company, within ten (10) 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 benefit being repaid by the Participant, to the extent that such repayment results in a reduction in the Excise Tax and a dollar-for-dollar reduction in the Participant'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 percent 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 payment 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 Participant with respect to such excess) within five (5) business days following the time that the amount of such excess is finally determined. The Participant and the Company shall each reasonably cooperate with the other relative to any administrative or judicial proceedings concerning the existence or amount of liability for the Excise Tax.
4.5 LEGAL FEES. The Company shall pay, on a fully grossed up, after tax
basis, all legal fees and expenses incurred by the Participant (i) in disputing
in good faith any issue relating to the Participant's termination of employment,
(ii) in seeking in good faith to obtain or enforce any benefit or right provided
under the Plan in accordance with Section 11.5, or (iii) 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 under the Plan. Such payments shall
be made within ten (10) business days after delivery of the Participant's
written request for payment accompanied with such evidence of fees and expenses
incurred as the Company may reasonably require.
5. TIME OF BENEFITS PAYMENTS
The Company shall pay the Participant any cash benefits described in
paragraphs (a), (b), (c) (if the Participant elects to receive a cash payment in
lieu of outplacement services), (d), (e) and (f) of Section 4.3 in a single sum
cash payment within thirty (30) days after the Participant's Employment
Termination Date. If it is subsequently determined that additional monies are
due and payable to the Participant as benefits described in paragraphs (a), (b),
(c) (if the Participant elects to receive a cash payment in lieu of outplacement
services), (d) and (f) of Section 4.3, the Company will pay any such unpaid
benefits to the Participant, together with interest on the unpaid benefits from
the date the single sum cash payment was made at the annual rate of 120 percent
of the rate provided in section 1274(b)(2)(B) of the Code, within ten (10)
business days of discovering that the additional monies are due and payable. If
the benefits paid to the Participant are subsequently determined to exceed the
amount of benefits the Participant should have received, such excess shall
constitute a loan by the Company to the Participant, payable within ten (10)
business days after demand by the Company, together with interest from the date
the single sum cash payment was made at the annual rate of 120 percent of the
rate provided in section 1274(b)(2)(B) of the Code, but only to the extent such
amount has not been previously paid by the Participant.
6. TERMINATION PROCEDURES AND COMPENSATION DURING DISPUTE
6.1 NOTICE OF TERMINATION. After a Change in Control and during the Term of the Plan, any purported termination of the Participant's employment by the Company shall be communicated by the Company by a written Notice of Termination to the Participant in accordance with Section 11.8 hereof. For purposes of this Agreement, a "Notice of Termination" shall mean a notice which shall indicate the specific termination provision in the Plan relied upon and shall set forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of the Participant'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 Participant and an opportunity for the Participant, together with the Participant's counsel, to be heard before the Board) finding that, in the good faith opinion of the Board, the Participant was guilty of conduct set forth in clause (i) or (ii) of the definition of Cause herein, and specifying the particulars thereof in detail. No purported termination of the Participant's employment by the Company after a Change in Control and during the Term of the Plan shall be effective unless the Company complies with the procedures set forth in this Section 6.1.
6.2 EMPLOYMENT TERMINATION DATE. "Employment Termination Date," with respect to any purported termination of the Participant's employment after a Change in Control and during the Term of the Plan, shall mean (i) if the Participant's employment is terminated for Disability, thirty (30) days after Notice of Termination is given (provided that the Participant shall not have returned to the full-time performance of the Participant's duties during such thirty (30) day period), and (ii) if the Participant'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 Participant, shall not be less than fifteen (15) days nor more than sixty (60) days, respectively, from the date such Notice of Termination is given).
6.3 DISPUTE CONCERNING TERMINATION. If within fifteen (15) days after
any Notice of Termination is given, or, if later, prior to the Employment
Termination Date (as determined without regard to this Section 6.3), the party
receiving such Notice of Termination notifies the other party that a dispute
exists concerning the termination, the Employment Termination Date shall be
extended until the earlier of (i) the date on which the Term of the Plan 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 Employment Termination Date shall
be extended by a notice of dispute given by the Participant only if such notice
is given in good faith and the Participant pursues the resolution of such
dispute with reasonable diligence.
6.4 COMPENSATION DURING DISPUTE. If a purported termination occurs
following a Change in Control and during the Term of the Plan and the Employment
Termination Date is extended in accordance with Section 6.3 hereof, the Company
shall continue to pay the Participant the full compensation in effect when the
notice giving rise to the dispute was given (including, but not limited to,
salary) and continue the Participant as a participant in all compensation,
benefit and insurance plans in which the Participant was participating when the
notice giving rise to the dispute was given or those plans in which the
Participant 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 Participant, until the Employment Termination Date, as
determined in accordance with Section 6.3 hereof. Amounts paid under this
Section 6.4 are in addition to all other amounts due under the Plan (other than
those due under Section 4.2 hereof) and shall not be offset against or reduce
any other amounts due under the Plan.
7. WITHHOLDING
Subject to the provisions of Section 4.4, Company may withhold from any benefits paid under the Plan all income, employment, and other taxes required to be withheld under applicable law.
8. DEATH OF PARTICIPANT
If a Participant dies after his Employment Termination Date but before the Participant receives full payment of the benefits to which he is entitled, any unpaid benefits will be paid to the Participant's surviving spouse, or if the Participant does not have a surviving spouse, to the Participant's estate.
9. AMENDMENT AND TERMINATION
During the Term of the Plan, the Plan may not be terminated or amended in any manner that would negatively affect a Participant's rights under the Plan. Further, no amendment or termination of the Plan after a Participant's Employment Termination Date shall affect the benefits payable to such Participant. Subject to the foregoing restrictions, Baker Hughes may amend or terminate the Plan by a written instrument that is authorized by the Committee.
10. ADOPTION OF PLAN BY OTHER EMPLOYERS
(a) With the written approval of the Committee, any entity that is an Affiliate may adopt the Plan by appropriate action of its board of directors or noncorporate counterpart, as evidenced by a written instrument executed by an authorized officer of such entity or an executed adoption agreement (approved by the board of directors or noncorporate counterpart of the Affiliate), agreeing to be bound by all the terms, conditions and limitations of the Plan and providing all information required by the Committee.
(b) The provisions of the Plan shall apply separately and equally to each adopting Affiliate and its employees in the same manner as is expressly provided for the Company and its employees, except that the power to appoint the Committee and the power to amend or terminate the Plan shall be exercised by Baker Hughes.
(c) For purposes of the Code and ERISA, the Plan as adopted by the Affiliates shall constitute a single plan rather than a separate plan of each Affiliate.
11. MISCELLANEOUS
11.1 PLAN NOT AN EMPLOYMENT CONTRACT. The adoption and maintenance of the Plan is not a contract between the Company and its employees that gives any employee the right to be retained in its employment. Likewise, it is not intended to interfere with the rights of the Company to terminate an employee's employment at any time with or without notice and with or without cause or to interfere with an employee's right to terminate his employment at any time.
11.2 ALIENATION PROHIBITED. No benefits hereunder shall be subject to anticipation or assignment by a Participant, to attachment by, interference with, or control of any creditor of a
Participant, or to being taken or reached by any legal or equitable process in satisfaction of any debt or liability of a Participant prior to its actual receipt by the Participant. Any attempted conveyance, transfer, assignment, mortgage, pledge, or encumbrance of the benefits hereunder prior to payment thereof shall be void.
11.3 SEVERABILITY. Each provision of the Plan may be severed. If any provision is determined to be invalid or unenforceable, that determination shall not affect the validity or enforceability of any other provision.
11.4 BINDING EFFECT. The Plan shall be binding upon any successor of the Company. Further, the Board shall not authorize a Change in Control that is a merger or a sale transaction unless the purchaser or the Company's successor agrees to take such actions as are necessary to cause all Participants to be paid or provided all benefits due under the terms of the Plan as in effect immediately prior to the Change in Control.
11.5 SETTLEMENT OF DISPUTES CONCERNING BENEFITS UNDER THE PLAN;
ARBITRATION. All claims by a Participant for benefits under the Plan 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 the Plan shall be delivered to
the Participant in writing within thirty (30) days after written notice of the
claim is provided to the Company in accordance with Section 11.9 and shall set
forth the specific reasons for the denial and the specific provisions of the
Plan relied upon. The Committee shall afford a reasonable opportunity to the
Participant for a review of the decision denying a claim and shall further allow
the Participant to appeal to the Committee a decision of the Committee within
sixty (60) days after notification by the Committee that the Participant's claim
has been denied. Any further dispute or controversy arising out of or relating
to the Plan, including without limitation, any and all disputes, claims (whether
in tort, contract, statutory or otherwise) or disagreements concerning the
interpretation or application of the provisions of the Plan shall be resolved by
arbitration in accordance with the rules of the American Arbitration Association
(the "AAA") then in effect. No arbitration proceeding relating to the Plan may
be initiated by either the Company or the Participant unless the claims review
and appeals procedures specified in Section 14 have been exhausted. Within ten
(10) business days of the initiation of an arbitration hereunder, the Company
and the Participant will each separately designate an arbitrator, and within
twenty (20) business days of selection, the appointed arbitrators will appoint a
neutral arbitrator from the AAA Panel of Commercial Arbitrators. The arbitrators
shall issue their written decision (including a statement of finding of facts)
within thirty (30) days from the date of the close of the arbitration hearing.
The decision of the arbitrators selected hereunder will be final and binding on
both parties. This arbitration provision is expressly made pursuant to and shall
be governed by the Federal Arbitration Act, 9 U.S.C. Sections 1-16 (or
replacement or successor statute). Pursuant to Section 9 of the Federal
Arbitration Act, the Company and any Participant agree that a judgment of the
United States District Court for the District in which the headquarters of Baker
Hughes is located at the time of initiation of an arbitration hereunder may be
entered upon the award made pursuant to the arbitration.
11.6 GUARANTY OF PAYMENT, PERFORMANCE, AND OBSERVANCE BY BAKER HUGHES. Baker Hughes hereby unconditionally guarantees to Participant the due, prompt and punctual payment, performance and observance by the Company, and its successors and assigns
(collectively, the "Obligor"), of the Obligor's obligations under the Plan
(collectively, the "Guaranteed Obligations"), including, but not limited to, (i)
the due, prompt and punctual payment of each and all amounts that the Company
shall become obligated to pay under the Plan, as and when the same shall become
due and payable hereunder, and (ii) the due, prompt and punctual performance and
observance by the Company of each term, provision and condition the Company is
required to perform or observe under the Plan, as and when the same shall be
required to be performed or observed hereunder. In any case of the failure of
the Obligor to punctually pay, perform or observe any of the Guaranteed
Obligations, Baker Hughes agrees to promptly cause to be promptly paid,
performed or observed such Guaranteed Obligation as and when such Guaranteed
Obligation is required to be paid, performed or observed. Baker Hughes agrees
that its obligations hereunder shall be as if it were the principal obligor and
not merely a surety, and shall be absolute and unconditional, irrespective of,
and shall be unaffected by, any invalidity, irregularity or unenforceability of
any provision of the Plan, or any waiver, modification or indulgence granted to
the Obligor with respect thereto, by the Participant, or any other circumstance
that may otherwise constitute a legal or equitable discharge of a surety or
guarantor. Baker Hughes hereby waives diligence, presentment, demand, any right
to require a proceeding first against the Obligor, and all demands whatsoever,
and covenants that its obligations under the Plan will not be discharged except
by payment, performance and observance in full of all of the Guaranteed
Obligations. The agreements of Baker Hughes hereunder shall inure to the benefit
of and be enforceable by Participant's personal or legal representatives,
executors, administrators, successors, heirs, distributees, devisees and
legatees.
11.7 NO MITIGATION. The Company agrees that if the Participant's employment with the Company terminates during the Term of the Plan, the Participant is not required to seek other employment or to attempt in any way to reduce any amounts payable to the Participant by the Company pursuant to the Plan. Further, except as expressly provided otherwise herein, the amount of any payment or benefit provided for in the Plan (other than Section 4.3(f) hereof) shall not be reduced by any compensation earned by the Participant as the result of employment by another employer, by retirement benefits, by offset against any amount claimed to be owed by the Participant to the Company, or otherwise.
11.8 OTHER AMOUNTS DUE. Except as expressly provided otherwise herein, the payments and benefits provided for in the Plan are in addition to and not in lieu of amounts and benefits that are earned by a Participant prior to his Termination of Employment. The Company shall pay a Participant any compensation earned through the Employment Termination Date but not previously paid the Participant. Further the Participant shall be entitled to any other amounts or benefits due the Participant in accordance with any contract, plan, program or policy of the Company or any of its Affiliates. Amounts that the Participant is entitled to receive under any plan, program, contract or policy of the Company or any of its Affiliates at or subsequent to the Participant's Termination of Employment shall be payable or otherwise provided in accordance with such plan, program, contract or policy, except as expressly modified herein.
11.9 NOTICES. For the purpose of the Plan, notices and all other communications provided for in the Plan 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 Participant, to the residential address listed on the Participant's notification of participation and, if to the Company, to 3900 Essex Lane; Houston, Texas 77027; Attention:
General Counsel, 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.
11.10 GOVERNING LAW. All provisions of the Plan shall be construed in accordance with the laws of Texas, except to the extent preempted by federal law and except to the extent that the conflicts of laws provisions of the State of Texas would require the application of the relevant law of another jurisdiction, in which event the relevant law of the State of Texas will nonetheless apply, with venue for litigation being in Houston, Texas.
IN WITNESS WHEREOF, the Company has caused this instrument to be executed by its duly authorized officer this ____ day of December, 2003.
BAKER HUGHES INCORPORATED
INTERNATIONAL SUPPLEMENT
1. GENERAL. The provisions of this Supplement apply to individuals who are Non-US Employees (as defined below). The provisions of the Plan apply to Non-US Employees, except to the extent this Supplement modifies the provisions of the Plan.
The purpose of this Supplement is to provide for severance benefits for Non-US Employees in the event of a Termination of Employment.
Capitalized terms used in this Supplement which are defined in the Plan have the same meaning in this Supplement unless such terms are defined differently for purposes of this Supplement. The definition of terms defined in this Supplement apply only to this Supplement and not to other parts of the Plan.
2. DEFINITIONS. Section 2.1 of the Plan is modified to add the following definitions to read as follows:
"NON-US EMPLOYEE" means an individual (i) employed in the services of the Company on the active payroll where the operations or principal place of business of the individual's employment is located outside of the United States and (ii) who is also an executive salary grade system employee (under the Company's then current payroll system categories), or any comparable executive designations in any system that replaces such salary grade system. Notwithstanding the foregoing, the Committee may from time to time designate other individuals who may be eligible to participate in the Plan.
"NON-US PARTICIPANT" means a Non-US Employee who is eligible to participate in the Plan.
3. REFERENCES. References in the Plan to "Employees" and "Participants" are deemed to be references to "Non-US Employees" and "Non-US Participants," respectively.
4. BENEFITS.
Section 4.3 shall be modified in the first paragraph to read as follows:
"Upon the occurrence of a Change in Control, the Company shall provide
a Non-US Participant who has satisfied the eligibility requirements of
Section 3 such severance benefits under the Plan as the Committee
determines in accordance with the provisions of Exhibit A, taking into
consideration any prohibitions or restrictions and any statutorily
mandated severance benefits applicable to the Non-US Participant, with
the intent of providing the Non-US Participant benefits that are
generally comparable to the benefits provided to Participants under the
Plan. It is the express intent of the Company that any benefits paid to
a Non-US Participant under this Supplement and the Plan will be in lieu
of any statutorily-mandated severance benefits (or other employment
termination related benefits), including, but not limited to, gratuity
and similar benefits.
EXHIBIT A
BAKER HUGHES INCORPORATED
CHANGE IN CONTROL SEVERANCE PLAN
SCHEDULE OF POST-TERMINATION OF EMPLOYMENT BENEFITS
The benefits described in this Schedule are summaries only. Each benefit is fully described in the Plan. In the event of a conflict between the provisions of the Plan and this Exhibit A, the terms of the Plan shall govern.
BENEFIT DETAILS OF BENEFIT ------- ------------------ 1. SEVERANCE PAYMENT BASED UPON BASE COMPENSATION Level 3 years (equivalent of 36 months) of Highest Base Compensation Level 2 2 years (equivalent of 24 months) of Highest Base Compensation 2. SEVERANCE PAYMENT Based on the "Expected Value" (EV) target percentage BASED UPON BONUSES under the Participant's Bonus for the Termination of Employment year prorated to the Participant's Employment Termination Date, plus an additional sum which is the product of: (A) EV target percentage under the Participant's Bonus for the Termination of Employment year, multiplied by (B) Participant's Highest Base Compensa tion, and multiplied by either Level 1 (C) 3 Level 2 2 |
EXHIBIT A
3. OUTPLACEMENT Level 1 3 years; or, if the Participant elects to receive a cash payment in lieu of outplacement, $30,000 Level 2 2 years; or, if the Participant elects to receive a cash payment in lieu of outplacement, $20,000 4. PERFORMANCE AWARDS Equity based performance awards are immediately vested and exercisable and all conditions thereof are deemed satisfied. 5. LOST BENEFITS UNDER PENSION, An amount equal to the undiscounted value of the THRIFT AND SUPPLEMENTAL employer-provided accruals and credits the RETIREMENT PLANS Participant would have earned under the Pension Plan, the Thrift Plan and the Supplemental Retirement Plan for the following period after the Participant's Employment Termination Date had he continued to participate thereunder: Level 1 3 years Level 2 2 years 6. ACCIDENT AND HEALTH INSURANCE Coverage for the following time period: Level 1 36 months Level 2 24 months 7. LIFE INSURANCE Payment of the monthly premium amount for the basic life insurance coverage the Participant had at his Employment Termination Date multiplied by the following: Level 1 36 Level 2 24 |
EXHIBIT A
8. PERQUISITES An amount equal to (i) the cost of the Participant's Perquisites for the remainder of the calendar year in which the Employment Termination Date occurs and (ii) the cost of the Participant's Perquisites for the following additional time period: Level 1 36 months Level 2 24 months 9. TAX GROSS-UP PAYMENT An amount such that after the payment of (i) any Excise Taxes due on the Benefits and other benefits or payments, (ii) any federal, state and local income and employment taxes on the Benefits, and (iii) any Excise Tax on the Gross-Up Payment benefit, the net amount retained by the Participant shall be equal to the gross amount of the Benefits prior to such deductions. 10. LEGAL FEES Legal fees and expenses incurred by the Participant (i) in disputing in good faith any issue relating to the Participant's termination of employment, (ii) in seeking in good faith to obtain or enforce any Benefit or right provided under the Plan, or (iii) in connection with any tax audit or proceeding to the extent attributable to the application of section 4999 of the Code to the payment of the Benefits or other benefits or payments. |
Exhibit 10.10
BAKER HUGHES INCORPORATED
DIRECTOR RETIREMENT POLICY
(THE "PLAN")
No additional benefits will accrue under this Plan; however, the Plan will remain in effect until all current benefits accrued thereunder are paid to the Directors in accordance with the terms and conditions of the Plan in effect as of December 31, 2001.
BAKER HUGHES INCORPORATED
RETIREMENT POLICY FOR
CERTAIN MEMBERS OF THE BOARD OF DIRECTORS
BAKER HUGHES INCORPORATED, a corporation organized under the laws of the State of Delaware (the "Company"), adopts the following Retirement Policy (the "Policy") pursuant to action of its Board of Directors (the "Board") taken on December 2, 1987.
1. Eligibility. The Policy shall cover any member of the Board (a "Director"), other than a Director who is or has ever been an officer or employee of the Company.
2. Retirement Benefit. Any eligible Director shall be paid a benefit under the Policy as determined below upon the Director's total and permanent disability, resignation from the Board or removal from the Board on account of any Rule of Governance other than any rule relating to attendance. No benefit shall be paid to an eligible Director who ceases to serve on the Board by reason of death.
3. Amount of Benefit. An eligible Director who is entitled to receive a benefit under paragraph 2 shall be paid a benefit equal to the amount of the annual basic retainer paid to Directors who are not employees of the Company, at the rate in effect on December 31 of the year preceding the year in which the eligible Director ceases to be a member of the Board, multiplied by the number of years of his or her service on the Board, to a maximum of ten years, with a proration of benefits on a monthly basis for partial years of service. In determining the number of years of service of a Director who has been reappointed or reelected to the Board after having received benefits hereunder, the Director shall not receive credit for years of service (or portions thereof)
with respect to which the Director has been paid benefits hereunder but such years (or portions thereof) shall be taken into account in applying the ten year cap on benefits hereunder.
4. Payment of Benefits. At the election of an eligible Director, his or her retirement benefit shall be payable either annually or quarterly at the annual or quarterly rate in effect as of the December 31 preceding the Director's retirement. Annual benefits shall be payable with respect to any year or part of a year of retirement on January 2 of the following year and quarterly benefits shall be paid fifteen days after the end of each calendar quarter, beginning on the first such date following the Director's retirement. In the event an eligible Director does not make an election hereunder, his or her benefits shall be paid on an annual basis.
5. Termination of Benefits. Notwithstanding any other provision hereof to the contrary, all benefits payable hereunder shall terminate upon the death of an eligible Director. Upon the reappointment or reelection of a retired Director to the Board, the payment of benefits hereunder with respect service on the Board prior to said reappointment or reelection shall terminate.
6. No Funding. Benefits under this Policy shall not be funded and shall be paid by the Company from its general assets. No person shall have any preferred claim on, or any beneficial ownership in, any assets of the Company prior to the time such assets are paid to an eligible Director and all rights created under this Policy shall be the mere unsecured contractual rights of an eligible Director against the Company.
7. No Assignment. No Director may sell, assign, encumber or otherwise transfer, assign or alienate his or her interest under this Policy and any attempt to do so shall be void and ineffective. In addition, the interest of a Director shall not be subject to attachment, execution,
garnishment, claims arising from proceedings in bankruptcy or any other form of legal or equitable levy or lien.
8. Miscellaneous. Nothing contained herein shall be construed as an employment contract or give any Director the right to continue to serve as a Director. This Policy may be amended or terminated at any time in the sole and absolute discretion of the Board, provided that no amendment or termination shall reduce benefits which are then in pay status. This Policy shall be governed by and construed under the laws of the State of Delaware.
1
EXHIBIT 10.30
AGREEMENT AND PLAN OF MERGER
AMONG
BAKER HUGHES INCORPORATED,
BAKER HUGHES DELAWARE I, INC.
AND
WESTERN ATLAS INC.
DATED AS OF MAY 10, 1998
2
TABLE OF CONTENTS
PAGE ---- ARTICLE 1 THE MERGER Section 1.1 The Merger.................................................. 5 Section 1.2 The Closing................................................. 5 Section 1.3 Effective Time.............................................. 5 ARTICLE 2 CERTIFICATE OF INCORPORATION AND BYLAWS OF THE SURVIVING CORPORATION Section 2.1 Certificate of Incorporation................................ 5 Section 2.2 Bylaws...................................................... 5 ARTICLE 3 DIRECTORS AND OFFICERS OF THE SURVIVING CORPORATION AND PARENT Section 3.1 Directors of Surviving Corporation.......................... 5 Section 3.2 Officers of Surviving Corporation........................... 6 Section 3.3 Parent Board of Directors; President........................ 6 ARTICLE 4 CONVERSION OF COMPANY COMMON STOCK Section 4.1 Certain Definitions......................................... 6 Section 4.2 Conversion of Company Stock................................. 7 Section 4.3 Exchange of Certificates Representing Company Common Stock....................................................... 8 Section 4.4 Adjustment of Exchange Ratio................................ 10 Section 4.5 Rule 16b-3 Approval......................................... 11 ARTICLE 5 REPRESENTATIONS AND WARRANTIES OF THE COMPANY Section 5.1 Existence; Good Standing; Corporate Authority............... 11 Section 5.2 Authorization, Validity and Effect of Agreements............ 11 Section 5.3 Capitalization.............................................. 11 Section 5.4 Significant Subsidiaries.................................... 12 Section 5.5 No Violation of Law......................................... 12 Section 5.6 No Conflict................................................. 13 Section 5.7 SEC Documents............................................... 13 Section 5.8 Litigation.................................................. 14 Section 5.9 Absence of Certain Changes.................................. 14 Section 5.10 Taxes....................................................... 15 Section 5.11 Employee Benefit Plans...................................... 16 Section 5.12 Labor Matters............................................... 17 Section 5.13 Environmental Matters....................................... 17 Section 5.14 Intellectual Property....................................... 18 Section 5.15 Insurance................................................... 18 Section 5.16 No Brokers.................................................. 18 Section 5.17 Opinion of Financial Advisor................................ 18 Section 5.18 Parent Stock Ownership...................................... 19 Section 5.19 Reorganization.............................................. 19 Section 5.20 Pooling..................................................... 19 Section 5.21 Vote Required............................................... 19 Section 5.22 Amendment to the Company Rights Agreement................... 19 |
PAGE ---- Section 5.23 Certain Approvals........................................... 19 Section 5.24 Certain Contracts........................................... 19 ARTICLE 6 REPRESENTATIONS AND WARRANTIES OF PARENT AND MERGER SUB Section 6.1 Existence; Good Standing; Corporate Authority............... 20 Section 6.2 Authorization, Validity and Effect of Agreements............ 20 Section 6.3 Capitalization.............................................. 20 Section 6.4 Significant Subsidiaries.................................... 21 Section 6.5 No Violation of Law......................................... 21 Section 6.6 No Conflict................................................. 21 Section 6.7 SEC Documents............................................... 22 Section 6.8 Litigation.................................................. 23 Section 6.9 Absence of Certain Changes.................................. 23 Section 6.10 Taxes....................................................... 23 Section 6.11 Employee Benefit Plans...................................... 24 Section 6.12 Labor Matters............................................... 26 Section 6.13 Environmental Matters....................................... 26 Section 6.14 Intellectual Property....................................... 26 Section 6.15 Insurance................................................... 27 Section 6.16 No Brokers.................................................. 27 Section 6.17 Opinion of Financial Advisor................................ 27 Section 6.18 Company Stock Ownership..................................... 27 Section 6.19 Reorganization.............................................. 27 Section 6.20 Pooling..................................................... 27 Section 6.21 Vote Required............................................... 27 Section 6.22 Certain Approvals........................................... 27 Section 6.23 Certain Contracts........................................... 28 ARTICLE 7 COVENANTS Section 7.1 Conduct of Businesses....................................... 28 Section 7.2 No Solicitation by the Company.............................. 31 Section 7.3 No Solicitation by Parent................................... 32 Section 7.4 Meetings of Stockholders.................................... 33 Section 7.5 Filings; Best Efforts....................................... 33 Section 7.6 Inspection.................................................. 35 Section 7.7 Publicity................................................... 36 Section 7.8 Registration Statement...................................... 36 Section 7.9 Listing Application......................................... 37 Section 7.10 Letters of Accountants...................................... 37 Section 7.11 Agreements of Rule 145 Affiliates........................... 37 Section 7.12 Expenses.................................................... 38 Section 7.13 Indemnification and Insurance............................... 38 Section 7.14 Certain Benefits............................................ 39 Section 7.15 Reorganization; Pooling..................................... 42 Section 7.16 Rights Agreement............................................ 42 |
PAGE ---- ARTICLE 8 CONDITIONS Section 8.1 Conditions to Each Party's Obligation to Effect the Merger...................................................... 43 Section 8.2 Conditions to Obligation of the Company to Effect the Merger...................................................... 44 Section 8.3 Conditions to Obligation of Parent and Merger Sub to Effect the Merger.................................................. 44 ARTICLE 9 TERMINATION Section 9.1 Termination by Mutual Consent............................... 45 Section 9.2 Termination by Parent or the Company........................ 45 Section 9.3 Termination by the Company.................................. 46 Section 9.4 Termination by Parent....................................... 47 Section 9.5 Effect of Termination....................................... 47 Section 9.6 Extension; Waiver........................................... 49 ARTICLE 10 GENERAL PROVISIONS Section 10.1 Nonsurvival of Representations, Warranties and Agreements... 49 Section 10.2 Notices..................................................... 50 Section 10.3 Assignment; Binding Effect; Benefit......................... 50 Section 10.4 Entire Agreement............................................ 51 Section 10.5 Amendments.................................................. 51 Section 10.6 Governing Law............................................... 51 Section 10.7 Counterparts................................................ 51 Section 10.8 Headings.................................................... 51 Section 10.9 Interpretation.............................................. 52 Section 10.10 Waivers..................................................... 52 Section 10.11 Incorporation of Exhibits................................... 52 Section 10.12 Severability................................................ 52 Section 10.13 Enforcement of Agreement.................................... 52 Section 10.14 Obligation of Parent........................................ 53 Section 10.15 Subsidiaries................................................ 53 |
AGREEMENT AND PLAN OF MERGER
THIS AGREEMENT AND PLAN OF MERGER (this "Agreement") dated as of May 10, 1998 is among Baker Hughes Incorporated, a Delaware corporation ("Parent"), Baker Hughes Delaware I, Inc., a Delaware corporation and a direct, wholly owned subsidiary of Parent ("Merger Sub"), and Western Atlas Inc., a Delaware corporation (the "Company").
RECITALS
WHEREAS, Parent and the Company have each determined to engage in a strategic business combination with the other;
WHEREAS, in furtherance thereof, the parties hereto desire to merge Merger Sub with and into the Company (the "Merger"), with the Company surviving as a direct, wholly owned subsidiary of Parent, pursuant to which each share of the Company Common Stock (as defined in Section 4.1) will be converted into the right to receive Parent Common Stock (as defined in Section 4.1);
WHEREAS, the respective Boards of Directors of Parent, Merger Sub and the Company have determined the Merger, in the manner contemplated herein, to be desirable and in the best interests of their respective corporations and stockholders and to be consistent with, and in furtherance of, their respective business strategies and goals, and, by resolutions duly adopted, have approved and adopted this Agreement;
WHEREAS, for federal income tax purposes, it is intended that the Merger qualify as a reorganization within the meaning of section 368(a) of the Internal Revenue Code of 1986, as amended (the "Code");
WHEREAS, for financial accounting purposes, it is intended that the Merger be accounted for as a "pooling of interests" under U.S. generally accepted accounting principles;
NOW, THEREFORE, in consideration of the foregoing, and of the representations, warranties, covenants and agreements contained herein, the parties hereto hereby agree as follows:
ARTICLE 1
THE MERGER
SECTION 1.1 The Merger. Subject to the terms and conditions of this Agreement, at the Effective Time (as defined in Section 1.3), Merger Sub shall be merged with and into the Company in accordance with this Agreement, and the separate corporate existence of Merger Sub shall thereupon cease. The Company shall be the surviving corporation in the Merger (sometimes hereinafter referred to as the "Surviving Corporation"). The Merger shall have the effects specified in the Delaware General Corporation Law (the "DGCL").
SECTION 1.2 The Closing. Subject to the terms and conditions of this Agreement, the closing of the Merger (the "Closing") shall take place (a) at the offices of Baker & Botts, L.L.P., One Shell Plaza, 910 Louisiana, Houston, Texas, at 9:00 a.m., local time, on the first business day immediately following the day on which the last to be fulfilled or waived of the conditions set forth in Article 8 shall be fulfilled or waived in accordance herewith or (b) at such other time, date or place as Parent and the Company may agree. The date on which the Closing occurs is hereinafter referred to as the "Closing Date."
SECTION 1.3 Effective Time. If all the conditions to the Merger set forth in Article 8 shall have been fulfilled or waived in accordance herewith and this Agreement shall not have been terminated as provided in Article 9, Parent, Merger Sub and the Company shall cause a certificate of merger (the "Certificate of Merger") meeting the requirements of section 251 of the DGCL to be properly executed and filed in accordance with such section on the Closing Date. The Merger shall become effective at the time of filing of the Certificate of Merger with the Secretary of State of the State of Delaware in accordance with the DGCL, or at such later time that the parties hereto shall have agreed upon and designated in such filing as the effective time of the Merger (the "Effective Time").
6
ARTICLE 2
CERTIFICATE OF INCORPORATION AND BYLAWS
OF THE SURVIVING CORPORATION
SECTION 2.1 Certificate of Incorporation. The certificate of incorporation of the Company in effect immediately prior to the Effective Time shall be the certificate of incorporation of the Surviving Corporation, until duly amended in accordance with applicable law.
SECTION 2.2 Bylaws. The bylaws of Merger Sub in effect immediately prior to the Effective Time shall be the bylaws of the Surviving Corporation, until duly amended in accordance with applicable law.
ARTICLE 3
DIRECTORS AND OFFICERS OF THE
SURVIVING CORPORATION AND PARENT
SECTION 3.1 Directors of Surviving Corporation. The directors of Merger Sub immediately prior to the Effective Time shall be the directors of the Surviving
Corporation as of the Effective Time.
SECTION 3.2 Officers of Surviving Corporation. The officers of the Company immediately prior to the Effective Time shall be the officers of the Surviving Corporation as of the Effective Time.
SECTION 3.3 Parent Board of Directors; President. John R. Russell shall be elected as President of Parent as of the Effective Time, and Max L. Lukens shall continue as Chairman of the Board of Directors and Chief Executive Officer of Parent. The Board of Directors of Parent will take such action as may be necessary to cause the election or appointment of Alton J. Brann, John R. Russell and two other persons designated by the Company after consultation with the Parent to be directors of Parent as of the Effective Time; provided that the Company shall not designate any person not currently a member of the Company's Board of Directors to which the Parent shall have reasonably objected. Such new directors shall be designated into the classes of directors of Parent in accordance with the Parent's bylaws in such classes as the Company shall indicate, John R. Russell shall be appointed to the Executive Committee of Parent's Board of Directors and not less than one such new director shall be appointed to each of the other committees of such Board.
ARTICLE 4
CONVERSION OF COMPANY COMMON STOCK
SECTION 4.1 Certain Definitions. For purposes of this Agreement, the following terms shall have the following meanings:
(a) "Company Common Stock" shall mean the common stock, par value $1.00 per share, of the Company.
(b) "Parent Common Stock" shall mean the common stock, par value $1.00 per share, of Parent.
(c) "Exchange Ratio" shall equal (i) 2.4, if the Parent Share Price is
greater than or equal to $38.25 but less than or equal to $42.75; (ii) if
the Parent Share Price is greater than $42.75 but less than or equal to
$44.75, that fraction, rounded to the nearest thousandth, or if there shall
not be a nearest thousandth, to the next lower thousandth, equal to the
quotient obtained by dividing $102.60 by the Parent Share Price; (iii) if
the Parent Share Price is greater than $44.75, 2.293; and (iv) if the
Parent Share Price is less than $38.25, that fraction, rounded to the
nearest thousandth, or if there shall not be a nearest thousandth, to the
next higher thousandth, equal to the quotient obtained by dividing $91.80
by the Parent Share Price; provided, however, that except as provided in
Section 9.3(d), the Exchange Ratio shall in no event be greater than 2.623,
notwithstanding that the Parent Share Price is less than $35.00.
(d) "Parent Share Price" shall mean the average of the per share closing prices of Parent Common Stock as reported on the consolidated transaction reporting system for securities traded on the New York
Stock Exchange, Inc. ("NYSE") (as reported in the New York City edition of The Wall Street Journal or, if not reported thereby, another authoritative source) for the 20 consecutive trading days ending on the fifth trading day prior to the Closing Date, appropriately adjusted for any stock splits, reverse stock splits, stock dividends, recapitalizations or other similar transactions.
(e) "Stock Option Agreements" shall mean (i) the Stock Option Agreement dated the date hereof between Parent and the Company pursuant to which Parent has granted to the Company an option to purchase a certain number of shares of Parent Common Stock and (ii) the Stock Option Agreement dated the date hereof between the Company and Parent pursuant to which the Company has granted to Parent an option to purchase a certain number of shares of Company Common Stock.
SECTION 4.2 Conversion of Company Stock.
(a) At the Effective Time, each share of the common stock, par value $0.01 per share, of Merger Sub outstanding immediately prior to the Effective Time shall be converted into and become one fully paid and non-assessable share of Common Stock, par value $1.00 per share, of the Surviving Corporation.
(b) At the Effective Time, each share of the Company Common Stock issued and outstanding immediately prior to the Effective Time (other than shares of Company Common Stock (i) held in the Company's treasury or (ii) owned by Parent, Merger Sub or any other wholly owned Subsidiary (as defined in Section 10.15) of Parent or the Company) shall, by virtue of the Merger and without any action on the part of the holder thereof, be converted into the right to receive a number of shares of Parent Common Stock equal to the Exchange Ratio.
(c) As a result of the Merger and without any action on the part of the holder thereof, each share of the Company Common Stock shall cease to be outstanding and shall be canceled and retired and shall cease to exist, and each holder of a certificate (a "Certificate") representing any shares of the Company Common Stock shall thereafter cease to have any rights with respect to such shares of the Company Common Stock, except the right to receive, without interest, Parent Common Stock and cash for fractional shares of Parent Common Stock in accordance with Sections 4.3(b) and 4.3(e) upon the surrender of such Certificate.
(d) Each share of the Company Common Stock issued and held in the Company's treasury, and each share of the Company Common Stock owned by Parent, Merger Sub or any other wholly owned Subsidiary of Parent or the Company shall, at the Effective Time and by virtue of the Merger, cease to be outstanding and shall be canceled and retired without payment of any consideration therefor, and no stock of Parent or other consideration shall be delivered in exchange therefor.
(e) (i) At the Effective Time, all options (individually, a "Company Option" and collectively, the "Company Options") then outstanding under the Western Atlas Inc. 1993 Stock Incentive Plan and the Western Atlas Inc. Director Stock Option Plan (collectively, the "Company Stock Option Plans") shall remain outstanding following the Effective Time. At the Effective
Time, the Company Options shall, by virtue of the Merger and without any further action on the part of the Company or the holder of any Company Option, be assumed by Parent in such manner that Parent (i) is a corporation "assuming a stock option in a transaction to which section 424(a) applied" within the meaning of section 424 of the Code or (ii) to the extent that section 424 of the Code does not apply to any Company Option, would be such a corporation were section 424 of the Code applicable to such option. Each Company Option assumed by Parent shall be exercisable upon the same terms and conditions as under the applicable Company Stock Option Plan and the applicable option agreement issued thereunder, except that (i) each Company Option shall be exercisable for that whole number of shares of Parent Common Stock (rounded to the nearest whole share) into which the number of shares of the Company Common Stock subject to such Company Option immediately prior to the Effective Time would be converted under Section 4.2(b), and (ii) the option price per share of Parent Common Stock shall be an amount equal to the option price per share of Company Common Stock subject to such Company Option in effect
8 immediately prior to the Effective Time divided by the Exchange Ratio (the price per share, as so determined, being rounded upward to the nearest full cent).
(ii) Parent shall take all corporate action necessary to reserve for issuance a number of shares of Parent Common Stock equal to the number of shares of Parent Common Stock issuable upon the exercise of the Company Options assumed by Parent pursuant to this Section 4.2(e). From and after the date of this Agreement, except as provided in Section 7.1(f), no additional options shall be granted by the Company or its Subsidiaries under the Company Stock Option Plans or otherwise. At the Effective Time or as soon as practicable, but in no event more than three business days, thereafter, Parent shall file with the Securities and Exchange Commission (the "SEC") a Registration Statement on Form S-8 covering all shares of Parent Common Stock to be issued upon exercise of the Company Options and shall cause such registration statement to remain effective for as long as there are outstanding any Company Options.
SECTION 4.3 Exchange of Certificates Representing Company Common Stock.
(a) As of the Effective Time, Parent shall deposit, or shall cause to be deposited, with an exchange agent selected by Parent, which shall be Parent's transfer agent for the Parent Common Stock or such other party reasonably satisfactory to the Company (the "Exchange Agent"), for the benefit of the holders of shares of Company Common Stock, for exchange in accordance with this Article 4, certificates representing the shares of Parent Common Stock and the cash in lieu of fractional shares (such cash and certificates for shares of Parent Common Stock, together with any dividends or distributions with respect thereto, being hereinafter referred to as the "Exchange Fund") to be issued pursuant to Section 4.2 and paid pursuant to this Section 4.3 in exchange for outstanding shares of Company Common Stock.
(b) Promptly after the Effective Time, Parent shall cause the Exchange
Agent to mail to each holder of record of one or more Certificates (other than to holders of Company Common Stock that, pursuant to Section 4.2(d), are canceled without payment of any consideration therefor): (A) a letter of transmittal (the "Letter of Transmittal") which shall specify that delivery shall be effected, and risk of loss and title to the Certificates shall pass, only upon delivery of the Certificates to the Exchange Agent and shall be in such form and have such other provisions as Parent and the Company may reasonably specify and (B) instructions for use in effecting the surrender of the Certificates in exchange for certificates representing shares of Parent Common Stock and cash in lieu of fractional shares. Upon surrender of a Certificate for cancellation to the Exchange Agent together with such Letter of Transmittal, duly executed and completed in accordance with the instructions thereto, the holder of such Certificate shall be entitled to receive in exchange therefor (x) a certificate representing that number of whole shares of Parent Common Stock and (y) a check representing the amount of cash in lieu of fractional shares, if any, and unpaid dividends and distributions, if any, which such holder has the right to receive in respect of the Certificate surrendered pursuant to the provisions of this Article 4, after giving effect to any required withholding tax, and the Certificate so surrendered shall forthwith be canceled. No interest will be paid or accrued on the cash in lieu of fractional shares and unpaid dividends and distributions, if any, payable to holders of Certificates. In the event of a transfer of ownership of Company Common Stock which is not registered in the transfer records of the Company, a certificate representing the proper number of shares of Parent Common Stock, together with a check for the cash to be paid in lieu of fractional shares, shall be issued to such a transferee if the Certificate representing such Company Common Stock is presented to the Exchange Agent, accompanied by all documents required to evidence and effect such transfer and to evidence that any applicable stock transfer taxes have been paid.
(c) Notwithstanding any other provisions of this Agreement, no dividends or other distributions declared or made after the Effective Time with respect to Parent Common Stock with a record date after the Effective Time shall be paid with respect to the shares to be issued upon conversion of any Certificate until such Certificate is surrendered for exchange as provided herein. Subject to the effect of applicable laws, following surrender of any such Certificate, there shall be paid to the holder of the certificates representing whole shares of Parent Common Stock issued in exchange therefor, without interest, (i) at the time of such surrender, the amount of dividends or other distributions with a record date after the Effective Time theretofore payable with respect to such whole shares of Parent Common Stock and not
9 paid, less the amount of any withholding taxes which may be required thereon, and (ii) at the appropriate payment date, the amount of dividends or other distributions with a record date after the Effective Time but prior to surrender and a payment date subsequent to surrender payable with respect to such whole shares of Parent Common Stock, less the amount of any withholding taxes which may be required thereon.
(d) At or after the Effective Time, there shall be no transfers on the
stock transfer books of the Company of the shares of Company Common Stock which were outstanding immediately prior to the Effective Time. If, after the Effective Time, Certificates are presented to the Surviving Corporation, the presented Certificates shall be canceled and exchanged for certificates for shares of Parent Common Stock and cash in lieu of fractional shares, if any, deliverable in respect thereof pursuant to this Agreement in accordance with the procedures set forth in this Article 4. Certificates surrendered for exchange by any person constituting an "affiliate" of the Company for purposes of Rule 145(c) under the Securities Act of 1933, as amended (the "Securities Act"), shall not be exchanged until Parent has received a written agreement from such person as provided in Section 7.11.
(e) No fractional shares of Parent Common Stock shall be issued pursuant hereto. In lieu of the issuance of any fractional share of Parent Common Stock pursuant to Section 4.2(b), cash adjustments will be paid to holders in respect of any fractional share of Parent Common Stock that would otherwise be issuable, and the amount of such cash adjustment shall be equal to such fractional proportion of the Parent Share Price.
(f) Any portion of the Exchange Fund (including the proceeds of any investments thereof and any shares of Parent Common Stock) that remains unclaimed by the former stockholders of the Company one year after the Effective Time shall be delivered to Parent. Any former stockholders of the Company who have not theretofore complied with this Article 4 shall thereafter look only to Parent for payment of their shares of Parent Common Stock, cash in lieu of fractional shares and unpaid dividends and distributions on the Parent Common Stock deliverable in respect of each Certificate such former stockholder holds as determined pursuant to this Agreement.
(g) None of Parent, the Surviving Corporation, the Exchange Agent or any other person shall be liable to any former holder of shares of Company Common Stock for any amount properly delivered to a public official pursuant to applicable abandoned property, escheat or similar laws.
(h) In the event any Certificate shall have been lost, stolen or destroyed, upon the making of an affidavit of that fact by the person claiming such Certificate to be lost, stolen or destroyed and, if required by the Surviving Corporation, the posting by such person of a bond in such reasonable amount as the Surviving Corporation may direct as indemnity against any claim that may be made against it with respect to such Certificate, the Exchange Agent will issue in exchange for such lost, stolen or destroyed Certificate the shares of Parent Common Stock and cash in lieu of fractional shares, and unpaid dividends and distributions on shares of Parent Common Stock as provided in Section 4.3(c), deliverable in respect thereof pursuant to this Agreement.
SECTION 4.4 Adjustment of Exchange Ratio. In the event that, subsequent to the date of this Agreement but prior to the Effective Time, the Company changes the number of shares of Company Common Stock, or Parent changes the number of shares of Parent Common Stock, issued and outstanding as a result of a stock split, reverse stock split, stock dividend, recapitalization or other similar transaction, the Exchange Ratio and other items dependent thereon shall be appropriately adjusted.
SECTION 4.5 Rule 16b-3 Approval. Parent agrees that the Parent Board of Directors or the Compensation Committee of the Parent Board of Directors shall at or prior to the Effective Time adopt resolutions specifically approving, for purposes of Rule 16b-3 ("Rule 16b-3") under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), the receipt, pursuant to Section 4.2, of Parent Common Stock and Parent stock options by officers and directors of the Company who will become officers or directors of the Parent subject to Rule 16b-3.
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ARTICLE 5
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
Except as set forth in the disclosure letter delivered to Parent
concurrently with the execution hereof (the "Company Disclosure Letter") or as
disclosed with reasonable specificity in the Company Reports (as defined in
Section 5.7), the Company represents and warrants to Parent that:
SECTION 5.1 Existence; Good Standing; Corporate Authority. The Company is a corporation duly incorporated, validly existing and in good standing under the laws of its jurisdiction of incorporation. The Company is duly qualified to do business as a foreign corporation and is in good standing under the laws of any jurisdiction in which the character of the properties owned or leased by it therein or in which the transaction of its business makes such qualification necessary, except where the failure to be so qualified would not have, individually or in the aggregate, a Company Material Adverse Effect (as defined in Section 10.9). The Company has all requisite corporate power and authority to own, operate and lease its properties and to carry on its business as now conducted. The copies of the Company's certificate of incorporation and bylaws previously made available to Parent are true and correct and contain all amendments as of the date hereof.
SECTION 5.2 Authorization, Validity and Effect of Agreements. The Company has the requisite corporate power and authority to execute and deliver this Agreement, the Stock Option Agreements and all other agreements and documents contemplated hereby. The consummation by the Company of the transactions contemplated hereby and by the Stock Options Agreements has been duly authorized by all requisite corporate action, other than, with respect to the Merger, the approval and adoption of this Agreement by the Company's stockholders. This Agreement and the Stock Option Agreements constitute the valid and legally binding obligations of the Company, enforceable in accordance with their respective terms, subject to applicable bankruptcy, insolvency, moratorium or other similar laws relating to creditors' rights and general principles of equity.
SECTION 5.3 Capitalization. The authorized capital stock of the Company consists of 150,000,000 shares of Company Common Stock and 25,000,000 shares of preferred stock, par value $1.00 per share, of the Company ("Company Preferred Stock") and, as of April 30, 1998, there were 54,802,834 shares of Company Common Stock issued and outstanding and 4,360,254 shares of Company Common Stock reserved for issuance upon exercise of outstanding Company Options, and no shares of Company Preferred Stock issued and
outstanding. All such issued and outstanding shares of Company Common Stock are duly authorized, validly issued, fully paid, nonassessable and free of preemptive rights. One right to purchase Series A Junior Participating Preferred Stock (each, a "Company Right") issued pursuant to the Rights Agreement, dated as of August 17, 1994 (the "Company Rights Agreement"), as amended, between the Company and Chemical Trust Company of California is associated with and attached to each outstanding share of Company Common Stock. As of the date of this Agreement, except as set forth in this Section 5.3 or in the Stock Option Agreements and except for any shares of Company Common Stock issued pursuant to Company Stock Option Plans described in the Company Reports filed prior to the date of this Agreement, there are no outstanding shares of capital stock and there are no options, warrants, calls, subscriptions, convertible securities, or other rights, agreements or commitments which obligate the Company or any of its Subsidiaries to issue, transfer or sell any shares of capital stock or other voting securities of the Company or any of its Subsidiaries. The Company has no outstanding bonds, debentures, notes or other obligations the holders of which have the right to vote (or which are convertible into or exercisable for securities having the right to vote) with the stockholders of the Company on any matter.
SECTION 5.4 Significant Subsidiaries. For purposes of this Agreement, "Significant Subsidiary" shall mean significant subsidiary as defined in Rule 1-02 of Regulation S-X of the Exchange Act. Each of the Company's Significant Subsidiaries is a corporation or partnership duly organized, validly existing and in good standing (where applicable) under the laws of its jurisdiction of incorporation or organization, has the corporate or partnership power and authority to own, operate and lease its properties and to carry on its business as it is now being conducted, and is duly qualified to do business and is in good standing (where applicable) in each jurisdiction in which the ownership, operation or lease of its property or the conduct of its business requires such qualification, except for jurisdictions in which such failure to be so qualified or to be in
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good standing would not have a Company Material Adverse Effect. All of the outstanding shares of capital stock of, or other ownership interests in, each of the Company's Significant Subsidiaries is duly authorized, validly issued, fully paid and nonassessable, and is owned, directly or indirectly, by the Company free and clear of all liens, pledges, security interests, claims or other encumbrances ("Liens"). Schedule 5.4 to the Company Disclosure Letter sets forth for each Significant Subsidiary of the Company, its name and jurisdiction of incorporation or organization.
SECTION 5.5 No Violation of Law. Neither the Company nor any of its Subsidiaries is in violation of any order of any court, governmental authority or arbitration board or tribunal, or any law, ordinance, governmental rule or regulation to which the Company or any of its Subsidiaries or any of their respective properties or assets is subject, except as would not have, individually or in the aggregate, a Company Material Adverse Effect. The Company and its Subsidiaries hold all permits, licenses, variances, exemptions, orders, franchises and approvals of all governmental authorities necessary for the lawful conduct of their respective businesses (the "Company Permits"), except where the failure so to hold would not have a Company Material Adverse Effect. The Company and its Subsidiaries are in compliance with the terms of the Company
Permits, except where the failure so to comply would not have a Company Material Adverse Effect. To the knowledge of the Company, no investigation by any governmental authority with respect to the Company or any of its Subsidiaries is pending or threatened, other than those the outcome of which would not have a Company Material Adverse Effect.
SECTION 5.6 No Conflict.
(a) Neither the execution and delivery by the Company of this Agreement or the Stock Option Agreements nor the consummation by the Company of the transactions contemplated hereby or thereby in accordance with the terms hereof or thereof will: (i) conflict with or result in a breach of any provisions of the certificate of incorporation or bylaws of the Company; (ii) violate, or conflict with, or result in a breach of any provision of, or constitute a default (or an event which, with notice or lapse of time or both, would constitute a default) under, or result in the termination or in a right of termination or cancellation of, or give rise to a right of purchase under, or accelerate the performance required by, or result in the creation of any Lien upon any of the properties of the Company or its Subsidiaries under, or result in being declared void, voidable, or without further binding effect, or otherwise result in a detriment to the Company or any of its Subsidiaries under, any of the terms, conditions or provisions of, any note, bond, mortgage, indenture, deed of trust, license, franchise, permit, lease, contract, agreement, joint venture or other instrument or obligation to which the Company or any of its Subsidiaries is a party, or by which the Company or any of its Subsidiaries or any of their properties is bound or affected; or (iii) contravene or conflict with or constitute a violation of any provision of any law, rule, regulation, judgment, order or decree binding upon or applicable to the Company or any of its Subsidiaries, except, in the case of matters described in clause (ii) or (iii), as would not have, individually or in the aggregate, a Company Material Adverse Effect.
(b) Neither the execution and delivery by the Company of this Agreement or the Stock Option Agreements nor the consummation by the Company of the transactions contemplated hereby or thereby in accordance with the terms hereof or thereof will require any consent, approval or authorization of, or filing or registration with, any governmental or regulatory authority, other than (i) the filings provided for in Article 1 and (ii) filings required under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the "HSR Act"), the Exchange Act, the Securities Act or applicable state securities and "Blue Sky" laws and applicable foreign competition or antitrust laws ((i) and (ii) collectively, the "Regulatory Filings"), and listing on the NYSE of the Company Common Stock to be issued upon exercise of the option granted to Parent pursuant to the applicable Stock Option Agreement, except for any consent, approval or authorization the failure of which to obtain and for any filing or registration the failure of which to make would not have a Company Material Adverse Effect.
SECTION 5.7 SEC Documents. The Company has made available to Parent each registration statement, report, proxy statement or information statement (other than preliminary materials) filed by the Company with the SEC since January 1, 1997, each in the form (including exhibits and any amendments thereto) filed
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with the SEC (collectively, the "Company Reports"). As of their respective dates, the Company Reports (i) were prepared in all material respects in accordance with the applicable requirements of the Securities Act, the Exchange Act, and the rules and regulations thereunder and (ii) did not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements made therein, in the light of the circumstances under which they were made, not misleading except for such statements, if any, as have been modified by subsequent filings with the SEC prior to the date hereof. Each of the consolidated balance sheets included in or incorporated by reference into the Company Reports (including the related notes and schedules) fairly presents in all material respects the consolidated financial position of the Company and its Subsidiaries as of its date and each of the consolidated statements of income, cash flows and changes in stockholders' equity of the Company included in or incorporated by reference into the Company Reports (including any related notes and schedules) fairly presents in all material respects the results of operations, cash flows or changes in stockholders' equity, as the case may be, of the Company and its Subsidiaries for the periods set forth therein (subject, in the case of unaudited statements, to (x) such exceptions as may be permitted by Form 10-Q of the SEC and (y) normal year-end audit adjustments), in each case in accordance with generally accepted accounting principles consistently applied during the periods involved, except as may be noted therein. Except as and to the extent set forth on the consolidated balance sheet of the Company and its Subsidiaries at December 31, 1997, including all notes thereto, as of such date, neither the Company nor any of its Subsidiaries had any liabilities or obligations of any nature (whether accrued, absolute, contingent or otherwise) that would be required to be reflected on, or reserved against in, a balance sheet of the Company or in the notes thereto prepared in accordance with generally accepted accounting principles consistently applied, other than liabilities or obligations which would not have, individually or in the aggregate, a Company Material Adverse Effect.
SECTION 5.8 Litigation. There are no actions, suits or proceedings pending against the Company or any of its Subsidiaries or, to the Company's knowledge, threatened against the Company or any of its Subsidiaries, at law or in equity, or before or by any federal, state or foreign commission, board, bureau, agency or instrumentality, that are likely to have, individually or in the aggregate, a Company Material Adverse Effect. There are no outstanding judgments, decrees, injunctions, awards or orders against the Company or any of its Subsidiaries that are likely to have, individually or in the aggregate, a Company Material Adverse Effect.
SECTION 5.9 Absence of Certain Changes. Since December 31, 1997, there has not been (i) any event or occurrence that has had or is likely to have a Material Adverse Effect with respect to the Company, (ii) any material change by the Company or any of its Subsidiaries, when taken as a whole, in any of its accounting methods, principles or practices or any of its tax methods, practices or elections, (iii) any declaration, setting aside or payment of any dividend or distribution in respect of any capital stock of the Company or any redemption, purchase or other acquisition of any of its securities, or (iv) any increase in or establishment of any bonus, insurance, severance, deferred compensation, pension, retirement, profit sharing, stock option, stock purchase or other
employee benefit plan, except in the ordinary course of business.
SECTION 5.10 Taxes.
(a) Each of the Company, its Subsidiaries and each affiliated, consolidated, combined, unitary or similar group of which any such corporation is or was a member has (i) duly filed (or there has been filed on its behalf) on a timely basis with appropriate governmental authorities all tax returns, statements, reports, declarations, estimates and forms ("Returns") required to be filed by or with respect to it, except to the extent that any failure to file would not have, individually or in the aggregate, a Company Material Adverse Effect, and (ii) duly paid or deposited in full on a timely basis or made adequate provisions in accordance with generally accepted accounting principles (or there has been paid or deposited or adequate provision has been made on its behalf) for the payment of all taxes required to be paid by it, except to the extent that any failure to pay or deposit or make adequate provision for the payment of such taxes would not have, individually or in the aggregate, a Company Material Adverse Effect. The Company's aggregate adjusted basis for federal income tax purposes in its shares of Unova, Inc. immediately before the distribution by the Company to its stockholders of such shares was equal to at least $500 million.
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(b) (i) Except as set forth in the Company Disclosure Letter, the federal income tax returns of the Company and each of its Subsidiaries have been examined by the Internal Revenue Service (the "IRS") (or the applicable statutes of limitation for the assessment of federal income taxes for such periods have expired) for all periods; (ii) except to the extent being contested in good faith, all material deficiencies asserted as a result of such examinations and any other examinations of the Company and its Subsidiaries by any taxing authority have been paid fully, settled or adequately provided for in the financial statements contained in the Company Reports; (iii) as of the date hereof, neither the Company nor any of its Subsidiaries has granted any requests, agreements, consents or waivers to extend the statutory period of limitations applicable to the assessment of any taxes with respect to any Returns of the Company or any of its Subsidiaries; (iv) neither the Company nor any of its Subsidiaries is a party to, is bound by or has any obligation under any tax sharing, allocation or indemnity agreement or any similar agreement or arrangement that would have a Company Material Effect; and (v) neither the Company nor any of its Subsidiaries is a party to an agreement that provides for the payment of any amount that would constitute a "parachute payment" within the meaning of section 280G of the Code.
For purposes of this Agreement, "tax" or "taxes" means all federal, state, county, local, foreign or other net income, gross income, gross receipts, sales, use, ad valorem, transfer, accumulated earnings, personal holding company, excess profits, franchise, profits, license, withholding, payroll, employment, excise, severance, stamp, occupation, premium, property, disability, capital stock, or windfall profits taxes, customs duties or other taxes, fees, assessments or governmental charges of any kind whatsoever, together with any interest and any penalties, additions to tax or additional amounts imposed by
any taxing authority (domestic or foreign).
SECTION 5.11 Employee Benefit Plans.
(a) Schedule 5.11 of the Company Disclosure Letter contains a list of all U.S. Company Benefit Plans. The term "Company Benefit Plans" means all material employee benefit plans and other material benefit arrangements, including all "employee benefit plans" as defined in the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), covering employees of the Company and its Subsidiaries. True and complete copies of the U.S. Company Benefit Plans and, if applicable, the most recent Form 5500 and annual reports for each such plan have been made available to Parent.
(b) Except as would not have, individually or in the aggregate, a Company Material Adverse Effect: all applicable reporting and disclosure requirements have been met with respect to the Company Benefit Plans; there has been no "reportable event," as that term is defined in section 4043 of ERISA, with respect to the Company Benefit Plans subject to Title IV of ERISA; to the extent applicable, the Company Benefit Plans comply, in all material respects, with the requirements of ERISA and the Code, and any Company Benefit Plan intended to be qualified under section 401(a) of the Code has been determined by the IRS to be so qualified; the Company Benefit Plans have been maintained and operated, in all material respects, in accordance with their terms, and there are no breaches of fiduciary duty in connection with the Company Benefit Plans; to the Company's knowledge, there are no pending or threatened claims against or otherwise involving any Company Benefit Plan and no suit, action or other litigation (excluding claims for benefits incurred in the ordinary course of Company Benefit Plan activities) has been brought against or with respect to any such Company Benefit Plan; all material contributions required to be made as of the date hereof to the Company Benefit Plans have been made or provided for; the Company does not maintain or contribute to any material plan or arrangement which provides or has any liability to provide life insurance, medical or other employee welfare benefits to any employee or former employee upon his retirement or termination of employment and the Company has not represented, promised or contracted (whether in oral or written form) to any employee or former employee that such benefits would be provided; with respect to the Company Benefit Plans or any "employee pension benefit plans," as defined in section 3(2) of ERISA, that are subject to Title IV of ERISA and have been maintained or contributed to within six years prior to the Effective Time by the Company, its Subsidiaries or any trade or business (whether or not incorporated) which is under common control, or which is treated as a single employer, with the Company or any of its Subsidiaries under
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sections 414(b), (c), (m), or (o) of the Code, (i) neither the Company nor any of its Subsidiaries has incurred any direct or indirect liability under title IV of ERISA in connection with any termination thereof or withdrawal therefrom; (ii) there does not exist any accumulated funding deficiency within the meaning of section 412 of the Code or section 302 of ERISA, whether or not waived; and (iii) the actuarial value of the assets equal or
exceed the actuarial present value of the benefit liabilities, within the meaning of section 4041 of ERISA, based upon reasonable actuarial assumptions and asset valuation principles; and no prohibited transaction has occurred with respect to any Company Benefit Plan that would result in the imposition of any excise tax or other liability under the Code or ERISA.
(c) Neither the Company nor any of its Subsidiaries nor any trade or business (whether or not incorporated) which is under common control, or which is treated as a single employer, with the Company or any of its Subsidiaries under sections 414(b), (c), (m), or (o) of the Code, contributes to, or has an obligation to contribute to, and has not within six years prior to the Effective Time contributed to, or had an obligation to contribute to, a multiemployer plan within the meaning of section 3(37) of ERISA. The execution of, and performance of the transactions contemplated in, this Agreement will not (either alone or upon the occurrence of any additional or subsequent events) constitute an event under any benefit plan, policy, arrangement or agreement or any trust or loan that will or may result in any payment (whether of severance pay or otherwise), acceleration, forgiveness of indebtedness, vesting, distribution, increase in benefits or obligations to fund benefits with respect to any employee of the Company or any Subsidiary thereof.
SECTION 5.12 Labor Matters. Except as would not have a Company Material Adverse Effect, (i) neither the Company nor any of its Subsidiaries is a party to, or bound by, any collective bargaining agreement, contract or other agreement or understanding with a U.S. labor union or U.S. labor organization and (ii) to the Company's knowledge, there are no organizational efforts with respect to the formation of a collective bargaining unit presently being made or threatened involving employees of the Company or any of its Subsidiaries.
SECTION 5.13 Environmental Matters. Except as would not have, individually or in the aggregate, a Company Material Adverse Effect:
(a) there are not any past or present conditions or circumstances that interfere with the conduct of the business of the Company and each of its Subsidiaries in the manner now conducted or which interfere with compliance with any order of any court, governmental authority or arbitration board or tribunal, or any law, ordinance, governmental rule or regulation related to human health or the environment ("Environmental Law");
(b) there are not any past or present conditions or circumstances at, or arising out of, any current or former businesses, assets or properties of the Company or any Subsidiary of the Company, including but not limited to on-site or off-site disposal or release of any chemical substance, product or waste, which could reasonably be expected to give rise to: (i) liabilities or obligations for any cleanup, remediation, disposal or corrective action under any Environmental Law or (ii) claims arising for personal injury, property damage, or damage to natural resources; and
(c) neither the Company nor any of its Subsidiaries has (i) received any notice of noncompliance with, violation of, or liability or potential liability under any Environmental Law or (ii) entered into any consent decree or order or is subject to any order of any court or governmental authority or tribunal under any Environmental Law or relating to the
cleanup of any hazardous materials contamination.
SECTION 5.14 Intellectual Property. Except as previously disclosed to Parent in writing, the Company and its Subsidiaries own or possess adequate licenses or other valid rights to use all patents, patent rights, trademarks, trademark rights and proprietary information used or held for use in connection with their respective businesses as currently being conducted, except where the failure to own or possess such licenses and other rights would not have, individually or in the aggregate, a Company Material Adverse Effect, and there are no assertions or claims challenging the validity of any of the foregoing which are likely to have,
15
individually or in the aggregate, a Company Material Adverse Effect. The conduct of the Company's and its Subsidiaries' respective businesses as currently conducted does not conflict with any patents, patent rights, licenses, trademarks, trademark rights, trade names, trade name rights or copyrights of others in any way likely to have, individually or in the aggregate, a Company Material Adverse Effect. There is no material infringement of any proprietary right owned by or licensed by or to the Company or any of its Subsidiaries which is likely to have, individually or in the aggregate, a Company Material Adverse Effect. The computer software operated, sold or licensed by the Company that is material to its business or its internal operations is capable of providing or is being or will be adapted, or is capable of being replaced, to provide uninterrupted millennium functionality to record, store, process and present calendar dates falling on or after January 1, 2000 in substantially the same manner and with substantially the same functionality as such software records, stores, processes and presents such calendar dates falling on or before December 31, 1999, except as would not have a Company Material Adverse Effect. The costs of the adaptations and replacements referred to in the prior sentence will not have a Company Material Adverse Effect.
SECTION 5.15 Insurance. The Company and its Subsidiaries maintain insurance coverage reasonably adequate for the operation of their respective businesses (taking into account the cost and availability of such insurance).
SECTION 5.16 No Brokers. The Company has not entered into any contract, arrangement or understanding with any person or firm which may result in the obligation of the Company or Parent to pay any finder's fees, brokerage or agent's commissions or other like payments in connection with the negotiations leading to this Agreement or the consummation of the transactions contemplated hereby, except that the Company has retained as its financial advisor, the arrangements with which have been disclosed in writing to Parent prior to the date hereof.
SECTION 5.17 Opinion of Financial Advisor. The Board of Directors of the Company has received the opinion of to the effect that, as of the date of this Agreement, the Exchange Ratio is fair, from a financial point of view, to the holders of the Company Common Stock; it being understood and acknowledged by Parent that such opinion has been rendered for the benefit of the Board of Directors of the Company, and is not intended to, and may not, be relied upon by Parent, its affiliates or their respective Subsidiaries.
SECTION 5.18 Parent Stock Ownership. Neither the Company nor any of its Subsidiaries owns any shares of capital stock of Parent or any other securities convertible into or otherwise exercisable to acquire capital stock of Parent.
SECTION 5.19 Reorganization. Neither the Company nor any of its Subsidiaries has taken or failed to take any action, as a result of which the Merger would not qualify as a reorganization within the meaning of section 368(a) of the Code.
SECTION 5.20 Pooling. Neither the Company nor any of its Subsidiaries has taken or failed to take any action, as a result of which the Merger would not qualify as a "pooling of interests" for financial accounting purposes.
SECTION 5.21 Vote Required. The affirmative vote of the holders of at least a majority of the outstanding shares of Company Common Stock is the only vote of the holders of any class or series of Company capital stock necessary to approve this Agreement and the transactions contemplated hereby.
SECTION 5.22 Amendment to the Company Rights Agreement. The Company has amended or taken other action under the Company Rights Agreement so that none of the execution and delivery of this Agreement or the Stock Option Agreements, the conversion of shares of Company Common Stock into the right to receive Parent Common Stock in accordance with Article 4 of this Agreement, the issuance of shares of Company Common Stock upon exercise of the option granted to Parent pursuant to the applicable Stock Option Agreement, and the consummation of the Merger or any other transaction contemplated hereby or by the Stock Option Agreement, will cause (i) the Company Rights to become exercisable under the Company Rights Agreement, (ii) Parent or any of its Subsidiaries to be deemed an "Acquiring Person" (as defined in the Company Rights Agreement), (iii) any such event to be an event described in Section 11(a)(ii) or 13 of the Company Rights Agreement or (iv) the "Shares Acquisition Date" or the "Distribution Date" (each as
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defined in the Company Rights Agreement) to occur upon any such event, and so that the Company Rights will expire immediately prior to the Effective Time. The Company has delivered to Parent a true and complete copy of the Company Rights Agreement, as amended to date.
SECTION 5.23 Certain Approvals. The Company Board of Directors has taken any and all necessary and appropriate action to render inapplicable to the Merger and the transactions contemplated by this Agreement and the Stock Option Agreements the provisions of Section 203 of the DGCL. No other state takeover or business combination statute applies or purports to apply to the Merger or the transactions contemplated by this Agreement or the Stock Option Agreements.
SECTION 5.24 Certain Contracts. Neither the Company nor any of its Subsidiaries is a party to or bound by any non-competition agreement or any other agreement or obligation which purports to limit in any material respect the manner in which, or the localities in which, all or any material portion of the current business of the Company and its Subsidiaries, taken as a whole, or the Parent and its Subsidiaries, taken as a whole, is conducted.
ARTICLE 6
REPRESENTATIONS AND WARRANTIES OF PARENT
AND MERGER SUB
Except as set forth in the disclosure letter delivered to the Company
concurrently with the execution hereof (the "Parent Disclosure Letter") or as
disclosed with reasonable specificity in the Parent Reports (as defined in
Section 6.7), Parent and Merger Sub, jointly and severally, represent and
warrant to the Company that:
SECTION 6.1 Existence; Good Standing; Corporate Authority. Parent and Merger Sub are corporations duly incorporated, validly existing and in good standing under the laws of their respective jurisdictions of incorporation. Parent is duly qualified to do business as a foreign corporation and is in good standing under the laws of any jurisdiction in which the character of the properties owned or leased by it therein or in which the transaction of its business makes such qualification necessary, except where the failure to be so qualified would not have, individually or in the aggregate, a Parent Material Adverse Effect (as defined in Section 10.9). Parent has all requisite corporate power and authority to own, operate and lease its properties and to carry on its business as now conducted. The copies of Parent's certificate of incorporation and bylaws previously made available to the Company are true and correct and contain all amendments as of the date hereof.
SECTION 6.2 Authorization, Validity and Effect of Agreements. Each of Parent and Merger Sub has the requisite corporate power and authority to execute and deliver this Agreement, the Stock Option Agreements and all other agreements and documents contemplated hereby to which it is a party. Each of the consummation by Parent and Merger Sub of the transactions contemplated hereby, including the issuance and delivery by Parent of shares of Parent Common Stock pursuant to the Merger, and the consummation by Parent of the transactions contemplated by the Stock Option Agreements, has been duly authorized by all requisite corporate action, other than approval of the issuance of the shares of Parent Common Stock pursuant to the Merger contemplated hereby by Parent's stockholders as required by the rules of the NYSE. This Agreement and the Stock Option Agreements constitute the valid and legally binding obligations of each of Parent and Merger Sub to the extent it is a party, enforceable in accordance with their respective terms, subject to applicable bankruptcy, insolvency, moratorium or other similar laws relating to creditors' rights and general principles of equity.
SECTION 6.3 Capitalization. The authorized capital stock of Parent consists of 400,000,000 shares of Parent Common Stock and 15,000,000 shares of preferred stock, par value $1.00 per share, of Parent ("Parent Preferred Stock"), and, as of May 1, 1998, there were 169,709,279 shares of Parent Common Stock issued and outstanding and 6,286,974 shares of Parent Common Stock reserved for issuance upon exercise of outstanding Parent options and no shares of Parent Preferred Stock issued and outstanding. All such issued and outstanding shares of Parent Common Stock are duly authorized, validly issued, fully paid, nonassessable and free of preemptive rights. The shares of Parent Common Stock to be issued in connection with the
Merger, when issued in accordance with this Agreement, will be validly issued, fully paid and nonassessable. As of the date of this Agreement, except as set forth in this Section 6.3 or in the Stock Option Agreements and except for any shares of Parent Common Stock issued pursuant to plans described in the Parent Reports filed prior to the date of this Agreement, there are no outstanding shares of capital stock and there are no options, warrants, calls, subscriptions, convertible securities or other rights, agreements or commitments which obligate Parent or any of its Subsidiaries to issue, transfer or sell any shares of capital stock or other voting securities of Parent or any of its Subsidiaries. Parent has no outstanding bonds, debentures, notes or other obligations the holders of which have the right to vote (or which are convertible into or exercisable for securities having the right to vote) with the stockholders of Parent on any matter.
SECTION 6.4 Significant Subsidiaries.
(a) Each of Parent's Significant Subsidiaries is a corporation or partnership duly organized, validly existing and in good standing (where applicable) under the laws of its jurisdiction of incorporation or organization, has the corporate or partnership power and authority to own, operate and lease its properties and to carry on its business as it is now being conducted, and is duly qualified to do business and is in good standing (where applicable) in each jurisdiction in which the ownership, operation or lease of its property or the conduct of its business requires such qualification, except for jurisdictions in which such failure to be so qualified or to be in good standing would not have a Parent Material Adverse Effect. All of the outstanding shares of capital stock of, or other ownership interests in, each of the Parent's Significant Subsidiaries is duly authorized, validly issued, fully paid and nonassessable, and is owned, directly or indirectly, by the Parent free and clear of all Liens. Schedule 6.4 to the Parent Disclosure Letter sets forth for each Significant Subsidiary of Parent its name and jurisdiction of incorporation or organization.
(b) All of the outstanding shares of capital stock of Merger Sub are owned directly by Parent. Merger Sub was formed solely for the purpose of engaging in the transactions contemplated hereby and has not engaged in any activities other than in connection with the transactions contemplated by this Agreement.
SECTION 6.5 No Violation of Law. Neither Parent nor any of its Subsidiaries is in violation of any order of any court, governmental authority or arbitration board or tribunal, or any law, ordinance, governmental rule or regulation to which Parent or any of its Subsidiaries or any of their respective properties or assets is subject, except as would not have, individually or in the aggregate, a Parent Material Adverse Effect. Parent and its Subsidiaries hold all permits, licenses, variances, exemptions, orders, franchises and approvals of all governmental authorities necessary for the lawful conduct of their respective businesses (the "Parent Permits"), except where the failure so to hold would not have a Parent Material Adverse Effect. Parent and its Subsidiaries are in compliance with the terms of the Parent Permits, except where the failure so to comply would not have a Parent Material Adverse Effect. To the knowledge of Parent, no investigation by any governmental authority with respect to Parent or any of its Subsidiaries is pending or threatened, other than those the outcome of which would not have a Parent Material Adverse Effect.
SECTION 6.6 No Conflict.
(a) Neither the execution and delivery by Parent and Merger Sub of this Agreement, the execution and delivery by Parent of the Stock Option Agreements nor the consummation by Parent and Merger Sub of the transactions contemplated hereby or thereby in accordance with the terms hereof or thereof will: (i) conflict with or result in a breach of any provisions of the certificate of incorporation or bylaws of Parent or Merger Sub; (ii) violate, or conflict with, or result in a breach of any provision of, or constitute a default (or an event which, with notice or lapse of time or both, would constitute a default) under, or result in the termination or in a right of termination or cancellation of, or give rise to a right of purchase under or accelerate the performance required by, or result in the creation of any Lien upon any of the properties of Parent or its Subsidiaries under, or result in being declared void, voidable, or without further binding effect, or otherwise result in a detriment to Parent or any of its Subsidiaries under any of the terms, conditions or provisions of, any note, bond, mortgage, indenture, deed of trust, license, franchise, permit, lease, contract, agreement, joint venture or other instrument or obligation to which Parent or any of its Subsidiaries is a party, or by which Parent or any of its Subsidiaries or any of their properties is bound or affected; or (iii) contravene or conflict with or constitute a violation of any provision of any law,
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rule, regulation, judgment, order or decree binding upon or applicable to Parent or any of its Subsidiaries, except, in the case of matters described in clause (ii) or (iii), as would not have, individually or in the aggregate, a Parent Material Adverse Effect.
(b) Neither the execution and delivery by Parent or Merger Sub of this Agreement, the execution and delivery by Parent of the Stock Option Agreements nor the consummation by Parent or Merger Sub of the transactions contemplated hereby or thereby in accordance with the terms hereof or thereof will require any consent, approval or authorization of, or filing or registration with, any governmental or regulatory authority, other than Regulatory Filings, and listing of the Parent Common Stock to be issued in the Merger and upon exercise of the option granted to the Company pursuant to the applicable Stock Option Agreement under the rules of the NYSE, except for any consent, approval or authorization the failure of which to obtain and for any filing or registration the failure of which to make would not have a Parent Material Adverse Effect.
SECTION 6.7 SEC Documents. Parent has made available to the Company each registration statement, report, proxy statement or information statement (other than preliminary materials) filed by Parent with the SEC since September 30, 1996, each in the form (including exhibits and any amendments thereto) filed with the SEC (collectively, the "Parent Reports"). As of their respective dates, the Parent Reports (i) were prepared in all material respects in accordance with the applicable requirements of the Securities Act, the Exchange Act, and the rules and regulations thereunder and (ii) did not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements made therein, in the light of the circumstances under which they were made, not misleading except for such
statements, if any, as have been modified by subsequent filings with the SEC prior to the date hereof. Each of the consolidated balance sheets included in or incorporated by reference into the Parent Reports (including the related notes and schedules) fairly presents in all material respects the consolidated financial position of Parent and its Subsidiaries as of its date and each of the consolidated statements of income, cash flows and changes in stockholders' equity included in or incorporated by reference into the Parent Reports (including any related notes and schedules) fairly presents in all material respects the results of operations, cash flows or changes in stockholders' equity, as the case may be, of Parent and its Subsidiaries for the periods set forth therein (subject, in the case of unaudited statements, to (x) such exceptions as may be permitted by Form 10-Q of the SEC and (y) normal year-end audit adjustments), in each case in accordance with generally accepted accounting principles consistently applied during the periods involved, except as may be noted therein. Except as and to the extent set forth on the consolidated balance sheet of Parent and its Subsidiaries at September 30, 1997, including all notes thereto, as of such date, neither Parent nor any of its Subsidiaries had any liabilities or obligations of any nature (whether accrued, absolute, contingent or otherwise) that would be required to be reflected on, or reserved against in, a balance sheet of Parent or in the notes thereto prepared in accordance with generally accepted accounting principles consistently applied, other than liabilities or obligations which would not have, individually or in the aggregate, a Parent Material Adverse Effect.
SECTION 6.8 Litigation. There are no actions, suits or proceedings pending against Parent or any of its Subsidiaries or, to Parent's knowledge, threatened against Parent or any of its Subsidiaries, at law or in equity, or before or by any federal, state or foreign commission, board, bureau, agency or instrumentality, that are likely to have, individually or in the aggregate, a Parent Material Adverse Effect. There are no outstanding judgments, decrees, injunctions, awards or orders against Parent or any of its Subsidiaries that are likely to have, individually or in the aggregate, a Parent Material Adverse Effect.
SECTION 6.9 Absence of Certain Changes. Since December 31, 1997, there has
not been (i) any event or occurrence that has had or is likely to have a
Material Adverse Effect with respect to Parent, (ii) any material change by
Parent or any of its Subsidiaries, when taken as a whole, in any of its
accounting methods, principles or practices or any of its tax methods, practices
or elections, (iii) any declaration, setting aside or payment of any dividend or
distribution in respect of any capital stock of Parent or any redemption,
purchase or other acquisition of any of its securities, except dividends on the
Parent Common Stock at a rate of not more than $0.115 per share per quarter, or
(iv) any increase in or establishment of any bonus, insurance, severance,
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deferred compensation, pension, retirement, profit sharing, stock option, stock purchase or other employee benefit plan, except in the ordinary course of business.
SECTION 6.10 Taxes.
(a) Each of Parent, its Subsidiaries and each affiliated,
consolidated, combined, unitary or similar group of which any such corporation is or was a member has (i) duly filed (or there has been filed on its behalf) on a timely basis with appropriate governmental authorities all Returns required to be filed by or with respect to it, except to the extent that any failure to file would not have, individually or in the aggregate, a Parent Material Adverse Effect, and (ii) duly paid or deposited in full on a timely basis or made adequate provisions in accordance with generally accepted accounting principles (or there has been paid or deposited or adequate provision has been made on its behalf) for the payment of all taxes required to be paid by it, except to the extent that any failure to pay or deposit or make adequate provision for the payment of such taxes would not have, individually or in the aggregate, a Parent Material Adverse Effect.
(b) (i) The federal income tax returns of Parent and each of its Subsidiaries have been examined by the IRS (or the applicable statutes of limitation for the assessment of federal income taxes for such periods have expired) for all periods through and including September 30, 1993; (ii) except to the extent being contested in good faith, all material deficiencies asserted as a result of such examinations and any other examinations of Parent and its Subsidiaries by any taxing authority have been paid fully, settled or adequately provided for in the financial statements contained in the Parent Reports; (iii) as of the date hereof, neither Parent nor any of its Subsidiaries has granted any requests, agreements, consents or waivers to extend the statutory period of limitations applicable to the assessment of any taxes with respect to any Returns of Parent or any of its Subsidiaries, except that Parent and its Subsidiaries have agreed to extend the applicable Federal statutory period of limitations to December 31, 1998 for the fiscal year ended October 1, 1994; (iv) neither Parent nor any of its Subsidiaries is a party to, is bound by or has any obligation under any tax sharing, allocation or indemnity agreement or any similar agreement or arrangement that would have a Parent Material Adverse Effect; and (v) neither Parent nor any of its Subsidiaries is a party to an agreement that provides for the payment of any amount that would constitute a "parachute payment" within the meaning of Section 280G of the Code.
SECTION 6.11 Employee Benefit Plans.
(a) Schedule 6.11 of the Parent Disclosure Letter contains a list of all U.S. Parent Benefit Plans. The term "Parent Benefit Plans" means all material employee benefit plans and other material benefit arrangements, including all "employee benefit plans" as defined in ERISA, covering employees of Parent and its Subsidiaries. True and complete copies of the U.S. Parent Benefit Plans and, if applicable, the most recent Form 5500 and annual reports for each such plan have been made available to the Company.
(b) Except as would not have, individually or in the aggregate, a Parent Material Adverse Effect: all applicable reporting and disclosure requirements have been met with respect to the Parent Benefit Plans; there has been no "reportable event," as that term is defined in section 4043 of ERISA, with respect to the Parent Benefit Plans subject to Title IV of ERISA; to the extent applicable, the Parent Benefit Plans comply, in all material respects, with the requirements of ERISA and the Code, and any Parent Benefit Plan intended to be qualified under section 401(a) of the
Code has been determined by the IRS to be so qualified; the Parent Benefit Plans have been maintained and operated, in all material respects, in accordance with their terms, and there are no breaches of fiduciary duty in connection with the Parent Benefit Plans; to Parent's knowledge, there are no pending or threatened claims against or otherwise involving any Parent Benefit Plan and no suit, action or other litigation (excluding claims for benefits incurred in the ordinary course of Parent Benefit Plan activities) has been brought against or with respect to any such Parent Benefit Plan; all material contributions required to be made as of the date hereof to the Parent Benefit Plans have been made or provided for; Parent does not maintain or contribute to any material plan or arrangement which provides or has any liability to provide life insurance, medical or other employee welfare benefits to any employee or former employee upon his retirement or termination of employment and Parent has not represented, promised or contracted (whether in oral or written form)
20
to any employee or former employee that such benefits would be provided; with respect to the Parent Benefit Plans or any "employee pension benefit plans," as defined in section 3(2) of ERISA, that are subject to Title IV of ERISA and have been maintained or contributed to within six years prior to the Effective Time by Parent, its Subsidiaries or any trade or business (whether or not incorporated) which is under common control, or which is treated as a single employer, with Parent or any of its Subsidiaries under sections 414(b), (c), (m), or (o) of the Code, (i) neither Parent nor any of its Subsidiaries has incurred any direct or indirect liability under title IV of ERISA in connection with any termination thereof or withdrawal therefrom; (ii) there does not exist any accumulated funding deficiency within the meaning of section 412 of the Code or section 302 of ERISA, whether or not waived; and (iii) the actuarial value of the assets equal or exceed the actuarial present value of the benefit liabilities, within the meaning of section 4041 of ERISA, based upon reasonable actuarial assumptions and asset valuation principles; and no prohibited transaction has occurred with respect to any Parent Benefit Plan that would result in the imposition of any excise tax or other liability under the Code or ERISA.
(c) Neither Parent nor any of its Subsidiaries nor any trade or business (whether or not incorporated) which is under common control, or which is treated as a single employer, with Parent or any of its Subsidiaries under sections 414(b), (c), (m), or (o) of the Code, contributes to, or has an obligation to contribute to, and has not within six years prior to the Effective Time contributed to, or had an obligation to contribute to, a multiemployer plan within the meaning of section 3(37) of ERISA. The execution of, and performance of the transactions contemplated in, this Agreement will not (either alone or upon the occurrence of any additional or subsequent events) constitute an event under any benefit plan, policy, arrangement or agreement or any trust or loan that will or may result in any payment (whether of severance pay or otherwise), acceleration, forgiveness of indebtedness, vesting, distribution, increase in benefits or obligations to fund benefits with respect to any employee of Parent or any Subsidiary thereof.
SECTION 6.12 Labor Matters. Neither Parent nor any of its Subsidiaries is subject to a dispute, strike or work stoppage with respect to any collective bargaining agreement, contract or other agreement or understanding with a labor union or labor organization to which it is a party or by which it is bound which would have a Parent Material Adverse Effect. To Parent's knowledge, there are no organizational efforts with respect to the formation of a collective bargaining unit presently being made or threatened involving employees of Parent or any of its Subsidiaries, except for those the formation of which would not have a Parent Material Adverse Effect.
SECTION 6.13 Environmental Matters. Except as would not have, individually or in the aggregate, a Parent Material Adverse Effect:
(a) there are not any past or present conditions or circumstances that interfere with the conduct of the business of Parent and each of its Subsidiaries in the manner now conducted or which interfere with compliance with any order of any court, governmental authority or arbitration board or tribunal, or any Environmental Law;
(b) there are not any past or present conditions or circumstances at, or arising out of, any current or former businesses, assets or properties of Parent or any Subsidiary of Parent, including but not limited to on-site or off-site disposal or release of any chemical substance, product or waste, which could reasonably be expected to give rise to: (i) liabilities or obligations for any cleanup, remediation, disposal or corrective action under any Environmental Law or (ii) claims arising for personal injury, property damage, or damage to natural resources; and
(c) neither Parent nor any of its Subsidiaries has (i) received any notice of noncompliance with, violation of, or liability or potential liability under any Environmental Law or (ii) entered into any consent decree or order or is subject to any order of any court or governmental authority or tribunal under any Environmental Law or relating to the cleanup of any hazardous materials contamination.
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SECTION 6.14 Intellectual Property. Except as previously disclosed to the Company in writing, Parent and its Subsidiaries own or possess adequate licenses or other valid rights to use all patents, patent rights, trademarks, trademark rights and proprietary information used or held for use in connection with their respective businesses as currently being conducted, except where the failure to own or possess such licenses and other rights would not have, individually or in the aggregate, a Parent Material Adverse Effect, and there are no assertions or claims challenging the validity of any of the foregoing which are likely to have, individually or in the aggregate, a Parent Material Adverse Effect. The conduct of Parent's and its Subsidiaries' respective businesses as currently conducted does not conflict with any patents, patent rights, licenses, trademarks, trademark rights, trade names, trade name rights or copyrights of others in any way likely to have, individually or in the aggregate, a Parent Material Adverse Effect. There is no material infringement of any proprietary right owned by or licensed by or to Parent or any of its Subsidiaries which is likely to have, individually or in the aggregate, a Parent Material Adverse Effect. The computer software operated, sold or licensed by Parent that is
material to its business or its internal operations is capable of providing or is being or will be adapted, or is capable of being replaced, to provide uninterrupted millennium functionality to record, store, process and present calendar dates falling on or after January 1, 2000 in substantially the same manner and with substantially the same functionality as such software records, stores, processes and presents such calendar dates falling on or before December 31, 1999, except as would not have a Parent Material Adverse Effect. The costs of the adaptations and replacements referred to in the prior sentence will not have a Parent Material Adverse Effect.
SECTION 6.15 Insurance. Parent and its Subsidiaries maintain insurance coverage reasonably adequate for the operation of their respective businesses (taking into account the cost and availability of such insurance).
SECTION 6.16 No Brokers. Parent has not entered into any contract, arrangement or understanding with any person or firm which may result in the obligation of the Company or Parent to pay any finder's fees, brokerage or agent's commissions or other like payments in connection with the negotiations leading to this Agreement or the consummation of the transactions contemplated hereby, except that Parent has retained Merrill Lynch & Co. as its financial advisor, the arrangements with which have been disclosed in writing to the Company prior to the date hereof.
SECTION 6.17 Opinion of Financial Advisor. The Board of Directors of Parent has received the opinion of Merrill Lynch & Co. to the effect that, as of the date thereof, the Exchange Ratio is fair to Parent from a financial point of view.
SECTION 6.18 Company Stock Ownership. Neither Parent nor any of its Subsidiaries owns any shares of capital stock of the Company or any other securities convertible into or otherwise exercisable to acquire capital stock of the Company.
SECTION 6.19 Reorganization. Neither Parent nor any of its Subsidiaries has taken or failed to take any action, as a result of which the Merger would not qualify as a reorganization within the meaning of section 368(a) of the Code.
SECTION 6.20 Pooling. Neither Parent nor any of its Subsidiaries has taken or failed to take any action, as a result of which the Merger would not qualify as a "pooling of interests" for financial accounting purposes.
SECTION 6.21 Vote Required. The vote of holders of Parent Common Stock required by the rules of the NYSE is the only vote of the holders of any class or series of Parent capital stock necessary to approve the issuance of Parent Common Stock pursuant to this Agreement and the transactions contemplated hereby.
SECTION 6.22 Certain Approvals. The Parent Board of Directors has taken any and all necessary and appropriate action to render inapplicable to the Merger and the transactions contemplated by this Agreement and the Stock Option Agreements the provisions of Section 203 of the DGCL. No other state takeover or
business combination statute applies or purports to apply to the Merger or the transactions contemplated by this Agreement or the Stock Option Agreements.
SECTION 6.23 Certain Contracts. Neither the Parent nor any of its Subsidiaries is a party to or bound by any non-competition agreement or any other agreement or obligation which purports to limit in any material respect the manner in which, or the localities in which, all or any material portion of the current business of the Parent and its Subsidiaries, taken as a whole, or the Company and its Subsidiaries, taken as a whole, is conducted.
ARTICLE 7
COVENANTS
SECTION 7.1 Conduct of Businesses. Prior to the Effective Time, except as set forth in the Company Disclosure Letter or as expressly contemplated by any other provision of this Agreement or the Stock Option Agreements, unless the Parent or the Company, respectively, has consented in writing thereto, each of the Company and Parent:
(a) shall, and shall cause each of its Subsidiaries to, conduct its operations according to their usual, regular and ordinary course in substantially the same manner as heretofore conducted;
(b) shall use its commercially reasonable best efforts, and shall cause each of its Subsidiaries to use its commercially reasonable best efforts, to preserve intact their business organizations and goodwill, keep available the services of their respective officers and employees and maintain satisfactory relationships with those persons having business relationships with them;
(c) shall not amend its certificate of incorporation or bylaws;
(d) shall promptly notify the other of any material change in its condition (financial or otherwise) or business or any material litigation or material governmental complaints, investigations or hearings (or communications in writing indicating that such litigation, complaints, investigations or hearings may be contemplated), or the breach in any material respect of any representation or warranty contained herein;
(e) shall promptly deliver to the other true and correct copies of any report, statement or schedule filed with the SEC subsequent to the date of this Agreement;
(f) shall not (i) except pursuant to the exercise of options, warrants, conversion rights and other contractual rights existing on the date hereof, or referred to in clause (ii) below and disclosed pursuant to this Agreement or in connection with transactions permitted by Section 7.1(i), issue any shares of its capital stock, effect any stock split or otherwise change its capitalization as it existed on the date hereof, (ii) grant, confer or award any option, warrant, conversion right or other right not existing on the date hereof to acquire any shares of its capital stock except (x) the automatic awards to non-employee directors pursuant to the Western Atlas Inc. Director Stock Option Plan or the Baker Hughes Incorporated Long-Term Incentive Plan, (y) the grant of options to new
employees consistent with past practice or pursuant to contractual commitments existing on the date of this Agreement, and (z) the grant of options by the Company or Parent prior to the Effective Time in amounts and at times consistent with past practice, at exercise prices not less than the fair market value of the underlying common stock on the date of grant and, in each case, in an amount not to exceed 1.2 million shares of Company Common Stock, in the case of the Company, and 120% of the Total Option Dollars granted by the Parent, in the case of Parent, in the previous fiscal year (provided that for purposes of the foregoing the term "Total Option Dollars" shall mean the aggregate number of options granted multiplied by the exercise price thereof) and notwithstanding the provisions of Section 7.14 or any other provision of this Agreement to the contrary, in the event the Company grants options to any of its employees prior to the Effective Time, such employees will not be entitled to participate in option grants by Parent subsequent to the Effective Time for a period at least equal to one year subsequent to the grant of such options to Company employees (e.g., if the Company follows its past practice of granting options in July and Parent
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follows its past practice of granting options in October, such period would
be 15 months); (iii) increase any compensation or benefits, except in the
ordinary course of business consistent with past practice, or enter into or
amend any employment agreement with any of its present or future officers
or directors, except with new employees consistent with past practice, or
(iv) adopt any new employee benefit plan (including any stock option, stock
benefit or stock purchase plan) or amend (except as required by law) any
existing employee benefit plan in any material respect, except for changes
which are less favorable to participants in such plans;
(g) shall not (i) declare, set aside or pay any dividend or make any other distribution or payment with respect to any shares of its capital stock or (ii) redeem, purchase or otherwise acquire any shares of its capital stock or capital stock of any of its Subsidiaries, or make any commitment for any such action, except in the case of Parent for the declaration and payment of regular, quarterly dividends, consistent with past practice, not to exceed $0.115 per share of Parent Common Stock per quarter;
(h) shall not, and shall not permit any of its Subsidiaries to, sell, lease or otherwise dispose of any of its assets (including capital stock of Subsidiaries) which are material to the Company or Parent, as the case may be, individually or in the aggregate, except in the ordinary course of business;
(i) shall not, and shall not permit any of its Subsidiaries to, except pursuant to contractual commitments in effect on the date hereof and disclosed in the Parent Disclosure Letter or the Company Disclosure Letter, as the case may be, acquire or agree to acquire by merging or consolidating with, or by purchasing a substantial equity interest in or a substantial portion of the assets of, or by any other manner, any business or any corporation, partnership, association or other business organization or division thereof or otherwise acquire or agree to acquire any assets or
securities in each case (i) for an aggregate consideration for all such acquisitions in excess of $100 million (excluding acquisitions approved in writing by Parent and the Company) and (ii) where a filing under the HSR Act is required, except where Parent and the Company have agreed in writing that such action is not likely to (x) have a material adverse effect on the ability of the parties to consummate the transactions contemplated by this Agreement or (y) delay materially the Effective Time;
(j) except as may be required as a result of a change in law or in generally accepted accounting principles, change any of the accounting principles or practices used by it;
(k) shall, and shall cause any of its Subsidiaries to, use reasonable efforts to maintain with financially responsible insurance companies insurance in such amounts and against such risks and losses as are customary for such party;
(l) shall not, and shall not permit any of its Subsidiaries to, (i)
make or rescind any material express or deemed election relating to taxes
unless it is reasonably expected that such action will not materially and
adversely affect it (or Parent), including elections for any and all joint
ventures, partnerships, limited liability companies, working interests or
other investments where it has the capacity to make such binding election,
(ii) settle or compromise any material claim, action, suit, litigation,
proceeding, arbitration, investigation, audit or controversy relating to
taxes, except where such settlement or compromise will not materially and
adversely affect it (or Parent), or (iii) change in any material respect
any of its methods of reporting any item for federal income tax purposes
from those employed in the preparation of its federal income tax return for
the most recent taxable year for which a return has been filed, except as
may be required by applicable law or except for such changes that are
reasonably expected not to materially and adversely affect it (or Parent);
(m) shall not, nor shall it permit any of its Subsidiaries to, (i) incur any indebtedness for borrowed money (except for (x) general corporate purposes, (y) refinancings of existing debt and (z) other immaterial borrowings that, in the case of (x), (y) or (z), permit prepayment of such debt without penalty (other than LIBOR breakage costs)) or guarantee any such indebtedness or issue or sell any debt securities or warrants or rights to acquire any debt securities of such party or any of its Subsidiaries or guarantee any debt securities of others, (ii) except in the ordinary course of business, enter into any material lease (whether such lease is an operating or capital lease) or create any material mortgages,
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liens, security interests or other encumbrances on the property of the Company or any of its Subsidiaries in connection with any indebtedness thereof, or (iii) make or commit to make aggregate capital expenditures in excess of $75 million over the fiscal 1998 capital expenditures budget previously disclosed to the other;
(n) shall not purchase any shares of Parent Common Stock or Company Common Stock;
(o) shall not, nor shall it permit any of its Subsidiaries to, agree in writing or otherwise to take any of the foregoing actions;
(p) subject to Section 7.5, shall not take any action that is likely to delay materially or adversely affect the ability of any of the parties hereto to obtain any consent, authorization, order or approval of any governmental commission, board or other regulatory body or the expiration of any applicable waiting period required to consummate the Merger; and
(q) during the period from the date of this Agreement through the Effective Time, shall not terminate, amend, modify or waive any provision of any confidentiality or standstill agreement to which it or any of its respective Subsidiaries is a party; and during such period shall enforce, to the fullest extent permitted under applicable law, the provisions of such agreement, including by obtaining injunctions to prevent any breaches of such agreements and to enforce specifically the terms and provisions thereof in any court of the United States of America or any state having jurisdiction.
SECTION 7.2 No Solicitation by the Company.
(a) The Company agrees that (i) neither it nor any of its Subsidiaries shall, and shall not knowingly permit any of its officers, directors, employees, agents or representatives (including, without limitation, any investment banker, attorney or accountant retained by it or any of its Subsidiaries) to, solicit, initiate or knowingly encourage (including by way of furnishing material non-public information) any inquiry, proposal or offer (including, without limitation, any proposal or offer to its stockholders) with respect to a tender offer, merger, consolidation, business combination or similar transaction involving, or any purchase of 20% or more of the assets on a consolidated basis or 20% or more of any class of capital stock of, the Company (any such proposal, offer or transaction being hereinafter referred to as a "Company Acquisition Proposal") or participate or engage in any discussions or negotiations concerning a Company Acquisition Proposal; and (ii) it will immediately cease and cause to be terminated any existing negotiations with any parties conducted heretofore with respect to any of the foregoing; provided that nothing contained in this Agreement shall prevent the Company or its Board of Directors from (A) complying with Rule 14e-2 promulgated under the Exchange Act with regard to a Company Acquisition Proposal, or (B) prior to the Cutoff Date, providing information (pursuant to a confidentiality agreement in reasonably customary form) to or engaging in any negotiations or discussions with any person or entity who has made an unsolicited bona fide Company Acquisition Proposal with respect to all the outstanding Company Common Stock or all or substantially all the assets of the Company that, in the good faith judgment of the Company's Board of Directors, taking into account the likelihood of consummation, after consultation with its financial advisors, is superior to the Merger (a "Company Superior Proposal"), if the Board of Directors of the Company, after consultation with its outside legal counsel, determines that the failure to do so would be inconsistent with its fiduciary obligations.
(b) Prior to taking any action referred to in Section 7.2(a), if the Company intends to participate in any such discussions or negotiations or
provide any such information to any such third party, the Company shall give prompt prior notice to Parent of each such action. The Company will immediately notify Parent of any such requests for such information or the receipt of any Company Acquisition Proposal, including the identity of the person or group engaging in such discussions or negotiations, requesting such information or making such Company Acquisition Proposal, and the material terms and conditions of any Company Acquisition Proposal.
(c) Nothing in this Section 7.2 shall permit the Company to enter into any agreement with respect to a Company Acquisition Proposal during the term of this Agreement, it being agreed that during the
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term of this Agreement, the Company shall not enter into any agreement with any person that provides for, or in any way facilitates, a Company Acquisition Proposal, other than a confidentiality agreement in reasonably customary form.
(d) For purposes hereof, the "Cutoff Date" means the date the conditions set forth in Section 8.1(a) are satisfied.
SECTION 7.3 No Solicitation by Parent.
(a) Parent agrees that (i) neither it nor any of its Subsidiaries shall, and shall not knowingly permit any of its officers, directors, employees, agents or representatives (including, without limitation, any investment banker, attorney or accountant retained by it or any of its Subsidiaries) to, solicit, initiate or knowingly encourage (including by way of furnishing material non-public information) any inquiry, proposal or offer (including, without limitation, any proposal or offer to its stockholders) with respect to a tender offer, merger, consolidation, business combination or similar transaction involving, or any purchase of 20% or more of the assets on a consolidated basis or 20% or more of any class of capital stock of, Parent (any such proposal, offer or transaction being hereinafter referred to as a "Parent Acquisition Proposal") or participate or engage in any discussions or negotiations concerning a Parent Acquisition Proposal; and (ii) it will immediately cease and cause to be terminated any existing negotiations with any parties conducted heretofore with respect to any of the foregoing; provided that nothing contained in this Agreement shall prevent Parent or its Board of Directors from (A) complying with Rule 14e-2 promulgated under the Exchange Act with regard to a Parent Acquisition Proposal, or (B) prior to the Cutoff Date, providing information (pursuant to a confidentiality agreement in reasonably customary form) to or engaging in any negotiations or discussions with any person or entity who has made an unsolicited bona fide Parent Acquisition Proposal with respect to all the outstanding Parent Common Stock or all or substantially all the assets of Parent that, in the good faith judgment of Parent's Board of Directors, taking into account the likelihood of consummation, after consultation with its financial advisors, is superior to the Merger (a "Parent Superior Proposal"), if the Board of Directors of Parent, after consultation with its outside legal counsel, determines that the failure to do so would be inconsistent with its fiduciary obligations.
(b) Prior to taking any action referred to in Section 7.3(a), if Parent intends to participate in any such discussions or negotiations or provide any such information to any such third party, Parent shall give prompt prior notice to the Company of each such action. The Parent will immediately notify the Company of any such requests for such information or the receipt of any Parent Acquisition Proposal, including the identity of the person or group engaging in such discussions or negotiations, requesting such information or making such Parent Acquisition Proposal, and the material terms and conditions of any Parent Acquisition Proposal.
(c) Nothing in this Section 7.3 shall permit Parent to enter into any agreement with respect to a Parent Acquisition Proposal during the term of this Agreement, it being agreed that during the term of this Agreement, Parent shall not enter into any agreement with any person that provides for, or in any way facilitates, a Parent Acquisition Proposal, other than a confidentiality agreement in reasonably customary form.
SECTION 7.4 Meetings of Stockholders.
(a) Each of Parent and the Company will take all action necessary in accordance with applicable law and its certificate of incorporation and bylaws to convene a meeting of its stockholders as promptly as practicable to consider and vote upon (i) in the case of Parent, the approval of the issuance of the shares of Parent Common Stock pursuant to the Merger contemplated hereby and (ii) in the case of the Company, the approval of this Agreement and the Merger. The Company and Parent shall coordinate and cooperate with respect to the timing of such meetings and shall use their best efforts to hold such meetings on the same day.
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(b) The Company and Parent, through their respective Boards of Directors, shall recommend approval of such matters subject to the determination by the Board of Directors of the Company and the Board of Directors of Parent after consultation with their respective counsel that recommending approval of such matters would not be inconsistent with its fiduciary obligations. Additionally, the Board of Directors of the Company or the Board of Directors of Parent may at any time prior to the Effective Time withdraw, modify, or change any recommendation and declaration regarding this Agreement or the Merger, or recommend and declare advisable any other offer or proposal, if in the opinion of such Board of Directors after consultation with its counsel the failure to so withdraw, modify, or change its recommendation and declaration would be inconsistent with its fiduciary obligations.
SECTION 7.5 Filings; Best Efforts.
(a) Subject to the terms and conditions herein provided, the Company and Parent shall:
(i) promptly (but in not more than 20 business days from the date hereof) make their respective filings under the HSR Act with respect to the Merger and thereafter shall promptly make any other required
submissions under the HSR Act;
(ii) use their reasonable best efforts to cooperate with one another in (a) determining which filings are required to be made prior to the Effective Time with, and which consents, approvals, permits or authorizations are required to be obtained prior to the Effective Time from governmental or regulatory authorities of the United States, the several states, and foreign jurisdictions in connection with the execution and delivery of this Agreement and the consummation of the Merger and the transactions contemplated hereby; and (b) timely making all such filings and timely seeking all such consents, approvals, permits or authorizations;
(iii) promptly notify each other of any communication concerning this Agreement or the Merger to that party from any governmental authority and permit the other party to review in advance any proposed communication concerning this Agreement or the Merger to any governmental entity;
(iv) not agree to participate in any meeting or discussion with any governmental authority in respect of any filings, investigation or other inquiry concerning this Agreement or the Merger unless it consults with the other party in advance and, to the extent permitted by such governmental authority, gives the other party the opportunity to attend and participate thereat;
(v) furnish the other party with copies of all correspondence, filings and communications (and memoranda setting forth the substance thereof) between them and their affiliates and their respective representatives on the one hand, and any government or regulatory authority or members or their respective staffs on the other hand, with respect to this Agreement and the Merger; and
(vi) furnish the other party with such necessary information and reasonable assistance as such other parties and their respective affiliates may reasonably request in connection with their preparation of necessary filings, registrations or submissions of information to any governmental or regulatory authorities, including without limitation, any filings necessary or appropriate under the provisions of the HSR Act.
(b) Without limiting Section 7.5(a), Parent and the Company shall:
(i) each use its best efforts to avoid the entry of, or to have vacated or terminated, any decree, order or judgment that would restrain, prevent or delay the Closing, including without limitation defending through litigation on the merits any claim asserted in any court by any party; and
(ii) each take any and all steps necessary to avoid or eliminate each and every impediment under any antitrust, competition or trade regulation law that may be asserted by any governmental entity with respect to the Merger so as to enable the Closing to occur as soon as reasonably possible (and in any event no later than 60 days following the termination of all applicable waiting periods
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under the HSR Act, unless the parties are in litigation with the government in which case at the conclusion of such litigation), including without limitation, proposing, negotiating, committing to and effecting, by consent decree, hold separate order or otherwise, the sale, divestiture or disposition of such assets or businesses of Parent or the Company or any of their respective subsidiaries or otherwise take or commit to take any action that limits its freedom of action with respect to, or its ability to retain, any of the businesses, product lines or assets of Parent, the Company or their respective subsidiaries, as may be required in order to avoid the entry of, or to the effect the dissolution of, any injunction, temporary restraining order or other order in any suit or proceeding, which would otherwise have the effect of preventing or delaying the Closing. At the request of Parent, the Company shall agree to divest, hold separate or otherwise take or commit to take any action that limits its freedom of action with respect to, or its ability to retain, any of the businesses, product lines or assets of the Company or any of its Subsidiaries, provided that any such action may be conditioned upon the consummation of the Merger and the transactions contemplated hereby. Notwithstanding anything to the contrary contained in this Agreement, in connection with any filing or submission required or action to be taken by Parent, the Company or any of their respective Subsidiaries to consummate the Merger or other transactions contemplated in this Agreement, the Company shall not, without Parent's prior written consent, recommend, suggest or commit to any divestiture of assets or businesses of the Company and its Subsidiaries.
SECTION 7.6 Inspection. From the date hereof to the Effective Time, each of the Company and Parent shall allow all designated officers, attorneys, accountants and other representatives of Parent or the Company, as the case may be, access at all reasonable times upon reasonable notice to the records and files, correspondence, audits and properties, as well as to all information relating to commitments, contracts, titles and financial position, or otherwise pertaining to the business and affairs of Parent and the Company and their respective Subsidiaries, including inspection of such properties; provided that no investigation pursuant to this Section 7.6 shall affect any representation or warranty given by any party hereunder, and provided further that notwithstanding the provision of information or investigation by any party, no party shall be deemed to make any representation or warranty except as expressly set forth in this Agreement. Notwithstanding the foregoing, no party shall be required to provide any information which it reasonably believes it may not provide to the other party by reason of applicable law, rules or regulations, which constitutes information protected by attorney/client privilege, or which it is required to keep confidential by reason of contract or agreement with third parties. The parties hereto will make reasonable and appropriate substitute disclosure arrangements under circumstances in which the restrictions of the preceding sentence apply. Each of Parent and the Company agrees that it will not, and will cause its respective representatives not to, use any information obtained pursuant to this Section 7.6 for any purpose unrelated to the consummation of the transactions contemplated by this Agreement.
SECTION 7.7 Publicity. The parties will consult with each other and will mutually agree upon any press releases or public announcements pertaining to this Agreement or the transactions contemplated hereby and shall not issue any such press releases or make any such public announcements prior to such consultation and agreement, except as may be required by applicable law or by obligations pursuant to any listing agreement with any national securities exchange, in which case the party proposing to issue such press release or make such public announcement shall use its best efforts to consult in good faith with the other party before issuing any such press releases or making any such public announcements.
SECTION 7.8 Registration Statement.
(a) Each of Parent and the Company shall cooperate and promptly prepare and Parent shall file with the SEC as soon as practicable a Registration Statement on Form S-4 (the "Form S-4") under the Securities Act, with respect to the Parent Common Stock issuable in the Merger, a portion of which Registration Statement shall also serve as the joint proxy statement with respect to the meetings of the stockholders of Parent and of the Company in connection with the Merger (the "Proxy Statement/ Prospectus"). The respective parties will cause the Proxy Statement/Prospectus and the Form S-4 to comply as to form in all material respects with the applicable provisions of the Securities Act, the
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Exchange Act and the rules and regulations thereunder. Parent shall use its best efforts, and the Company will cooperate with Parent, to have the Form S-4 declared effective by the SEC as promptly as practicable. Parent shall use its reasonable best efforts to obtain, prior to the effective date of the Form S-4, all necessary state securities law or "Blue Sky" permits or approvals required to carry out the transactions contemplated by this Agreement and will pay all expenses incident thereto. Parent will advise the Company, promptly after it receives notice thereof, of the time when the Form S-4 has become effective or any supplement or amendment has been filed, the issuance of any stop order, the suspension of the qualification of the Parent Common Stock issuable in connection with the Merger for offering or sale in any jurisdiction, or any request by the SEC for amendment of the Proxy Statement/Prospectus or the Form S-4 or comments thereon and responses thereto or requests by the SEC for additional information.
(b) Each of Parent and the Company will use its best efforts to cause the Proxy Statement/ Prospectus to be mailed to its stockholders as promptly as practicable after the date hereof.
(c) Each of Parent and the Company agrees that the information provided by it for inclusion in the Proxy Statement/Prospectus and each amendment or supplement thereto, at the time of mailing thereof and at the time of the respective meetings of stockholders of Parent and of the Company, or, in the case of information provided by it for inclusion in the Form S-4 or any amendment or supplement thereto, at the time it is filed or becomes effective, (i) will not include an untrue statement of a material fact or omit to state a material fact required to be stated therein or
necessary to make the statements therein, in light of the circumstances under which they were made, not misleading, and (ii) will comply as to form in all material respects with the provisions of the Exchange Act.
SECTION 7.9 Listing Application. Parent shall promptly prepare and submit to the NYSE a listing application covering the shares of Parent Common Stock issuable in the Merger, and shall use its best efforts to obtain, prior to the Effective Time, approval for the listing of such Parent Common Stock, subject to official notice of issuance.
SECTION 7.10 Letters of Accountants.
(a) The Company shall use its reasonable best efforts to cause to be delivered to Parent "comfort" letters of Deloitte & Touche LLP, the Company's independent public accountants, dated the effective date of the Form S-4 and the Closing Date, respectively, and addressed to Parent with regard to certain financial information regarding the Company included in the Form S-4, in form reasonably satisfactory to Parent and customary in scope and substance for "comfort" letters delivered by independent public accountants in connection with registration statements similar to the Form S-4.
(b) Parent shall use its reasonable best efforts to cause to be delivered to the Company "comfort" letters of Deloitte & Touche LLP, Parent's independent public accountants, dated the effective date of the Form S-4 and the Closing Date, respectively, and addressed to the Company, with regard to certain financial information regarding Parent included in the Form S-4, in form reasonably satisfactory to the Company and customary in scope and substance for "comfort" letters delivered by independent public accountants in connection with registration statements similar to the Form S-4.
SECTION 7.11 Agreements of Rule 145 Affiliates. Prior to the Effective Time, the Company shall cause to be prepared and delivered to Parent a list identifying all persons who, at the time of the meeting or the meeting of the Company's stockholders pursuant to Section 7.4, the Company believes may be deemed to be "affiliates" of the Company, as that term is used in paragraphs (c) and (d) of Rule 145 under the Securities Act (the "Rule 145 Affiliates"). Parent shall be entitled to place restrictive legends on any shares of Parent Common Stock received by such Rule 145 Affiliates. The Company shall use its best efforts to cause each person who is identified as a Rule 145 Affiliate in such list to deliver to Parent, at or prior to the Effective Time, a written agreement, in the form to be approved by the parties hereto, that such Rule 145 Affiliate will not sell, pledge, transfer or otherwise dispose of any shares of Parent Common Stock issued to such Rule 145 Affiliate pursuant to the Merger, except pursuant to an effective registration statement or in compliance with
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Rule 145 or an exemption from the registration requirements of the Securities Act. The Company shall use its best efforts to cause each person who is identified as a Rule 145 Affiliate in such list, and the Parent shall use its best efforts to cause each person who is an affiliate of Parent, to sign on or prior to the thirtieth day prior to the Effective Time a written agreement, in
the form to be approved by the Company and Parent, that such party will not sell or in any other way reduce such party's risk relative to any shares of Parent Common Stock received in the Merger (within the meaning of Section 201.01 of the SEC's Financial Reporting Release No. 1), until such time as financial results (including combined sales and net income) covering at least 30 days of post-merger operations have been published, except as permitted by Staff Accounting Bulletin No. 76 (or any successor thereto) issued by the SEC.
SECTION 7.12 Expenses. Whether or not the Merger is consummated, all costs and expenses incurred in connection with this Agreement and the transactions contemplated hereby shall be paid by the party incurring such expenses, except as expressly provided in Section 9.5.
SECTION 7.13 Indemnification and Insurance.
(a) From and after the Effective Time, Parent and the Surviving Corporation shall indemnify, defend and hold harmless to the fullest extent permitted under applicable law each person who is, or has been at any time prior to the Effective Time, an officer or director of the Company (or any Subsidiary or division thereof) and each person who served at the request of the Company as a director, officer, trustee or fiduciary of another corporation, partnership, joint venture, trust, pension or other employee benefit plan or enterprise (individually, an "Indemnified Party" and, collectively, the "Indemnified Parties") against all losses, claims, damages, liabilities, costs or expenses (including attorneys' fees), judgments, fines, penalties and amounts paid in settlement in connection with any claim, action, suit, proceeding or investigation arising out of or pertaining to acts or omissions, or alleged acts or omissions, by them in their capacities as such, whether commenced, asserted or claimed before or after the Effective Time. In the event of any such claim, action, suit, proceeding or investigation (an "Action"), (i) Parent and the Surviving Corporation shall pay, as incurred, the fees and expenses of counsel selected by the Indemnified Party, which counsel shall be reasonably acceptable to the Surviving Corporation, in advance of the final disposition of any such Action to the fullest extent permitted by applicable law, and, if required, upon receipt of any undertaking required by applicable law, and (ii) Parent and the Surviving Corporation will cooperate in the defense of any such matter; provided, however, the Surviving Corporation shall not be liable for any settlement effected without its written consent (which consent shall not be unreasonably withheld or delayed), and provided further, that Parent and the Surviving Corporation shall not be obligated pursuant to this Section 7.13 to pay the fees and disbursements of more than one counsel for all Indemnified Parties in any single Action, unless, in the good faith judgment of any of the Indemnified Parties, there is or may be a conflict of interests between two or more of such Indemnified Parties, in which case there may be separate counsel for each similarly situated group.
(b) The parties agree that the rights to indemnification, including provisions relating to advances of expenses incurred in defense of any action or suit, in the certificate of incorporation and bylaws of the Company and its Subsidiaries with respect to matters occurring through the Effective Time, shall survive the Merger and shall continue in full force and effect for a period of six years from the Effective Time; provided, however, that all rights to indemnification in respect of any Action
pending or asserted or claim made within such period shall continue until the disposition of such Action or resolution of such claim.
(c) For a period of six years after the Effective Time, Parent and the Surviving Corporation shall cause to be maintained officers' and directors' liability insurance covering the Indemnified Parties who are or at any time prior to the Effective Time covered by the Company's existing officers' and directors' liability insurance policies on terms substantially no less advantageous to the Indemnified Parties than such existing insurance; provided, that after the third year after the Effective Time, the Surviving Corporation shall not be required to pay annual premiums in excess of 250% of the last annual premium paid by the Company prior to the date hereof (the amount of which premium is set forth in the Company Disclosure Letter), but in such case shall purchase as much coverage as reasonably practicable for such amount.
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(d) The rights of each Indemnified Party hereunder shall be in addition to any other rights such Indemnified Party may have under the certificate of incorporation or bylaws of the Company or any of its Subsidiaries, under the DGCL or otherwise. The provisions of this Section 7.13 shall survive the consummation of the Merger and expressly are intended to benefit each of the Indemnified Parties.
(e) In the event Parent, the Surviving Corporation or any of their respective successors or assigns (i) consolidates with or merges into any other person and shall not be the continuing or surviving corporation or entity in such consolidation or merger or (ii) transfers all or substantially all of its properties and assets to any person, then and in either such case, proper provision shall be made so that the successors and assigns of Parent or the Surviving Corporation, as the case may be, shall assume the obligations set forth in this Section 7.13.
SECTION 7.14 Certain Benefits.
(a) From and after the Effective Time, Parent and its Subsidiaries
(including the Surviving Corporation) will honor in accordance with their
terms the executive, employment and other agreements and arrangements set
forth in Schedule 7.14(a)(i) of the Company Disclosure Letter or permitted
by Section 7.1(f) between the Company or its Subsidiaries and certain
employees and former employees thereof (the "Employment Agreements") and
certain executives and former executives thereof ("Executive Agreements")
and all of the Company Benefit Plans and the agreements described in
Section 7.14(e); provided, however, that nothing herein shall preclude any
change in any Company Benefit Plan effected on a prospective basis that is
permitted pursuant to this Section 7.14 and the terms of the applicable
Benefit Plan; provided, further, that the WAII Retirement/Profit Sharing
Plan and the WAII Benefits Restoration Plan (and the related cash
contribution bonus feature) described in Schedule 7.14(a)(ii) of the
Company Disclosure Letter (the "Profit Sharing Plans") shall be continued
at least through December 31, 1998 for Company Employees (as defined in
Section 7.14(d)) without any adverse amendment or modification, the
Company's Supplemental Retirement Plan and the WAII Executive Retirement
Plan described in Schedule 7.14(a)(iii) of the Company Disclosure Letter (the "Retirement Plans") shall be continued through at least December 31, 1998 without any adverse amendment or modification, the Profit Sharing Plans shall be continued without adverse amendment or modification for the Western Geophysical division of the Company at least through the end of Parent's fiscal year ending in 2001 (and shall be equitably adjusted by Parent to appropriately reflect the stand-alone basis of Western Geophysical), and the "change of control" provisions in the Profit Sharing Plans and the Retirement Plans shall in no event be adversely amended or modified. Company performance in respect of calculations made under the Profit Sharing Plans for 1998 shall be calculated without taking into account any expenses or costs associated with or arising as a result of transactions contemplated by this Agreement or any non-recurring charges that would not reasonably be expected to have been incurred had the transactions contemplated by this Agreement not occurred. Parent hereby acknowledges that the consummation of the Merger or stockholder approval of the Merger, as applicable, will result in a "change of control" under the Executive Agreements and the Employment Agreements, the WAII Supplemental Retirement Plan, the WAII Executive Retirement Plan and the other Company Benefit Plans set forth in Schedule 7.14(a)(i) of the Company Disclosure Letter. Parent shall cause the Surviving Corporation (i) to assume the obligations of the Company under the Company Benefit Plans as in effect immediately prior to the Effective Time, and to continue to cover under such Company Benefit Plans all Company Employees and former Company Employees who are participants therein immediately prior to the Effective Time and who remain eligible to participate in such Company Benefit Plans pursuant to the terms thereof and will provide aggregate employee benefits to such Company Employees that are no less favorable than the aggregate employee benefits provided them immediately prior to the Effective Time; provided, that the Surviving Corporation at its sole option may, except as provided herein or by the terms of such plans, amend such plans at any time following the Effective Time to provide employee benefits to Company Employees which in the aggregate are no less favorable than those applicable to similarly situated employees of Parent or, (ii) in lieu thereof, except as provided herein or by the terms of the Company Benefit Plans, to provide employee benefits to such Company Employees under Parent Benefit Plans so that the aggregate employee benefits provided to such Company
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Employees are no less favorable than those that are applicable to similarly situated employees of Parent. After the Effective Time, any Company Employee who is or becomes entitled to continued medical, dental, hospitalization, long-term disability and life insurance coverage pursuant to an agreement with the Company set forth in Schedule 7.14(a)(i) of the Company Disclosure Letter will be entitled to participate under any medical, dental, hospitalization, long-term disability and life insurance plan sponsored by Parent or the Surviving Corporation which covers Company Employees under the same terms and for payment of the same level of premiums as specified in his or her agreement. The Surviving Corporation and Parent shall not be obligated hereunder to cover any employee who is not a Company Employee or former Company Employee or is not hired or offered employment prior to the Effective Time under any employee benefit
plan, program or arrangement. With respect to the Parent Benefit Plans and any plans established by the Surviving Corporation, Parent and the Surviving Corporation shall grant to all Company Employees, from and after the Effective Time, credit for all service with the Company and its affiliates and predecessors (and any other service credited by the Company under the Company Benefit Plans) prior to the Effective Time for seniority, eligibility to participate, eligibility for benefits, benefit accrual and vesting purposes. To the extent Parent Benefit Plans provide medical or dental welfare benefits, such plans shall waive any pre-existing conditions and actively-at-work exclusions with respect to Company Employees (but only to the extent such Company Employees were provided coverage under the Company Benefit Plans) and shall provide that any expenses incurred on or before the Effective Time by or on behalf of any Company Employees shall be taken into account under the Parent Benefit Plans for purposes of satisfying applicable deductible, coinsurance and maximum out-of-pocket provisions.
(b) The Company acknowledges that the consummation of the Merger will generally result in a "change of control" under the executive agreements, employment agreements, stock option plan and other employee benefit and welfare plans of the Parent and its Subsidiaries containing change of control provisions.
(c) Parent agrees to maintain the Company's severance or termination plans and practices and the Company's Corporate Office Severance Plan (the "Company Severance Plans") as in effect on the date hereof for a period of one year from the Effective Time, and to maintain the Company's Executive Severance Plan without amendment except pursuant to its terms, for the benefit of Company Employees; provided, however, that any employees covered by such plans shall not be covered by the Parent's Severance Plan or Executive Severance Plan during such period that such Company's Employees are covered under the Company Severance Plans or Executive Severance Plan, as applicable.
(d) For purposes of this Section 7.14, the term "Company Employees" shall mean all individuals employed by the Company and its Subsidiaries (including those on lay-off, disability or leave of absence, paid or unpaid) immediately prior to the Effective Time.
(e) Parent shall enter into definitive employment agreements prior to the Effective Time with the Company Employees set forth on Schedule 7.14(e) of the Company Disclosure Letter pursuant to the terms set forth on Schedule 7.14(e) of the Company Disclosure Letter. In the event such employment agreements are not entered into, the terms set forth on Schedule 7.14(e) of the Company Disclosure Letter shall govern the employment of such Company Employees.
(f) With respect to the Company's 1995 Incentive Compensation Plan and the Company's Individual Performance Award Plan (collectively, the "Incentive Plans"), within 30 days following the Effective Time Company Employees who remain employed by the Company or its affiliates as of the Effective Time shall be paid (to the extent a pro rata bonus is not paid under an employment agreement) an amount equal to their maximum potential bonus awards under the Incentive Plans, multiplied by a fraction equal to the number of days in 1998 through the Effective Time, divided by 365. The
remainder of the 1998 maximum potential bonus awards for Company Employees shall be paid in the first payroll check in 1999, to those Company Employees who are employed with the Parent or any of its affiliates on December 31, 1998 or have been terminated prior to such date by the Company without cause, or terminated due to death or disability. After the Effective Time, any bonuses for periods commencing on or after January 1, 1999 will be paid under Parent's plans and practices. "Cause" shall mean acts of theft,
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unethical conduct or dishonesty affecting the assets, properties or business of the Surviving Corporation or Parent, willful misconduct or continued material dereliction of duty after notice has been provided.
(g) Parent shall not terminate, or permit the Surviving Corporation to terminate, other than for Cause, the employment of the individuals set forth on Schedule 7.14(g) of the Company Disclosure Letter prior to January 1, 1999.
SECTION 7.15 Reorganization; Pooling.
(a) From and after the date hereof and until the Effective Time, none of Parent, the Company, or any of their respective Subsidiaries shall knowingly (i) take any action, or fail to take any reasonable action, as a result of which the Merger would fail to qualify as a reorganization within the meaning of section 368(a) of the Code or (ii) enter into any contract, agreement, commitment or arrangement to take or fail to take any such action. Each of the parties shall use its reasonable best efforts to obtain the opinions of counsel referred to in Sections 8.2(b) and 8.3(b).
(b) From and after the date hereof and until the Effective Time, none of the Company, Parent or any of their respective Subsidiaries shall knowingly (i) take any action, or fail to take any reasonable action, that would prevent the treatment of the Merger as a "pooling of interests" for financial accounting purposes or (ii) enter into any contract, agreement, commitment or arrangement to take or fail to take any such action.
(c) Following the Effective Time, neither Parent nor any of its Subsidiaries shall knowingly take any action or knowingly cause any action to be taken which would cause the Merger to fail to qualify as a reorganization within the meaning of section 368(a) of the Code (and any comparable provisions of applicable state or local law).
SECTION 7.16 Rights Agreement. Prior to the Effective Time, the Board of Directors of the Company shall take any action (including, if necessary, amending or terminating (but with respect to termination, only as of immediately prior to the Effective Time) the Rights Agreement) necessary so that none of the execution and delivery of this Agreement, the Stock Option Agreements, the conversion of shares of Company Common Stock into the right to receive Parent Common Stock in accordance with Article 4 of this Agreement, the issuance of Company Common Stock upon exercise of the option granted to Parent pursuant to the applicable Stock Option Agreement, the consummation of the Merger, or any other transaction contemplated hereby or by the Stock Option Agreements will
cause (i) the Company Rights to become exercisable under the Company Rights
Agreement, (ii) Parent or any of its Subsidiaries to be deemed an "Acquiring
Person" (as defined in the Company Rights Agreement), (iii) any such event to be
an event described in Section 11(a)(ii) or 13 of the Company Rights Agreement or
(iv) the "Shares Acquisition Date" or the "Distribution Date" (each as defined
in the Company Rights Agreement) to occur upon any such event, and so that the
Company Rights will expire immediately prior to the Effective Time. Neither the
Board of Directors of the Company nor the Company shall take any other action to
terminate the Company Rights Agreement, redeem the Company Rights, cause any
person not to be or become an "Acquiring Person" or otherwise amend the Company
Rights Agreement in a manner adverse to Parent.
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ARTICLE 8
CONDITIONS
SECTION 8.1 Conditions to Each Party's Obligation to Effect the Merger. The respective obligation of each party to effect the Merger shall be subject to the fulfillment at or prior to the Closing Date of the following conditions:
(a) (i) This Agreement and the Merger shall have been adopted and approved by the affirmative vote of holders of a majority of the issued and outstanding shares of Company Common Stock entitled to vote thereon; and
(ii) The issuance of the shares of Parent Common Stock pursuant to the Merger shall have been approved by the holders of issued and outstanding shares of Parent Common Stock as and to the extent required by the rules of the NYSE.
(b) The waiting period applicable to the consummation of the Merger shall have expired or been terminated under (i) the HSR Act and (ii) any mandatory waiting period under any applicable foreign competition or antitrust law or regulation where the failure to observe such waiting period referred to in this clause (ii) would have a Parent Material Adverse Effect or a Company Material Adverse Effect.
(c) None of the parties hereto shall be subject to any decree, order or injunction of a court of competent jurisdiction, U.S. or foreign, which prohibits the consummation of the Merger; provided, however, that prior to invoking this condition each party agrees to comply with Section 7.5, and with respect to other matters not covered by Section 7.5, to use its commercially reasonable best efforts to have any such decree, order or injunction lifted or vacated; and no statute, rule or regulation shall have been enacted by any governmental authority which prohibits or makes unlawful the consummation of the Merger.
(d) The Form S-4 shall have become effective and no stop order with respect thereto shall be in effect.
(e) The shares of Parent Common Stock to be issued pursuant to the Merger shall have been authorized for listing on the NYSE, subject to official notice of issuance.
(f) Parent and the Company shall have received from Deloitte & Touche LLP letters that the Merger will be treated as a "pooling of interests" for financial accounting purposes.
(g) The Company shall have received the written consent of the United States Nuclear Regulatory Commission ("NRC") to the transfer of control of all NRC licenses of the Company and its Subsidiaries pursuant to 10 CFR 30.34(b).
SECTION 8.2 Conditions to Obligation of the Company to Effect the Merger. The obligation of the Company to effect the Merger shall be subject to the fulfillment at or prior to the Closing Date of the following conditions:
(a) Parent shall have performed in all material respects its covenants and agreements contained in this Agreement required to be performed on or prior to the Closing Date and the representations and warranties of Parent and Merger Sub contained in this Agreement and in any document delivered in connection herewith shall be true and correct in all material respects as of the date of this Agreement and as of the Closing Date (except for representations and warranties made as of a specified date, which need be true and correct in all material respects only as of the specified date), and the Company shall have received a certificate of the Parent, executed on its behalf by its President or a Vice President of Parent, dated the Closing Date, certifying to such effect.
(b) The Company shall have received the opinion of Wachtell, Lipton, Rosen & Katz, counsel to the Company, in form and substance reasonably satisfactory to the Company, dated the Closing Date, a copy of which shall be furnished to Parent, to the effect that (i) the Merger will be treated for federal
34
income tax purposes as a reorganization within the meaning of section 368(a) of the Code and (ii) no gain or loss will be recognized by the stockholders of the Company who exchange all of their Company Common Stock solely for Parent Common Stock pursuant to the Merger (except with respect to cash received in lieu of a fractional share interest in Parent Common Stock). In rendering such opinion, such counsel shall be entitled to receive and rely upon representations of officers of the Company and Parent as to such matters as such counsel may reasonably request.
(c) At any time after the date of this Agreement, there shall not have been any event or occurrence that has had or is likely to have a Parent Material Adverse Effect.
SECTION 8.3 Conditions to Obligation of Parent and Merger Sub to Effect the Merger. The obligations of Parent and Merger Sub to effect the Merger shall be subject to the fulfillment at or prior to the Closing Date of the following conditions:
(a) The Company shall have performed in all material respects its covenants and agreements contained in this Agreement required to be
performed on or prior to the Closing Date and the representations and warranties of the Company contained in this Agreement and in any document delivered in connection herewith shall be true and correct in all material respects as of the date of this Agreement and as of the Closing Date (except for representations and warranties made as of a specified date, which need be true and correct in all material respects only as of the specified date), and Parent shall have received a certificate of the Company, executed on its behalf by its President or a Vice President of the Company, dated the Closing Date, certifying to such effect.
(b) Parent shall have received the opinion of Baker & Botts, L.L.P., counsel to Parent, in form and substance reasonably satisfactory to Parent, dated the Closing Date, a copy of which will be furnished to the Company, to the effect that the (i) Merger will be treated for federal income tax purposes as a reorganization within the meaning of section 368(a) of the Code and (ii) no gain or loss will be recognized by the stockholders of the Company who exchange all of their Company Common Stock solely for Parent Common Stock pursuant to the Merger (except with respect to cash received in lieu of a fractional share interest in Parent Common Stock). In rendering such opinion, such counsel shall be entitled to receive and rely upon representations of officers of the Company and Parent as to such matters as such counsel may reasonably request.
(c) At any time after the date of this Agreement, there shall not have been any event or occurrence that has had or is likely to have a Company Material Adverse Effect.
ARTICLE 9
TERMINATION
SECTION 9.1 Termination by Mutual Consent. This Agreement may be terminated at any time prior to the Effective Time by the mutual written consent of the Company and Parent.
SECTION 9.2 Termination by Parent or the Company. This Agreement may be terminated by action of the Board of Directors of Parent or of the Company if:
(a) the Merger shall not have been consummated by October 31, 1998; provided, however, that in the event Section 8.1(b)(i) or 8.1(c) or both are the only conditions that are not satisfied or capable of being immediately satisfied as a result of governmental litigation engaged in by the parties pursuant to Section 7.5 under any antitrust, competition or trade regulation law, such October 31, 1998 date shall be extended for a period not to exceed the lesser of 90 days or the fifth business day after the entrance by the court in which such litigation is pending of its decision (whether or not subject to appeal or rehearing) in such litigation; and provided, further, that the right to terminate this Agreement pursuant to this clause (a) shall not be available to any party whose failure to perform or observe in any material respect any of its obligations under this Agreement in any manner shall have been the cause of, or resulted in, the failure of the Merger to occur on or before such date;
35
(b) a meeting (including adjournments and postponements) of the Company's stockholders for the purpose of obtaining the approval required by Section 8.1(a)(i) shall have been held and such stockholder approval shall not have been obtained; or
(c) a meeting (including adjournments and postponements) of the
Parent's stockholders for the purpose of obtaining the approval required by
Section 8.1(a)(ii) shall have been held and such stockholder approval shall
not have been obtained; or
(d) a United States federal or state court of competent jurisdiction or United States federal or state governmental, regulatory or administrative agency or commission shall have issued an order, decree or ruling or taken any other action permanently restraining, enjoining or otherwise prohibiting the Merger and such order, decree, ruling or other action shall have become final and non-appealable; provided, however, that the party seeking to terminate this Agreement pursuant to this clause (d) shall have complied with Section 7.5 and with respect to other matters not covered by Section 7.5 shall have used its commercially reasonable best efforts to remove such injunction, order or decree.
SECTION 9.3 Termination by the Company. This Agreement may be terminated prior to the Effective Time, by action of the Board of Directors of the Company after consultation with its legal advisors, if
(a) the Board of Directors of the Company determines that proceeding
with the Merger would be inconsistent with its fiduciary obligations by
reason of a Company Superior Proposal and elects to terminate this
Agreement effective prior to the Cutoff Date; provided that the Company may
not effect such termination pursuant to this Section 9.3(a) unless and
until (i) Parent receives at least one week's prior written notice from the
Company of its intention to effect such termination pursuant to this
Section 9.3(a); (ii) during such week, the Company shall, and shall cause
its respective financial and legal advisors to, consider any adjustment in
the terms and conditions of this Agreement that Parent may propose; and
provided, further, that any termination of this Agreement pursuant to this
Section 9.3(a) shall not be effective until the Company has made the $50
million payment required by Section 9.5(a)(i); or
(b) (i) there has been a breach by Parent or Merger Sub of any representation, warranty, covenant or agreement set forth in this Agreement or if any representation or warranty of Parent or Merger Sub shall have become untrue, in either case such that the conditions set forth in Section 8.2(a) would not be satisfied and (ii) such breach is not curable, or, if curable, is not cured within 30 days after written notice of such breach is given to Parent by the Company; provided, however, that the right to terminate this Agreement pursuant to Section 9.3(b) shall not be available to the Company if it, at such time, is in material breach of any representation, warranty, covenant or agreement set forth in this Agreement such that the condition set forth in Section 8.3(a) shall not be satisfied; or
(c) the Board of Directors of Parent shall have withdrawn or
materially modified, in a manner adverse to the Company, its approval or recommendation of the Merger or recommended a Parent Acquisition Proposal, or resolved to do so; or
(d) on the date on which the Closing would otherwise occur, the Parent Share Price shall be less than $35.00; provided that (i) Parent shall receive at least three business days' prior written notice of its intent to effect such termination pursuant to this Section 9.3(d) and (ii) during such three business day period, Parent shall not have elected to increase the Exchange Ratio by agreeing that the proviso in Section 4.1(c)(iv) shall not be given effect.
SECTION 9.4 Termination by Parent. This Agreement may be terminated at any time prior to the Effective Time, by action of the Board of Directors of Parent after consultation with its legal advisors, if:
(a) the Board of Directors of Parent determines that proceeding with the Merger would be inconsistent with its fiduciary obligations by reason of a Parent Superior Proposal and elects to terminate this Agreement effective prior to the Cutoff Date; provided that Parent may not effect such termination pursuant to this Section 9.4(a) unless and until (i) the Company receives at least one week's prior
36
written notice from Parent of its intention to effect such termination pursuant to this Section 9.4(a); (ii) during such week, Parent shall, and shall cause its respective financial and legal advisors to, consider any adjustment in the terms and conditions of this Agreement that the Company may propose; and provided, further, that any termination of this Agreement pursuant to this Section 9.4(a) shall not be effective until Parent has made the $50 million payment required by Section 9.5(b)(i); or
(b) (i) there has been a breach by the Company of any representation, warranty covenant or agreement set forth in this Agreement or if any representation or warranty of the Company shall have become untrue, in either case such that the conditions set forth in Section 8.3(a) would not be satisfied and (ii) such breach is not curable, or, if curable, is not cured within 30 days after written notice of such breach is given by Parent to the Company; provided, however, that the right to terminate this Agreement pursuant to Section 9.4(b) shall not be available to Parent if it, at such time, is in material breach of any representation, warranty, covenant or agreement set forth in this Agreement such that the conditions set forth in Section 8.2(a) shall not be satisfied; or
(c) the Board of Directors of the Company shall have withdrawn or materially modified, in a manner adverse to Parent, its approval or recommendation of the Merger or recommended a Company Acquisition Proposal, or resolved to do so.
SECTION 9.5 Effect of Termination.
(a) If this Agreement is terminated
(i) by the Company pursuant to Section 9.3(a) fiduciary out; or
(ii) after the public announcement of a Company Acquisition Proposal, by the Company or Parent pursuant to Section 9.2(b) failure to obtain Company stockholder approval; or
(iii) after the public announcement or receipt by the Company's Board of Directors of a Company Acquisition Proposal, by Parent pursuant to Section 9.4(c) withdrawal of Company recommendation to stockholders;
then the Company shall pay Parent a fee of $50 million (subject to reduction pursuant to Section 9 of the applicable Stock Option Agreement) at the time of such termination in cash by wire transfer to an account designated by Parent. In addition, if within one year after such termination, the Company enters into a definitive agreement with respect to a Company Acquisition or a Company Acquisition is consummated, in either case with the person making the Company Acquisition Proposal related to the termination or any affiliate thereof, then upon the consummation of such Company Acquisition, the Company shall pay Parent an additional fee of $150 million (subject to reduction pursuant to Section 9 of the applicable Stock Option Agreement) at the time of such consummation in cash by wire transfer to an account designated by Parent. For purposes here, "Company Acquisition" means (i) a consolidation, exchange of shares or merger of the Company with any person, other than Parent or one of its Subsidiaries, and, in the case of a merger, in which the Company shall not be the continuing or surviving corporation, (ii) a merger of the Company with a person, other than Parent or one of its Subsidiaries, in which the Company shall be the continuing or surviving corporation but the then outstanding shares of Company Common Stock shall be changed into or exchanged for stock or other securities of the Company or any other person or cash or any other property or the shares of Company Common Stock outstanding immediately before such merger shall after such merger represent less than 50% of the voting stock of the Company outstanding immediately after the merger, (iii) the acquisition of beneficial ownership of 50% or more of the voting stock of the Company by any person (as such term is used under Section 13(d) of the Exchange Act), or (iv) a sale, lease or other transfer of 50% or more of the assets of the Company to any person, other than Parent or one of its Subsidiaries.
(b) If this Agreement is terminated
(i) by Parent pursuant to Section 9.4(a) fiduciary out; or
(ii) after the public announcement of a Parent Acquisition Proposal, by the Company or Parent pursuant to Section 9.2(c) failure to obtain Parent stockholder approval; or
37
(iii) after the public announcement or receipt by Parent's Board of Directors of a Parent Acquisition Proposal, by the Company pursuant to Section 9.3(c) withdrawal of Parent recommendation to stockholders;
then Parent shall pay the Company a fee of $50 million (subject to reduction pursuant to Section 9 of the applicable Stock Option Agreement) at the time of
such termination in cash by wire transfer to an account designated by the Company. In addition, if within one year after such termination, Parent enters into a definitive agreement with respect to a Parent Acquisition or a Parent Acquisition is consummated, in either case with the person making the Parent Acquisition Proposal related to the termination or any affiliate thereof, then upon the consummation of such Parent Acquisition, Parent shall pay the Company an additional fee of $150 million (subject to reduction pursuant to Section 9 of the applicable Stock Option Agreement) at the time of such consummation in cash by wire transfer to an account designated by the Company. For purposes here, "Parent Acquisition" means (i) a consolidation, exchange of shares or merger of Parent with any person, other than the Company or one of its Subsidiaries, and, in the case of a merger, in which Parent shall not be the continuing or surviving corporation, (ii) a merger of Parent with a person, other than the Company or one of its Subsidiaries, in which Parent shall be the continuing or surviving corporation but the then outstanding shares of Parent Common Stock shall be changed into or exchanged for stock or other securities of Parent or any other person or cash or any other property or the shares of Parent Common Stock outstanding immediately before such merger shall after such merger represent less than 50% of the voting stock of Parent outstanding immediately after the merger, (iii) the acquisition of beneficial ownership of 50% or more of the voting stock of Parent by any person (as such term is used under Section 13(d) of the Exchange Act), or (iv) a sale, lease or other transfer of 50% or more of the assets of Parent to any person, other than the Company or one of its Subsidiaries.
(c) In the event of termination of this Agreement and the abandonment of the Merger pursuant to this Article 9, all obligations of the parties hereto shall terminate, except the obligations of the parties pursuant to this Section 9.5 and Section 7.12 and except for the provisions of Sections 10.3, 10.4, 10.6, 10.8, 10.9, 10.12, 10.13 and 10.14, provided that nothing herein shall relieve any party from any liability for any willful and material breach by such party of any of its covenants or agreements set forth in this Agreement and all rights and remedies of such nonbreaching party under this Agreement in the case of such a willful and material breach, at law or in equity, shall be preserved.
SECTION 9.6 Extension; Waiver. At any time prior to the Effective Time, each party may by action taken by its Board of Directors, to the extent legally allowed, (a) extend the time for the performance of any of the obligations or other acts of the other parties hereto, (b) waive any inaccuracies in the representations and warranties made to such party contained herein or in any document delivered pursuant hereto and (c) waive compliance with any of the agreements or conditions for the benefit of such party contained herein. Any agreement on the part of a party hereto to any such extension or waiver shall be valid only if set forth in an instrument in writing signed on behalf of such party.
ARTICLE 10
GENERAL PROVISIONS
SECTION 10.1 Nonsurvival of Representations, Warranties and Agreements. All representations, warranties and agreements in this Agreement or in any instrument delivered pursuant to this Agreement shall not survive the Merger; provided, however, that the agreements contained in Article 4 and in Sections
7.11, 7.12, 7.13, 7.14, 7.15 and this Article 10 and the agreements delivered pursuant to this Agreement shall survive the Merger.
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SECTION 10.2 Notices. Any notice required to be given hereunder shall be sufficient if in writing, and sent by facsimile transmission or by courier service (with proof of service), hand delivery or certified or registered mail (return receipt requested and first-class postage prepaid), addressed as follows:
(a) if to Parent or Merger Sub:
Baker Hughes Incorporated
3900 Essex Lane
Houston, Texas 77027
Attention: Lawrence O'Donnell, III
Facsimile: (713) 439-8472
with a copy to:
J. David Kirkland, Jr., Esq.
Baker & Botts, L.L.P.
One Shell Plaza
910 Louisiana
Houston, Texas 77002-4995
Facsimile: (713) 229-1522
(b) if to the Company:
Western Atlas Inc.
10205 Westheimer Road
Houston, Texas 77042
Attention: James E. Brasher
Facsimile: (713) 266-1717
with a copy to:
Daniel A. Neff, Esq.
Wachtell, Lipton, Rosen & Katz
51 West 52nd Street
New York, New York 10019
Facsimile: (212) 403-2000
or to such other address as any party shall specify by written notice so given, and such notice shall be deemed to have been delivered as of the date so telecommunicated, personally delivered or mailed.
SECTION 10.3 Assignment; Binding Effect; Benefit. Neither this Agreement nor any of the rights, interests or obligations hereunder shall be assigned by any of the parties hereto (whether by operation of law or otherwise) without the prior written consent of the other parties. Subject to the preceding sentence, this Agreement shall be binding upon and shall inure to the benefit of the
parties hereto and their respective successors and assigns. Notwithstanding anything contained in this Agreement to the contrary, except for the provisions of Section 3.3, Article 4 and Sections 7.13 and 7.14 (other than the provisions regarding equitable adjustment of the Profit Sharing Plans) and except as provided in any agreements delivered pursuant hereto (collectively, the "Third Party Provisions"), nothing in this Agreement, expressed or implied, is intended to confer on any person other than the parties hereto or their respective heirs, successors, executors, administrators and assigns any rights, remedies, obligations or liabilities under or by reason of this Agreement. The Third Party Provisions may be enforced by the beneficiaries thereof.
SECTION 10.4 Entire Agreement. This Agreement, the exhibits to this Agreement, the Company Disclosure Letter, the Parent Disclosure Letter and any documents delivered by the parties in connection herewith constitute the entire agreement among the parties with respect to the subject matter hereof and supersede all prior agreements and understandings among the parties with respect thereto. No addition to or
39
modification of any provision of this Agreement shall be binding upon any party hereto unless made in writing and signed by all parties hereto.
SECTION 10.5 Amendments. This Agreement may be amended by the parties hereto, by action taken or authorized by their Boards of Directors, at any time before or after approval of matters presented in connection with the Merger by the stockholders of the Company or Parent, but after any such stockholder approval, no amendment shall be made which by law requires the further approval of stockholders without obtaining such further approval. This Agreement may not be amended except by an instrument in writing signed on behalf of each of the parties hereto.
SECTION 10.6 Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of Delaware without regard to its rules of conflict of laws. Each of the Company and Parent hereby irrevocably and unconditionally consents to submit to the exclusive jurisdiction of the courts of the State of Delaware and of the United States of America located in the State of Delaware (the "Delaware Courts") for any litigation arising out of or relating to this Agreement and the transactions contemplated hereby (and agrees not to commence any litigation relating thereto except in such courts), waives any objection to the laying of venue of any such litigation in the Delaware Courts and agrees not to plead or claim in any Delaware Court that such litigation brought therein has been brought in an inconvenient forum.
SECTION 10.7 Counterparts. This Agreement may be executed by the parties hereto in separate counterparts, each of which when so executed and delivered shall be an original, but all such counterparts shall together constitute one and the same instrument. Each counterpart may consist of a number of copies hereof each signed by less than all, but together signed by all of the parties hereto.
SECTION 10.8 Headings. Headings of the Articles and Sections of this Agreement are for the convenience of the parties only, and shall be given no substantive or interpretative effect whatsoever.
SECTION 10.9 Interpretation. In this Agreement:
(a) Unless the context otherwise requires, words describing the singular number shall include the plural and vice versa, and words denoting any gender shall include all genders and words denoting natural persons shall include corporations and partnerships and vice versa.
(b) The phrase "to the knowledge of" and similar phrases relating to knowledge of the Company or Parent, as the case may be, shall mean the actual knowledge of its executive officers.
(c) "Material Adverse Effect" with respect to the Company or Parent shall mean a material adverse effect or change on (a) the business or financial condition of a party and its Subsidiaries on a consolidated basis, except for such changes or effects in general economic, capital market, regulatory or political conditions or changes that affect generally the energy services industry or (b) the ability of the party to consummate the transactions contemplated by this Agreement or fulfill the conditions to closing. "Company Material Adverse Effect" and "Parent Material Adverse Effect" mean a Material Adverse Effect with respect to the Company and Parent, respectively.
SECTION 10.10 Waivers. Except as provided in this Agreement, no action taken pursuant to this Agreement, including, without limitation, any investigation by or on behalf of any party, shall be deemed to constitute a waiver by the party taking such action of compliance with any representations, warranties, covenants or agreements contained in this Agreement. The waiver by any party hereto of a breach of any provision hereunder shall not operate or be construed as a waiver of any prior or subsequent breach of the same or any other provision hereunder.
SECTION 10.11 Incorporation of Exhibits. The Company Disclosure Letter, the Parent Disclosure Letter and all exhibits attached hereto and referred to herein are hereby incorporated herein and made a part hereof for all purposes as if fully set forth herein.
SECTION 10.12 Severability. Any term or provision of this Agreement which is invalid or unenforceable in any jurisdiction shall, as to that jurisdiction, be ineffective to the extent of such invalidity or unenforceability without rendering invalid or unenforceable the remaining terms and provisions of this Agreement or
40
affecting the validity or enforceability of any of the terms or provisions of this Agreement in any other jurisdiction. If any provision of this Agreement is so broad as to be unenforceable, the provision shall be interpreted to be only so broadly as is enforceable.
SECTION 10.13 Enforcement of Agreement. The parties hereto agree that irreparable damage would occur in the event that any of the provisions of this Agreement were not performed in accordance with its specific terms or was otherwise breached. It is accordingly agreed that the parties shall be entitled
to an injunction or injunctions to prevent breaches of this Agreement and to enforce specifically the terms and provisions hereof in any Delaware Court, this being in addition to any other remedy to which they are entitled at law or in equity.
SECTION 10.14 Obligation of Parent. Whenever this Agreement requires Merger Sub (or its successors) to take any action, such requirement shall be deemed to include an undertaking on the part of Parent to cause Merger Sub to take such action and a guarantee of the performance thereof.
SECTION 10.15 Subsidiaries. As used in this Agreement, the word "Subsidiary" when used with respect to any party means any corporation or other organization, whether incorporated or unincorporated, of which such party directly or indirectly owns or controls at least a majority of the securities or other interests having by their terms ordinary voting power to elect a majority of the board of directors or others performing similar functions with respect to such corporation or other organization, or any organization of which such party is a general partner.
IN WITNESS WHEREOF, the parties have executed this Agreement and caused the same to be duly delivered on their behalf on the day and year first written above.
BAKER HUGHES INCORPORATED
By: /s/ MAX L. LUKENS --------------------------------- Name: Max L. Lukens Title: Chairman of the Board, President & CEO |
BAKER HUGHES DELAWARE I, INC.
By: /s/ LAWRENCE O'DONNELL, III --------------------------------- Name: Lawrence O'Donnell, III Title: Vice President |
WESTERN ATLAS INC.
By: /s/ ALTON J. BRANN --------------------------------- Name: Alton J. Brann Title: Chairman of the Board |
DCN: 98629178
LOAD-DATE: July 10, 1998
EXHIBIT 10.31
TAX SHARING AGREEMENT
by and between
WESTERN ATLAS INC.
and
UNOVA, INC.
dated as of October 31, 1997
TAX SHARING AGREEMENT
TABLE OF CONTENTS
ARTICLE I - DEFINITIONS 1997 Stub Period 4 Accounting Firm. 4 Acquisition. 4 Calendar Year. 4 Carryback Item 4 Code 4 Distribution Agreement 4 Distribution Date. 4 Filed UNOVA Group Separate Tax Liability 4 Filed UNOVA Group Separate Joint Tax Liability 5 Final Determination. 5 IRS. 5 Joint Return 5 Litton Agreement 5 Norand Tax 5 Notification Date. 5 Other Tax Return 5 Pre-Distribution Year. 5 Restructuring Taxes. 5 Tax. 6 Taxes. 6 Tax Benefit. 6 Tax Detriment. 6 Tax Item 6 Tax Reserves 6 Tax Return 6 UNOVA Business 6 UNOVA Distribution 7 UNOVA Group. 7 UNOVA Group Separate Joint Tax Liability 7 UNOVA Group Separate Taxable Income. 7 UNOVA Group Separate Tax Liability 7 |
UNOVA Indemnity Issue. 7 UNOVA Issue. 7 UNOVA Notice 7 Unrelated Person 7 Western Atlas Adjustment 7 Western Atlas Business 7 Western Atlas Consolidated Group 8 Western Atlas Group. 8 Western Atlas Issue. 8 Western Atlas Revision 8 ARTICLE II - FILING OF TAX RETURNS Section 2.1 - Manner of Filing 8 Section 2.2 - Pre-Distribution Tax Returns 9 Section 2.3 - Post-Distribution Tax Returns. 9 ARTICLE III - PAYMENT OF TAXES Section 3.1 - Unfiled Federal Taxes for Pre-Distribution Periods 9 Section 3.2 - Unfiled Joint Returns for Pre-Distribution Periods 12 Section 3.3 - Change in Federal Returns and Joint Returns. 14 Section 3.4 - Change in Other Pre-Distribution Year State, Local or Other Return 16 Section 3.5 - Change in Pre-Distribution Year Foreign Return 17 Section 3.6 - Restructuring Taxes. 17 Section 3.7 - Dual Consolidated Loss Closing Agreement 18 Section 3.8 - Liability for Taxes with Respect to Post-Distribution Periods. 19 Section 3.9 - Carrybacks 19 Section 3.10 - Statutes of Limitations 20 Section 3.11 - Earnings and Profits. 21 Section 3.12 - Liability for Norand Taxes. 21 Section 3.13 - Breach. 21 ARTICLE IV - INDEMNITY: COOPERATION AND EXCHANGE OF INFORMATION Section 4.1 - Indemnity. 21 |
Section 4.2 - Cooperation and Exchange of Information. 22 Section 4.3 - Reliance on Exchanged Information. 23 ARTICLE V - MISCELLANEOUS Section 5.1 - Reserves 24 Section 5.2 - Expenses 24 Section 5.3 - Payments 24 Section 5.4 - Entire Agreement; Termination of Prior Agreements Other Than Litton Agreement. 24 Section 5.5 - Notices. 24 Section 5.6 - Application to Present and Future Subsidiaries 25 Section 5.7 - Term 25 Section 5.8 - Titles and Headings. 25 Section 5.9 - Legal Enforceability 25 Section 5.10 - Further Assurances. 26 Section 5.11 - Parties in Interest 26 Section 5.12 - Setoff. 26 Section 5.13 - Change of Law 26 Section 5.14 - Governing Law and Interpretation. 26 Section 5.15 - Resolution of Certain Disputes. 26 Section 5.16 - Confidentiality 28 Section 5.17 - Limitation on Waivers 28 Section 5.18 - Counterparts. 28 Section 5.19 - Fair Meaning. 29 Section 5.20 - Construction. 29 Section 5.21 - Termination 29 |
TAX SHARING AGREEMENT
THIS TAX SHARING AGREEMENT (the "Agreement") is being entered into this
31st day of October, 1997, in connection with a Distribution and Indemnity Agreement (the "Distribution Agreement") dated as of October 31, 1997 by and between WESTERN ATLAS Inc., a Delaware corporation ("WESTERN ATLAS"), and UNOVA, Inc., a Delaware corporation ("UNOVA"), pursuant to which, among other things, WESTERN ATLAS will distribute to holders of its common stock all the issued and outstanding common stock of UNOVA (the "UNOVA Distribution"). Western Atlas, on behalf of itself and its present and future subsidiaries (the "Western Atlas Group"), and UNOVA on behalf of itself and its present and future subsidiaries (the "UNOVA Group"), are entering into this Agreement to provide for the allocation between the Western Atlas Group and the UNOVA Group of all responsibilities, liabilities and benefits relating to or affecting Taxes (as hereinafter defined) paid or payable by either of them for all taxable periods, whether beginning before or after the Distribution Date (as hereinafter defined) and to provide for certain other matters.
ARTICLE I
DEFINITIONS
As used in this Agreement, the following terms shall have the following meanings (such meanings to be equally applicable to both the singular and the plural forms of the terms defined):
"1997 Stub Period" shall have the meaning assigned to such term in Section 3.1(a) of this Agreement.
"Accounting Firm" shall have the meaning assigned to such term in Section 3.1(b)(2)(B) of this Agreement.
"Acquisition" shall have the meaning assigned to such term in Section 3.6(b) of this Agreement.
"Calendar Year" means the 52-53 week year ending on the Sunday nearest December 31.
"Carryback Item" shall have the meaning assigned to such term in Section 3.8(b) of this Agreement.
"Code" means the Internal Revenue Code of 1986, as amended, or any successor statute, and shall include corresponding provisions of any subsequently enacted federal tax laws.
"Distribution Agreement" shall have the meaning assigned to such term in the preface to this Agreement.
"Distribution Date" means the date determined by Western Atlas Board of Directors as of which the UNOVA Distribution shall be effected, which is presently contemplated to be October 31, 1997.
"Filed UNOVA Group Separate Tax Liability" means the amount determined
pursuant to Section 3.1(b) for the 1997 Stub Period.
"Filed UNOVA Group Separate Joint Tax Liability" means that amount determined pursuant to Section 3.2(b) for the 1997 Stub Period.
"Final Determination" shall mean the final resolution of liability for any tax for a taxable period (i) by IRS Form 870 or 870-AD (or any successor forms thereto), on the date of acceptance by or on behalf of the IRS, or by a comparable form under the laws of other jurisdictions; except that a Form 870 or 870-AD or comparable form that reserves
(whether by its terms or by operation of law) the right of the taxpayer to file a claim for refund and/or the right of the taxing authority to assert a further deficiency shall not constitute a Final Determination; (ii) by a decision, judgment, decree, or other order by a court of competent jurisdiction, which has become final and unappealable; (iii) by a closing agreement or accepted offer in compromise under Section 7121 or 7122 of the Code, or comparable agreements under the laws of other jurisdictions; (iv) by any allowance of a refund or credit in respect of an overpayment of Tax, but only after the expiration of all periods during which such refund may be recovered (including by way of offset) by the Tax imposing jurisdiction; or (v) by any other final disposition of liability in respect of a Tax provided for under applicable law, including by reason of the expiration of the applicable statute of limitations.
"IRS" means the Internal Revenue Service.
"Joint Return" means a state income tax return, including, but not limited to, a unitary, combined or consolidated state income tax return, that includes at least one Western Atlas Business and at least one UNOVA Business.
"Litton Agreement" shall have the meaning assigned to such term in Section 5.4 of this Agreement.
"Norand Tax" shall have the meaning assigned to such term in Section 3.11 of this Agreement.
"Notification Date" shall have the meaning assigned to such term in Section 3.1(b)(2)(B) of this Agreement.
"Other Tax Return" means any Tax Return other than (1) a federal income tax return, (2) a state or local tax return and (3) a foreign tax return.
"Pre-Distribution Year" means any taxable year beginning before the Distribution Date during which any member of the UNOVA Group was included in the Western Atlas Consolidated Group.
"Restructuring Taxes" means any Taxes, including related interest, penalties and additions to Tax and reasonable attorneys' fees, resulting from (1) the failure of the UNOVA Distribution to qualify as
a distribution described in Sections 355 and/or 368(a)(1)(D) of the Code or corresponding provisions of state tax law or (2) the application of Sections 355(e) of the Code to the UNOVA Distribution.
"Tax" means any of the Taxes.
"Taxes" means all forms of taxation, whenever created or imposed, and whether of the United States or elsewhere, and whether imposed by a local, municipal, governmental, state, federation or other body, and without limiting the generality of the foregoing, shall include income, sales, use, ad valorem, gross receipts, value added, franchise, transfer, recording, withholding, payroll, employment, excise, occupation, premium and property taxes, together with any related interest, penalties and additions to any such tax, or additional amounts imposed by any taxing authority (domestic or foreign) upon the UNOVA Group, the Western Atlas Group or any of their respective members or divisions or branches.
"Tax Benefit" means any item of loss, deduction, credit or any other Tax Item which decreases Taxes paid or payable, other than Tax Items resulting from an adjustment pursuant to Section 3.1(d) or 3.2(c).
"Tax Detriment" means any item of income, gain, recapture of credit or any other Tax Item which increases Taxes paid or payable, including taxes paid or payable to
Litton pursuant to the Litton Agreement, other than Tax Items previously taken into account pursuant to Section 3.1(d) and/or 3.2(c).
"Tax Item" means any item of income, gain, loss, deduction, credit, recapture of credit or any other item which increases or decreases Taxes paid or payable, including an adjustment under Code Section 481 resulting from a change in accounting method.
"Tax Reserves" shall have the meaning assigned to such term in Section 5.1 of this Agreement.
"Tax Return" means any return, filing, questionnaire or other document required to be filed, including requests for extensions of time, filings made with estimated tax payments, claims for refund and amended returns that may be filed, for any period with any taxing authority (whether domestic or foreign) in connection with any Tax or Taxes (whether or not a payment is required to be made with respect to such filing).
"UNOVA Business" means any present or future subsidiary, division or business of any member of the UNOVA Group which is not, or is not contemplated by the Distribution Agreement to be, part of the Western Atlas Group immediately after the UNOVA Distribution. UNOVA Business shall include any subsidiary, division or business listed on Schedule A hereto.
"UNOVA Distribution" shall have the meaning assigned to such term in the preface to this Agreement.
"UNOVA Group" shall have the meaning assigned to such term in the preface to this Agreement.
"UNOVA Group Separate Joint Tax Liability" shall have the meaning assigned to such term in Section 3.2(b) of this Agreement.
"UNOVA Group Separate Taxable Income" means, with respect to Calendar Year 1996 or the 1997 Stub Period, the sum of (i) the consolidated federal taxable income of the UNOVA Group members that were members of the Western Atlas Consolidated Group at any time during Calendar Year 1996 or Calendar Year 1997, determined as though such UNOVA Group members constituted a separate consolidated group of which UNOVA was the common parent and (ii) the UNOVA Group's portion of the federal taxable income of the FSC.
"UNOVA Group Separate Tax Liability" means, with respect to Calendar Year 1996 or the 1997 Stub Period, the sum of (i) the consolidated federal income tax liability of UNOVA Group members that were members of the Western Atlas Consolidated Group at any time during such year, determined as though such UNOVA Group members constituted a separate consolidated group of which UNOVA was the common parent, reduced by the tax benefit of any loss or credit that is limited at the UNOVA level but utilized at the Western Atlas Consolidated Group level and increased by the tax benefit of any loss or credit that is limited at the Western Atlas Consolidated Group level but utilized at the UNOVA level; and (ii) the UNOVA Group's portion of the federal income tax liability of the FSC.
"UNOVA Indemnity Issue" shall have the meaning assigned to such term in Section 4.1(a) of this Agreement.
"UNOVA Issue" shall have the meaning assigned to such term in Section 3.4(a) of this Agreement.
"UNOVA Notice" shall have the meaning assigned to such term in Section 3.1(b)(2)(B) of this Agreement.
"Unrelated Person" means any person (within the meaning of Section 7701(a)(1) of the Code) other than a party hereto or a corporation that is a controlled subsidiary (within the meaning of Section 368(c) of the Code) of such party immediately prior to the Acquisition of such party's stock or assets.
"Western Atlas Adjustment" shall have the meaning assigned to such term in
Section 3.1(b)(2)(A) of this Agreement.
"Western Atlas Business" means any present or future subsidiary, division or business of any member of the Western Atlas Group, other than a present or future subsidiary, division or business of any member
of the UNOVA Group. Western Atlas Business also shall include any former subsidiary, division or business of Western Atlas not listed on Schedule A hereto.
"Western Atlas Consolidated Group" means with respect to any taxable period, the affiliated group of corporations of which Western Atlas is the common parent (within the meaning of Section 1504 of the Code).
"Western Atlas Group" shall have the meaning assigned to such term in the preface to this Agreement.
"Western Atlas Issue" shall have the meaning assigned to such term in Section 3.4(a) of this Agreement.
"Western Atlas Revision" shall have the meaning ascribed to such term in Section 3.1(e) of this Agreement.
ARTICLE II
FILING OF TAX RETURNS
Section 2.1. MANNER OF FILING. All Tax Returns filed after the Distribution Date shall be prepared on a basis which is consistent with any opinion of counsel obtained by Western Atlas in connection with the UNOVA Distribution and shall be filed on a timely basis (including extensions) by the party responsible for such filing under this Agreement. In the absence of a change in controlling law, all Tax Returns filed after the date of this Agreement shall be prepared on a basis consistent with the elections, accounting methods, conventions, and principles of taxation used for the most recent taxable periods for which Tax Returns involving similar Tax Items have been filed, except to the extent that an inconsistent position would not result in a Tax Detriment to the other party; provided, however, that any deduction attributable to the exercise after the Distribution Date of a stock option (with respect to either Western Atlas stock or Litton Industries, Inc. Stock) under section 83(h) of the Code or Treasury Regulation section 1.83-6, or any deduction attributable to the disqualifying disposition of incentive stock option stock (with respect to either Western Atlas stock or Litton Industries, Inc. stock) or the disqualifying disposition of stock acquired through the Western Atlas Inc. 1996 Employee Stock Purchase Plan (with respect to either Western Atlas stock or UNOVA stock) under Section 421(b) of the Code, shall be claimed on the Tax Return of the UNOVA Group in the case of an employee, independent contractor, or director (other than a director who is an employee of Western Atlas) of any member of the UNOVA Group and on the Tax Return of the Western Atlas Group in the case of an employee, independent contractor or director (other than a director who is an employee of UNOVA) of any member of the Western Atlas Group. Subject to the provisions of this Agreement, all decisions relating to the preparation of Tax Returns shall be made in the sole
discretion of the party responsible under this Agreement for such preparation.
Section 2.2. PRE-DISTRIBUTION TAX RETURNS.
(a) Except as otherwise provided in this Section 2.2, all Tax Returns required to be filed for periods beginning before the Distribution Date shall be filed by UNOVA or the appropriate UNOVA Business.
(b) State and local tax returns (other than Joint Returns) and Other Tax Returns for all taxable periods beginning before the Distribution Date shall be filed by the Western Atlas Business or UNOVA Business, as the case may be, which had responsibility for filing such return for the last taxable period ending prior to the Distribution Date.
(c) All foreign Tax Returns for taxable periods beginning before the Distribution Date shall be filed by the legal entity which had responsibility for filing such return for the last taxable period ending prior to the Distribution Date, regardless of whether such entity was a member of the Western Atlas Group or the UNOVA Group before or after the Distribution Date.
(d) The United States consolidated federal income Tax Return for the Western Atlas Consolidated Group for the 1996 Calendar Year, if not filed before the Distribution Date, shall be filed by UNOVA. The United States consolidated federal income Tax Return for the Western Atlas Consolidated Group for the 1997 Calendar Year shall be filed by Western Atlas. All Joint Returns for the 1996 Calendar Year, if not filed before the Distribution Date, shall be filed by Western Atlas, and all Joint Returns for the 1997 Calendar Year shall be filed by Western Atlas.
(e) IRS Form 8697, Interest Computation Under the Look-Back Method for Completed Long-Term Contracts, and any comparable state forms, for the Western Atlas Consolidated Group for the 1997 Calendar Year shall be prepared by UNOVA and filed by Western Atlas.
Section 2.3. POST-DISTRIBUTION TAX RETURNS. All Tax Returns of the UNOVA Group for periods beginning after the Distribution Date shall be filed by UNOVA or the appropriate UNOVA Business and all Tax Returns of the Western Atlas Group for periods beginning after the Distribution Date shall be filed by Western Atlas or the appropriate Western Atlas Business.
ARTICLE III
PAYMENT OF TAXES
Section 3.1. UNFILED FEDERAL TAXES FOR PRE-DISTRIBUTION PERIODS. (a) On or about October 15, 1997, Western Atlas shall pay to or receive from, as appropriate, the UNOVA Group a sum equal to the difference between (i) the UNOVA Group Separate Tax Liability for Calendar Year 1996, and (ii) an amount equal to all payments previously made by the
UNOVA Group or any member thereof. On or about March 31, 1998, UNOVA shall deliver to Western Atlas an estimate of the UNOVA Group Separate Taxable Income for the period beginning on December 30, 1996 and ending on the last day in which the members of the UNOVA Group are includible in the Western Atlas Consolidated Group (the "1997 Stub Period"). On or about April 30, 1998, UNOVA shall pay to Western Atlas, or Western Atlas shall pay to UNOVA, as appropriate, a sum equal to the difference (if any) between (i) Western Atlas's estimate of the UNOVA Group Separate Tax Liability for the 1997 Stub Period, and (ii) an amount equal to all payments previously made by the UNOVA Group or any member thereof. Not later than one business day before April 15, 1998, Western Atlas shall deliver to UNOVA a schedule showing its estimate of the UNOVA Group Separate Tax Liability for the 1997 Stub Period and the amount payable by UNOVA to Western Atlas, or by Western Atlas to UNOVA, as the case may be, pursuant to this Section 3.1(a).
(b) UNOVA shall pay to Western Atlas, or Western Atlas shall pay to UNOVA, as appropriate, an amount reflecting the difference (if any) between (i) the Filed UNOVA Group Separate Tax Liability for the 1997 Stub Period and (ii) an amount equal to all federal income tax payments made by the UNOVA Group with respect to such period. Such payment shall be made on or before November 15, 1998. Amounts due or refunds receivable from IRS Form 8697 and any comparable state forms which relate to the UNOVA Group shall be allocated to UNOVA for all periods. The Filed UNOVA Group Separate Tax Liability for the 1997 Stub Period shall be determined pursuant to the following procedures:
(1) On or before June 30, 1998, UNOVA shall deliver to Western Atlas all information (including without limitation, Federal Form 1120, prepared on a separate basis in accordance with past practice, together with schedules, statements and supporting documentation) as Western Atlas may reasonably request from time to time, with respect to each member of the UNOVA Group that was a member of the Western Atlas Consolidated Group at any time in Calendar Year 1997, for the preparation of the federal income Tax Return of the Western Atlas Consolidated Group for Calendar Year 1997. All information provided by UNOVA pursuant to this paragraph shall correctly reflect the facts regarding the income, properties, operations and status of each such member of the UNOVA Group and shall be prepared applying elections and methods of accounting that are consistent with those made or used by such member in prior taxable periods or such other elections and methods as may be reasonably agreed upon by the parties.
(2) (A) Western Atlas shall make any adjustments to the information so submitted that it deems appropriate (individually, a "Western Atlas Adjustment") and shall prepare and file the consolidated federal income Tax Return for the Western Atlas Consolidated Group for Calendar Year 1997. Western Atlas shall determine, in good faith, the UNOVA Group Separate Tax Liability for 1997 Stub Year, including amounts due or refunds receivable with respect to IRS Form 8697. Western Atlas
shall notify UNOVA in writing of the amount of such liability no later than October 15, 1998. Such notification shall include an explanation of the basis for any Western Atlas Adjustments and a copy of the calculations of the UNOVA Group Separate Tax Liability.
(B) On or before November 15, 1998, UNOVA shall provide Western Atlas with written notice (the "UNOVA Notice") of all Western Atlas Adjustments with which UNOVA disagrees, together with the grounds for such disagreement and any supporting documentation.
If and to the extent that any Western Atlas Adjustments remain in dispute, Western Atlas shall provide to any branch of a nationally recognized accounting firm not then engaged by either party as its primary auditor (hereinafter, "Accounting Firm") all portions of the UNOVA Notice pertaining to the disputed Western Atlas Adjustments, together with a statement of Western Atlas's position with respect to each such adjustment and any supporting documentation. Accounting Firm's fees and expenses shall be borne equally by Western Atlas and UNOVA. Western Atlas shall provide such information to Accounting Firm no later than December 15, 1998. Accounting Firm shall resolve all disputed Western Atlas Adjustments and shall notify the parties of such resolution, which shall be binding on the parties hereto. Such notification shall be given on or before January 15, 1999 (the "Notification Date"). Any communication by either party with Accounting Firm prior to the applicable Notification Date shall be in writing, with a copy simultaneously furnished to the other party. If Accounting Firm cannot resolve a disputed Western Atlas Adjustment by the applicable Notification Date, Western Atlas shall use its sole discretion in reflecting such disputed Western Atlas Adjustment on its federal income Tax Return. Accounting Firm shall be directed to proceed to a resolution of such disputed Western Atlas Adjustment as soon as practicable, and, if such resolution differs from the manner in which the disputed Western Atlas Adjustment was reflected on Western Atlas's federal income Tax Return, Western Atlas shall file an amended return reflecting such difference within two months of such resolution. Western Atlas shall make the appropriate adjustments to the amount of the Filed UNOVA Group Separate Tax Liability for the 1997 Stub Period, and shall promptly pay UNOVA any balance otherwise due UNOVA within three months of such resolution.
(c) Either party may extend any date referenced in this Section 3.1 with the consent of the other party, and such consent shall not be unreasonably withheld and shall be deemed to be given unless the other party objects to such extension in writing within a reasonable time after the request therefor.
(d) For all known tax adjustments, including credits, for the UNOVA Group for which an amended federal return has not been filed as of the Distribution Date, UNOVA shall notify Western Atlas within 90 days of the Distribution Date of these known adjustments and resulting tax
liabilities or refunds. The resulting tax liabilities or refunds shall be an amount by which the actual Taxes paid or payable Western Atlas shall increase or decrease. Within 30 days of such notification, Western Atlas shall pay to UNOVA, or UNOVA shall pay to Western Atlas, as appropriate, such liability or refund as the case may be.
(e) (A) Western Atlas shall make any revisions to the known adjustments so submitted that it deems appropriate (individually, a "Western Atlas Revision") and shall determine, in good faith, a resulting tax liability of the known adjustments including any Western Atlas Revisions.
Western Atlas shall notify UNOVA of the amount of such liability including an explanation for any Western Atlas Revision no later than 180 days from the Distribution Date.
(B) Within 30 days of such notice from Western Atlas, UNOVA shall provide Western Atlas with a response of all Western Atlas Revisions with which UNOVA disagrees, together with an explanation.
If and to the extent that any Western Atlas Revisions remain in dispute, Western Atlas and UNOVA shall jointly meet with Accounting Firm. The parties shall discuss all explanations, notices and calculations provided under this Subsection. Accounting Firm's fees and expenses shall be borne equally by Western Atlas and UNOVA. Accounting Firm shall resolve all disputed Western Atlas Revisions and shall notify the parties of such resolution, which shall be binding on the parties hereto. Such notification shall be given within 30 days of such meeting. Any communication with the Accounting Firm will include Western Atlas and UNOVA. If Accounting Firm cannot resolve a disputed Western Atlas Revision within the applicable period, an extension of time may be granted upon agreement of all parties. Western Atlas shall make the appropriate adjustments to the resulting tax liability, and Western Atlas or UNOVA, as the case may be, shall promptly pay any balance otherwise due UNOVA or Western Atlas, as appropriate, within 30 days of such resolution.
Section 3.2. UNFILED JOINT RETURNS FOR PRE-DISTRIBUTION PERIODS. (a) On or about November 15, 1997, Western Atlas shall pay to or receive from, as appropriate, the UNOVA Group a sum equal to the difference between (i) the UNOVA Group Separate Joint Tax Liability for Calendar Year 1996, and (ii) an amount equal to all payments previously made by the UNOVA Group or any member thereof. On or about April 30, 1998, UNOVA shall pay to Western Atlas, or Western Atlas shall pay to UNOVA, as appropriate, a sum equal to the difference (if any) between (i) Western Atlas's estimate of the UNOVA Group Separate Joint Tax Liability for the 1997 Stub Period, computed using 1996 apportionment factors and the taxable income numbers supplied in Section 3.1(a), and (ii) an amount equal to all payments previously made by the UNOVA Group or any member thereof. Not later than one business day before April 15, 1998, Western Atlas shall deliver to UNOVA a schedule showing its estimate of the UNOVA Group Separate Joint Tax Liability for the 1997
Stub Period and the amount payable by UNOVA to Western Atlas, or by Western Atlas to UNOVA, as the case may be, pursuant to this Section 3.2(a).
(b) UNOVA shall pay to Western Atlas, or Western Atlas shall pay to UNOVA, as appropriate, an amount reflecting the difference (if any) between (i) the Filed UNOVA Group Separate Joint Tax Liability for the 1997 Stub Period and (ii) an amount equal to all tax payments made by the UNOVA Group with respect to such period. Such payment shall be made on or before December 15, 1998. Amounts due or refunds receivable from any state or other taxing jurisdiction with regard to the interest computations under the look-back method for completed long-term contracts which relate to the UNOVA Group shall be allocated to UNOVA for all periods. The Filed UNOVA Group Separate Joint Tax Liability for the 1997 Stub Period shall be determined pursuant to the following procedures:
(1) On or before July 31, 1998, UNOVA shall deliver to Western Atlas all information (including without limitation, schedules, statements and supporting documentation) as Western Atlas may reasonably request from time to time, with respect to each member of the UNOVA Group that Western Atlas, in its sole discretion, deems includible in the filing of a Joint Return for Calendar Year 1997. All information provided by UNOVA pursuant to this paragraph shall correctly reflect the facts regarding the income, properties, operations and status of each such member of the UNOVA Group and shall be prepared applying elections and methods of accounting that are consistent with those made or used by such member in prior taxable periods or such other elections and methods of accounting as may be reasonably agreed upon by the parties.
(2) (A) Western Atlas shall adjust the information so submitted in good faith and shall prepare and file all Joint Returns for Calendar Year 1997. Western Atlas shall determine, in good faith, the UNOVA Group Separate Joint Tax Liability of the UNOVA Group for each state in which UNOVA is included in a Joint Return for Calendar Year 1997, reduced by the tax benefit of any loss or credit that is limited at the UNOVA level but utilized in the Joint Return and increased by the tax benefit of any loss or credit that is limited at the Western Atlas Consolidated Group level but utilized at the UNOVA level (the "UNOVA Group Separate Joint Tax Liability").
Western Atlas shall notify UNOVA in writing of the amount of such liability no later than November 30, 1998. Such notification shall include an explanation of the basis for any Western Atlas Adjustments and a copy of the calculations of the UNOVA Group Separate Joint Tax Liability.
(B) Any adjustments made by Western Atlas under Section 3.2(b)(2)(A) shall be revised in the manner set forth in Section 3.1(b)(2)(B) in
accordance with the procedures set forth therein and moving the dates specified therein one month forward or substituting for the dates specified therein such other dates as may be mutually agreed upon by the parties.
(c) For all known tax adjustments, including credits, for the UNOVA Group for which an amended Joint Return has not been filed as of the Distribution Date, UNOVA shall notify Western Atlas within 120 days of the Distribution Date of those known adjustments and resulting tax liabilities or refunds. The resulting tax liabilities or refunds shall be an amount by which actual Taxes paid or payable by Western Atlas shall increase or decrease or, if both parties agree, an amount calculated using an agreed-upon effective state tax rate. Within 30 days after such notification, Western Atlas shall pay to UNOVA, or UNOVA shall pay to Western Atlas, as appropriate, such liability or refund, as the case may be. The known tax adjustments so submitted shall be revised in the manner described in Section 3.1(e) in accordance with the procedures set forth therein.
(d) Either party may extend any date referenced in this Section 3.2 with the consent of the other party, and such consent shall not be unreasonably withheld and shall be deemed to be given unless the other party objects in writing within a reasonable time after the request therefor.
Section 3.3. CHANGE IN FEDERAL RETURNS AND JOINT RETURNS. (a) The parties acknowledge that there has not yet been a Final Determination of the federal income tax liability of the Western Atlas Group for any taxable year after the fiscal year ended August 1, 1982 and that certain members of the UNOVA Group were included in the Western Atlas Consolidated Group from March 18, 1994 through the Distribution Date. Except as otherwise provided in this Agreement, Western Atlas and each member of the Western Atlas Group shall jointly and severally indemnify UNOVA and each member of the UNOVA Group against and hold them harmless from federal income taxes and all Taxes with respect to Joint Returns for all periods beginning before the Distribution Date and shall be entitled to receive and retain all refunds of federal income taxes and Taxes with respect to Joint Returns with respect to periods beginning before the Distribution Date.
(b) Except as otherwise provided in this Agreement, if as a result of any audit, amendment or other change in a federal income tax return or a Joint Return as filed by Western Atlas or UNOVA with respect to any period, the Final Determination of an adjustment to any Tax Item generates a Tax Detriment to Western Atlas or any Western Atlas Business for any period and a corresponding Tax Benefit for UNOVA or any of the UNOVA Businesses for any period (a "Reimbursable Adjustment"), then Western Atlas shall notify UNOVA of such Reimbursable Adjustment.
(c) If UNOVA receives a notice of a Reimbursable Adjustment, UNOVA shall use reasonable efforts to have the Tax Benefit to UNOVA flow through to Western Atlas.
(d) If UNOVA is unable to have a Tax Benefit flow through to Western Atlas as described in Section 3.3(c), within ninety (90) days of receiving notice of a Reimbursable Adjustment that generates a Tax Benefit for UNOVA or any member of the UNOVA Group for any taxable period(s) with respect to which (i) a federal income tax return or a Joint Return has been filed, and (ii) the applicable statute of limitations has not expired, UNOVA (or the appropriate member of the UNOVA Group) shall file a refund claim pursuant to Code Section 6511 reflecting such Tax Benefit (or a comparable provision of state law in the case of a Joint Return). UNOVA shall, within 30 days after receipt, pay to Western Atlas any refunds received by UNOVA resulting from the filing of a refund claim pursuant to the preceding sentence, together with any interest refunded with respect thereto. In the event that UNOVA would have received a refund with respect to such claim had such refund not been offset by the United States Government (or the relevant state government in the case of a Joint Return) against deficiencies, interest or penalties assessed against UNOVA or any member of the UNOVA Group, UNOVA shall pay to Western Atlas, within 30 days after receipt of written notice of such offset, an amount equal to the amount of such offset, together with interest at the overpayment rate established under Section 6621 of the Code.
If, for any taxable year, UNOVA is required to and does make a repayment to the IRS (or a state governmental authority in the case of a Joint Return) of any portion of a refund described herein, then Western Atlas shall pay to UNOVA, within 30 days following the date UNOVA notifies Western Atlas of such repayment, the amount of such repayment, including related interest.
(e) In the event that UNOVA receives notice of a Reimbursable Adjustment that
generates a Tax Benefit for UNOVA or any member of the UNOVA Group for any
taxable period(s) with respect to which a federal income tax return or a Joint
Return has not been filed and UNOVA is unable to have such Tax Benefit flow
through to Western Atlas as described in Section 3.3(c), then UNOVA (or the
appropriate member of the UNOVA Group) shall file federal Form 1120(s) (or
corresponding form under relevant state law in the case of a Joint Return)
reflecting such Tax Benefit and shall pay to Western Atlas, no later than thirty
(30) days after the filing of such return(s), the amount by which such Tax
Benefit actually reduces the federal income taxes and/or Taxes with respect to a
Joint Return payable by UNOVA or such member of the UNOVA Group with respect to
such taxable period(s), using the appropriate statutory income tax rate
applicable to such period(s). If, pursuant to a Final Determination for any
taxable year, UNOVA is required to and does make a payment to the IRS (or a state governmental authority in the case of a Joint Return) representing any portion of the amount paid to Western Atlas pursuant to the preceding sentence, then Western Atlas shall pay to UNOVA, within 30 days following the date UNOVA notifies Western Atlas of such payment to the IRS (or a state governmental authority in the case of a Joint Return), the amount of such payment, including related interest.
(f) Western Atlas may notify UNOVA of a Reimbursable Adjustment prior to the Final Determination of such adjustment if Western Atlas, in its sole discretion, determines that such Reimbursable Adjustment may, upon Final Determination, generate a Tax Benefit for UNOVA with respect to which a refund claim may be barred by the applicable statute of limitations. If Western Atlas so requests, UNOVA shall file a refund claim for the appropriate taxable period(s) reflecting such Tax Benefit, and shall pay to Western Atlas any Tax and interest refunded with respect thereto under the terms and conditions set forth in subsection (c) of this Section 3.3. All refund claims filed by UNOVA pursuant to this Section 3.3(e) shall be prepared in cooperation with Western Atlas, shall fully explain the circumstances giving rise to the claim and shall be identified with the notation "Protective Claim".
(g) If as a result of any audit, amendment or other change in a federal income Tax Return or a Joint Return filed by Western Atlas or UNOVA with respect to any period beginning after the Distribution Date, the Final Determination of an adjustment to any Tax Item generates a Tax Detriment to UNOVA or any UNOVA Business and a corresponding Tax Benefit for Western Atlas or any Western Atlas Business for any period, then the provisions of subsections (b), (c), (d), (e) and (f) of this Section 3.3 shall be applied by substituting Western Atlas for UNOVA and UNOVA for Western Atlas, as the context requires.
(h) Any payment not made on or before the last day on which such payment could be timely made under this Section 3.3 shall thereafter bear interest at the rate established for large corporate underpayments pursuant to Section 6621(c)(1) of the Code.
(i) Notwithstanding any provision of this Agreement to the contrary, the total amount payable by UNOVA to Western Atlas with respect to any Reimbursable Adjustment pursuant to subsections (c), (d) and/or (e) of this Section 3.3 shall not exceed the amount of the Taxes paid by Western Atlas with respect to such adjustment.
Section 3.4. CHANGE IN OTHER PRE-DISTRIBUTION YEAR STATE, LOCAL OR OTHER RETURN.
(a) Except as otherwise provided in this Section 3.4, if as a result of any
audit, amendment or other change in a state or local tax return (other than a
Joint Return) or any Other Tax Return filed with respect to any period beginning
before the Distribution Date, there is an adjustment to any Tax Item, then
Western Atlas shall be responsible for and shall hold UNOVA harmless from any
such adjustment generated by or attributable to Western Atlas or any Western
Atlas
Business (a "Western Atlas Issue"), and UNOVA shall be responsible for and shall hold Western Atlas harmless from any such adjustment generated by or attributable to UNOVA or any UNOVA Business (a "UNOVA Issue"). Upon request by Western Atlas, UNOVA or any member of the UNOVA Group shall use its reasonable best efforts to cooperate in any contest of such UNOVA Issue.
(b) Any payment required to be made under this Section 3.4 shall be inclusive of interest and penalties and shall be made no later than 30 days after the party required to make such payment receives written notice of a Final Determination of the Western Atlas Issue or UNOVA Issue, as the case may be, giving rise to such payment; provided, however, that no payment shall be due under this Section 3.4 unless the total amount payable with respect to any individual state or local return (other than a Joint Return) or Other Tax Return by Western Atlas or by UNOVA, as the case may be, equals or exceeds $10,000 exclusive of interest and penalties. Any payment not made within the 30-day period described in the preceding sentence shall thereafter bear interest at the rate established for large corporate underpayments pursuant to Section 6621(c)(1) of the Code.
Section 3.5. CHANGE IN PRE-DISTRIBUTION YEAR FOREIGN RETURN. Any legal entity responsible for filing a foreign Tax Return with respect to any taxable period beginning prior to the Distribution Date shall be responsible for the payment of all Taxes, penalties and interest whenever assessed, due or payable in connection therewith and shall be entitled to all refunds, whenever granted, attributable thereto, regardless of whether such legal entity is a member of the Western Atlas Group or the UNOVA Group before or after the Distribution Date. Notwithstanding the foregoing, if a decrease in foreign Taxes results in a Tax Detriment to Western Atlas and a corresponding Tax Benefit to UNOVA or any of the UNOVA Businesses, UNOVA shall pay Western Atlas an amount equal to such Tax Detriment. In the event that an increase in foreign Taxes results in a Tax Benefit to Western Atlas and a corresponding Tax Detriment to UNOVA or any of the UNOVA Businesses, Western Atlas shall pay UNOVA an amount equal to the amount by which such Tax Benefit actually reduces the Taxes of Western Atlas.
Section 3.6. RESTRUCTURING TAXES. (a) Notwithstanding any other provision of this Agreement to the contrary, and except as otherwise provided in this Section 3.6, Western Atlas shall pay fifty percent (50%) of all Restructuring Taxes and UNOVA shall pay fifty percent (50%) of all Restructuring Taxes. UNOVA and each member of the UNOVA Group will jointly and severally indemnify Western Atlas and each member of the Western Atlas Group against and hold them harmless from any payment of Restructuring Taxes in excess of fifty percent (50%) of such taxes, and Western Atlas and each member of the Western Atlas Group will jointly and severally indemnify UNOVA and each member of the UNOVA Group against and hold them harmless from any payment of Restructuring Taxes in excess of fifty percent
(50%) of such taxes.
(b) In the event that any Restructuring Taxes are attributable to the acquisition ("Acquisition") of fifty percent (50%) or more of the stock or assets of Western Atlas or UNOVA by an Unrelated Person, then the party so acquired, or the party whose assets were so acquired, as the case may be, shall pay and shall indemnify and hold harmless the other party to this Agreement from and against any and all Restructuring Taxes and from and against any costs whatsoever connected with such Restructuring Taxes. For purposes of this Section 3.6(b), a Restructuring Tax is attributable to an Acquisition if the Acquisition occurs prior to the assessment of such Restructuring Tax.
(c) Any payment required to be made pursuant to this Section 3.6 shall be made no later than 30 days after the payor receives written notice of a Final Determination of such Restructuring Taxes. Any payment not so made within 30 days shall thereafter bear interest at the rate established for large corporate underpayments pursuant to Section 6621(c)(1) of the Code.
(d) Neither Western Atlas nor UNOVA shall engage in any acts, other than an Acquisition, which would result in any Restructuring Taxes. In the event that any Restructuring Taxes are attributable to such acts, the party so engaged shall pay and shall indemnify and shall hold harmless the other party to this Agreement from and against any such Restructuring Taxes.
Section 3.7. DUAL CONSOLIDATED LOSS CLOSING AGREEMENT. Prior to the filing of the 1997 federal income tax return of the Western Atlas Consolidated Group, in accordance with Treasury Regulation section 1.1503-2(g)(2)(iv)(B)(2)(i), WAI and UNOVA will enter into a closing agreement with the IRS providing that WAI and UNOVA will be jointly and severally liable for the total amount of the recapture of dual consolidated loss and interest charge required in Treasury Regulation section 1.1503-2(g)(2)(vii) related to Norand's dual consolidated losses, if there is a triggering event described in Treasury Regulation section 1.1503-2(g)(2)(iii).
In accordance with Treasury Regulation section 1.1503-2(g)(2)(iv)(B)(2)(ii), WAI will agree with the IRS to treat any potential recapture amount under Treasury Regulation section 1.1503-2(g)(2)(vii) related to Norand's dual consolidated losses as unrealized built in gain for purposes of Section 384(a) of the Code, subject to any applicable exceptions thereunder.
In accordance with Treasury Regulation section 1.1503-2(g)(2)(iv)(B)(2)(iii), WAI will file, with the timely filed 1997 federal income tax return of the Western Atlas Consolidated Group, the agreement described in Treasury Regulation section 1.1503-2(g)(2)(i).
Prior to the filing of the 1997 federal income tax return of the Western Atlas Consolidated Group, in accordance with Treasury Regulation section 1.1503-2(g)(2)(iv)(B)(2)(i), WAI and UNOVA will enter into a closing agreement with the IRS providing that WAI and UNOVA will be jointly and severally liable for the total amount of the recapture of dual consolidated loss and interest charge required in Treasury Regulation section 1.1503-2(g)(2)(vii) related to UNOVA Business' dual consolidated losses, if there is a triggering event described in Treasury Regulation section 1.1503-2(g)(2)(iii).
In accordance with Treasury Regulation section 1.1503-2(g)(2)(iv)(B)(2)(ii),
UNOVA will agree with the IRS to treat any potential recapture amount under
Treasury Regulation section 1.1503-2(g)(2)(vii) related to Norand's and UNOVA
Business' dual consolidated losses as unrealized built-in gain for purposes of
Section 384(a) of the Code, subject to any applicable exceptions thereunder.
In accordance with Treasury Regulation section 1.1503-2(g)(2)(iv)(B)(2)(iii), UNOVA will file, with its 1997 UNOVA Group consolidated Tax Return for the short period beginning the day after the Distribution Date and ending on December 28, 1997, the agreement described in Treasury Regulation section 1.1503-2(g)(2)(i).
Section 3.8. LIABILITY FOR TAXES WITH RESPECT TO POST-DISTRIBUTION PERIODS. Unless otherwise provided in this Agreement, the Western Atlas Group shall pay all Taxes and shall be entitled to receive and retain all refunds of Taxes with respect to periods beginning after the Distribution Date which are attributable to Western Atlas Businesses. Unless otherwise provided in this Agreement, the UNOVA Group shall pay all Taxes and shall be entitled to receive and retain all refunds of Taxes with respect to periods beginning after the Distribution Date which are attributable to UNOVA Businesses.
Section 3.9. CARRYBACKS. (a) If, for any taxable year beginning on or after the Distribution Date, a member of the UNOVA Group (or a successor to such member) incurs a net operating loss that may be carried back to a Pre-Distribution Year in which such member was a member of the Western Atlas Consolidated Group, such member shall make an election pursuant to Section 172(b)(3) of the Code, unless Western Atlas, in its sole discretion, consents to treat such net operating loss as a Carryback Item pursuant to paragraph (b) of this Section 3.9.
(b) If, for any taxable year beginning on or after the Distribution Date, a member of the UNOVA Group (or a successor to such member) incurs a net capital loss, business tax credit, or foreign tax credit (each a "Carryback Item") that may be carried back to a consolidated federal income tax return which was filed by the Western Atlas Consolidated Group, UNOVA (or such member of the UNOVA Group) may file a refund claim pursuant to Code section 6411 reflecting such
Carryback Item. In the event that UNOVA (or such member of the UNOVA Group) shall not elect to file such a claim (or shall not be eligible to file such claim under applicable law), Western Atlas shall, at the request and expense of UNOVA, file amended returns or refund claims reflecting such Carryback Item. Western Atlas shall, within 30 days after receipt, pay to UNOVA any refunds received by Western Atlas resulting from the filing of a refund claim pursuant to the foregoing provisions of this Section 3.9(b) (without regard to whether the income or tax in the Pre-Distribution Year was earned or paid, as the case may be, by Western Atlas or by UNOVA), together with any interest refunded with respect thereto. In the event that Western Atlas would have received a refund with respect to such claim had such refund not been offset by the United States Government against deficiencies, interest or penalties assessed against the Western Atlas Consolidated Group or any member thereof (other than deficiencies, interest or penalties attributable to (i) the operations of the UNOVA Group and with respect to which the UNOVA Group would otherwise be responsible under the terms of this Agreement or (ii) a taxable year of the Western Atlas Consolidated Group for which the statute of limitations has expired), Western Atlas shall pay to UNOVA, within 30 days after receipt of notice of such offset, an amount equal to the amount of such offset, together with interest at the overpayment rate established under Section 6621 of the Code. To the extent that a member of the Western Atlas Group or a member of the UNOVA Group receives a double benefit as a result of this Section 3.9(b) and the operation of the Code, Western Atlas or UNOVA, respectively, will compensate UNOVA or Western Atlas, respectively, for the duplication of the benefit. If, for any taxable year, Western Atlas is required to and does make a repayment to the IRS of any portion of a refund described herein, then UNOVA shall pay to Western Atlas, within 30 days following the date Western Atlas notifies UNOVA of such repayment, the amount of such repayment, including interest.
(c) Rules similar to those provided in Sections 3.9(a) and 3.9(b) with respect to federal income Tax Returns shall be applied to Joint Returns.
Section 3.10. STATUTES OF LIMITATIONS.
(a) Except as otherwise provided in this Agreement, UNOVA or Western Atlas may allow a statute of limitations to expire, extend a statute, or make exceptions for any Tax Item in a final agreement with the IRS or other taxing authority in respect of any taxable period ending after the Distribution Date, as UNOVA or Western Atlas in its sole discretion may determine.
(b) At least six months prior to the expiration of the statute of limitations with respect to any consolidated federal income Tax Return or any Joint Return of UNOVA for any taxable period, UNOVA shall advise
Western Atlas in writing of the date of such expiration.
Section 3.11. EARNINGS AND PROFITS. The allocation of earnings and profits described in Section 312(h) of the Code and Treasury Regulation section 1.312-10 shall be made by Western Atlas in its sole discretion and its good faith determination shall be binding on the parties hereto. Western Atlas shall provide such allocation to UNOVA on or before the second anniversary of the Distribution Date.
Section 3.12. LIABILITY FOR NORAND TAXES. Notwithstanding any other provision of this Agreement to the contrary, UNOVA shall represent Norand Corporation in connection with, and shall pay and hold harmless Western Atlas from and against any and all Taxes, together with related penalties and interest, assessed in respect of any audit, amendment or other change in a Tax Return filed by or on behalf of Norand Corporation for any taxable period ending prior to the date upon which Norand Corporation became a member of the Western Atlas Consolidated Group (hereinafter, "Norand Taxes").
Section 3.13. BREACH. Western Atlas shall indemnify and hold harmless each member of the UNOVA Group and UNOVA shall indemnify and hold harmless each member of the Western Atlas Group from and against any Taxes, penalties or interest required to be paid as a result of the breach by a member of the Western Atlas Group or the UNOVA Group, as the case may be, of any obligation under this Agreement.
ARTICLE IV
INDEMNITY: COOPERATION AND EXCHANGE OF INFORMATION
Section 4.1. INDEMNITY.
(a) Western Atlas shall have full responsibility and discretion in the handling of any federal income tax controversy or controversy with respect to a Joint Return, including, without limitation, any audit, protest to the Appeals Division of the IRS, or litigation in Tax Court or any other court of competent jurisdiction or comparable state governmental authority in the case of any Joint Return of the Western Atlas Consolidated Group. Upon request by Western Atlas, UNOVA or any member of the UNOVA Group shall use its reasonable best efforts to cooperate in a defense in any such federal income tax controversy or Joint Return controversy with respect to any Reimbursable Adjustment, or any Restructuring Tax, for which UNOVA could be liable under Section 3.3 or 3.6 of this Agreement (hereinafter, a "UNOVA Indemnity Issue").
(b) Western Atlas shall (i) promptly notify UNOVA of any inquiries by any taxing authority or any other administrative, judicial or other governmental authority that relate to any UNOVA Indemnity Issue or any liability of any member of
the UNOVA Group that might arise under this Agreement, (ii) shall provide UNOVA with such notice and information as is necessary to keep UNOVA reasonably apprised of the progress of any audit or proceeding involving a UNOVA Indemnity Issue and (iii) shall in good faith consider all reasonable suggestions of UNOVA with respect to the contest of such issue. UNOVA shall promptly notify Western Atlas of any inquiries by any taxing authority or any other administrative, judicial or other governmental authority that relate to any Tax that may be imposed on any member of the Western Atlas Group or any liability of any member of the Western Atlas Group that might arise under this Agreement.
Section 4.2. COOPERATION AND EXCHANGE OF INFORMATION. (a) Western Atlas, on behalf of itself and each member of the Western Atlas Group, agrees to provide the UNOVA Group, and UNOVA, on behalf of itself and each member of the UNOVA Group, agrees to provide the Western Atlas Group, with such cooperation and information as the other shall reasonably request in connection with the preparation or filing of any Tax Return or claim for refund contemplated by this Agreement or in conducting any audit or other proceeding in respect of Taxes. Such cooperation and information shall include without limitation promptly forwarding copies of appropriate notices and forms or other communications received from or sent to any taxing authority which relate to Western Atlas Businesses in the case of the UNOVA Group and UNOVA Businesses in the case of the Western Atlas Group, or which relate to any Tax Item for which the other party may bear responsibility under the terms of this Agreement, and providing copies of all relevant Tax Returns, together with accompanying schedules and related workpapers, documents relating to rulings or other determinations by taxing authorities, including, without limitation, foreign taxing authorities, and records concerning the ownership and tax basis of property, which either party may possess. Western Atlas shall make available to UNOVA any information in Western Atlas's possession that would enable UNOVA to compute the tax basis of its assets or stock. UNOVA shall collect and make available to Western Atlas foreign tax receipts with respect to periods beginning before the Distribution Date, regardless of when such foreign tax receipts are issued. Each party shall make its employees and facilities available on a mutually convenient basis to provide explanation of any documents or information provided hereunder. However, neither party or its employees shall make any voluntary disclosures to any taxing authority, respecting any taxable period or Tax Item for which the other party may bear responsibility under the terms of this Agreement, without the specific prior consent of such other party, which consent shall not be unreasonably withheld.
(b) Subject to subsection (d) of this Section 4.2, UNOVA and Western Atlas agree to retain all Tax Returns, related schedules and workpapers, and all material records and other documents relating thereto existing on the date hereof or created through or with respect to periods ending on or before the first anniversary of the
Distribution Date, until the expiration of the statute of limitations (including extensions) of the taxable years to which such Tax Returns and other documents relate and until the Final Determination of any payments which may be required in respect of such years under this Agreement. Western Atlas and UNOVA agree to advise each other promptly of any such Final Determination.
(c) If any member of the Western Atlas Group or the UNOVA Group, as the case may
be, fails to provide any information requested pursuant to Section 3.1(b)(1),
Section 3.2(a) or this Section 4.2 by (i) the date(s) specified in such Section
or (ii) if no date is specified, within a reasonable period, as determined in
good faith by the party requesting the information, then the requesting party
shall have the right to engage a public accountant of its choice to gather such
information. UNOVA and Western Atlas, as the case may be, agree upon 24 hours'
notice, in the case of a failure to provide information pursuant to Section
3.1(b)(1) or Section 3.2(a) of this Agreement, and otherwise upon 30 days'
notice after the expiration of such reasonable period, to permit any such public
accountant full access to all appropriate records or other information in the
possession of any member of the Western Atlas Group or the UNOVA Group, as the
case may be, during reasonable business hours and to reimburse or pay directly
all costs and expenses in connection with the engagement of such public
accountant.
(d) Upon the expiration of any statute of limitations, the documentation of Western Atlas or UNOVA or any member of their respective groups, including, without limitation, books, records, Tax Returns and all supporting schedules and information relating thereto, may be destroyed or disposed of unless (i) the other party requests that such documentation be retained, by written notice describing in reasonable detail the documentation to be retained, and (ii) the recipient of such notice agrees in writing to such retention. If the recipient of such notice objects, then the party proposing the retention shall promptly offer to take delivery of such materials from the objecting party at the expense of the objecting party.
Section 4.3. RELIANCE ON EXCHANGED INFORMATION. If either Western Atlas or UNOVA, or a member of their respective groups, supplies information to another party upon such party's request, and an officer of the requesting party intends to sign a statement or other document under penalties of perjury in reliance upon the accuracy of such information, then a duly authorized officer of the party supplying such information shall certify, to the best of such party's knowledge, the accuracy and completeness of the information so supplied.
ARTICLE V
MISCELLANEOUS
Section 5.1. RESERVES. The parties agree that all accrued taxes, tax reserves and other tax balances in the balance sheet accounts of Western Atlas and its subsidiaries as of the Distribution Date, including but not limited to Financial Consolidations accounts (hereinafter, "Tax Reserves"), shall remain with the Western Atlas Group after the UNOVA Distribution, except for those Tax Reserves which shall belong to the UNOVA Group upon the UNOVA Distribution, as set forth by company and division on Schedule B hereto.
Section 5.2. EXPENSES. Unless otherwise expressly provided in this Agreement or in the Distribution Agreement, each party shall bear any and all expenses that arise from their respective obligations under this Agreement.
Section 5.3. PAYMENTS. All payments to be made under this Agreement shall be made in immediately available funds.
Section 5.4. ENTIRE AGREEMENT; TERMINATION OF PRIOR AGREEMENTS OTHER THAN LITTON AGREEMENT. Except for that certain TAX SHARING AGREEMENT dated as of March 17, 1994 by and between Litton Industries, Inc. and WESTERN ATLAS (the "Litton Agreement"), this Agreement constitutes the entire agreement of the parties concerning the subject matter hereof and supersedes all other agreements, whether or not written, in respect of any Tax between or among any member or members of the WESTERN ATLAS Group, on the one hand, and any member or members of the UNOVA Group, on the other hand. All such agreements other than the Litton Agreement are hereby canceled and any rights or obligations existing thereunder are hereby fully and finally settled without any payment by any party thereto. This Agreement may not be amended except by an agreement in writing, signed by the parties hereto. Anything in this Agreement or the Distribution Agreement to the contrary notwithstanding, in the event and to the extent that there shall be a conflict between the provisions of this Agreement and the Distribution Agreement, the provisions of this Agreement shall control. In the event and to the extent that there shall be a conflict between the provisions of this Agreement and the Litton Agreement, the provisions of the Litton Agreement shall control.
Section 5.5. NOTICES. All notices and other communications hereunder shall be in writing and shall be personally delivered (provided a receipt is obtained therefor); or mailed by registered or certified mail (return receipt requested); transmitted by telex or telecopy; or sent by private messenger or carrier that issues delivery receipts, to the parties at the following addresses (or at such other addresses for a party as shall be specified by like notice) and shall be deemed given on the date on which such notice is received:
To Western Atlas or any member of the Western Atlas Group:
General Counsel
Western Atlas Inc.
10205 Westheimer Road
Houston, TX 77042
To UNOVA or any member of the UNOVA Group:
General Counsel
UNOVA Inc.
360 North Crescent Drive
Beverly Hills, CA 90210
Section 5.6. APPLICATION TO PRESENT AND FUTURE SUBSIDIARIES. This Agreement is being entered into by Western Atlas and UNOVA on behalf of themselves and each member of the Western Atlas Group and UNOVA Group, respectively. This Agreement shall constitute a direct obligation of each such member and shall be deemed to have been readopted and affirmed on behalf of any corporation which becomes a member of the Western Atlas Group and UNOVA Group in the future. Western Atlas and UNOVA hereby guarantee the performance of all actions, agreements and obligations provided for under this Agreement of each member of the Western Atlas Group and the UNOVA Group, respectively. Western Atlas and UNOVA shall, upon the written request of the other, cause any of their respective group members formally to execute this Agreement. This Agreement shall be binding upon, and shall inure to the benefit of, the successors, assigns and persons controlling any of the corporations bound hereby for so long as such successors, assigns or controlling persons are members of the Western Atlas Group or the UNOVA Group or their successors and assigns.
Section 5.7. TERM. This Agreement shall commence on the date of execution indicated below and shall continue in effect until otherwise agreed to in writing by Western Atlas and UNOVA or their successors.
Section 5.8. TITLES AND HEADINGS. Titles and headings to sections herein are inserted for the convenience of reference only and are not intended to be a part or to affect the meaning or interpretation of this Agreement.
Section 5.9. LEGAL ENFORCEABILITY. Any provision of this Agreement which is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof. Any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provisions in any other jurisdiction. Without prejudice to any rights or remedies otherwise available to any party hereto, each party hereto acknowledges that damages would be an inadequate remedy for any breach of the provisions of this Agreement and agrees that the obligations of the parties hereunder shall be specifically enforceable.
Section 5.10. FURTHER ASSURANCES. Subject to the provisions hereof, the parties hereto shall make, execute, acknowledge and deliver such other instruments and documents, and take all such other actions, as may be reasonably required in order to effectuate the purposes of this Agreement and to consummate the transactions contemplated hereby. Subject to the provisions hereof, each of the parties shall, in connection with entering into this Agreement, perform its obligations hereunder and take any and all actions relating hereto, comply with all applicable laws, regulations, orders, and decrees, obtain all required consents and approvals and make all required filings with any governmental agency, other regulatory or administrative agency, commission or similar authority and promptly provide the other parties with all such information as they may reasonably request in order to be able to comply with the provisions of this sentence.
Section 5.11. PARTIES IN INTEREST. Except as herein otherwise specifically provided, nothing in this Agreement expressed or implied is intended to confer any right or benefit upon any person, firm or corporation other than the parties and their respective successors and permitted assigns.
Section 5.12. SETOFF. All payments to be made under this Agreement shall be made without setoff, counterclaim or withholding, all of which are expressly waived.
Section 5.13. CHANGE OF LAW. If, due to any change in applicable law or regulations or the interpretation thereof by any court of law or other governing body having jurisdiction subsequent to the date of this Agreement, performance of any provision of this Agreement or any transaction contemplated thereby shall become impracticable or impossible, the parties hereto shall use their best efforts to find and employ an alternative means to achieve the same or substantially the same result as that contemplated by such provision.
Section 5.14. GOVERNING LAW AND INTERPRETATION. This Agreement shall be governed by and construed in accordance with the laws of the State of Delaware applicable to agreements made and to be performed in the State of Delaware, without regard to conflict of laws principles thereof.
Section 5.15. RESOLUTION OF CERTAIN DISPUTES.
(a) Disagreements between Western Atlas, on the one hand, and the members of the UNOVA Group, on the other, with respect to amounts that Western Atlas claims are owed by the UNOVA Group, or that the UNOVA Group claims are owed by Western Atlas, under Sections 3.3, 3.4 or 3.6 of this Agreement shall be resolved as follows: No later than the last day on which a disputed payment could be timely made pursuant to
Section 3.3, 3.4 or 3.6 of this Agreement, as the case may be, the complaining party shall provide written notice to the other party of the amount of the payment with which it disagrees and the basis for such disagreement. Any disagreement that is not resolved by mutual agreement within 30 days of such notice shall be resolved by arbitration pursuant to this Section 5.15. Upon the commencement of the 30-day dispute resolution period specified in the preceding sentence until the time of a final resolution by the arbitrator, the applicable time period for making a disputed payment pursuant to Section 3.3, 3.4 or 3.6 shall be tolled. Such tolling shall not affect the accrual of interest pursuant to Section 3.3(h), 3.4(b) or 3.6(c).
(b) Any arbitrator selected pursuant to this Section 5.15 shall have at least
five years of experience in the field of corporate taxation, shall be an
attorney licensed to practice law in any state of the United States and shall
not be or have been employed by or affiliated with either party. The parties
shall first attempt to agree on a mutually satisfactory arbitrator. If the
parties are unable to agree on a mutually satisfactory arbitrator within 15 days
after expiration of the 30-day dispute resolution period specified in subsection
(a) of this Section 5.15, such arbitrator shall be selected by the American
Arbitration Association. If the position of an arbitrator is vacated, the person
or persons who originally selected the arbitrator to fill such position shall
select a new arbitrator to fill the position. The arbitrator's fees and expenses
shall be borne equally by Western Atlas and UNOVA.
(c) Arbitration Procedure.
(i) The arbitration shall be conducted in accordance with the rules set forth in Exhibit A. The arbitration shall not be conducted under the auspices of the American Arbitration Association.
(ii) Each party within 30 days after engagement of the arbitrator shall submit to the arbitrator a written statement of the party's position (including the total net amount it asserts is owed by it or is due to it) regarding the total amount in dispute, which position shall be consistent with any notice provided by such party pursuant to subsection (a) of this Section 5.15, together with a copy of such notice.
(iii) The arbitrator shall base his decision on the following standards. In the case of a factual dispute between the parties, the arbitrator shall make a determination of the correct facts. In the case of a dispute regarding a legal issue or a settlement amount, the arbitrator shall consider the strength of Western Atlas's and UNOVA's litigation positions (with respect to all issues raised by the taxing authority with whom the settlement was made in a
Revenue Agent's Report or similar document) relative to the costs and risks of litigation. Upon making determinations with respect to all issues in dispute the arbitrator shall find in favor of the party whose statement submitted pursuant to paragraph (ii) above proposed the amount closest to the aggregate of the amounts so determined.
(iv) The arbitrator shall render a written decision stating only the amount of such decision as soon as practicable. The arbitrator shall also orally explain the bases of such decision to both parties as soon as practicable. If and only if both parties request, the arbitrator shall state the bases of such decision in writing. The arbitrator's decision shall be in an amount equal to one of the total amounts asserted by one of the parties in the written statements submitted pursuant to paragraph (ii) above. The arbitrator shall not, and is not authorized to, render a decision in any other amount.
(v) The arbitrator's decision shall be final and binding on the parties.
Section 5.16. CONFIDENTIALITY. Each party shall hold and shall cause its
consultants and advisors to hold in strict confidence, unless compelled to
disclose by judicial or administrative process or, in the opinion of its
counsel, by other requirements of law, all information (other than any such
information relating solely to the business or affairs of such party) concerning
the other parties hereto furnished it by such other party or its representatives
pursuant to this Agreement (except to the extent that such information can be
shown to have been (i) previously known by the party to which it was furnished,
(ii) in the public domain through no fault of such party, or (iii) later
lawfully acquired from other sources by the party to which it was furnished),
and each party shall not release or disclose such information to any other
person, except its auditors, attorneys, financial advisors, bankers and other
consultants and advisors who shall be advised of the provisions of this
Agreement. Each party shall be deemed to have satisfied its obligation to hold
confidential information concerning or supplied by the other party if it
exercises the same care as it takes to preserve confidentiality for its own
similar information.
Section 5.17. LIMITATION ON WAIVERS. The provisions of this Agreement may be waived only if the waiver is in writing and signed by the party making the waiver. No delay or omission in exercising any right under this Agreement will operate as a waiver of the right on any further occasion. No waiver of any particular provision of this Agreement will be treated as a waiver of any other provision, and no waiver of any rights will be deemed a continuing waiver of the same right with respect to subsequent occurrences that give rise to it. All rights given by this Agreement are cumulative to other rights provided for in this Agreement and to any other rights available under applicable law.
Section 5.18. COUNTERPARTS. This Agreement may be executed in one or more counterparts, each of which shall be deemed to be an original, but all of which together shall constitute one and the same instrument.
Section 5.19. FAIR MEANING. This Agreement shall be construed in accordance with its fair meaning and shall not be construed strictly against the drafter.
Section 5.20. CONSTRUCTION. In this Agreement, unless the context otherwise requires, the terms "herein," "hereof," "hereto," and "hereunder" refer to this Agreement.
Section 5.21. TERMINATION. This Agreement may be terminated at any time prior to the Distribution Date, without the approval of UNOVA, by and in the sole discretion of the Western Atlas Board of Directors. In the event of such termination, no party shall have any liability to the other party from or for the terminated Agreement, except that expenses incurred in connection with the preparation of this Agreement shall be paid as provided in Section 5.2 hereof.
IN WITNESS WHEREOF, the parties hereto have executed and delivered this Agreement as of the day and year first above written.
WESTERN ATLAS INC.
By: /s/ Michael E. Keane UNOVA, INC. By: /s/ Charles A. Cusumano EXHIBIT "A" |
TO THE TAX SHARING AGREEMENT
ARBITRATION PROCEDURAL RULES
1. Administration and Conduct of Arbitration.
(a) At the discretion of the Arbitrator, an administrative conference with the Arbitrator and the parties and/or their representatives will be scheduled in appropriate cases to expedite the Arbitration proceedings.
(b) It is intended that the Arbitration be conducted in an expeditious manner and without evidentiary hearing or oral presentation and argument, unless the Arbitrator determines, at any time, that an evidentiary hearing, and/or oral presentation or argument is desired by the Arbitrator for the rendition of an award or a decision. However, the Arbitrator shall fix limits on the duration of any such evidentiary hearing and/or oral presentation and argument, in advance, with time equally divided between the parties.
(c) On such schedule as may be established by the Arbitrator, each of the parties shall submit simultaneous briefs, including exhibits, to
the Arbitrator supporting their respective positions. There shall be no limit to the number of pages included in such briefs or to the number of exhibits. Each party shall have a reasonable opportunity, as determined by the Arbitrator, to reply to the brief of the other. The Arbitrator shall have the right to request additional written statements of all or any of the parties; provided that each party shall have the reasonable opportunity to reply to any such additional statements submitted in response to the request of the Arbitrator.
2. Fixing of Locale.
The parties may mutually agree to the locale where the Arbitration is to be held. If the parties cannot agree on the locale, the Arbitrator shall have the power to determine the locale and its decision shall be final and binding.
3. Date, Time and Place of Hearing.
The Arbitrator shall set the date, time, and place for any hearing. The Arbitrator shall mail to each party notice thereof at least ten days in advance, unless the parties by mutual agreement waive such notice or modify the terms thereof.
4. Postponements.
The Arbitrator for good cause show may postpone any hearing upon the request of a party or upon the Arbitrator's own initiative, and shall also grant such postponement when all of the parties agree thereto.
5. Oaths.
Before proceeding with the first hearing, the Arbitrator may take an oath of office and, if required by law, shall do so. The Arbitrator may require witnesses to testify under oath administered by any duly qualified person and, if it is required by law, shall do so.
6. Order of Proceedings and Communication with Arbitrator.
(a) A hearing shall be opened by the filing of the oath of the Arbitrator, where required, and by the recording of the date, time, and place of the hearing, and the presence of the Arbitrator, the parties, and their representatives, if any.
(b) The Arbitrator may, at the beginning of the hearing, ask for statements clarifying the issues involved.
(c) The complaining party shall then present evidence and/or argument, as required by the Arbitrator, to support its claim. The defending
party shall then present evidence and/or argument supporting its position and responding to the position of the other. Witnesses, if any, for each party shall submit to questions or other examination. The Arbitrator has the discretion to vary this procedure but, within the time limits specified above, shall afford a full and equal opportunity to all parties for the presentation of any material and relevant evidence.
(d) Exhibits, when offered by either party, may be received in evidence by the Arbitrator. The names and addresses of any witnesses and a description of the exhibits in the order received shall be made a part of the record.
(e) There shall be no direct communication between the parties and the Arbitrator other than at oral hearing, unless the parties and the Arbitrator agree in writing.
7. Arbitration in the Absence of a Party or Representative.
Unless the law provides to the contrary, the Arbitration may proceed in the absence of any party or representative who, after due notice, fails to be present or fails to obtain a postponement ("absence in default"). An award shall not be made solely on the default of a party. The Arbitrator shall require the party who is present to submit such evidence as the Arbitrator may require for the making of an award.
8. Evidence.
(a) The parties may offer such evidence as is relevant and material to the dispute and shall produce such evidence as the Arbitrator may deem necessary to an understanding and determination of the dispute.
(b) The Arbitrator shall be the judge of the relevance and materiality of the evidence offered, and conformity to legal rules of evidence shall not be necessary. All evidence shall be taken in the presence of the Arbitrator and all of the parties, except where any of the parties is absent in default or has waived the right to be present.
9. Evidence by Affidavit and Post-Hearing Filing of Documents or Other Evidence.
(a) The Arbitrator may receive and consider the evidence of witnesses by affidavit, but shall give it only such weight as the Arbitrator deems it to be entitled to after consideration of any objection made to its admission.
(b) If the parties agree or the Arbitrator directs that documents or other evidence be submitted to the Arbitrator after the hearing, the documents or other evidence shall be filed with the Arbitrator. All parties shall be afforded an opportunity to examine such documents or other evidence.
10. Closing of Hearing.
If satisfied that the record is complete, the Arbitrator shall declare the hearing closed and a minute thereof shall be recorded. If briefs are to be filed, the hearing shall be declared closed as of the final date set by the Arbitrator for the receipt of briefs. If documents are to be filed as provided in Section 9 and the date set for their receipt is later than that set for the receipt of briefs, the later date shall be the date of closing of the hearing.
11. Reopening of Hearing.
The hearing may be reopened on the Arbitrator's initiative at any time before the award is made. If reopening the hearing would prevent the making of the award within the specified time limit, the matter may not be reopened unless the parties agree on an extension of time.
12. Waiver of Oral Hearing.
The parties may provide, by written agreement, for the waiver of oral hearing in any case.
13. Waiver of Rules.
Any party who proceeds with the Arbitration after knowledge that any provision or requirement of these rules has not been complied with and who fails to state an objection thereto in writing shall be deemed to have waived the right to object.
14. Extensions of Time.
The parties may modify any period of time by mutual agreement. The Arbitrator may for good cause extend any period of time established by these rules, except the time for making the award. The Arbitrator shall notify the parties of any extension.
15. Serving of Notice.
Each party shall be deemed to have consented that any papers, notices, or process necessary or proper for the initiation or continuation of an Arbitration under these rules, for any court action in connection therewith, or for the entry of judgment on any award made under these rules may be served on a party by mail addressed to the party or its representative at the last known address or by personal service, in or outside the state where the Arbitration is to be held, provided that reasonable opportunity to be heard with regard thereto has been granted to the party.
16. Time of the Award.
The award shall be made promptly by the Arbitrator and, unless otherwise agreed by the parties in writing or specified by law, no later than thirty days from the date of closing the hearing, or, if oral hearings have not been held, from the date of the transmittal of the final briefs, statements and proofs to the Arbitrator.
17. Award upon Settlement.
If the parties settle their dispute during the course of the Arbitration, the Arbitrator may set forth the terms of the agreed settlement in an award. Such an award is referred to as a consent award.
18. Deliver of Award to Parties.
Parties shall accept as legal delivery of the award the placing of the award or a true copy thereof in the mail addressed to a party or its representative at the last known address, personal service of the award, or the filing of the award in any other manner that is permitted by law.
19. Applications to Court and Exclusion of Liability.
(a) No judicial proceeding by a party relating to the subject matter of the Arbitration shall be deemed a waiver of the party's right to arbitrate.
(b) Parties to these rules shall be deemed to have consented that judgment upon the Arbitration award may be entered in any federal or state court having jurisdiction thereof.
20. Interpretation and Application of Rules.
The Arbitrator shall interpret and apply these rules insofar as they relate to the Arbitrator's powers and duties. If there is more than one Arbitrator and a difference arises among them concerning the meaning or application of these rules, it shall be decided by a majority vote.
21. Complex Procedures.
Notwithstanding the foregoing, if the parties mutually agree, any Arbitration to be conducted between the parties may be concluded in the manner provided for in the Supplementary Procedure for Large Complex Disputes of the American Arbitration Association, with such modification as the parties may agree upon.
DCN: 97719887
LOAD-DATE: November 27, 1997
EXHIBIT 10.32
EMPLOYEE BENEFITS AGREEMENT
EMPLOYEE BENEFITS AGREEMENT (the "Agreement") dated as of October 31, 1997 by and between WESTERN ATLAS Inc., a Delaware corporation ("WESTERN ATLAS") and UNOVA, Inc., a Delaware corporation ("UNOVA"), which, as of the date hereof, is a direct, wholly-owned subsidiary of WESTERN ATLAS.
WHEREAS, the Board of Directors of WESTERN ATLAS has decided to distribute all of the stock of UNOVA to the shareholders of WESTERN ATLAS in a transaction intended to qualify under Section 355 of the Code (the "Distribution");
WHEREAS, Western Atlas and UNOVA are entering into a Distribution and Indemnity Agreement (the "Distribution Agreement") which, among other things, together with the annexes to the Distribution Agreement, sets forth the principal corporate transactions required to effect the Distribution and sets forth other agreements that will govern certain other matters following the Distribution; and
WHEREAS, in connection with the Distribution, Western Atlas and UNOVA desire to provide for the allocation of assets and liabilities and other matters relating to employee benefit plans and compensation arrangements;
NOW, THEREFORE, in consideration of the mutual agreements, provisions and covenants contained in this Agreement, Western Atlas and UNOVA agree as follows:
Section 1. DEFINITIONS.
Terms used but not defined in this Agreement shall have the meanings set forth in the Distribution Agreement. As used in this Agreement the following terms shall have the following meanings (such meanings to be equally applicable to both the singular and plural forms of the term defined):
AFFILIATE: with respect to a Person, any Person controlled by, controlling or under common control with such Person.
BENEFIT PLAN: any Plan, existing on or prior to the Distribution Date
which was established by any member of the Western Atlas Group or the UNOVA Group, or any predecessor or Affiliate of any of the foregoing, to which any member of the Western Atlas Group or the UNOVA Group contributes, has contributed, is required to contribute or has been required to contribute, or under which any employee, former employee, director or former director of any member of the Western Atlas Group or the UNOVA Group or any beneficiary thereof is covered, is eligible for coverage or has benefits rights.
CODE: the Internal Revenue Code of 1986, as amended.
CURRENT PLAN YEAR: the plan year during which the Distribution Date occurs.
DISTRIBUTION DATE: the date on which the Distribution is effected.
ERISA: the Employee Retirement Income Security Act of 1974, as amended.
EXISTING RETIREMENT PLANS: the Western Atlas Inc. Retirement Plan, the Landis Tool Pension Plan and the Retirement Plan of the von Gal Operations of Western Atlas Inc.
GROUP: the Western Atlas Group or the UNOVA Group.
LIABILITY: any debt, liability or obligation, whether absolute or contingent, matured or unmatured, liquidated or unliquidated, accrued or unaccrued, known or unknown, whenever arising, and whether or not the same would properly be reflected on a balance sheet, and all costs and expenses related thereto.
NONQUALIFIED PLAN: any Plan that provides retirement benefits and is not intended to qualify under Section 401(a) of the Code.
PERSON: an individual, a partnership, a joint venture, a corporation, a limited liability company, a trust, an unincorporated organization or a government or any department or agency thereof.
PLAN: any bonus, incentive compensation, deferred compensation, pension, profit sharing, retirement, stock option, stock purchase, stock ownership, stock appreciation rights, phantom stock, leave of absence, layoff, vacation, day or dependent care, legal services, cafeteria, life, health (including medical, dental and vision care), accident, disability, severance, pay in lieu of notice, separation, workers' compensation, travel or other employee benefit
plan, practice, policy or arrangement of any kind (including, but not limited to, any "employee benefit plan" (within the meaning of Section 3(3) of ERISA)).
PRIOR PLAN YEAR: to the extent applicable with respect to any Plan, any plan year that ended on or prior to the Distribution Date.
QUALIFIED PLAN: a Plan which is an employee benefit pension plan (within the meaning of Section 3(2) of ERISA) and which is intended to qualify under Section 401(a) of the Code.
SUBSIDIARY: a corporation more than 50% of the voting power of whose outstanding voting securities are owned directly or indirectly by another specified corporation.
UNOVA COMMON STOCK: the Common Stock, par value $.01 per share, of UNOVA.
UNOVA-ONLY DIRECTOR: any director of UNOVA immediately after the Distribution Date who was a director of Western Atlas immediately prior to the Distribution Date, but who ceases to be a director of Western Atlas in connection with the Distribution.
UNOVA EMPLOYEE: any individual who immediately after the Distribution Date is an officer or employee of the UNOVA Group.
UNOVA FORMER EMPLOYEE: any terminated employee of Western Atlas who was, as of such employee's termination of employment, principally employed (i) in the business which will be conducted by the UNOVA Group, (ii) at the corporate headquarters of Western Atlas or (iii) in one of the "UNOVA Discontinued Operations" as such term is defined in Schedule B of the Distribution Agreement, and any beneficiary or dependent of any such terminated employee.
UNOVA GROUP: UNOVA and the UNOVA Subsidiaries and Affiliates.
UNOVA INC. PENSION PLAN: the Western Atlas Inc. Retirement Plan assumed by UNOVA on or prior to the Distribution Date and renamed the UNOVA Inc. Pension Plan.
UNOVA OPTION PLAN: the UNOVA 1997 Stock Incentive Plan.
UNOVA PARTICIPANT: any individual, with respect to a particular Plan maintained by the UNOVA Group or the Western Atlas Group, who (i) is a UNOVA Employee and who is eligible to participate in such Plan, (ii) at
any time after the Distribution Date is or becomes an officer or employee of any member of the UNOVA Group and is eligible to participate in such Plan or (iii) is a beneficiary or dependent of any individual described in clause (i) or (ii).
UNOVA SUBSIDIARIES: any direct or indirect Subsidiary of UNOVA at or after the Distribution.
WELFARE PLAN: any Plan, other than a Qualified Plan, which provides medical, health, disability, accident, life insurance, death, dental or other welfare benefits, including any post-employment benefits or retiree medical, life insurance or other such benefits.
WESTERN ATLAS BONUS PLAN: the Western Atlas Inc. 1995 Incentive Compensation Plan and the Western Atlas Inc. Individual Performance Award Plan, and any other cash incentive plan in which both UNOVA Employees and Western Atlas Employees participated.
WESTERN ATLAS EMPLOYEE: any individual who immediately after the Distribution Date is an officer or employee of a member of the Western Atlas Group.
WESTERN ATLAS FORMER EMPLOYEE: any terminated employee of Western Atlas other than a UNOVA Former Employee.
WESTERN ATLAS FSSP: the Western Atlas Financial Security and Savings Program.
WESTERN ATLAS GROUP: Western Atlas and the Subsidiaries and Affiliates of Western Atlas, other than UNOVA and the UNOVA Subsidiaries and Affiliates.
WESTERN ATLAS INDEMNITEE: each member of the Western Atlas Group and each of their respective directors, officers, employees and agents (but only in their capacities as such) and each of the heirs, executors, successors and assigns of any of the foregoing.
WESTERN ATLAS MISCELLANEOUS PLANS: any Benefit Plan, other than any Qualified Plan, Nonqualified Plan, Welfare Plan, Western Atlas Bonus Plan or Western Atlas Stock Option Plan.
WESTERN ATLAS NONQUALIFIED PLANS: the Supplemental Retirement Agreement between Western Atlas Inc. and Alton J. Brann (dated March 17, 1994), the Western Atlas Inc. Restoration Plan, the Western Atlas Inc. Supplemental Executive Retirement Plan and the Western Atlas Inc.
Deferred Compensation Plan for Directors.
WESTERN ATLAS OPTION: an option to purchase shares of Western Atlas Common Stock granted pursuant to a Western Atlas Stock Option Plan or assumed by Western Atlas under Plans of Norand Corporation.
WESTERN ATLAS PARTICIPANT: any individual who is a participant in any Benefit Plan and is not a UNOVA Participant or UNOVA Former Employee, and any beneficiary or dependent of such individual.
WESTERN ATLAS STOCK OPTION PLANS: the Western Atlas Inc. Director Stock Option Plan and the Western Atlas Inc. 1993 Stock Incentive Plan.
Section 2. OFFERS OF EMPLOYMENT; ASSUMPTION OF EMPLOYMENT, SEVERANCE AND CONSULTING AGREEMENTS.
(a) On or prior to the Distribution Date, the UNOVA Group shall offer to employ, to the extent required in this Section 2(a), each employee employed by the Western Atlas Group who is principally employed by Western Atlas in connection with the Western Atlas industrial automation systems businesses which will be conducted by the UNOVA Group following the Distribution and each Western Atlas corporate headquarters employee, except as may otherwise be agreed upon by Western Atlas and UNOVA with respect to any particular Western Atlas corporate headquarters employees. The employees to be offered employment by the UNOVA Group shall include all active and inactive employees of such businesses, including all employees laid-off, disabled or on leave of absence, unless their employment with the Western Atlas Group has been terminated. The UNOVA Group is not obligated to employ any such employees of the Western Atlas Group who decline employment with the UNOVA Group, and Western Atlas shall not be obligated to continue the employment of such employees.
(b) Western Atlas and UNOVA agree that with respect to individuals who, in connection with the Distribution, cease to be employees of the Western Atlas Group and become employees of the UNOVA Group, such cessation shall not be deemed a severance of employment from either Group for purposes of any Plan or agreement that provides for the payment of severance, salary continuation or similar benefits or stock repurchase rights and, in connection with the Distribution, if and to the extent appropriate, Western Atlas and UNOVA shall use their best efforts (without payment of monetary compensation) to obtain waivers
from individuals against any such assertion.
(c) The UNOVA Group shall assume and be solely responsible for, and shall indemnify the Western Atlas Group against, all liabilities and obligations whatsoever in connection with claims made by or on behalf of UNOVA Employees or UNOVA Former Employees in respect of severance pay, salary continuation and similar obligations relating to the termination or alleged termination of any such person's employment either before, on or after the Distribution Date.
Section 3. CASH BONUS PLANS.
(a) Western Atlas shall be responsible for the payment of all Liabilities for benefits due and payable but unpaid as of and through the Distribution Date under each Western Atlas Bonus Plan with respect to any Prior Plan Year (other than the Current Plan Year), other than with respect to benefits due and payable to UNOVA Participants or UNOVA Former Employees.
(b) Except as provided in paragraph (c) below, under each Western Atlas Bonus Plan, the UNOVA Group shall be responsible for the payment of all Liabilities for benefits to UNOVA Participants and UNOVA Former Employees due and payable after the Distribution Date or due and payable but unpaid as of and through the Distribution Date, including the portions of awards made prior to the Distribution Date which are not payable prior to the Distribution Date.
(c) Prior to the Distribution Date, Western Atlas shall determine 1997 annual bonus awards under the Western Atlas Bonus Plans for UNOVA Employees who are Western Atlas corporate headquarters employees. Such awards shall be pro rated based upon the portion of the 1997 bonus year which had expired as of the Distribution Date. Western Atlas shall pay a portion of the cash bonus prior to the Distribution Date (the bonus amount that is up to 50% of the employee's base salary earned for 1997 prior to the Distribution Date), and UNOVA shall pay the balance of the bonus following the Distribution Date in installments pursuant to the terms of the Western Atlas Bonus Plans.
(d) Following the end of 1997, UNOVA shall determine 1997 annual bonus awards for UNOVA Employees who were not Western Atlas corporate headquarters employees, and shall make such payments to such UNOVA Employees.
(e) For purposes of the Western Atlas Bonus Plans, individuals who, in
connection with the Distribution, cease to be employees of Western Atlas and become UNOVA Employees shall not be deemed to have terminated employment under such Plans as a result of becoming UNOVA Employees for purposes of receiving installments of prior year "Final Awards" under the Western Atlas Bonus Plans. To the extent applicable, for purposes of receiving payments of installments of prior year "Final Awards" under the Western Atlas Bonus Plans, UNOVA Employees must at the time such payment is due (i) be in the active employ of UNOVA or a Subsidiary or Affiliate of UNOVA, (ii) have terminated employment with UNOVA by reason of death, or "Disability" or "Retirement" (as defined in the UNOVA Option Plan) or (iii) be on an "Approved Leave of Absence" (as determined by the UNOVA Compensation Committee or, prior to the Distribution, by the Western Atlas Compensation Committee but including, without limitation, a leave of absence for purposes of service in the Armed Services of the United States).
Section 4. STOCK OPTIONS.
Western Atlas shall take all action necessary to amend (if necessary), or
otherwise provide for adjustments of outstanding awards under, the Western Atlas
Stock Option Plan, so that each outstanding Western Atlas Option will be
adjusted by (i) multiplying the number of shares of Western Atlas Common Stock
subject to the option by the Adjustment Factor and (ii) dividing the exercise
price per share of the option by the Adjustment Factor. For these purposes, the
"Adjustment Factor" is defined as the quotient obtained by dividing (x) the
Average Market Price of the Western Atlas Common Stock plus the Average Market
Price of the UNOVA Common Stock by (y) the Average Market Price of the Western
Atlas Common Stock. The "Average Market Price" of Western Atlas Common Stock or
UNOVA Common Stock, as the case may be, is defined to be the average of the high
and low daily prices of such security as reported on the NYSE Composite Tape
(or, if not listed on such exchange, on any other national securities exchange
on which the Western Atlas Common Stock or the UNOVA Common Stock is listed or
on NASDAQ) on the sixth through tenth trading days, inclusive, following the
Distribution Date. Each Western Atlas Option held by a UNOVA Employee who, in
(a) connection with the Distribution, ceases to be a Western Atlas Employee and
becomes a UNOVA Employee, shall be amended to provide that (i) service with
UNOVA shall be deemed continuous service with Western Atlas for purposes of
vesting, exercisability and the duration of such Western Atlas Option and (ii)
to avoid the potential loss of the opportunity to exercise such Western Atlas
Option following a "Change in Control" of UNOVA (as defined in the UNOVA Option
Plan), such Western Atlas Option
held by UNOVA Employees shall immediately vest and become exercisable upon a Change in Control of UNOVA. Each Western Atlas Option held by a UNOVA-only Director shall be vested and exercisable in full on the Distribution Date, and each such Western Atlas Option shall remain exercisable until the later of (A) ten years following the date of grant of such option by Western Atlas and (B) three years following the first to occur of the date of retirement or resignation of the UNOVA-only Director as a director of UNOVA (or the failure of such UNOVA-only Director to be re-elected as a director of UNOVA), the UNOVA-only Director's total or permanent disability or his death.
Section 5. QUALIFIED PLANS.
(a) Effective on or prior to the Distribution Date, UNOVA shall assume sponsorship of the Existing Retirement Plans. The Western Atlas Inc. Retirement Plan shall be renamed the UNOVA, Inc. Pension Plan. The other two Existing Retirement Plans will remain as frozen plans with no further benefit accruals thereunder. The UNOVA, Inc. Pension Plan shall continue to provide benefits for all individuals who, immediately prior to the Distribution Date, were participants in the Western Atlas Inc. Retirement Plan. UNOVA agrees that each such participant shall be, to the extent applicable, entitled, for all purposes under the UNOVA, Inc. Pension Plan (including, without limitation, eligibility, vesting and benefit accrual), to be credited with the term of service credited to such participant as of the Distribution Date under the terms of the Western Atlas Inc. Retirement Plan as if such service had been rendered to UNOVA and had originally been credited to such participant under the UNOVA, Inc. Pension Plan and shall have the same accrued benefit under the UNOVA, Inc. Pension Plan immediately following the Distribution Date as was accrued under the Western Atlas Inc. Retirement Plan as of the Distribution Date. Western Atlas shall, as soon as practicable after the Distribution Date, provide UNOVA with such additional information (in the possession of the Western Atlas Group and not already in the possession of the UNOVA Group) as may be reasonably requested by UNOVA and necessary in order for the UNOVA Group to establish and administer effectively the Existing Retirement Plans assumed by UNOVA.
(b) Effective on or prior to the Distribution Date, UNOVA shall assume sponsorship of the Western Atlas FSSP and the Western Atlas FSSP shall be renamed the UNOVA, Inc. Financial Security and Savings Program (the "UNOVA FSSP"). UNOVA agrees that all service credited under the Western Atlas FSSP as of the Distribution Date with respect to Western Atlas FSSP participants shall be credited under the UNOVA FSSP for all
Plan purposes, including eligibility and vesting.
(c) From and after the Distribution Date, the Western Atlas Group shall cease to have any Liability whatsoever with respect to participants under the Western Atlas Inc. Retirement Plan or the Western Atlas FSSP, and UNOVA and the UNOVA, Inc. Pension Plan and the UNOVA FSSP, as the case may be, shall assume or retain sole responsibility for, and shall indemnify the Western Atlas Indemnitees with respect to, all Liabilities of either Group with respect to participants under the UNOVA, Inc. Pension Plan and the UNOVA FSSP.
Section 6. NONQUALIFIED RETIREMENT PLANS.
Effective as of the Distribution Date, UNOVA shall assume, and shall indemnify
the Western Atlas Indemnitees from and against, all Liabilities with respect to
(i) the Supplemental Retirement Agreement between Western Atlas Inc. and Alton
J. Brann (dated March 17, 1994) and all participants under the Western Atlas
Inc. Restoration Plan, (ii) UNOVA Participants and UNOVA Former Employees under
the Western Atlas Inc. Supplemental Executive Retirement Plan and (iii)
UNOVA-only Directors under the Western Atlas Inc. Deferred Compensation Plan for
Directors.
UNOVA represents that it has established plans on substantially the same terms as the Western Atlas Nonqualified Plans pursuant to which each participant for whom UNOVA has assumed Liabilities will be credited with the term of service credited to such participant as of the Distribution Date under the Western Atlas Nonqualified Plans, as if such service had been rendered to UNOVA.
Section 7. DEFERRED COMPENSATION.
Effective as of the Distribution Date, UNOVA shall assume and indemnify the Western Atlas Indemnitees from and against all Liabilities with respect to UNOVA Participants and UNOVA Former Employees in connection with any deferred compensation plans.
Section 8. WELFARE PLANS.
(a) Effective on or prior to the Distribution Date, UNOVA shall assume the Western Atlas Inc. Employees Welfare Benefit Trust, and such trust shall be renamed the UNOVA, Inc. Employees Welfare Benefit Trust (the "UNOVA Trust"). Effective as of the Distribution Date, UNOVA shall be responsible for and shall indemnify the Western Atlas Indemnitees from and against all Liabilities arising under any Welfare Plan with respect
to claims by UNOVA Participants or UNOVA Former Employees for benefits incurred prior to or after the Distribution Date pursuant to the terms of the applicable Plan.
(b) Effective on or prior to the Distribution Date, UNOVA shall assume sponsorship of the Welfare Plans maintained by Western Atlas in which UNOVA Employees participate. In connection with the foregoing, Western Atlas agrees to provide UNOVA or its designated insurance representative with such information (in the possession of the Western Atlas Group and not already in the possession of the UNOVA Group) as may be reasonably requested by UNOVA and necessary for the UNOVA Group to assume or establish any such Welfare Plan, and UNOVA agrees to provide Western Atlas or its designated insurance representative with similar information. Split-dollar insurance policies noted on Exhibit A as UNOVA policies shall be assumed by UNOVA, and split-dollar insurance policies noted on Exhibit A as Western Atlas policies shall remain with Western Atlas.
Section 9. WESTERN ATLAS MISCELLANEOUS PLANS; POST-DISTRIBUTION LIABILITIES.
(a) The Western Atlas Group shall be solely responsible for the payment of all Liabilities whatsoever with respect to any Western Atlas Participant or Western Atlas Former Employee unpaid as of and through the Distribution Date under any Western Atlas Miscellaneous Plan and the UNOVA Group shall assume and be solely responsible for the payment of all Liabilities with respect to any UNOVA Participant or UNOVA Former Employee unpaid as of and through the Distribution Date under any Western Atlas Miscellaneous Plan.
(b) Except as otherwise expressly provided herein, the Western Atlas Group shall be solely responsible for the payment of all Liabilities whatsoever arising with respect to any Western Atlas Employee or Western Atlas Former Employee and attributable to any period subsequent to the Distribution Date and the UNOVA Group shall be solely responsible for the payment of all Liabilities whatsoever arising with respect to any UNOVA Employee or UNOVA Former Employee and attributable to any period subsequent to the Distribution Date.
Section 10. PRESERVATION OF RIGHTS TO AMEND OR TERMINATE PLANS.
No provisions of this Agreement, including the agreement or representation of Western Atlas or UNOVA that it, or any member of the Western Atlas Group or the UNOVA Group, will make or has made a contribution or payment to or under any Plan herein referred to for any
period, shall be construed as a limitation on the right of Western Atlas or UNOVA or any member of the Western Atlas Group or the UNOVA Group to amend such Plan or terminate its participation therein which Western Atlas or UNOVA or any member of the Western Atlas Group or the UNOVA Group would otherwise have under the terms of such Plan or otherwise, and no provision of this Agreement shall be construed to create a right in any employee or former employee or beneficiary of such employee or former employee under a Plan which such employee or former employee or beneficiary would not otherwise have under the terms of the Plan itself.
Section 11. REIMBURSEMENT; INDEMNIFICATION.
Each of the parties hereto acknowledges that the Western Atlas Group, on the one hand, and the UNOVA Group, on the other hand, may incur costs and expenses (including contributions to Plans and the payment of insurance premiums) arising from or related to any of the Plans which are, as set forth in this Agreement, the responsibility of the other party hereto. Accordingly, Western Atlas and UNOVA agree to reimburse each other, as soon as practicable but in any event within 30 days of receipt from the other party of appropriate verification, for all such costs and expenses.
Section 12. TRANSFER OF RESERVES.
To the extent that any Liability assumed by any member of the UNOVA Group hereunder is secured by a reserve on the books of Western Atlas, such reserve shall be transferred from Western Atlas to the books of UNOVA as soon as practicable on or following the Distribution Date.
Section 13. FURTHER TRANSFERS.
Western Atlas and UNOVA recognize that there may be UNOVA Employees who will, after the Distribution Date, become employed by Western Atlas and there may be Western Atlas Employees who become employed, after the Distribution Date, by UNOVA and there may be UNOVA Former Employees or Western Atlas Former Employees who are hired by Western Atlas or UNOVA, respectively. If Western Atlas and UNOVA so agree with respect to any such individuals, the assets and liabilities with respect to such employees which are associated with the plans and programs described in this Agreement may be transferred and assumed in a manner consistent with this Agreement and such employees will be treated as Western Atlas Employees or UNOVA Employees, as the case may be. Any such transfers
or assumptions and treatment of employees will be considered to be governed by the terms of this Agreement and shall not require the agreement of Western Atlas and UNOVA if they occur within 3 months following the Distribution Date.
Section 14. OFFICERS AND EMPLOYEES.
Except as otherwise agreed by the parties hereto, effective as of the Distribution Date, all officers or employees of the UNOVA Group who are acting as directors or officers of the Western Atlas Group and are UNOVA Employees shall resign from such positions with the Western Atlas Group.
Section 15. OTHER LIABILITIES; GUARANTEE OF OBLIGATIONS.
(a) As of the Distribution Date, UNOVA shall assume and be solely responsible
for all Liabilities whatsoever of the Western Atlas Group with respect to claims
made by the UNOVA Employees or UNOVA Former Employees relating to any Liability
not otherwise expressly provided for in this Agreement, including earned salary,
wages, bonus, incentive or severance payments or other compensation and accrued
sick, holiday, vacation, health, dental or retirement benefits, regardless of
whether such Liability was incurred before or after the Distribution Date. In
the event of any claim pursuant to which UNOVA may be required to indemnify
Western Atlas with respect to any such Liability, UNOVA shall have all of the
rights and obligations of an "Indemnifying Party" that are provided under
Section 4.4 of the Distribution Agreement and Western Atlas shall have all of
the rights and obligations of an Indemnified Party that are provided under
Section 4.4 of the Distribution Agreement.
(b) As of the Distribution Date, Western Atlas shall assume and be solely responsible for all Liabilities whatsoever of the UNOVA Group with respect to claims made by the Western Atlas Employees or Western Atlas Former Employees relating to any Liability not otherwise expressly provided for in this Agreement, including earned salary, wages, bonus, incentive or severance payments or other compensation and accrued sick, holiday, vacation, health, dental or retirement benefits, regardless of whether such Liability was incurred before or after the Distribution Date. In the event of any claim pursuant to which Western Atlas may be required to indemnify UNOVA with respect to any such Liability, Western Atlas shall have all of the rights and obligations of an "Indemnifying Party" that are provided under Section 4.4 of the Distribution Agreement and UNOVA shall have all of the rights and obligations of an Indemnified Party that are provided under Section 4.4
of the Distribution Agreement.
(c) Effective immediately after the Distribution, and in connection with the assumption by UNOVA of obligations with respect to employees of the UNOVA Subsidiaries, UNOVA shall cause each corporation which will become a UNOVA Subsidiary, to perform, and guarantees the performance of, each and every obligation of such UNOVA Subsidiaries with respect to the provisions of this Agreement.
Section 16. COMPLIANCE.
Notwithstanding anything to the contrary in this Agreement, to the extent any actions of the parties contemplated in this Agreement are determined prior to the Distribution Date to violate law or result in unintended tax liability for Western Atlas Participants or Western Atlas Former Employees or UNOVA Participants or UNOVA Former Employees, such action may be modified to avoid such violation of law or unintended tax liability.
SECTION 17. TERMINATION OF PARTICIPATION.
Except as otherwise expressly provided herein, the participation of UNOVA Participants in any Benefit Plan sponsored or maintained by Western Atlas shall cease as of the Distribution Date.
Section 18. COMPLETE AGREEMENT.
This Agreement, together with the Distribution Agreement, and the Annexes and Schedules thereto, shall constitute the entire agreement between the parties hereto with respect to the subject matter hereof and shall supersede all previous negotiations, commitments and writings with respect to such subject matter.
Section 19. GOVERNING LAW.
This Agreement shall be governed by and construed in accordance with the laws of the State of Delaware (other than the laws regarding choice of laws and conflicts of laws) as to all matters, including matters of validity, construction, effect, performance and remedies.
Section 20. NOTICES.
All notices, requests, claims, demands and other communications hereunder (collectively, "Notices") shall be in writing and shall be given (and shall be deemed to have been duly given upon receipt) by
delivery in person, by cable, telegram, telex, telecopy or other standard form of telecommunications, or by registered or certified mail, postage prepaid, return receipt requested, addressed as follows:
If to Western Atlas:
Western Atlas Inc.
10205 Westheimer Road
Houston, Texas 77042
Attention: General Counsel
If to UNOVA:
UNOVA, Inc.
360 North Crescent Drive
Beverly Hills, California 90210
Attention: General Counsel
or to such other address as any party hereto may have furnished to the other parties by a notice in writing in accordance with this Section 20.
Section 21. AMENDMENT AND MODIFICATION.
This Agreement may be amended, modified or supplemented only by a written agreement signed by Western Atlas and UNOVA, Inc.
Section 22. SUCCESSORS AND ASSIGNS; NO THIRD-PARTY BENEFICIARIES.
This Agreement and all of the provisions hereof shall be binding upon and inure to the benefit of the parties hereto and their successors and permitted assigns, but neither this Agreement nor any of the rights, interests and obligations hereunder shall be assigned by any party hereto without the prior written consent of each of the other parties (which consent shall not be unreasonably withheld). This Agreement is solely for the benefit of the parties hereto and their Subsidiaries and is not intended to confer upon any other Persons any rights or remedies hereunder.
Section 23. COUNTERPARTS.
This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument.
Section 24. INTERPRETATION.
The Section headings contained in this Agreement are solely for the purpose of reference, are not part of the agreement of the parties hereto and shall not in any way affect the meaning or interpretation of this Agreement.
Section 25. TERMINATION.
Notwithstanding any provision hereof, this Agreement may be terminated at any time prior to the Distribution Date. Any termination of the Distribution Agreement shall result in the termination of this Agreement. In the event of such termination, no party hereto shall have any Liability to any Person by reason of this Agreement.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed as of the date first above written.
WESTERN ATLAS INC.
By: /s/ Michael E. Keane UNOVA, INC. By: /s/ Charles A. Cusumano DCN: 97719887 |
LOAD-DATE: November 27, 1997
Exhibit 10.43
AMENDED AND RESTATED
STOCK MATCHING AGREEMENT
This Amended and Restated Stock Matching Agreement (this "Agreement") is made and entered into this 3rd day of December, 2003, 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.
W I T N E S S E T H:
WHEREAS, the Company and the Employee previously entered into that certain Stock Matching Agreement dated March 1, 2002, as amended on March 6, 2002 (the "Original Agreement");
WHEREAS, the Company and the Employee desire to make certain changes to the Original Agreement in order to remove the administrative burden on the Company associated with the reservation and subsequent issuance of shares of the Company's common stock, $1.00 par value per share ("Common Stock"); and
WHEREAS, the Company and the Employee desire to amend and restate the Original Agreement in its entirety and, unless otherwise set forth herein, all terms and provisions hereof are effective as of the date first written above;
NOW, THEREFORE, in consideration of the premises and mutual covenants and agreements contained herein, the parties hereto hereby agree to amend and restate the Original Agreement and agree as follows:
1. AWARD OF MATCHED SHARES. The Company hereby issues, subject to all the terms and conditions in this Agreement, 25,000 shares of restricted Common Stock ("Restricted Stock"), which represents one share 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 September 2, 2002. Such shares of Restricted Stock shall be referred to herein as the "Matched Shares."
2. VESTING PERIOD. Each Matched Share issued by the
Company pursuant to this Agreement shall either (x) if not earlier
forfeited, fully vest in accordance with Section 3(a) upon the
occurrence of an event described in Section 2(I) (a "Vesting Event") or
(y) be forfeited in accordance with Section 3(b) 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
(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. (a) VESTING 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 6, the Matched Shares shall fully vest in an amount 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 September 2, 2002 as determined pursuant to Sections 6 and 7. If necessary, a new certificate representing such shares shall be issued to and in the name of the Employee (or, in the case of death, in the name of the estate of the Employee) as soon as administratively practicable following the Vesting Event, and the original certificate shall be cancelled. The Employee may replace shares of Common Stock that the Employee owned on September 2, 2002 with other shares of Common Stock, so long as the Employee continuously owns 25,000 shares (which is the same number of shares for which the Company initially issued Matched
Shares) from September 2, 2002 until the date of the Vesting Event (excluding the Matched Shares in making such determination).
(b) FORFEITURE OF MATCHED SHARES. If a Forfeiture Event occurs prior to a Vesting Event with respect to the Employee, as of the date of the Forfeiture Event all of the Matched Shares shall automatically revert back to the Company for cancellation, and the Employee shall forfeit, for all purposes of this Agreement and without consideration, 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. STOCK CERTIFICATES. The Company will issue a stock
certificate for the Matched Shares in the name of the Employee;
provided that the Secretary of the Company will hold the stock
certificate(s) representing such shares and any additional shares
issued as a result of a stock dividend or stock split (as provided in
Section 8) until the occurrence of a Vesting Event or Forfeiture Event.
5. SHAREHOLDER STATUS. The Employee will have (i) the right to receive all cash dividends on the Matched Shares, subject to forfeiture of such shares under Sections 2 and 3(b), and (ii) the right to vote such shares, subject to forfeiture of such shares under Sections 2 and 3(b). If the Matched Shares are forfeited pursuant to Sections 2 and 3(b), the Employee will at the same time forfeit the Employee's right to vote such shares and to receive future cash dividends and any other distributions made with respect to such shares. Any distributions made with respect to the Matched Shares (other than cash dividends) shall be deemed to be a portion of the Matched Shares and held by the Secretary of the Company subject to the terms and conditions of this Agreement.
6. CERTIFICATION OF SHARE OWNERSHIP BY THE EMPLOYEE. Within 30 days after September 2, 2004, the Employee shall certify to the Company the number of shares of Common Stock that the Employee owns as of such 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 September 2nd and within 15 days after a Vesting Event, the Employee (or the representative of the Employee' 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 September 2nd or Vesting Event date, and during the period commencing immediately after the September 2nd 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 determination of sufficient evidence to verify ownership shall be made in the sole discretion of the Committee.
7. 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 September 2, 2002. 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 September 2, 2002 in order that the number of shares owned by the Employee (excluding any Matched Shares) is reduced to a number below the amount held on such date, the number of Matched Shares to the Employee that shall vest shall be reduced on a share-for-share basis. No increase in shares subsequent to September 2, 2002 shall create a right to an increase in the number of Matched Shares.
8. 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 reflect and to take into account such stock dividend or stock split, as the case may be. The additional shares to be issued as a result of such stock dividend or stock split shall be deemed to be a portion of the Matched Shares and subject to the terms and conditions of this Agreement.
9. 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) "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.
(c) "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.
10. 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.
11. ENTIRE AGREEMENT. This Agreement is intended by the parties hereto to be the final expression of their Agreement with respect to the subject matter hereof and is the complete and exclusive statement thereof notwithstanding any prior representation or statements to the contrary. This Agreement hereby supercedes the Original Agreement. This Agreement may be modified only by written instrument signed by each of the parties hereto.
12. HEADINGS AND SECTIONS. The headings contained in this Agreement are for reference purposes only and do not affect in any way the meaning or interpretation of this Agreement. All references to sections in this Agreement shall be to sections of this Agreement unless otherwise indicated.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written.
BAKER HUGHES INCORPORATED
BY _________________________________
Michael E. Wiley
Chairman, President and Chief
Executive Officer
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 Amended and Restated Stock Matching 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.
_______________________________ ____________________________________ Date James Roderick Clark 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 Amended and Restated Stock Matching 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.
EXHIBIT 10.50
BAKER HUGHES INCORPORATED
STOCK OPTION AGREEMENT
--FULL NAME--
GRANTEE
Date of Grant: JANUARY 28, 2004 Total Number of Shares Granted: --GRANT-- Exercise Price per Share: $35.81 Expiration Date: JANUARY 28, 2014 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 2005, 2006, AND 2007. Other Terms of Award: TERMS AND CONDITIONS ARE PROVIDED UPON REQUEST AND ARE LOCATED ON THE BHI INTRANET AT: http://interchange/humanresources/compensation |
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 --PLAN NAME-- (the "Plan"), the above-named Grantee is hereby granted --TYPE-- 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 28, 2004).
BAKER HUGHES INCORPORATED
/S/ MICHAEL E. WILEY Michael E. Wiley - Chairman, President & CEO |
BAKER HUGHES INCORPORATED
TERMS AND CONDITIONS
OF
OPTION AGREEMENTS
(JANUARY 28, 2004)
These Terms and Conditions are applicable to options granted pursuant to the Baker Hughes Incorporated 2002 Director & Officer Long-Term Incentive Plan (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 1.6, 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 years 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 to the contrary, if a Change in Control of the Company occurs, the provisions of Article 14 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.
1.5 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 have five 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).
1.6 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.
BAKER HUGHES INCORPORATED
TERMS AND CONDITIONS
OF
OPTION AGREEMENTS
(JANUARY 28, 2004)
These Terms and Conditions are applicable to options granted pursuant to the Baker Hughes Incorporated 2002 Employee Long-Term Incentive Plan (the "Plan").
2. 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 1.6, 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 years 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 to the contrary, if a Change in Control of the Company occurs, the provisions of Article 14 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.
1.5 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 have five 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).
1.6 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).
8. 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.
9. CASHLESS EXERCISE. Cashless exercise, in accordance with the terms of the Plan, shall be available to Grantee for the shares subject to the option.
10. 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.
11. 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.
12. 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.
13. 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.
.
.
.
EXHIBIT 21.1
BAKER HUGHES INCORPORATED
SIGNIFICANT SUBSIDIARIES
December 31, 2003
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% 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% 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. 93.98% Other subsidiaries 6.02% (2) Baker Hughes International Branches, Inc. Baker Hughes Oilfield Operations, Inc. 96.65% Other subsidiaries 3.35% |
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. 33-52195 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, in Registration Statement No. 333-41982 on Form S-8, in Registration Statement No. 333-87372 on Form S-8 in Registration Statement No. 333-103838 on Form S-8, and in Registration Statement No. 333-103839 on Form S-8 of our report dated February 11, 2004 (which report expresses an unqualified opinion and includes an explanatory paragraph relating to the Company's adoption of certain accounting standards during the three year period ended December 31, 2003) appearing in this Annual Report on Form 10-K of Baker Hughes Incorporated for the year ended December 31, 2003.
Deloitte & Touche LLP
Houston, Texas
March 3, 2004
EXHIBIT 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration Statements on Form S-8 (Nos. 33-14803, 33-39445, 33-51295, 33-57759, 333-19771, 333-28123, 333-29027, 333-49327, 333-61065, 333-62205, 333-74897, 333-81463, 333-41982, 333-87372, 333-103838, 333-103839) and the Registration Statement on Form S-3 (No. 333-87829) of Baker Hughes Incorporated of our report dated March 1, 2004 relating the financial statements of WesternGeco attached as Exhibit 99.2 to this Annual Report on Form 10-K for the year ended December 31, 2003.
PricewaterhouseCoopers LLP
Houston, Texas
March 4, 2004
Exhibit 31.1
CERTIFICATION
I, Michael E. Wiley, certify that:
1. I have reviewed this annual report on Form 10-K of Baker Hughes Incorporated;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) [INTENTIONALLY OMITTED PURSUANT TO SEC RELEASE NO. 33-8238 AND 34-47986];
c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
Date: March 3, 2004 By: /s/ Michael E. Wiley ---------------------------------- Michael E. Wiley Chairman of the Board and Chief Executive Officer |
Exhibit 31.2
CERTIFICATION
I, G. Stephen Finley, certify that:
1. I have reviewed this annual report on Form 10-K of Baker Hughes Incorporated;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) [INTENTIONALLY OMITTED PURSUANT TO SEC RELEASE NO. 33-8238 AND 34-47986];
c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
Date: March 3, 2004 By: /s/ G. Stephen Finley ------------------------------------ G. Stephen Finley Sr. Vice President - Finance and Administration and Chief Financial Officer |
Exhibit 32
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Baker Hughes Incorporated (the "Company") on Form 10-K for the year ended December 31, 2003, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), the undersigned, Michael E. Wiley, Chief Executive Officer of the Company, and G. Stephen Finley, the Chief Financial Officer of the Company, each of the undersigned hereby certifies, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
(i) The Report fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934; and
(ii) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
The certification is given to the knowledge of the undersigned.
/s/ Michael E. Wiley --------------------------------------- Name: Michael E. Wiley Title: Chief Executive Officer Date: March 3, 2004 /s/ G. Stephen Finley --------------------------------------- Name: G. Stephen Finley Title: Chief Financial Officer Date: March 3, 2004 |
EXHIBIT 99.2
WESTERNGECO
COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 2003, 2002 AND 2001
PAGE(S) ------- REPORT OF INDEPENDENT AUDITORS...........................................1 COMBINED FINANCIAL STATEMENTS Balance Sheets...........................................................2 Statements of Operations and Comprehensive Income........................3 Statements of Owners' Net Investment.....................................4 Statements of Cash Flows.................................................5 Notes to Financial Statements.........................................6-22 |
REPORT OF INDEPENDENT AUDITORS
To the Shareholders Representatives Committee and Owners of WesternGeco
In our opinion, the accompanying combined balance sheets and the related combined statements of operations and comprehensive income, of owners' net investment and of cash flows present fairly, in all material respects, the financial position of WesternGeco (the "Venture") at December 31, 2003 and 2002, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2003, in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Venture's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, which 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, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
As discussed in Note 2 to the combined financial statements, effective January 1, 2002, the Company changed its method of accounting for goodwill in accordance with Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets.
As discussed in Note 10 and Note 12 to the combined financial statements, the Venture has significant transactions with related parties.
PricewaterhouseCoopers LLP
Houston, Texas
March 1, 2004
(in thousands of dollars) 2003 2002 ---------- ---------- ASSETS Current assets Cash $ 15,797 $ 9,399 Short-term investments 207,840 269,183 Trade receivables, less allowance for doubtful accounts (2003 - $6,815; 2002 - $16,259) 247,448 269,119 Receivables from affiliates 22,057 9,149 Inventories 20,238 21,261 Prepaid expenses and other current assets 93,065 104,491 ---------- ---------- Total current assets 606,445 682,602 Multiclient library, net 505,785 1,018,483 Property, plant and equipment, net 497,559 599,556 Deferred taxes on income 32,348 26,731 Goodwill, net 228,510 228,510 Other intangible assets, net 33,059 37,948 Other assets 5,183 10,866 ---------- ---------- Total assets $1,908,889 $2,604,696 ========== ========== LIABILITIES AND OWNERS' NET INVESTMENT Current liabilities Accounts payable and accrued liabilities $ 371,396 $ 464,852 Payables to affiliates 33,180 35,479 Income taxes payable 10,086 15,376 Short-term loans 93,391 188,813 ---------- ---------- Total current liabilities 508,053 704,520 Long-term debt 119,040 131,829 Employee benefits 32,266 17,793 Other noncurrent liabilities 19,189 10,264 ---------- ---------- Total liabilities 678,548 864,406 Commitments and contingencies (Note 9) Minority interest 1,014 1,152 Owners' net investment 1,229,327 1,739,138 ---------- ---------- Total liabilities and owners' net investment $1,908,889 $2,604,696 ========== ========== |
The accompanying notes are an integral part of these combined financial statements.
(in thousands of dollars) 2003 2002 2001 ----------- ----------- ----------- REVENUE Contract service revenue $ 831,533 $ 1,063,845 $ 1,047,496 Multiclient license revenue 351,459 412,193 653,583 ----------- ----------- ----------- Total revenue 1,182,992 1,476,038 1,701,079 ----------- ----------- ----------- OPERATING EXPENSES Costs and expenses 831,023 1,112,689 1,020,598 Multiclient amortization 263,375 171,083 312,370 Research and engineering 51,919 67,957 63,018 Selling, general and administrative 55,353 65,306 53,468 Asset impairments and restructure charges 459,586 305,373 83,812 Other expense and (income), net 10,941 6,051 (738) ----------- ----------- ----------- 1,672,197 1,728,459 1,532,528 ----------- ----------- ----------- Income (loss) before taxes and minority interest (489,205) (252,421) 168,551 Income tax expense 17,025 23,089 24,879 ----------- ----------- ----------- Income (loss) before minority interest (506,230) (275,510) 143,672 Minority interest 138 361 6,370 ----------- ----------- ----------- Net (loss) income (506,092) (275,149) 150,042 ----------- ----------- ----------- OTHER COMPREHENSIVE (LOSS) INCOME, NET OF TAX OF $0 Translation adjustments (1,740) 2,227 (2,511) Unrealized (loss) gain on foreign currency hedges (3,790) 3,829 (45) ----------- ----------- ----------- Total other comprehensive (loss) income, net of tax (5,530) 6,056 (2,556) ----------- ----------- ----------- Comprehensive (loss) income $ (511,622) $ (269,093) $ 147,486 =========== =========== =========== |
The accompanying notes are an integral part of these combined financial statements.
SCHLUMBERGER BAKER HUGHES (in thousands of dollars) LIMITED INCORPORATED TOTAL ------------ ------------ ----------- BALANCES AT DECEMBER 31, 2000 $ 1,302,522 $ 558,223 $ 1,860,745 Other comprehensive loss (1,789) (767) (2,556) Net income 105,029 45,013 150,042 ------------ ------------ ----------- BALANCES AT DECEMBER 31, 2001 1,405,762 602,469 2,008,231 Other comprehensive income 4,239 1,817 6,056 Net loss (192,604) (82,545) (275,149) ------------ ------------ ----------- BALANCES AT DECEMBER 31, 2002 1,217,397 521,741 1,739,138 Capital contribution - cash 52 23 75 Capital contribution - employee compensation 1,736 -- 1,736 Other comprehensive loss (3,871) (1,659) (5,530) Net loss (354,785) (151,307) (506,092) ------------ ------------ ----------- BALANCES AT DECEMBER 31, 2003 $ 860,529 $ 368,798 $ 1,229,327 =========== =========== =========== |
The accompanying notes are an integral part of these combined financial statements.
(in thousands of dollars) 2003 2002 2001 --------- --------- --------- CASH FLOWS FROM OPERATING ACTIVITIES Net (loss) income $(506,092) $(275,149) $ 150,042 Adjustments to reconcile net loss to net cash provided by operating activities Depreciation and amortization 179,954 216,328 174,166 Amortization of multiclient library 263,375 171,083 312,370 Asset impairments 456,590 207,543 83,812 Noncash employee compensation 1,736 -- -- Deferred tax benefit (5,617) (10,371) (1,658) Minority interest (138) (361) (6,370) Change in operating assets and liabilities Decrease (increase) in receivables 21,671 204,911 (260,872) (Increase) decrease in receivables from affiliates (12,908) (11) 91,620 Decrease (increase) in inventories 1,023 (2,744) 11,202 (Increase) decrease in prepaid expenses and other current assets (56,827) 177,614 (193,384) (Decrease) increase in accounts payable and accrued liabilities (6,903) (152,499) 217,307 Decrease in payables to affiliates (2,299) (69,079) (49,101) (Decrease) increase in income taxes payable (14,414) 11,631 11,352 Other - net 33,586 11,222 (5,339) --------- --------- --------- Net cash provided by operating activities 352,737 490,118 535,147 --------- --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES Purchases of fixed assets (149,899) (170,021) (313,838) Investment in multiclient library (149,767) (344,705) (458,188) Sales of fixed assets 8,331 69,689 28,821 Decrease (increase) in short term investments 61,343 (63,918) 11,085 --------- --------- --------- Net cash used in investing activities (229,992) (508,955) (732,120) --------- --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from issuance of long-term debt -- 69,841 106,631 Payments of long-term debt (21,000) (78,389) -- Net change in short-term debt (95,422) 1,252 106,978 Capital contribution 75 -- -- --------- --------- --------- Net cash (used in) provided by financing activities (116,347) (7,296) 213,609 --------- --------- --------- Net increase (decrease) in cash 6,398 (26,133) 16,636 CASH Beginning of period 9,399 35,532 18,896 --------- --------- --------- End of period $ 15,797 $ 9,399 $ 35,532 ========= ========= ========= SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION Cash paid for Interest $ 8,645 $ 9,992 $ 9,603 Income taxes 25,905 27,996 20,774 |
The accompanying notes are an integral part of these combined financial statements.
1. BUSINESS AND ORGANIZATION
WesternGeco is comprised of WesternGeco LLC, a Delaware limited liability company, WesternGeco Ltd., a United Kingdom limited liability company, WesternGeco Seismic Holdings ("B.V.I.") Ltd., a British Virgin Islands company, WesternGeco B.V., a Netherlands company, and WesternGeco Canada, a Canadian partnership, together with their respective subsidiaries (collectively, "WesternGeco" or the "Venture").
WesternGeco was formed on December 1, 2000, with the contribution by Schlumberger Limited ("Schlumberger") and Baker Hughes Incorporated ("BHI") of their seismic operations. Concurrently, Schlumberger paid $500,000 to BHI in exchange for a 70 percent interest in the Venture. WesternGeco Canada was formed on November 1, 2003, with a $75 cash contribution by Schlumberger and BHI. The five entities that comprise WesternGeco are each 70 percent owned by Schlumberger and affiliated companies and 30 percent owned by BHI and affiliated companies (collectively, the "Owners"). Specific terms and conditions of the venture are included, or referred to, in a Master Formation Agreement dated September 6, 2000.
WesternGeco provides comprehensive worldwide reservoir imaging, monitoring, and development services, with extensive seismic crews and data processing centers, as well as having a multiclient seismic library available for licensing. Services range from 2D, 3D and time-lapse (4D) seismic surveys to multicomponent surveys for delineating prospects and reservoir management.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION AND PRINCIPLES OF CONSOLIDATION
The combined financial statements include accounts of the Venture and all majority-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated.
Individual assets and liabilities initially contributed to the Venture by Schlumberger, including goodwill contributed to the Venture from previous transactions, were recorded using their respective historical carrying values at the date of contribution. Individual assets and liabilities contributed to the Venture by BHI were recorded using their respective fair values at the date of contribution. The excess of purchase price over the estimated fair value of the net assets at contribution was $126,000, which has been recorded as goodwill and was being amortized over 15 years prior to the adoption of Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets ("SFAS No. 142") in 2002.
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 revenue and expenses during the reporting period. Actual results could differ from those estimates.
TRANSLATION OF FOREIGN CURRENCIES
The Venture's foreign subsidiaries predominately have the U.S. dollar designated as their functional currency. Financial statements of these foreign subsidiaries are remeasured to U.S. dollars for consolidation purposes using current rates of exchange for monetary assets and liabilities and historical rates of exchange for nonmonetary assets and related elements of expense. Revenue and other expense elements are remeasured at rates that approximate the rates in effect on the transaction dates. Remeasurement gains and losses are included in the Venture's combined statement of operations. Certain foreign subsidiaries designate the local currency as their functional currency and the related cumulative translation adjustments are included as a component of accumulated other comprehensive income.
DERIVATIVE FINANCIAL INSTRUMENTS
Derivative financial instruments are recognized at fair value. The Venture uses derivative financial instruments, such as foreign currency forward contracts, to mitigate the impact of changes in foreign currency exchange rates. The accounting for realized and unrealized gains and losses from derivative financial instruments depends upon the intended use of the derivative and the resulting designation. For derivative financial instruments designated as cash flow hedges, gains and losses, to the extent the hedge is effective, are recognized in other comprehensive income until the hedged item is recognized in earnings in other income and expense, net. Any change in fair value resulting from ineffectiveness is recognized immediately in earnings in other expense and income, net. At December 31, 2003, no contracts designated as cash flow hedges were outstanding. At December 31, 2002, contracts with a notional value of $22,572 were outstanding for the Norwegian kroner and U.K. pound. At December 31, 2003 and 2002, $0 and $2,417 were deferred in accumulated other comprehensive income, respectively. For derivative financial instruments entered to offset the change in foreign currency exchange rates related to the future settlement of assets and liabilities denominated in other than the functional currency, gains and losses are recognized when the currency exchange rates fluctuate, resulting in an offset to the currency gains or losses on those foreign currency denominated assets or liabilities. At December 31, 2003, contracts with a notional value of $128,617 were outstanding for the U.K. pound, Norwegian kroner, Euro, Singapore dollar and Japanese yen. At December 31, 2002, contracts with a notional value of $118,895 were outstanding for the U.K. pound, Norwegian kroner, Australian dollar and Swedish krona.
At December 31, 2003 and 2002, $3,991 and $5,829, respectively, was included in other assets relating to derivate financial instruments.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The reported amounts of financial instruments such as cash, short-term investments, receivables and accounts payable approximate fair value because of their short maturities. The reported amounts of debt approximate fair values because of their variable interest rates.
RISKS AND UNCERTAINTIES
Since the Venture operates in many countries, the business is subject to varying degrees of risk and uncertainty. The Venture insures its business and assets against insurable risks in a manner that it deems appropriate. Because of its diversity, the Venture believes that the risk of loss from uninsured events in any one country would not have a material, adverse effect on its operations as a whole. Additionally, management believes there is no material concentration of risk within any single customer or supplier, or small group of customers or suppliers, whose failure or nonperformance would materially affect the Venture's financial position. For the year ended December 31, 2003, revenue from one customer accounted for 12 percent of total revenue. For the years ended December 31, 2002 and 2001, no customer accounted for more than 10 percent of total revenue. At December 31, 2003, the Company had receivables outstanding from two customers that comprised 13 percent and 10 percent of total trade receivables, respectively. At December 31, 2002, no customer had an outstanding balance greater than 10 percent of total trade receivables.
REVENUE RECOGNITION
Revenues from contract services performed on a dayrate basis are recognized as the service is performed. Revenues from other contract services are recognized as the seismic data is acquired or processed. Multiclient data surveys are licensed to customers on a nontransferable basis. Revenues on completed multiclient data surveys are recognized upon obtaining a signed license agreement and providing customers access to such data. Revenues on in-process multiclient data surveys are recognized after obtaining a signed licensing agreement as the seismic data is acquired and processed, similar to other contract services.
RESEARCH AND ENGINEERING COSTS
Research and engineering costs are expensed as incurred.
CASH
Cash includes cash on hand and demand deposits with banks.
SHORT-TERM INVESTMENTS
Short-term investments are held to maturity and stated at cost plus accrued interest, which approximates market value, and comprise primarily certificates of deposit and time deposits. Short-term investments include certain time deposits that are held through an affiliate in the amounts of $119,544 and $174,984 at December 31, 2003 and 2002, respectively.
INVENTORIES
Inventories consist of parts and raw materials and are stated at the lower of cost or market, cost being determined on the average cost basis.
MULTICLIENT LIBRARY
The multiclient library consists of completed and in-process seismic surveys that are licensed on a nonexclusive basis. All capitalizable costs associated with acquiring and processing the data are capitalized into the multiclient library. Costs capitalized during the years ended December 31, 2003, 2002 and 2001, were $149,767, $344,705 and $458,188, respectively. Such costs are charged to multiclient amortization based on the percentage of the total costs to estimated total revenue that the Venture expects to receive from multiclient surveys. Additionally, each survey is amortized over a maximum of 4 years. No individual survey carries a net book value above the straight-line amortized value.
The carrying value of the multiclient library is periodically reviewed to determine whether there has been a permanent impairment of value. Adjustments to the value are recorded when it is determined that estimated sales would not be sufficient to recover the carrying value of the asset (Note 3).
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost, less accumulated depreciation. Depreciation is computed using the straight-line method over the estimated useful lives of the assets which are as follows:
YEARS ----- Buildings and improvements 5 - 50 Field technical and drilling equipment 3 - 15 Vessels 12 - 18 Other equipment 2 - 15 Furniture, fixtures and office equipment 5 - 12 |
Maintenance and repairs are charged to operating expenses as incurred.
TAXES ON INCOME
The Venture accounts for income taxes using the asset and liability approach. The asset and liability approach requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the carrying amounts and the tax basis of certain assets and liabilities. The income tax provision and related accounts in the accompanying combined financial statements are primarily related to operations outside the United States ("U.S."). The Owners or their affiliates are directly responsible for U.S. income taxes on WesternGeco LLC earnings and Canadian income taxes on WesternGeco Canada earnings. Therefore, no such taxes are provided on the U.S. earnings of WesternGeco LLC and the Canadian earnings of WesternGeco Canada in the combined financial statements. Valuation allowances are recorded to reduce deferred tax assets when it is more likely than not that a deferred tax asset will not be realized by the Venture.
GOODWILL
The excess purchase price over the fair value of assets acquired is recorded as goodwill. Beginning in 2002 with the adoption of SFAS No. 142, goodwill is no longer amortized, but is tested for impairment annually and when an event occurs or circumstances change that would cause the fair value of a reporting unit to be below its carrying amount. Prior to 2002, goodwill was amortized using the straight-line method over its estimated period of benefit of 15-25 years. Accumulated amortization was $9,896 at December 31, 2003 and 2002.
The proforma effect of implementing SFAS No. 142 is as follows:
(in thousands of dollars) DECEMBER 31, 2001 ------------ Net income as reported $ 150,042 Goodwill amortization 8,801 ---------- Pro forma net income $ 158,843 ========== |
OTHER INTANGIBLE ASSETS
Other intangible assets, which are stated at cost less accumulated amortization, consist primarily of purchased software. The purchased software is amortized over 15 years, which is the expected useful life. Other intangible assets are amortized over 5 to 20 years. Accumulated amortization was $16,010, $9,806 and $3,946 at December 31, 2003, 2002 and 2001, respectively. Amortization expense for the years ended December 31, 2003, 2002 and 2001 was $6,204, $5,860 and $6,085, respectively. Amortization expense for the next five years is estimated to be:
(in thousands of dollars) 2004 $ 4,302 2005 3,732 2006 3,028 2007 2,466 2008 2,466 |
IMPAIRMENT OF LONG LIVED ASSETS
In accordance with Statement of Financial Accounting Standards No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets ("SFAS No. 144"), the Venture assesses potential impairments of long-lived assets and identifiable intangible assets when there is evidence that events or changes in circumstances may have made recovery of an asset's carrying value uncertain. For assets held and used, an impairment loss is recognized when the sum of the expected, future undiscounted net cash flow is less than the carrying amount of the asset.
MOBILIZATION COSTS
Transportation and other expenses incurred prior to commencement of seismic operations where a customer contract already exists are deferred and amortized over the term of the related contract. Transportation or other expenses incurred prior to commencement of seismic operations for a multiclient project are capitalized as a part of the multiclient library. Expenses incurred to relocate seismic units not under contract are expensed as incurred.
RECENT ACCOUNTING PRONOUNCEMENTS
In July 2002, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 146, Accounting for Exit or Disposal Activities ("Statement No. 146"). Statement No. 146 addresses issues regarding the recognition, measurement and reporting of costs that are associated with exit and disposal activities, including restructuring activities. The scope of Statement No. 146 also includes (1) costs related to terminating a contract that is not a capital lease and (2) termination benefits that employees who are involuntarily terminated receive under the terms of a one-time benefit arrangement that is not an ongoing benefit arrangement or an individual deferred compensation contract. Statement No. 146 was effective for exit or disposal activities that were initiated after December 31, 2002. The Company adopted Statement No. 146 effective January 1, 2003, with no impact upon its financial position or results of operations.
In December 2003, the FASB issued Statement of Financial Accounting Standards No. 132 (revised 2003) Employers' Disclosures About Pensions and Other Postretirement Benefits ("Statement No. 132R"). Statement No. 132R requires additional disclosures to those in the original Statement 132 about the assets, obligations, cash flows, and net periodic benefit cost of defined benefit pension plans and other defined benefit postretirement plans. The Venture adopted Statement No. 132R for the year ended December 31, 2003.
In January 2004, the FASB issued FSP No. FAS 106-1 (Accounting and Disclosure Requirements Related to the Medicare Prescription Drug Improvement and Modernization Act of 2003). The statement permits the deferral of accounting related to the effects of the legislation until the earlier of issuance of final accounting guidance by the FASB or a significant plan amendment/curtailment event requiring remeasurement, occurring after January 31, 2004. The Venture is assessing the impact of the new legislation upon future postretirement medical costs.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform to current year presentation.
3. ASSET IMPAIRMENTS AND RESTRUCTURE CHARGES
During the years ended December 31, 2003, 2002 and 2001, the Company recognized asset impairments and restructuring charges as follows:
2003 2002 2001 ---------- ---------- ---------- Multiclient impairment $ 399,090 $ 184,091 $ 50,393 Asset impairment 57,500 23,452 33,419 Employee separation costs 2,996 42,017 -- Other exit costs -- 55,813 -- ---------- ---------- ---------- $ 459,586 $ 305,373 $ 83,812 ========== ========== ========== |
During the year ended December 31, 2002, the Venture's management approved a restructuring plan to reduce infrastructure and overhead, remove several marine vessels from service, cease all U.S. land acquisition activity and writedown certain assets. Employee separation costs were for approximately 1,700 employees, impacting the majority of business functions, job classes and geographic regions. Employee separation benefits included severance, medical and other benefits. Other exit costs consisted of vessel stacking, de-rigging costs, lease cancellation and other costs primarily related to the removal from service of nine vessels and all U.S. land crews. The activity related to the restructure action is as follows:
BALANCE 2002 BALANCE DECEMBER 31, CHARGES TO DECEMBER 31, 2001 EXPENSE EXPENDITURES 2002 ------------ ---------- ------------ ------------ Employee separation costs $ -- $ 42,017 $ (17,438) $ 24,579 Other exit costs -- 55,813 (14,911) 40,902 --------- --------- --------- --------- $ -- $ 97,830 $ (32,349) $ 65,481 ========= ========= ========= ========= |
BALANCE 2003 BALANCE DECEMBER 31, CHARGES TO DECEMBER 31, 2002 EXPENSE EXPENDITURES 2003 ------------ ---------- ------------ ------------ Employee separation costs $ 24,579 $ 11,552 $ (33,627) $ 2,504 Other exit costs 40,902 (8,556) (32,346) -- --------- --------- --------- --------- 65,481 $ 2,996 $ (65,973) $ 2,504 ========= ========= ========= ========= |
During the year ended December 31, 2003, the Venture recorded an additional charge of $9,552 related to the restructure action for employee separation costs. The charge related to 730 additional employees that were separated. Additionally, the Venture recorded employee separation costs of $2,000 during the year ended December 31, 2003, relating to 80 employees separated for a reduction of data processing operations and overhead expenses.
4. UNBILLED TRADE RECEIVABLES
Unbilled amounts of approximately $76,043 and $59,526 are included in trade receivables at December 31, 2003 and 2002, respectively. Such amounts generally will be billed to the customers in one to three months in accordance with the provisions of the related contracts.
5. PROPERTY, PLANT AND EQUIPMENT
The components of property, plant and equipment are summarized as follows at December 31, 2003 and 2002:
(in thousands of dollars) 2003 2002 ----------- ----------- Land $ 600 $ 823 Buildings and improvements 57,052 45,049 Field technical and drilling equipment 979,828 1,024,316 Vessels 336,262 376,945 Furniture, fixtures and office equipment 40,416 35,932 Other equipment 110,865 115,761 Construction in progress 48,861 62,900 ----------- ----------- 1,573,884 1,661,726 Accumulated depreciation 1,076,325 1,062,170 ----------- ----------- Property, plant and equipment, net $ 497,559 $ 599,556 =========== =========== |
Depreciation expense, including amounts capitalized into the multiclient library, totaled $175,065, $210,468 and $162,609 for the years ended December 31, 2003, 2002 and 2001, respectively. No interest was capitalized during the periods presented.
6. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
At December 31, 2003 and 2002, accounts payable and accrued liabilities consisted of the following:
(in thousands of dollars) 2003 2002 ----------- ----------- Trade payables $ 124,666 $ 174,103 Payroll, vacation and employee benefits 74,244 70,899 Taxes, other than income 10,872 22,477 Deferred revenue 48,299 27,093 Restructure reserves 2,504 65,481 Multiclient commissions and brokerages 22,488 22,176 Other 88,323 82,623 ----------- ----------- $ 371,396 $ 464,852 =========== =========== |
7. DEBT
Based on working capital requirements, the Venture draws short-term loans with various international banks.
Short-term loans were $93,391 and $188,813 as of December 31, 2003 and 2002, respectively. The debt is primarily in U.S. dollars, at interest rates based on specified margins over selected interbank offering rates. The weighted-average interest rate of the short-term loans outstanding at December 31, 2003 and 2002, was 1.6 percent and 1.9 percent, respectively.
A summary of long-term debt by currency follows:
(in thousands of dollars) 2003 2002 ---------- ---------- U.K. pound $ 78,153 $ 70,400 U.S. dollar 29,000 50,000 Norwegian kroner 11,887 11,429 ---------- ---------- $ 119,040 $ 131,829 ========== ========== |
The majority of the long-term debt is at variable interest rates available from revolving credit agreements with a syndicate of banks. The weighted-average interest rate of the long-term debt outstanding at December 31, 2003 and 2002, was 3.9 percent and 3.3 percent, respectively. Such rates are reset every three months or sooner. The carrying value of long-term debt on December 31, 2003 and 2002, approximates the aggregate fair market value.
The above facilities were arranged through the Schlumberger treasury group. All long-term debt at December 31, 2003, is due after 2008.
8. INCOME TAXES
Income before taxes and minority interest for the years ended December 31 was as follows:
(in thousands of dollars) 2003 2002 2001 ---------- ---------- ---------- United States $ (309,950) $ 67,378 $ 200,740 Foreign (179,255) (319,799) (32,189) ---------- ---------- ---------- $ (489,205) $ (252,421) $ 168,551 ========== ========== ========== |
The components of income tax expense for the years ended December 31, are presented in the table below. All amounts are attributable to foreign operations.
(in thousands of dollars) 2003 2002 2001 ---------- ---------- ---------- Current provision $ 22,642 $ 33,460 $ 26,537 Deferred benefit (5,617) (10,371) (1,658) ---------- ---------- ---------- Total provision $ 17,025 $ 23,089 $ 24,879 ========== ========== ========== |
The difference between the U.S. federal statutory income tax rate of 35 percent and the Venture's effective tax rate for the years ended December 31 was as follows:
(in thousands of dollars) 2003 2002 2001 ---------- ---------- ---------- Computed tax provision at the applicable statutory income tax rate $ (171,222) $ (88,347) $ 58,993 Foreign operations 79,764 135,018 36,145 Tax effect of U.S. results benefited by/ (taxable to) the Owners 108,483 (23,582) (70,259) ---------- ---------- ---------- Income tax expense $ 17,025 $ 23,089 $ 24,879 ========== ========== ========== Total effective tax rate (3.5)% (9.1)% 14.8% ========== ========== ========== |
The impact of foreign operations upon the effective tax rate is due to taxes paid by the Venture in certain foreign jurisdictions on a deemed profit basis, income/losses in jurisdictions with tax rates different from the U.S. statutory income tax rate and unbenefitted foreign losses of the Venture.
The tax effects of temporary differences and carryforwards that give rise to deferred tax assets as of December 31 consisted of the following:
(in thousands of dollars) 2003 2002 --------- --------- Net operating loss carryforwards $ 13,919 $ 8,733 Property, plant and equipment 14,248 12,221 Other 4,181 5,777 --------- --------- Deferred tax asset $ 32,348 $ 26,731 ========= ========= |
The net operating loss carryforwards and property, plant and equipment temporary differences recognized by the Company are in the United Kingdom. The net operating loss carryforwards have an indefinite carryforward period.
9. COMMITMENTS AND CONTINGENCIES
Rent expense for the years ended December 31, 2003, 2002 and 2001, was $68,391, $83,341 and $96,771, respectively. Rent expense on facilities leased from BHI for the years ended December 31, 2003, 2002 and 2001, was $6,845, $6,631 and $6,969, respectively (Note 10).
Commitments for future minimum rental payments under noncancelable leases are:
(in thousands of dollars) 2004 $ 53,720 2005 30,338 2006 24,172 2007 20,932 2008 12,661 Thereafter 23,332 |
Rental payments to be made to BHI included in the above table are:
(in thousands of dollars) 2004 $ 5,482 2005 6,473 2006 5,598 2007 8,150 2008 7,122 Thereafter 16,325 |
Future minimum rental payments guaranteed by Schlumberger are:
(in thousands of dollars) 2004 $ 4,404 2005 4,404 2006 4,404 2007 4,625 2008 2,313 Thereafter -- |
In the course of its business affairs and operations, the Venture is subject to possible loss contingencies arising from local laws and regulations. Additionally, the Venture is subject to certain litigation matters arising from the normal course of business. Management has recorded a reserve for these matters to the extent management has concluded these matters are probable and can be reasonably estimated. In the opinion of management, there are no other matters which could have a material adverse effect on the financial position, results of operations or cash flows of the Venture.
The Department of Commerce, Department of the Navy and Department of Justice (the "U.S. Agencies") are investigating compliance with certain export licenses first issued to Western Geophysical in 1994 for export of seismic equipment to the People's Republic of China. BHI acquired Western Geophysical in August 1998 and subsequently transferred the related assets to the
Venture in December 2000. Under the master formation agreement, BHI indemnifies the Venture for this matter. The Venture is cooperating fully with the U.S. Agencies and with BHI.
10. RELATED PARTY TRANSACTIONS
The combined financial statements include costs for certain functions and services such as treasury services, information technology services, rent and other corporate and infrastructure costs performed or incurred by Schlumberger's centralized organizations and directly charged to the Venture based on usage. These allocations, which are based on the assumptions that Schlumberger's and the Venture's management believes are reasonable under the circumstances, resulted in charges of $28,354, $26,279 and $21,375 for 2003, 2002 and 2001, respectively.
The Venture leases certain properties from BHI. Payments made under the lease during the years ended December 31, 2003, 2002 and 2001, were $4,992, $5,503 and $4,592, respectively. Additionally, certain of the Venture's leases are guaranteed by Schlumberger.
The payables to affiliates balance includes amounts due to Schlumberger affiliates relating to asset purchases and direct operating costs.
During the years ended December 31, 2003, 2002 and 2001, Schlumberger granted options to purchase common stock to Venture employees and issued common shares to Venture employees under a direct stock purchase program (Note 12).
Certain of the Venture's excess cash funds are held by an affiliated entity and are included in the combined balance sheet as short-term investments. The balances held by the affiliate on behalf of the Venture at December 31, 2003 and 2002, were $119,544 and $174,984, respectively.
The combined financial statements also include interest expense of $235, $1,202 and $1,010 associated with debt payable to associated companies and interest income of $1,352, $1,642 and $2,950 associated with receivables from associated companies for the years ended December 31, 2003, 2002 and 2001, respectively.
11. PENSION AND OTHER POSTRETIREMENT BENEFIT PLANS
The Venture sponsors a defined benefit pension plan and a postretirement plan in the United States while Schlumberger sponsors a defined benefit pension plan in the United Kingdom (U.K.) that covers Venture employees. The benefits associated with these benefit plans are based on years of service with the Venture combined with years of service with either Schlumberger or BHI affiliates and compensation on a career-average pay basis. Charges to expense are based upon costs of the plans, as computed by independent actuaries. In addition, the Venture has statutory pension plans in various other foreign countries. The Venture's total pension expense was $16,206, $14,844 and $7,186 for 2003, 2002 and 2001, respectively.
U.S. PENSION PLAN
The components of net periodic benefit cost for the years ended December 31 are as follows:
(in thousands of dollars) 2003 2002 2001 --------- --------- --------- Service cost - benefits earned during the period $ 6,817 $ 6,446 $ 1,358 Interest cost on projected benefit obligation 453 99 -- Expected return on plan assets (274) -- -- --------- --------- --------- Net periodic benefit cost $ 6,996 $ 6,545 $ 1,358 ========= ========= ========= |
The following assumptions were used in determining the Venture's U.S. Pension Plan expense:
2003 2002 2001 ------ ------ ------ Discount rate 6.75% 7.25% 7.50% Rate of compensation increase 3.00 3.00 4.50 Rate of return on plan assets 8.50 -- -- |
The plan's funded status at December 31, 2003 and 2002, was as follows (based on valuations as of December 31):
(in thousands of dollars) 2003 2002 ---------- ---------- CHANGE IN BENEFIT OBLIGATION Benefit obligation at beginning of year $ 8,611 $ 1,358 Service cost 6,817 6,446 Contributions paid by participants -- -- Interest cost 453 99 Actuarial (gain) loss 923 708 Benefits paid (2,374) -- ---------- ---------- Benefit obligation at end of year $ 14,430 $ 8,611 ========== ========== CHANGE IN PLAN ASSETS Fair value of plan assets at beginning of year $ -- $ -- Actual return on plan assets 383 -- Employer contributions 9,883 -- Contributions paid by participants -- -- Benefits paid (2,374) -- ---------- ---------- Fair value of plan assets at end of year $ 7,892 $ -- ========== ========== Funded status of plan $ (6,538) $ (8,611) Unrecognized actuarial loss 1,521 708 ---------- ---------- Net amount recognized $ (5,017) $ (7,903) ========== ========== AMOUNTS RECOGNIZED IN THE CONSOLIDATED BALANCE SHEET Accrued benefit liability $ (5,017) $ (7,903) Accumulated other comprehensive income -- -- ---------- ---------- Net amount recognized $ (5,017) $ (7,903) ========== ========== |
The following assumptions were used in determining the Venture's U.S. Pension Plan obligation:
2003 2002 ---------- ---------- Discount rate 6.25% 6.75% Rate of compensation increase 3.00 3.00 Rate of return on plan assets 8.50 -- |
The Venture expects to contribute $4,514 to the plan in 2004.
Plan assets are included within the Schlumberger Pension Trust. The assets of the Schlumberger Pension Trust are invested as follows:
Equity Based Funds 63% Fixed Income Based Funds 33 Other 4 |
The asset allocation objectives are to diversify the portfolio among several asset classes to reduce volatility while maintaining an asset mix that provides the highest rate of return consistent with an acceptable level of risk. The investment strategies include a rebalancing of the asset mix as necessary to the previously defined levels and reassessing funding levels and asset allocation strategy at least annually.
The expected long-term rate of return on assets is 8.5%. This assumption represents the rate of return on plan assets reflecting the average rate of earnings expected on the funds invested or to be invested to provide for the benefits included in the projected benefit obligation. The assumption has been determined by reflecting expectations regarding future rates of return for the portfolio considering the asset distribution and related historical rates of return. The appropriateness of the assumption is reviewed at least annually.
U.K. PENSION PLAN
Schlumberger sponsors a pension plan in the United Kingdom which covers certain WesternGeco employees. Charges to expense recognized by the Venture of $4,243, $2,459 and $4,721 for the years ended December 31, 2003, 2002 and 2001, are based upon the costs of the plan, in total, and are allocated to the Venture by Schlumberger. For purposes of determining Schlumberger's U.K. pension expense, the following assumptions were used:
2003 2002 2001 ---- ---- ---- Discount rate 5.70% 5.75% 6.00% Rate of compensation increase 3.75 4.00 4.00 Rate of return on plan assets 8.50 9.00 9.00 |
U.S. POSTRETIREMENT PLAN
The components of net periodic benefit cost for the years ended December 31 were as follows:
(in thousands of dollars) 2003 2002 2001 ------- ------- ------- Service cost - benefits earned during the period $ 3,613 $ 3,461 $ 585 Interest cost 4,359 3,784 440 Expected return on plan assets -- -- -- Gain recognized -- -- (25) Prior service cost recognized 4,008 4,008 (5) ------- ------- ------- $11,980 $11,253 $ 995 ======= ======= ======= |
The following assumptions were used in determining the Venture's U.S. Postretirement Plan expense:
2003 2002 2001 ------------ ------------ ------------ Discount rate 6.75 % 7.25 % 7.50 % Mortality 1994 GAM 1994 GAM 1983 GAM Rate of compensation increase 3.00 3.00 4.50 Medical trend rates Varies based Varies based Varies based on age and on age and on age and year year year |
The plan's funded status at December 31 was as follows (based on valuations as of December 31):
(in thousands of dollars) 2003 2002 -------- -------- CHANGE IN BENEFIT OBLIGATION Benefit obligation at beginning of year $ 59,952 $ 1,412 Service cost 3,613 3,461 Contributions paid by participants -- -- Interest cost 4,359 3,784 Actuarial (gain) loss 6,883 7,924 Plan amendments (addition of joint venture employees) -- 43,502 Benefits paid (342) (131) -------- -------- Benefit obligation at end of year $ 74,465 $ 59,952 ======== ======== CHANGE IN PLAN ASSETS Fair value of plan assets at beginning of year $ -- $ -- Actual return on plan assets -- -- Employer contributions 342 131 Contributions paid by participants -- -- Benefits paid (342) (131) -------- -------- Fair value of plan assets at end of year $ -- $ -- ======== ======== Funded status of plan $(74,465) $(59,952) Unrecognized prior service cost 35,426 39,434 Unrecognized actuarial loss 14,311 7,428 -------- -------- Net amount recognized $(24,728) $(13,090) ======== ======== AMOUNTS RECOGNIZED IN THE CONSOLIDATED BALANCE SHEET Accrued benefit liability (24,728) (13,090) Accumulated other comprehensive income -- -- -------- -------- Net amount recognized $(24,728) $(13,090) ======== ======== |
The assumed discount rate used to determine the Venture's U.S. Postretirement Plan obligation was 6.25% for 2003 and 6.75% for 2002.
If the assumed medical cost trend rate was increased by one percentage point, health care cost in 2003 would have been $10,085, and the accumulated postretirement benefit obligation would have been $94,445 on December 31, 2003.
If the assumed medical cost trend rate was decreased by one percentage point, health care cost in 2003 would have been $6,371, and the accumulated postretirement benefit obligation would have been $59,170 on December 31, 2003.
12. STOCK-BASED COMPENSATION AND OTHER EMPLOYEE BENEFITS
In addition to the pension and other postretirement benefit plans, the Venture has other deferred benefit programs, primarily profit sharing. Expenses for these programs for 2003, 2002 and 2001 were $3,259, $8,300 and $21,790, respectively.
The Venture's employees are eligible to participate in Schlumberger's employee discounted stock purchase plan under which an employee can choose each year to have up to 10 percent of their annual earnings withheld to purchase Schlumberger common stock. The purchase price of the stock is 85 percent of the lower of its beginning or end of the plan year market price. During the year ended December 31, 2003, Schlumberger recognized stock-based compensation expense of approximately $1,536 related to Venture employees' participation in the stock purchase plan. As a result, the Venture recognized stock-based compensation of $1,536 as selling, general and administrative expense during the year ended December 31, 2003. The expense was treated as a capital investment from Schlumberger and was allocated to Schlumberger's owners' net investment balance. Since Schlumberger did not record compensation expense for stock purchased by employees of the Venture under the stock purchase plan during the years ended December 31, 2002 and 2001, no compensation expense has been recorded in the Venture's combined financial statements for the years ended December 31, 2002 and 2001.
The Venture's employees may be awarded options to purchase Schlumberger common stock on a periodic basis. In January and July 2003, Schlumberger granted options to purchase 9,000 and 184,250 shares of Schlumberger common stock, respectively, to Venture employees at exercise prices of $41.30 and $46.02 per share, respectively. In April 2002, 220,250 Schlumberger stock options were granted to Venture employees at an exercise price of $55.75. In January and October 2001, Schlumberger granted options to purchase 177,750 and 33,500 shares of Schlumberger common stock, respectively, to Venture employees at exercise prices of $77.06 and $46.25 per share, respectively. For all of the stock options granted, the exercise price equals the market price of Schlumberger common stock on the date of grant. Each option's maximum term is ten years, and options generally vest in 20 percent increments over five years. During the year ended December 31, 2003, Schlumberger recognized stock-based compensation expense of approximately $200 related to options to purchase Schlumberger common stock granted to Venture employees. As a result, the Venture recognized stock-based compensation of $200 as selling, general and administrative expense during the year ended December 31, 2003. The expense was treated as a capital investment from Schlumberger and was allocated to Schlumberger's owners' net investment balance. Since Schlumberger did not record compensation expense for any of the options granted to employees of the Venture during the years ended December 31, 2002 and 2001, no compensation expense has been recorded in the Venture's combined financial statements during these years.