UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
SCHEDULE 14A
(RULE 14a-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE SECURITIES
EXCHANGE ACT OF 1934 (AMENDMENT NO. )
Filed by the registrant [X]
Filed by a party other than the registrant [ ]
Check the appropriate box:
[ ] Preliminary proxy statement. [ ] Confidential, for use of the
Commission only (as permitted by
Rule 14a-6(e)(2)).
[X] Definitive proxy statement.
[ ] Definitive additional materials.
[ ] Soliciting material pursuant to Section 240.14a-12
BAKER HUGHES INCORPORATED
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(Name of Registrant as Specified in Its Charter)
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(Name of Person(s) Filing Proxy Statement if Other Than the Registrant)
Payment of filing fee (check the appropriate box):
[X] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and
0-11.
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pursuant to Exchange Act Rule 0-11 (set forth the amount on which the
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[ ] Fee paid previously with preliminary materials.
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[ ] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee
was paid previously. Identify the previous filing by registration
statement number, or the form or schedule and the date of its filing.
(1) Amount Previously Paid:
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BAKER HUGHES INCORPORATED
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
APRIL 23, 2003
To the Stockholders of Baker Hughes Incorporated:
The Annual Meeting of the Stockholders of Baker Hughes Incorporated
(the "Company" or "Baker Hughes") will be held at the offices of the Company,
3900 Essex Lane, Suite 210, Houston, Texas on Wednesday, April 23, 2003, at 9:00
a.m., Houston time, for the purpose of considering and voting on:
1. Election of four directors to serve for three-year terms.
2. Approval of amendment of the Baker Hughes Incorporated
Employee Stock Purchase Plan.
3. Stockholder Proposal No. 1 regarding poison pills.
4. Stockholder Proposal No. 2 regarding classified boards.
5. Stockholder Proposal No. 3 regarding prohibition of stock
option grants to senior executives.
6. Stockholder Proposal No. 4 on implementation of the MacBride
Principles in Northern Ireland.
7. Such other business as may properly come before the meeting
and any reconvened meeting after an adjournment thereof.
The Board of Directors has fixed March 5, 2003 as the record date for
determining the stockholders of the Company entitled to notice of, and to vote
at, the meeting and any reconvened meeting after an adjournment thereof, and
only holders of Common Stock of the Company of record at the close of business
on that date will be entitled to notice of, and to vote at, that meeting or a
reconvened meeting after an adjournment.
You are invited to attend the meeting in person. Whether or not you
plan to attend the meeting personally, please complete, sign and date the
enclosed proxy, and return it as soon as possible in the enclosed postage
prepaid envelope. You may revoke your proxy any time prior to its exercise, and
you may attend the meeting and vote in person, even if you have previously
returned your proxy. In some cases, you may be able to exercise your proxy by
telephone or by the Internet. Please refer to the Proxy Statement for further
information on telephone and Internet voting.
By order of the Board of Directors,
Sandra E. Alford
Corporate Secretary
Houston, Texas
March 17, 2003
TO ASSURE YOUR REPRESENTATION AT THE MEETING, PLEASE SIGN, DATE AND
RETURN YOUR PROXY AS PROMPTLY AS POSSIBLE. AN ENVELOPE, WHICH REQUIRES NO
POSTAGE, IF MAILED IN THE UNITED STATES, IS ENCLOSED FOR THIS PURPOSE.
PROXY STATEMENT
TABLE OF CONTENTS
<Table>
Proxy Statement........................................................................................... 1
Voting Securities......................................................................................... 2
Proposal No. 1, Election of Directors..................................................................... 3
Information Concerning Directors Not Standing for Election................................................ 4
Board of Directors and Committees of the Board............................................................ 6
Security Ownership of Management.......................................................................... 7
Certain Relationships and Related Transactions............................................................ 8
Compliance with Section 16(a) of the Securities Exchange Act of 1934...................................... 8
Executive Compensation, Summary Compensation Table........................................................ 9
Stock Options Granted During 2002......................................................................... 11
Aggregated Option Exercises During 2002 and Option Values at December 31, 2002............................ 12
Long-Term Incentive Plan Awards During 2002............................................................... 12
Pension Plan Table........................................................................................ 13
Employment and Severance Agreements....................................................................... 14
Compensation Committee Report............................................................................. 17
Audit/Ethics Committee Report............................................................................. 21
Appointment of Independent Auditors....................................................................... 21
Fees Paid to Deloitte & Touche LLP........................................................................ 21
Proposal to Approve Amendment of the Baker Hughes Incorporated
Employee Stock Purchase Plan......................................................................... 22
Equity Compensation Plans Information..................................................................... 24
Stockholder Proposal No. 1 Regarding Poison Pills......................................................... 28
Statement of the Board of Directors and Management in Opposition to Proposal No. 1........................ 29
Stockholder Proposal No. 2 Regarding Classified Boards.................................................... 30
Statement of the Board of Directors and Management in Opposition to Proposal No. 2........................ 31
Stockholder Proposal No. 3 Regarding Prohibition of Stock Option Grants to Senior Executives.............. 32
Statement of the Board of Directors and Management in Opposition to Proposal No. 3........................ 33
Stockholder Proposal No. 4 Regarding Implementation of the MacBride Principles in Northern Ireland........ 34
Statement of the Board of Directors and Management in Opposition to Proposal No. 4........................ 35
Annual Report............................................................................................. 36
Incorporation by Reference................................................................................ 36
Stockholder Proposals..................................................................................... 36
Other Matters............................................................................................. 36
Annex A, Baker Hughes Incorporated Employee Stock Purchase Plan
(as amended and restated March 5, 2003).............................................................. 37
</Table>
i
PROXY STATEMENT
This Proxy Statement is furnished in connection with the solicitation
of proxies by the Board of Directors of Baker Hughes Incorporated, a Delaware
corporation (the "Company" or "Baker Hughes"), to be voted at the Annual Meeting
of Stockholders scheduled to be held on Wednesday, April 23, 2003 and at any and
all reconvened meetings after adjournments thereof.
Solicitation of proxies by mail is expected to commence on or about
March 17, 2003 (the approximate date this Proxy Statement and accompanying proxy
were first sent to security holders). The Company will bear the cost of the
solicitation. In addition to solicitation by mail, certain of the directors,
officers and regular employees of the Company may, without extra compensation,
solicit proxies by telephone, facsimile and personal interview. The Company will
make arrangements with brokerage houses, custodians, nominees and other
fiduciaries to send proxy material to their principals, and the Company will
reimburse them for postage and clerical expenses. The Company has retained
Mellon Investor Services LLC, Baker Hughes' transfer agent and registrar, to
assist in the solicitation of proxies from stockholders of the Company for an
anticipated fee of $9,500, plus out-of-pocket expenses.
Stockholders with shares registered in their names with Mellon Investor
Services LLC may authorize a proxy by the Internet at the following internet
address: http://www.eproxy.com/bhi, or telephonically by calling Mellon Investor
Services LLC at 1-800-435-6710. Proxies submitted through Mellon Investor
Services LLC by the Internet or telephone must be received by 11:00 p.m. Eastern
time (10:00 p.m. Houston time) on April 22, 2003. The giving of a proxy will not
affect your right to vote in person if you decide to attend the meeting.
A number of banks and brokerage firms participate in a program that
also permits stockholders to direct their vote by the Internet or telephone.
This option is separate from that offered by Mellon Investor Services LLC and
will be reflected on the voting form from a bank or brokerage firm that
accompanies this Proxy Statement. If your shares are held in an account at a
bank or brokerage firm that participates in such a program, you may direct the
vote of these shares by the Internet or telephone by following the instructions
on the voting form enclosed with the proxy from the bank or brokerage firm.
Votes directed by the Internet or telephone through such a program must be
received by Mellon Investor Services LLC by 11:00 p.m. Eastern time (10:00 p.m.
Houston time) on April 22, 2003. Directing the voting of your shares will not
affect your right to vote in person if you decide to attend the meeting;
however, you must first request a proxy either on the Internet or the voting
form that accompanies this Proxy Statement. Requesting a proxy prior to the
deadlines described above will automatically cancel any voting directions you
have previously given by the Internet or by telephone with respect to your
shares.
The Internet and telephone proxy procedures are designed to
authenticate stockholders' identities, to allow stockholders to give their proxy
instructions and to confirm that those instructions have been properly recorded.
Stockholders authorizing proxies or directing the voting of shares by the
Internet should understand that there may be costs associated with electronic
access, such as usage charges from Internet access providers and telephone
companies, and those costs must be borne by the stockholder.
SHARES FOR WHICH PROXIES HAVE BEEN EXECUTED WILL BE VOTED AS SPECIFIED
IN THE PROXIES. IF NO SPECIFICATION IS MADE, THE SHARES WILL BE VOTED FOR THE
ELECTION OF NOMINEES LISTED HEREIN AS DIRECTORS, FOR THE APPROVAL OF AMENDMENT
OF THE BAKER HUGHES INCORPORATED EMPLOYEE STOCK PURCHASE PLAN AND AGAINST EACH
OF STOCKHOLDER PROPOSAL NOS. 1, 2, 3 AND 4.
Proxies may be revoked at any time prior to the exercise thereof by
filing with the Corporate Secretary, at the Company's executive offices, a
written revocation or a duly executed proxy bearing a later date. The executive
offices of the Company are located at 3900 Essex Lane, Houston, Texas
77027-5177. For a period of at least ten days prior to the Annual Meeting of
Stockholders, a complete list of stockholders entitled to vote at the Annual
Meeting will be available for inspection during ordinary business hours at the
Company's executive offices by stockholders of record for proper purposes.
1
VOTING SECURITIES
The securities of the Company entitled to be voted at the Annual
Meeting consist of shares of its Common Stock, par value $1 per share (the
"Common Stock"), of which 336,896,319 shares were issued and outstanding at the
close of business on March 5, 2003. Only stockholders of record at the close of
business on that date will be entitled to vote at the meeting. Each share of
Common Stock entitles the holder thereof to one vote on each matter to be
considered at the meeting.
Assuming a quorum is present at the Annual Meeting either in person or
represented by proxy, with respect to the election of directors, the four
nominees receiving the greatest number of votes cast by the holders of the
Common Stock entitled to vote on the matter will be elected as directors, and
the affirmative vote of the holders of a majority of the shares of Common Stock
present in person or represented by proxy at the Annual Meeting and entitled to
vote on the matter is required for the approval of amendment of the Baker Hughes
Incorporated Employee Stock Purchase Plan and Stockholder Proposal Nos. 1, 2, 3
and 4. There will be no cumulative voting in the election of directors. Under
Delaware law, abstentions are treated as present and entitled to vote and thus,
will be counted in determining whether a quorum is present and will have the
effect of a vote against a matter, except for the election of directors, in
which case an abstention will have no effect. Shares held by brokers or nominees
for which instructions have not been received from the beneficial owners or
persons entitled to vote and for which the broker or nominee does not have
discretionary power to vote on a particular matter (called "broker non-votes"),
will be considered present for quorum purposes but not considered entitled to
vote on that matter. Accordingly, broker non-votes will not have any impact on
the vote on a matter.
Under the rules of the New York Stock Exchange in effect at the time
this Proxy Statement was printed, if you hold your shares through a broker, your
broker is permitted to vote your shares on the election of the directors and
approval of amendment of the Baker Hughes Incorporated Employee Stock Purchase
Plan, even if the broker does not receive instructions from you. The New York
Stock Exchange has proposed changes to its rules regarding brokers'
discretionary voting authority, which may limit your broker's ability to vote on
the proposal relating to the approval of amendment the Baker Hughes Incorporated
Employee Stock Purchase Plan unless you provide your broker with voting
instructions. If these proposed changes to the New York Stock Exchange rules
become effective prior to the Annual Meeting, your broker may not be able to
vote your shares on this proposal without receiving instructions from you.
The following table sets forth information about the holders of the
Common Stock known to the Company on March 5, 2003 to own beneficially 5% or
more of the Common Stock, based on filings by the holders with the Securities
and Exchange Commission (the "SEC"). For the purposes of this Proxy Statement,
beneficial ownership of securities is defined in accordance with the rules of
the SEC to mean generally the power to vote or dispose of securities regardless
of any economic interest therein.
<Table>
<Caption>
NAME AND ADDRESS SHARES PERCENT
---------------- ------ -------
1. Capital Group International, Inc. 21,979,460 6.5%
11100 Santa Monica Blvd.
Los Angeles, CA 90025
2. Capital Research and Management Company 24,246,700 7.2%
333 South Hope Street
Los Angeles, CA 90071
3. FMR Corp. 32,954,954 9.8%
82 Devonshire Street
Boston, Massachusetts 02109
</Table>
2
PROPOSAL NO. 1
ELECTION OF DIRECTORS
Four Class III directors will be elected at the Annual Meeting of
Stockholders to serve for three-year terms expiring at the Annual Meeting of
Stockholders expected to be held in April 2006.
The following table sets forth each nominee director's name, all
positions with the Company held by the nominee, the nominee's principal
occupation, age, year in which the nominee first became a director of the
Company and class. Each nominee director has agreed to serve if elected.
<Table>
<Caption>
DIRECTOR
NOMINEES PRINCIPAL OCCUPATION AGE SINCE CLASS
------------------- --------------------------------------------------------- --- -------- -----
Claire W. Gargalli Former Vice Chairman, Diversified Search and 60 1998 III
Diversified Health Search Companies (executive search
consultants) from 1990 to 1998. Ms. Gargalli served as
President and Chief Operating Officer of Equimark from
1984 to 1990. During that period, she also served as
Chairman and Chief Executive Officer of Equimark's two
principal subsidiaries, Equibank and Liberty Bank. Ms.
Gargalli is a director of Praxair, Inc. and UNOVA, Inc.
She is also a trustee of Carnegie Mellon University and
Middlebury College.
James A. Lash Chairman of Manchester Principal LLC and its 58 2002 III
predecessor company (high technology venture capital
firm) since 1982. Mr. Lash also served as Chairman and
Chief Executive Officer of Reading Tube Corporation
from 1982 to 1996. Mr. Lash is a director of B.H.I.T.,
Inc., Ivy Animal Health, Inc., Vesper Corporation,
Unicast Communications and Webridge, Inc. Mr. Lash is
a director of City Center 55th Street Foundation, Inc.,
a Member of the Corporation of Massachusetts Institute
of Technology ("MIT") and President of the Alumni
Association of MIT. He is also Chairman of the Budget
Committee of the Board of Estimate and Taxation of
Greenwich, Connecticut.
James F. McCall Executive Director of the American Society of Military 68 1996 III
Comptrollers since 1991. He was Lieutenant General and
Comptroller of the U.S. Army from 1988 until 1991, when
he retired. General McCall was commissioned as 2nd
Lieutenant of Infantry in 1958 and was selected into
the Army's Comptroller/ Financial Management career
field in 1970. General McCall is Chairman of the Board
of Enterprise Bancorp Inc. and Vice Chairman of the
Board of Directors of the American Refugee Committee.
Michael E. Wiley Chairman of the Board, President and Chief Executive 52 2000 III
Officer of Baker Hughes since August 2000. Mr. Wiley
was President and Chief Operating Officer of Atlantic
Richfield Company (ARCO) (integrated energy company)
from 1998 through May 2000. Prior to 1998, he served as
Chairman, President and Chief Executive Officer of
Vastar Resources, Inc., a publicly traded independent
oil and gas company. Mr. Wiley is a director of
Spinnaker Exploration and the American Petroleum
Institute, a trustee of the University of Tulsa and the
Houston Museum of Natural Science and a member of the
National Petroleum Council. He also serves on the
Advisory Board of Riverstone Holdings LLC.
</Table>
3
INFORMATION CONCERNING DIRECTORS NOT STANDING FOR ELECTION
The following table sets forth certain information for those directors
whose present terms will continue after the Annual Meeting of Stockholders. The
term of each Class I and Class II director expires at the 2004 and 2005 Annual
Meeting of Stockholders, respectively.
Pursuant to the Company's Bylaws, in case of a vacancy on the Board of
Directors, a majority of the remaining directors will elect a successor, and the
director so elected will hold office for the remainder of the full term of the
director whose death, retirement, resignation, disqualification or other cause
created the vacancy, and thereafter until the election of a successor director.
<Table>
<Caption>
DIRECTOR
DIRECTORS PRINCIPAL OCCUPATION AGE SINCE CLASS
------------------- --------------------------------------------------------- --- -------- -----
Clarence P. Cazalot, Jr. President and Chief Executive Officer and Director 52 2002 II
since 2002 of Marathon Oil Corporation, formerly known
as USX Corporation (diversified petroleum), and he is
also a member of the Board of Managers of Marathon
Ashland Petroleum LLC. He served as Vice Chairman of
USX Corporation and President of Marathon Oil Company
from 2000 to 2001. Mr. Cazalot was with Texaco Inc.
from 1972 to 2000, and while at Texaco served in the
following executive positions: President of Worldwide
Production Operations of Texaco Inc. from 1999 to 2000;
President of International Production and Chairman of
London-based Texaco Ltd. from 1998 to 1999; President
of International Marketing and Manufacturing from 1997
to 1998; President of Texaco Exploration and Production
Inc. from 1994 to 1998; and President of Texaco's Latin
America/West Africa Division from 1992 to 1994. In
1992, he was named Vice President, Texaco Inc. He is a
director and Executive Committee member of both the
U.S. Saudi Arabian Business Council and the American
Petroleum Institute. Mr. Cazalot is a member of the
Board of Directors of the Greater Houston Partnership,
the Sam Houston Area Council, Boy Scouts of America and
the National Association of Manufacturers. He is on the
Board of Trustees of Spindletop Charities, Inc. and the
Board of Advisors for the Maguire Energy Institute.
Edward P. Djerejian Director of the James A. Baker III Institute for Public 63 2001 I
Policy at Rice University since 1994. Ambassador
Djerejian served as U.S. Ambassador to Israel from 1993
to 1994. He served as Assistant Secretary of State for
Near Eastern Affairs from 1991 to 1993. Ambassador
Djerejian also served as U.S. Ambassador to the Syrian
Arab Republic from 1988 to 1991, as Deputy Assistant
Secretary of Near Eastern and South Asian Affairs from
1986 to 1988 and as Special Assistant to the President
and Deputy Press Secretary for Foreign Affairs from
1985 to 1986. He is a director of Occidental Petroleum
and Global Industries, Ltd.
</Table>
4
<Table>
<Caption>
DIRECTOR
DIRECTORS (CONT'D.) PRINCIPAL OCCUPATION AGE SINCE CLASS
------------------- --------------------------------------------------------- --- -------- -----
Anthony G. Fernandes Former Chairman, President and Chief Executive 57 2001 II
Officer of Phillip Services Corporation (diversified
industrial services provider) from August 1999 to
April 2002. He was Executive Vice President of ARCO
(Atlantic Richfield Company) from 1994 to 1999,
President of ARCO Coal, a subsidiary of ARCO from
1990 to 1994 and Corporate Controller of ARCO from
1987 to 1990. Mr. Fernandes is a member of the
Claremont McKenna College Board of Trustees and also
serves on the Board of Black & Veatch and Cytec
Industries.
Richard D. Kinder Chairman and Chief Executive Officer of Kinder 58 1994 II
Morgan, Inc. and Kinder Morgan Energy Partners, L.P.
(diversified energy) since 1997 and Chairman and
Chief Executive Officer of Kinder Morgan Management
LLC since 2001. He is a trustee of the Museum of Fine
Arts, Houston, and is past Chairman of the Interstate
Natural Gas Association of America.
J. Larry Nichols Chairman, President and Chief Executive Officer of 60 2001 II
Devon Energy Corporation (an independent energy
company). Mr. Nichols has served as Chairman of Devon
Energy Corporation since 2000, as President since
1976 and as Chief Executive Officer since 1980. Mr.
Nichols is also a director of BOK Financial
Corporation and Smedvig asa, (an independent energy
company). He also serves on the Board of Governors of
the American Stock Exchange. Mr. Nichols is a
Director of the Domestic Petroleum Council, the
National Association of Manufacturers, the
Independent Petroleum Association of America, the
Natural Gas Supply Association, the Independent
Petroleum Association of New Mexico, the Oklahoma
Independent Petroleum Association and the National
Petroleum Council.
H. John Riley, Jr. Chairman of Cooper Industries, Ltd. (diversified 62 1997 I
manufacturer) since 1996, Chief Executive Officer
since 1995 and President since 1992. He was Executive
Vice President, Operations of Cooper Industries, Inc.
from 1982 to 1992 and Chief Operating Officer from
1992 to 1995. Mr. Riley is a director of The Allstate
Corporation. Mr. Riley also serves as a director of
the Manufacturers Alliance/MAPI, Inc., Junior
Achievement, Inc., Central Houston, Inc. and the
National Association of Manufacturers and as a
trustee of the Museum of Fine Arts, Houston.
</Table>
5
<Table>
<Caption>
DIRECTOR
DIRECTORS (CONT'D.) PRINCIPAL OCCUPATION AGE SINCE CLASS
------------------- --------------------------------------------------------- --- -------- -----
Charles L. Watson Chairman of Wincrest Ventures, L.P. (private 53 1998 I
investments) since January 1998. Former Chairman and
Chief Executive Officer of Dynegy Inc. (diversified
energy) from 1989 to 2002. Mr. Watson was elected
Chairman and Chief Executive Officer of NGC
Corporation, the predecessor of Dynegy, in 1989. He
served as President of NGC Corporation from its
establishment in 1985 until 1989. Mr. Watson serves
on the National Petroleum Council and the Governor's
Business Council. He is a member of the executive
committee of Edison Electric Institute, as well as a
founding member of the Natural Gas Council. Mr.
Watson is also a board member of Theatre Under the
Stars, Hobby Center for the Performing Arts and
Baylor College of Medicine. He served as Chairman of
the Alexis de Tocqueville Society 1998/99 and as
Chairman of the 1999/2000 fund raising campaign
for the United Way of the Texas Gulf Coast.
</Table>
BOARD OF DIRECTORS AND COMMITTEES OF THE BOARD
During fiscal year 2002, the Board of Directors held seven meetings. In
fiscal year 2002, each non-employee director was paid an annual retainer of
$60,000, with the Committee chairmen receiving an additional annual fee of
$10,000. Each non-employee director receives annual non-retainer equity in a
total amount of $50,000, with $30,000 issued in the form of restricted shares of
the Company's Common Stock and $20,000 issued in the form of stock options in
the Company's Common Stock. Restricted stock grants in the amount of $15,000 and
stock option grants in the amount of $10,000 will be made in January and July of
each year starting in January 2003. The restricted stock will vest upon
retirement from the Company's Board of Directors, and the stock options vest
one-year from the date of grant. Although the Directors Retirement Plan remains
in effect until all benefits accrued thereunder are paid in accordance with the
current terms and conditions of that Plan, no additional benefits have been
accrued under the Plan as of December 31, 2001.
The Board of Directors has, in addition to other committees, an
Audit/Ethics Committee, a Compensation Committee and a Governance Committee.
The Audit/Ethics Committee, which is comprised of Messrs. McCall
(Chairman), Cazalot, Fernandes, Lash and Nichols, held nine meetings during
fiscal year 2002. The Company's Corporate Audit Department sends written reports
quarterly to the Audit/Ethics Committee on its audit findings and the status of
its internal audit projects. The Audit/Ethics Committee provides assistance to
the Board of Directors in fulfilling its responsibility in matters relating to
the accounting and reporting practices of the Company, the adequacy of the
Company's disclosure controls and internal controls, the quality and integrity
of the financial statements of the Company, the performance of the Company's
internal audit function and the review and pre-approval of the current year
audit and non-audit fees. To promote independence of the audit, the Committee
consults separately and jointly with the independent accountants, the internal
auditors and management. The Audit/Ethics Committee also oversees the Company's
compliance program.
Under the provisions of the Sarbanes-Oxley Act of 2002 ("SOA"), the
Company will be required to disclose whether it has at least one member who is
an "audit committee financial expert" (as that term is defined by the SEC)
serving on its audit committee. The Board has reviewed the experience of the
members of the Audit/Ethics Committee and has found that all five members of the
Committee meet the qualifications to be an "audit committee financial expert"
under the recently adopted SEC rules issued pursuant to the SOA. In addition,
the Board has designated Anthony G. Fernandes as the member of the Committee who
will serve as the "audit committee financial expert" of the Company's
Audit/Ethics Committee. All members of the Audit/Ethics Committee are
"independent" for purposes of the SOA and SEC rules.
6
The Compensation Committee, which is comprised of Messrs. Kinder
(Chairman), Djerejian, Riley, and Watson and Ms. Gargalli, held five meetings
during fiscal year 2002. The functions performed by the Compensation Committee
include reviewing Baker Hughes' executive salary and bonus structure; reviewing
Baker Hughes' stock option plans (and making grants thereunder), employee
retirement income plans, the employee thrift plan and the employee stock
purchase plan; recommending directors' fees; setting bonus goals; approving
salary and bonus awards to key executives and recommending incentive
compensation and stock award plans for approval by stockholders.
The Governance Committee, which is comprised of Messrs. Riley
(Chairman), Cazalot, Djerejian, McCall and Watson, held four meetings during
fiscal year 2002. The functions performed by the Governance Committee include
selecting candidates to fill vacancies on the Board of Directors, reviewing the
structure and composition of the Board and considering the qualifications
required for continuing Board service. The Committee also considers nominees
that stockholders recommend. Stockholders desiring to make such recommendations
should submit, between October 19, 2003 and November 18, 2003, the candidate's
name, together with biographical information and his or her written consent to
nomination to: Chairman, Governance Committee of the Board of Directors of Baker
Hughes Incorporated, P.O. Box 4740, Houston, Texas 77210-4740.
During the fiscal year ended December 31, 2002, each director attended
at least 75% of the total number of meetings of the Company's Board of Directors
and respective Committees on which he or she served.
SECURITY OWNERSHIP OF MANAGEMENT
Set forth below is certain information with respect to beneficial
ownership of the Common Stock as of March 5, 2003 by each director and director
nominee, the persons named in the Summary Compensation Table below and the
directors and executive officers as a group. The table includes transactions
effected prior to the close of business on March 5, 2003.
<Table>
<Caption>
SHARES BENEFICIALLY OWNED
---------------------------
SHARES SHARES SUBJECT TO OPTIONS TOTAL
OWNED WHICH ARE OR WILL BECOME BENEFICIAL % OF
NAME AS OF 3/5/03 EXERCISABLE PRIOR TO 5/5/03 OWNERSHIP CLASS(1)
- ------------------------------------- ------------ --------------------------- ---------- --------
Clarence P. Cazalot, Jr ............. 1,714 -- 1,714 --
Edward P. Djerejian ................. 1,714 3,000 4,714 --
Anthony G. Fernandes ................ 3,714 3,582 7,296 --
Claire W. Gargalli .................. 9,370 11,400 20,770 --
Richard D. Kinder ................... 9,714 6,000 15,714 --
James A. Lash ....................... 1,714 -- 1,714 --
James F. McCall ..................... 3,714 6,000 9,714 --
J. Larry Nichols .................... 1,714 3,000 4,714 --
H. John Riley, Jr ................... 11,714 7,000 18,714 --
Charles L. Watson ................... 1,714 35,094 36,808 --
Michael E. Wiley .................... 229,866(2) 795,529 1,025,395 --
Andrew J. Szescila .................. 48,262(3) 270,978 319,240 --
G. Stephen Finley ................... 55,094(4) 224,746 279,740 --
Alan R. Crain, Jr ................... 7,369(5) 56,136 63,505 --
James R. Clark ...................... 50,408(6) 20,333 70,741 --
All directors and executive
officers as a group (23 persons)... 511,635 1,996,0458 2,507,680
</Table>
- ----------
(1) No percent of class is shown for holdings of less than 1%.
(2) Includes 61,667 shares of the 233,000-share restricted stock award
issued on August 15, 2000 upon Mr. Wiley's appointment as the Company's
Chairman of the Board, President and Chief Executive Officer. The
233,000 shares of Common Stock were awarded in an 83,000-share grant
and a 150,000-share grant. On January 24, 2001, Mr. Wiley forfeited
48,000 shares of the 83,000-share grant pursuant to the formula
contained in the grant, and on August 15, 2001 and August 15, 2002, he
used 17,667 and 17,467 shares, respectively, to pay a portion of the
federal income tax withholding due upon the vesting of one-third of his
restricted stock. Also includes a one-time, stock-matching award of
40,000 shares of restricted stock to which Mr. Wiley was entitled under
the provisions of his employment agreement, as amended. See "Employment
and Severance Agreements" for a description of Mr. Wiley's employment
agreement.
7
(3) Includes 25,000 shares issued as a restricted stock award on January
24, 2001.
(4) Includes 20,000 shares issued as a restricted stock award on October
23, 2002.
(5) Includes 7,500 shares issued as a restricted stock award on October 25,
2000. On October 25, 2002, Mr. Crain used 711 shares to pay a portion
of the federal income tax withholding due upon the vesting of one-third
of his restricted stock.
(6) Includes a one-time, stock-matching award of 25,000 shares of
restricted stock made on September 2, 2002. The restricted stock has
been reserved and will be issued to Mr. Clark upon his retirement from
the Company.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Under the Corporate Executive Loan Program, Andrew J. Szescila received
a loan from the Company on March 29, 1999, in the principal amount of $125,000.
The principal of this loan is due and payable on March 29, 2004. The loan bears
interest at the rate of 6.2% per annum, with interest due the last day of March,
June, September and December, commencing on June 30, 1999 and payable up to and
including the date of maturity of the loan. At the present, Mr. Szescila's
outstanding principal is $125,000. Under the provisions of the loan, the Company
is authorized to deduct due but unpaid amounts on these loans from Mr.
Szescila's earnings, amounts due to him under any severance plan or policy or
under the Company's Supplemental Retirement Plan or any other of his
compensation. In accordance with the provisions of the Sarbanes-Oxley Act of
2002, the Company has discontinued the Corporate Executive Loan Program, with
Mr. Szescila's loan grandfathered in since it was made prior to the enactment of
the statute.
COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES EXCHANGE ACT OF 1934
Section 16(a) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), requires executive officers and directors, and persons who
beneficially own more than 10% of the Common Stock, to file initial reports of
ownership and reports of changes in ownership with the SEC, the New York Stock
Exchange and the Pacific Exchange. SEC regulations require executive officers,
directors and greater than 10% beneficial owners to furnish the Company with
copies of all Section 16(a) forms they file.
Based solely on a review of the copies of those forms furnished to the
Company and written representations from the executive officers and directors,
the Company believes, that during its fiscal year ended December 31, 2002, the
Company's executive officers and directors complied with all applicable Section
16(a) filing requirements, with the exception of two inadvertent late filings on
Form 4, each relating to one transaction, one for Anthony G. Fernandes and the
other for Charles L. Watson, both directors, filed on January 6, 2003 (due date
of January 3, 2003).
8
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table sets forth the compensation earned by the Chief
Executive Officer and the four most highly compensated executive officers of the
Company for services rendered to the Company and its subsidiaries for the fiscal
years ended December 31, 2002, 2001 and 2000. Bonuses are paid under the
Company's applicable incentive compensation guidelines and are generally paid in
the year following the year in which the bonus is earned.
<Table>
<Caption>
LONG TERM COMPENSATION
ANNUAL COMPENSATION AWARDS
------------------------------------------- --------------------------
SECURITIES
OTHER RESTRICTED UNDERLYING
ANNUAL STOCK OPTIONS
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION(1) AWARDS(2) (# SHARES)(3)
--------------------------- ---- -------- ---------- --------------- ---------- -------------
Michael E. Wiley, Chairman of 2002 $969,423 $ 490,000 $ 283,239 -- 210,000
the Board, President and 2001 925,000 1,193,990 156,720 -- 640,791
Chief Executive Officer(4) 2000 337,981 725,000 27,497 233,000(5) 500,000
Andrew J. Szescila, Senior Vice 2002 594,423 226,875 164,918 -- 100,000
President and Chief 2001 542,462 659,230 106,623 25,000(6) --
Operating Officer 2000 471,507 686,400 33,876 -- --
G. Stephen Finley, Senior Vice 2002 464,677 160,000 120,692 20,000(7) 62,000
President - Finance and 2001 426,312 435,822 78,758 -- --
Administration and 2000 410,481 435,072 41,827 -- --
Chief Financial Officer
Alan R. Crain, Jr., Vice 2002 375,508 114,345 128,128 -- 39,000
President
and General Counsel(8) 2001 364,071 370,224 229,135(8) -- 39,452
2000 59,538 73,108 38,300(8) 7,500(9) 35,000
James R. Clark, Vice President 2002 297,027 155,414 74,208 25,000(11) 22,000
and President - Baker 2001 236,462 168,985 26,387 -- 25,000
Petrolite Corporation(10) 2000 -- -- -- -- --
</Table>
(1) Other Annual Compensation includes Company contributions to the Baker
Hughes Thrift Plan, the Baker Hughes Supplemental Retirement Plan, the
Baker Hughes Pension Plan, life insurance premiums, perquisites and
other compensation for the named executive officers. Amounts for fiscal
year 2002 for the persons named above are as follows:
<Table>
<Caption>
THRIFT SRP PENSION LIFE PERQUISITES TOTAL
-------- -------- ------- ------ ----------- --------
Michael E. Wiley $ 10,933 $240,705 $ 8,000 $3,175 $ 20,426 $283,239
Andrew J. Szescila 10,933 133,837 8,000 1,960 10,188 164,918
G. Stephen Finley 9,760 90,300 8,000 3,831 8,801 120,692
Alan R. Crain, Jr 10,933 70,545 8,000 3,062 35,588 128,128
James R. Clark 10,933 36,988 8,000 2,422 15,864 74,208
</Table>
(2) See table in "- Long-Term Incentive Plan Awards During 2002" below.
(3) See Footnote (1) to table in "- Stock Options Granted During 2002"
below.
(4) Mr. Wiley was appointed Chairman of the Board, President and Chief
Executive Officer effective August 14, 2000.
(5) Mr. Wiley was awarded as restricted stock 83,000 shares and 150,000
shares of Common Stock, valued at $8,781,188, on August 15, 2000,
pursuant to the Long Term Incentive Plan (the "LTIP"). See Footnote (2)
to the table under the caption "Security Ownership of Management"
above. Mr. Wiley received the Company's ordinary dividend payment on
the restricted stock awards on a quarterly basis in 2002. Mr. Wiley
forfeited 48,000 shares of the 83,000-share award on January 24, 2001
pursuant to the formula contained in the grant. Of the remaining 35,000
shares, 11,667 shares vested on August 15, 2001, with a value of
$393,878, based upon the closing stock price of $33.76 per share of
Common Stock on the New York Stock Exchange on August 14, 2001. An
additional 11,667 shares vested on August 15, 2002, with a value of
$323,176, based
9
upon the closing stock price of $27.70 per share of Common Stock on the
New York Stock Exchange on August 14, 2002, and the remaining 11,666
shares will vest on August 15, 2003. On August 15, 2001, 50,000 shares
of the 150,000-share award vested, with a value of $1,688,000, based
upon the closing stock price of $33.76 per share of Common Stock on the
New York Stock Exchange on August 14, 2001. Of the remaining 100,000
shares, 50,000 shares vested on August 15, 2002, with a value of
$1,385,000, based upon the closing stock price of $27.70 per share of
Common Stock on the New York Stock Exchange on August 14, 2002, and the
remaining 50,000 shares will vest on August 15, 2003, if certain
targets with respect to growth in operating profit after tax, or "Baker
Value Added," are met as of June 30th in 2003 and 2004. At December 31,
2002, Mr. Wiley held 105,866 shares of restricted stock, valued at
$3,407,827, based upon the closing stock price of $32.19 per share of
Common Stock on the New York Stock Exchange on December 31, 2002. See
"Compensation Committee Report" below for additional information on Mr.
Wiley's compensation.
(6) Mr. Szescila was awarded 25,000 shares of restricted Common Stock
valued at $1,026,563 on January 24, 2001, pursuant to the LTIP. See
Footnote (3) to the table under the caption "Security Ownership of
Management" above. Mr. Szescila received the Company's ordinary
dividend payment on the award on a quarterly basis in 2002. The
25,000-share award vests upon the three-year anniversary of the award,
January 24, 2004. At December 31, 2002, Mr. Szescila held 25,000 shares
of restricted stock, valued at $804,750, based upon the closing stock
price of $32.19 per share of Common Stock on the New York Stock
Exchange on December 31, 2002.
(7) On October 23, 2002, Mr. Finley was awarded 20,000 shares of restricted
Common Stock valued at $554,600 on October 22, 2002, pursuant to the
LTIP. See Footnote (4) to the table under the caption "Security
Ownership of Management" above. After October 23, 2002, Mr. Finley
received the Company's ordinary dividend payment on the award on a
quarterly basis. The 20,000-share award vests on June 30, 2006. At
December 31, 2002, Mr. Finley held 20,000 shares of restricted stock,
valued at $643,800, based upon the closing stock price of $32.19 per
share of Common Stock on the New York Stock Exchange on December 31,
2002.
(8) Mr. Crain was appointed Vice President and General Counsel effective
October 25, 2000. Mr. Crain was paid a $36,000 bonus at the
commencement of employment (reflected in "Other Annual Compensation"
for 2000). Also, in 2001, Mr. Crain received other compensation in the
amount of $182,885 related to his relocation to Houston (reflected in
"Other Annual Compensation" for 2001).
(9) Mr. Crain was awarded 7,500 shares of restricted Common Stock, valued
at $269,063, on October 25, 2000, pursuant to the LTIP. See Footnote
(5) to the table under the Caption "Security Ownership of Management"
above. Mr. Crain received the Company's ordinary dividend payment on
the award on a quarterly basis in 2002. On October 25, 2001, 2,500
shares of the 7,500-share award vested, with a value of $82,675 based
upon the closing stock price of $33.07 per share of Common Stock on the
New York Stock Exchange on October 24, 2001. On October 25, 2002, 2,500
shares of the remaining 5,000 shares vested, at a value of $73,325,
based upon the closing stock price of $29.33 per share of Common Stock
on the New York Stock Exchange on October 24, 2002. The remaining 2,500
shares will vest on October 25, 2003. At December 31, 2002, Mr. Crain
held 2,500 shares of restricted stock, valued at $80,475, based upon
the closing stock price of $32.19 per share of Common Stock on the New
York Stock Exchange on December 31, 2002.
(10) Mr. Clark was appointed Vice President and President - Baker Petrolite
Corporation effective March 1, 2001.
(11) Mr. Clark received a one-time, stock-matching award of 25,000 shares of
restricted stock on September 2, 2002. After that date, Mr. Clark
received a cash payment equivalent to the Company's ordinary dividend
payment on the award on a quarterly basis. See Footnote (6) to the
table under the caption "Security Ownership of Management" above.
10
STOCK OPTIONS GRANTED DURING 2002
The following table sets forth certain information regarding stock
options granted during fiscal year 2002 to the persons named in the Summary
Compensation Table above. The theoretical values on the date of the grant of
stock options granted in 2002 shown below are presented pursuant to SEC rules
and are calculated using the Black-Scholes Model for pricing options. The
theoretical values of options trading in the stock markets do not necessarily
bear a relationship to the compensation cost to the Company or potential gain
realized by an executive. The actual amount, if any, realized upon exercise of
stock options will depend upon the market price of the Common Stock relative to
the exercise price per share of the stock option at the time the stock option is
exercised. There is no assurance that the theoretical values of stock options
reflected in this table actually will be realized.
<Table>
<Caption>
% OF TOTAL
OPTIONS GRANT DATE
NAME AND OPTIONS GRANTED EXERCISE EXPIRATION THEORETICAL
DATE OF OPTION GRANT GRANTED TO EMPLOYEES PRICE DATE VALUE(1)
-------------------- ------- ------------ -------- ---------- -----------
Michael E. Wiley
01/30/2002 105,000 10.4% $32.50 01/30/2012 $1,201,645
07/24/2002 105,000 10.4% 24.94 07/24/2012 899,915
Andrew J. Szescila
01/30/2002 50,000 5.0% 32.50 01/30/2012 569,500
07/24/2002 50,000 5.0% 24.94 07/24/2012 426,500
G. Stephen Finley
01/30/2002 31,000 3.1% 32.50 01/30/2012 353,090
07/24/2002 31,000 3.1% 24.94 07/24/2012 264,430
Alan R. Crain, Jr.
01/30/2002 19,500 1.9% 32.50 01/30/2012 222,105
07/24/2002 19,500 1.9% 24.94 07/24/2012 166,335
James R. Clark
01/30/2002 11,000 1.1% 32.50 01/30/2012 125,290
07/24/02 11,000 1.1% 24.94 07/24/2012 93,830
</Table>
- ----------
(1) The theoretical values on the grant date are calculated under the
Black-Scholes Model. The Black-Scholes Model is a mathematical formula
used to value options traded on stock exchanges. This formula considers
a number of factors to estimate the option's theoretical value,
including the stock's historical volatility, the dividend rate, the
expected life of the option and risk-free interest rates. The grant
date theoretical value assumes a volatility of 45%, a dividend yield of
1.43%, a risk-free rate of return of 3.52% and an expected option life
of 3.8 years.
11
AGGREGATED OPTION EXERCISES DURING 2002
AND OPTION VALUES AT DECEMBER 31, 2002
The following table sets forth certain information regarding options
that the persons named in the Summary Compensation Table above exercised during
2002 and the options that those persons held at December 31, 2002. The values of
unexercised in-the-money stock options at December 31, 2002, shown below, are
presented pursuant to SEC rules. The actual amount, if any, realized upon
exercise of stock options will depend upon the market price of the Common Stock
relative to the exercise price per share of the stock option at the time the
stock option is exercised.
<Table>
<Caption>
UNEXERCISED OPTIONS AT DECEMBER 31, 2002
-------------------------------------------------------------
OPTION EXERCISES NUMBER OF SECURITIES VALUE OF UNEXERCISED
------------------------------ UNDERLYING UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS($)(1)
SHARES ACQUIRED VALUE ------------------------------- --------------------------
NAME ON EXERCISE (#) REALIZED ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
------------- --------------- ------------ ----------- ------------- ----------- -------------
Michael E. Wiley -- $ -- 546,932 803,859 $ -- $ 761,250
Andrew J. Szescila -- -- 254,312 168,157 2,127,551 362,500
G. Stephen Finley -- -- 214,413 115,557 1,798,929 224,750
Alan R. Crain, Jr. -- -- 36,845 79,967 -- 141,375
James R. Clark -- -- 8,334 38,666 -- 79,750
</Table>
- ----------
(1) Based on the closing price of the Common Stock of $32.19 on December
31, 2002, the last trading day of 2002.
LONG-TERM INCENTIVE PLAN
AWARDS DURING 2002
<Table>
<Caption>
PERFORMANCE OR ESTIMATED FUTURE PAYOUTS UNDER
OTHER PERIOD NON-STOCK PRICE-BASED PLANS(1)
NUMBER OF UNTIL ---------------------------------
SHARES, UNITS OR MATURATION MAXIMUM
NAME OTHER RIGHTS (#) OR PAYOUT TARGET ($ OR #)(2) ($ OR #)(3)
- ------------------- ---------------- -------------- ------------------ -----------
Michael E. Wiley n/a 12/31/03 $285,000 $570,000
Andrew J. Szescila n/a 12/31/03 140,000 280,000
G. Stephen Finley n/a 12/31/03 87,500 175,000
Alan R. Crain, Jr. n/a 12/31/03 55,000 110,000
James R. Clark n/a 12/31/03 67,500 135,000
</Table>
- ----------
(1) For the two-year period ending December 31, 2003, if the Company
achieves a first or second ranking in total shareholder return, as
compared to the rankings of the designated competitors, the Company
will issue shares of restricted stock equal to the dollar value
specified for each executive officer named in the Summary Compensation
Table for the ranking achieved. The restricted stock will vest one-year
from the date of issuance. The calculation of the number of shares of
restricted stock to be issued will be based on the price per share of
the last sale of the Company's common stock on the last trading day of
2003 as listed in the New York Stock Exchange composite transactions.
If the Company does not achieve first or second ranking in its total
shareholder return for the two-year period ending December 31, 2003, as
compared to the designated competitors, the performance awards will
lapse and be forfeited. See the "Compensation Committee Report" for
additional information.
(2) The "Target" is the equivalent of the attainment of the second rank in
total shareholder return for the two-year period ending December 31,
2003.
(3) The "Maximum" is the equivalent of the attainment of first rank in
total shareholder return for the two-year period ending December 31,
2003.
12
PENSION PLAN TABLE
Baker Hughes adopted the Baker Hughes Incorporated Pension Plan,
effective January 1, 2002, to provide benefits to its U.S. employees. (Employees
outside the U.S. are covered under different retirement plans.) Employees who
are officers of the Company participate on the same basis as other eligible
employees. The Pension Plan is a tax-qualified, defined benefit plan funded
entirely by the Company. Under the provisions of the Pension Plan, a cash
balance account is established for each participant. Company contributions are
made quarterly to the accounts, and the contribution percentage is determined by
the employee's age on the last day of the quarter and is applied to quarterly
eligible compensation. In addition to the Company contributions, the cash
balance accounts are credited with interest credits based on the balance in the
account on the last day of the quarter, using the applicable interest rate
provided under section 417(e)(3)(A)(ii)(II) of the Internal Revenue Code of
1986, as amended. The following are the quarterly contribution rates under the
Pension Plan:
<Table>
<Caption>
AGE AT END OF PERCENTAGE
QUARTER CONTRIBUTION
------------- ------------
Under age 35 2.0%
35 - 39 2.5%
40 - 44 3.0%
45 - 49 3.5%
50 and older 4.0%
</Table>
An employee is fully vested in his or her Pension Plan account after
five years of service. However, regardless of the number of years of service, an
employee is fully vested if the employee retires from Baker Hughes at age 65 or
later, or upon the death of the employee. In addition, employees of Baker Hughes
who were 55 years or older on January 1, 2002, had their prior years of service
with Baker Hughes counted in the number of years of service. Pension Plan
benefits in excess of $5,000 may be paid in the form of a single lump sum, a
single life annuity, or if an employee is married, a joint and 50% survivor
annuity.
Estimated annual benefits payable upon retirement at normal retirement
age (i.e., age 65) under the Baker Hughes Pension Plan to each executive named
in this Proxy Statement are reflected in the following table. The retirement
benefits in the table are calculated based on the assumptions that each
executive officer named in the Summary Compensation Table will remain an
employee until age 65 at the base salary shown in the Summary Compensation
Table, with no pay increases, cash balances are credited at the rate of 4% per
quarter, interest is credited quarterly using the applicable rate at December
31, 2002 and the terms of the Pension Plan remain unchanged.
In addition to the Pension Plan, the Company has a Supplemental
Retirement Plan to provide covered executives with the total amount of
retirement benefit that they would have otherwise received under the Pension
Plan but for legislated compensation ceilings in compliance with certain
sections of the Internal Revenue Code, which limit retirement benefits payable
under qualified plans. In accordance with these legislated ceilings, eligible
compensation under the Plan was limited to $200,000 in 2002. The ceiling may be
adjusted in the future by regulations issued under the Internal Revenue Code.
<Table>
<Caption>
APPROXIMATE YEARS OF ESTIMATED ANNUAL
CREDITED SERVICE AT BENEFITS PAYABLE AT
NAMED OFFICER ANTICIPATED RETIREMENT ANTICIPATED RETIREMENT
------------- ---------------------- ----------------------
Michael E. Wiley 13 $157,798
Andrew J. Szescila 10 122,068
G. Stephen Finley 13 192,531
Alan R. Crain, Jr. 14 199,076
James R. Clark 13 174,135
</Table>
13
EMPLOYMENT AND SEVERANCE
AGREEMENTS
The Company has an employment agreement with Michael E. Wiley, dated as
of July 17, 2000, which provides for the employment of Mr. Wiley for an initial
three-year period ending August 14, 2003, subject to termination as provided in
the agreement. The agreement provides that, after one year of the effective date
of the agreement, the term of the agreement is to be automatically extended for
one additional year unless the Company or the executive gives notice, within the
period specified in the agreement, to not extend the term. Pursuant to Mr.
Wiley's amended employment agreement, he received a one-time, stock matching
grant of 40,000 shares of restricted stock based on the number of shares of
stock Mr. Wiley owned as of June 30, 2002. Mr. Wiley's employment agreement was
also amended in December 2001 to change the termination date from August 14,
2003 to December 31, 2003 and to revise other related dates accordingly. During
the term of the employment agreement, Mr. Wiley is entitled to receive the
following, all as established from time to time by the Board of Directors or the
Compensation Committee:
o a base salary;
o the opportunity to earn annual cash bonuses in amounts that
may vary from year to year and that are based upon achievement
of performance goals;
o long-term incentives in the form of equity-based compensation
no less favorable than awards made to other senior executives
of the Company and that are commensurate with awards granted
to CEOs of other public companies of a similar size to the
Company and
o benefits and perquisites that other officers and employees of
the Company are entitled to receive.
Mr. Wiley's base salary is to be reviewed at least annually during the term of
the employment agreement and could be increased (but not decreased) based upon
his performance during the year. Upon the termination of Mr. Wiley's employment
due to his Disability (as defined in the employment agreement) for a period of
90 days in the aggregate during any period of 12 consecutive months, or
reasonable expectation of Disability for more than that period, he is to be paid
one-half of his then base salary in monthly installments for the remainder of
the employment agreement and a lump sum in cash equal to his expected value
incentive bonus for the year of termination. In the event of his death during
the term of the employment agreement, the Company is to pay one-half of his then
annual base salary to his beneficiary in monthly installments for the remaining
term of the employment agreement and a lump sum in cash equal to his expected
value incentive bonus for the year of Mr. Wiley's death. Upon termination of the
employment agreement by Mr. Wiley for Good Reason (as defined in the employment
agreement) or by the Company without Cause (as defined in the employment
agreement), he is entitled to receive for the remainder of the term of the
employment agreement:
(i) his then annual base salary and once a year for the
remainder of the term of the employment agreement, an amount equal to
his expected value incentive bonus for the year of termination (with
both the annual base salary and incentive bonus subject to adjustment
by the GNP price deflator),
(ii) the continuation of benefits except as may be provided by
a successor employer and
(iii) accelerated vesting of all equity-based awards held as
of the date of termination.
If the employment agreement is terminated by Mr. Wiley for any reason other than
a Good Reason or by the Company for Cause, he is to receive only his base salary
and benefits through the date of termination, but no annual bonus.
During the term of the employment agreement and for a period of two
years following termination of the employment agreement, Mr. Wiley is prohibited
from (i) engaging in Competition (as defined in the employment agreement) with
the Company and (ii) soliciting customers, employees and consultants of the
Company. To the extent any provision is covered by both the employment agreement
and the severance agreement described below, the severance agreement provision
so covered will supersede the employment agreement provision.
In addition to the employment agreement described above, the Company
also has severance agreements (the "Severance Agreements") with Michael E.
Wiley, Andrew J. Szescila, G. Stephen Finley, Alan R. Crain, Jr. and James
14
R. Clark (the "Named Officers"), as well as four other officers of the Company.
The Severance Agreements provide for payment of certain benefits to the Named
Officers as a result of termination of employment following, or in connection
with, a Change in Control (described below) of the Company. The initial term of
the Severance Agreements expired on December 31, 1999, except for the agreements
of Messrs. Wiley and Crain, which initially expired on December 31, 2001 and the
agreement of Mr. Clark, which initially expired on December 31, 2002. Beginning
on January 1, 1998 for Messrs. Szescila and Finley, January 1, 2001 for Messrs.
Wiley and Crain and January 1, 2003 for Mr. Clark and on each successive January
1 thereafter (the "Extension Date"), the term of the Severance Agreements is
automatically renewed for an additional year, unless notice of nonextension has
been given by the September 30th prior to the Extension Date. The term is
automatically extended for 24 months following a Change in Control (as defined
below).
Pursuant to the Severance Agreements, the Company pays severance
benefits to a Named Officer if the Named Officer's employment is terminated
following a Change in Control and during the term unless:
(i) the Named Officer resigns without Good Reason (as defined in the
Severance Agreements);
(ii) the Company terminates the Named Officer for Cause (as defined in
the Severance Agreements) or
(iii) the Named Officer is terminated by reason of death or disability.
If the Named Officer meets the criteria for payment of severance
benefits due to termination of employment following a Change in Control during
the term as described above, he will receive the following benefits:
(a) a lump sum payment equal to three times the sum of the
Named Officer's annual base salary in effect on the date of termination
of employment or, if higher, his annual base salary in effect
immediately prior to the event or circumstance constituting Good Reason
for his resignation;
(b) a lump sum payment equal to three times the sum of the
average annual bonus earned by the Named Officer during the three
fiscal years ending immediately prior to the fiscal year in which
termination of employment occurs or, if higher, immediately prior to
the fiscal year in which occurs the event or circumstance constituting
Good Reason; provided, that if the Named Officer has not participated
in an annual bonus plan of the Company for the entirety of the
three-year period, then the average bonus will be calculated using such
lesser number of bonuses as have been earned;
(c) continuation of life, disability, accident and health
insurance benefits and all perquisites for an additional three years;
(d) a lump sum payment equal to the sum of:
(1) any unpaid incentive compensation that has been
allocated or awarded to the Named Officer for a completed
fiscal year or other measuring period preceding the date of
termination under the Company's Annual Incentive Compensation
Plan and that, as of the date of termination, is contingent
only upon the continued employment of the Named Officer to a
subsequent date, and
(2) a pro rata portion to the date of termination of
the aggregate value of all contingent incentive compensation
awards to the Named Officer for all then uncompleted periods
under the Company's Annual Incentive Compensation Plan,
assuming the achievement of the expected value target level of
the performance goals established for the awards, provided,
that if the termination of employment occurs during the same
year in which the Change in Control occurs, the pro rata bonus
payment shall be offset by any payments received under the
Company's Annual Incentive Compensation Plan in connection
with the Change in Control;
(e) a lump sum payment equal to the present value of the
benefits the Named Officer would have received had he continued to
participate in the Company's thrift and supplemental retirement plans
for an additional three years, assuming for this purpose that:
15
(1) the Named Officer's compensation during that
three-year period remained at the levels used for calculating
the severance payment described in paragraphs (a) and (b)
above, and
(2) the Named Officer's contributions to those plans
remained at the levels in effect as of the date of the Change
in Control or the date of termination, whichever is greater;
(f) eligibility for the Company's retiree medical program if
the Named Officer would have become entitled to participate in that
program had he or she remained employed for an additional three years;
(g) outplacement services for a period of three years or, if
earlier, until the Named Officer's acceptance of an offer of employment
and
(h) an additional amount (a "gross-up" payment) in respect of
excise taxes that may be imposed under the "golden parachute" rules on
payments and benefits received in connection with the Change in
Control. The gross-up payment would make the Named Officer whole for
excise taxes (and for all taxes on the gross-up payment) in respect of
payments and benefits received pursuant to all the Company's plans,
agreements and arrangements (including for example, acceleration of
equity awards).
In addition to the above, the Severance Agreements provide for full
vesting of all stock options and other equity incentive awards upon the
occurrence of a Change in Control.
Pursuant to the Severance Agreements, a "Change in Control" is deemed
to occur if:
(i) any person becomes the owner of 20% or more of the
Company's voting securities (excluding securities acquired directly
from the Company or its affiliates) other than a person described in
(iii)(A) below;
(ii) a change in the majority of the membership of the Board
occurs without approval of two-thirds of the directors who either were
directors at the beginning of the period, or whose election was
previously so approved;
(iii) there is consummated a merger or consolidation of the
Company or a subsidiary thereof with any other corporation other than
(A) a merger or consolidation with a person in which the Company's
stockholders continue to hold at least 65% of the voting securities of
the surviving entity or (B) a merger or consolidation effected to
implement a recapitalization of the Company and in which no person
becomes the owner of 20% of the Company's voting securities (excluding
securities acquired directly from the Company or its affiliates, except
securities acquired in connection with the acquisition of a business by
the Company or its affiliates) or
(iv) the Company's stockholders approve a plan of complete
liquidation or dissolution of the Company or there is consummated an
agreement for the sale or disposition of all or substantially all of
the Company's assets other than a sale or disposition to an entity in
which the Company's stockholders continue to hold at least 65% of the
voting securities.
The Severance Agreements supersede any other agreements and
representations made by the Named Officer or the Company containing the terms
and conditions of the Named Officer's employment with the Company only if the
Named Officer's employment with the Company is terminated in connection with a
Change in Control by the Company other than for Cause (as defined in the
Severance Agreements) or by the Named Officer for Good Reason (as defined in the
Severance Agreements).
In addition, the Company has an Executive Severance Plan that provides
salary continuation for between 9 and 18 months for the executive officers and
other benefits, based upon salary grade, if the executive's employment is
terminated for certain specific reasons, other than a Change in Control of the
Company covered by the Severance Agreements described above.
16
COMPENSATION COMMITTEE REPORT
TO OUR STOCKHOLDERS
This report is provided in accordance with Securities and Exchange
Commission ("SEC") rules, to inform the Company's stockholders of the
Compensation Committee's compensation policies for executive officers and the
rationale for compensation paid to the Chief Executive Officer of the Company.
The Compensation Committee consists of five independent, non-employee
directors who have no "interlocking" relationships (as defined by the SEC). The
Compensation Committee's overall goal is to develop executive compensation
policies that support the Company's strategic business objectives and consider
current competitive market practices. The Compensation Committee reviews and
approves the design of, assesses the effectiveness of, and administers executive
compensation programs and other matters. The Compensation Committee also reviews
and approves all compensation and incentive programs for senior executives and
evaluates CEO performance.
COMPENSATION PHILOSOPHY
The Company's primary business objective is to maximize stockholder
value over the long term. The Company has developed a comprehensive business
strategy that emphasizes financial and organizational performance and continuing
market leadership and best in class products and services.
The following compensation policies are intended to facilitate the
achievement of the Company's business strategies:
o Drive and reward strong business performance which supports
the Company's core values and creates superior value for stockholders
and executives.
o Provide senior executives a significant percentage of total
pay that is at-risk compensation to ensure management is focused on the
long-term interests of stockholders while balancing short- and
long-term business goals.
o Encourage executives to maintain significant stock holdings to
align interests with those of stockholders.
o Design competitive total compensation and rewards which
enhance the Company's ability to attract and retain knowledgeable and
experienced executives.
o Target compensation and incentive levels that reflect
competitive market practices.
An independent compensation consultant provides competitive market data
which includes current compensation and benefit trends. The consultant reviews
and provides survey data to the Committee to compare the Company's executive
compensation with compensation levels at companies in peer and general industry
groups. The Compensation Committee reviews and approves the selection of
companies used for compensation comparison purposes.
The companies in the S&P 500 Oil and Gas Equipment and Services Index
in the Performance Graph included in this Proxy Statement are included in the
group of companies used for compensation comparisons. The Committee believes the
Company's market for both compensation comparison and executive talent purposes
consists of companies with national and international business operations and
similar sales volumes, employment levels and operations in comparable lines of
business.
The key components of the executive compensation program are base
salary, annual incentives, long-term compensation and benefits. The Compensation
Committee regularly reviews all elements of an executive's total compensation
package. Total compensation opportunity is targeted between the 50th and 75th
percentile based on performance. Executives can be rewarded at the upper end of
the range based on individual or company performance, as well as the executive's
experience and expertise.
Section 162(m) of the Internal Revenue Code places a limit of
$1,000,000 on the amount of compensation that may be deducted by the Company in
any year with respect to the Company's Chief Executive Officer and its four
other
17
highest paid executive officers, unless the compensation is performance-based
compensation as described in Section 162(m) and the related regulations. The
Company has qualified certain compensation paid to executive officers for
deductibility under Section 162(m), including compensation expense related to
options granted pursuant to the Company's 1993 Stock Option Plan, and options
and other long-term performance-based stock or cash awards granted pursuant to
the Long-Term Incentive Plan and the Baker Hughes Incorporated 2002 Director &
Officer Long-Term Incentive Plan and shares awarded pursuant to the 1993
Employee Stock Bonus Plan. The Company may from time to time pay compensation to
its executive officers that may not be deductible.
BASE SALARIES
Executive base salaries are targeted at median levels of the peer and
general industry group. Base salaries are determined by evaluating an
executive's level of responsibility and experience, company-wide performance and
internal and external equity.
After evaluating the competitive market data, increases to base
salaries, if any, are driven primarily by individual performance. Individual
performance considers the executive's efforts in achieving business results;
promoting the Company's core values and keys to success; continuing educational
and management training; improving product quality; developing relationships
with customers, suppliers and employees; and demonstrating leadership abilities
among co-workers.
In December 2001, the Compensation Committee set the base salary for
fiscal year 2002 for Mr. Michael E. Wiley, Chairman of the Board, President and
Chief Executive Officer at $980,000 per year. This salary was established
comparing the compensation of chief executive officers in a group of comparator
companies.
ANNUAL INCENTIVES
The annual incentive compensation plan provides executives with the
opportunity to earn cash bonuses based on the achievement of specific
Company-wide, business unit and individual performance goals.
Each year, the Compensation Committee establishes specific goals
relating to each executive's bonus opportunity. Executives are assigned
threshold, target and overachievement bonus levels based on a percentage of
their base salary. The percentages have been established based on competitive
practices of the comparator group. Executives earn bonuses to the extent to
which pre-established goals are achieved. Bonus awards may be adjusted to
differentiate performance among executives. However, no bonus is paid unless
predetermined threshold performance levels are reached. If overachievement
status is reached and surpassed, bonus awards earned over this level are paid to
the executive over a two-year period.
Performance goals are approved each year by the Compensation Committee
and are based upon financial and/or strategic objectives of the Company. During
fiscal year 2002, the corporate objective was based on (i) earnings per share
and (ii) Baker Value Added, a metric that measures operating profit after tax
less the cost of capital employed. Baker Value Added integrates the profit and
loss results and balance sheet investments of the Company by assuring that the
cost of any capital used to earn those profits is fully taken into account.
Where executives have business unit responsibilities, a portion of the goal may
be based on financial performance measures that support business unit
performance. This portion varies with the position of each individual and the
particular objectives of the Company.
Performance targets are established by the Compensation Committee at
levels that are achievable, but require above-average performance from each
executive. Target bonus awards range from 45% to 100% of base salary. In 2001,
the Company overachieved its target bonus awards, and Mr. Wiley earned a bonus
of $1,193,990.
Each of the named executive officers received an annual bonus based on
their contribution to the 2002 financial performance. For fiscal year 2002, Mr.
Wiley earned an annual bonus in the amount of $490,000.
18
LONG-TERM INCENTIVES
Long-term incentives comprise the largest portion of an executive's
total compensation package, supporting the Company's commitment to provide a
total compensation package that favors at-risk pay. The Compensation Committee's
objective is to provide executives with long-term incentive award opportunities
that are consistent with grants made within the comparator group.
Long-term incentive award guidelines are determined using competitive
market references for each executive position and the individual performance of
each executive.
Long-term incentives are provided pursuant to the Company's long-term
incentive plans. Stock options are granted at an option price equal to the fair
market value of the Common Stock on the date prior to the date of grant. Stock
options have value if the stock price appreciates after the date the options are
granted.
Each year the Compensation Committee determines the total pool of stock
options that will be made available to the Company's executives, as well as the
size of individual grants for each senior executive. The amounts vary each year
and are based upon what the Compensation Committee believes is appropriate after
consideration of the executive's total compensation package and equity ownership
levels.
Mr. Michael E. Wiley was awarded a stock option grant of 105,000 shares
of Common Stock, effective January 30, 2002, and a second stock option grant of
105,000 shares of Common Stock, effective July 24, 2002, at an exercise price
equal to the fair market value of the stock on the date prior to the respective
date of grant. The options vest and become exercisable in increments of 33 1/3%
each year from the date of grant. These grants were made to incent Mr. Wiley to
create stockholder value over the long-term.
In fiscal year 2002, the Compensation Committee also awarded grants of
options to certain of the Company's senior executives, including Messrs.
Szescila, Finley, Crain and Clark, to incent top performance.
In order to maintain a strong link to stockholders and provide a more
balanced long-term incentive program, the Compensation Committee approved the
implementation of a long-term performance plan in 2001, subject to shareholder
approval, which was obtained in April 2002. This plan compares Baker Hughes'
relative total shareholder return to a group of industry peer companies.
In December 2001, performance-related awards were approved by the
Compensation Committee for senior executives. If the Company ranks first or
second in relative total shareholder return for the two-year period ending
December 31, 2003, as compared to the rankings of designated oilfield services
competitors, the Company will issue shares of restricted stock equal to a dollar
value specified for each participating executive and for each ranking. If
company-wide performance ranks third or lower, no awards will be earned. The
Company just completed the first year of the plan, and we are currently below
first or second ranking as of December 2002.
SUMMARY
The Compensation Committee believes the executive compensation program
provides a competitive total compensation opportunity with a significant
performance orientation. The annual incentive plan is designed to evaluate and
reward for achievement of specific objectives that drive the success of the
Company. The long-term incentive awards link executives directly to stockholders
and reward the Company's executives for continuing positive stock performance on
an absolute and relative basis.
Richard D. Kinder (Chairman)
Edward P. Djerejian
Claire W. Gargalli
H. John Riley, Jr.
Charles L. Watson
19
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Company's Compensation Committee consists of Messrs. Kinder,
Djerejian, Riley, and Watson and Ms. Gargalli, all of whom are non-employee
directors. None of the Compensation Committee members has served as an officer
of the Company, and none of the Company's executive officers has served as a
member of a compensation committee or board of directors of any other entity
which has an executive officer serving as a member of the Company's Board of
Directors.
CORPORATE PERFORMANCE GRAPH
The following graph compares the yearly percentage change in the
Company's cumulative total stockholder return on its Common Stock (assuming
reinvestment of dividends into Common Stock at the date of payment) with the
cumulative total return on the published Standard & Poor's 500 Stock Index and
the cumulative total return on Standard & Poor's 500 Oil and Gas Equipment and
Services Index over the preceding five-year period. The following graph is
presented pursuant to SEC rules. The Company believes that while total
stockholder return is an important corporate performance indicator, it is
subject to the vagaries of the market. In addition to the creation of
stockholder value, the Company's executive compensation program is based on
financial and strategic results, and the other factors set forth and discussed
above in "Compensation Committee Report."
COMPARISON OF FIVE-YEAR CUMULATIVE TOTAL RETURN*
BAKER HUGHES INCORPORATED; S&P 500 INDEX AND S&P 500 OIL AND GAS EQUIPMENT AND
SERVICES INDEX
(GRAPH)
<Table>
<Caption>
1997 1998 1999 2000 2001 2002
------- ------- ------- ------- ------- ------
Baker Hughes $100.00 $ 41.14 $ 50.04 $100.05 $ 89.00 $79.66
S&P 500 Index 100.00 128.34 155.14 141.13 124.40 97.08
S&P Oil and Gas Equipment and Services Index 100.00 58.26 79.17 106.04 70.73 62.65
</Table>
* Total return assumes reinvestment of dividends on a quarterly basis.
The comparison of total return on investment (change in year-end stock
price plus reinvested dividends) assumes that $100 was invested on December 31,
1997 in Baker Hughes Common Stock, the S&P 500 Index and the S&P 500 Oil and Gas
Equipment and Services Index.
20
AUDIT/ETHICS COMMITTEE REPORT
The Audit/Ethics Committee of the Board of Directors provides
assistance to the Board of Directors in fulfilling its responsibility in matters
relating to the accounting and reporting practices of the Company, the adequacy
of the Company's disclosure controls and internal controls, the quality and
integrity of the quarterly and annual financial statements of the Company, the
performance of the Company's internal audit function and the review and
pre-approval of the current year audit and non-audit fees. The Audit/Ethics
Committee also oversees the Company's compliance programs relating to legal and
regulatory requirements. The Audit/Ethics Committee reviewed the qualification
and independence and appointed the Company's independent auditors for 2003.
Each member of the Audit/Ethics Committee is "independent" as defined
by listing standards of the New York Stock Exchange. During the year ended
December 31, 2002, the Audit/Ethics Committee held nine meetings.
During the year ended December 31, 2002, the Audit/Ethics Committee met
and otherwise communicated with management and with Deloitte & Touche LLP, the
Company's independent auditors for 2002. Deloitte & Touche discussed with the
Audit/Ethics Committee various matters under applicable auditing standards,
including information regarding the scope and results of the audit and other
matters required to be discussed by the Statement on Auditing Standards No. 61,
as amended, "Communication with Audit Committees." The Audit/ Ethics Committee
also discussed with Deloitte & Touche its independence from the Company and
received a written statement from Deloitte & Touche concerning independence as
required by the Independence Standards Board Standard No. 1, "Independence
Discussions with Audit Committees." The Audit/Ethics Committee also reviewed the
provision of services by Deloitte & Touche not related to the audit of the
Company's financial statements and to the review of the Company's interim
financial statements as it pertains to the independence of Deloitte & Touche.
The Audit/Ethics Committee also reviewed and discussed the Company's audited
financial statements for the year ended December 31, 2002 with the Company's
management, the Company's internal auditors and Deloitte & Touche. Deloitte &
Touche informed the Audit/Ethics Committee that the Company's audited financial
statements are presented fairly in conformity with generally accepted accounting
principles.
Based on the review and discussions referred to above, and such other
matters deemed relevant and appropriate by the Audit/Ethics Committee, the
Audit/Ethics Committee recommended to the Board of Directors, and the Board has
approved, that these financial statements be included in the Company's Annual
Report on Form 10-K for the year ended December 31, 2002.
James F. McCall (Chairman)
Clarence P. Cazalot, Jr.
Anthony G. Fernandes
James A. Lash
J. Larry Nichols
APPOINTMENT OF INDEPENDENT AUDITORS
The Audit/Ethics Committee appointed the firm of Deloitte & Touche LLP
as independent auditors to audit the Company's books and accounts for the year
ending December 31, 2003, which was approved by the Board of Directors. Deloitte
& Touche served as independent auditors for the Company for fiscal 2002. Its
representatives will be present at the Annual Meeting and will have an
opportunity to make a statement, if they so desire, as well as to respond to
appropriate questions asked by stockholders.
FEES PAID TO DELOITTE & TOUCHE LLP
Deloitte & Touche LLP, the member firms of Deloitte Touche Tohmatsu,
and their respective affiliates have billed the Company and its subsidiaries
fees as set forth in the table below for (i) the audit of the Company's 2002
annual financial statements and reviews of quarterly financial statements, (ii)
financial information systems design and implementation work rendered in 2002
and (iii) all other services rendered in 2002. The Company purchased software
and hardware from a Deloitte & Touche affiliate in 2002. The purchases, which
totaled approximately $5.7 million, were competitively bid.
<Table>
<Caption>
FEES PAID IN
FISCAL YEAR 2002
----------------
(in millions)
Audit fees $3.3
Financial information systems
design and implementation fees --
All other fees 1.6
----
Total $4.9
</Table>
21
PROPOSAL TO APPROVE AMENDMENT OF
THE BAKER HUGHES INCORPORATED
EMPLOYEE STOCK PURCHASE PLAN
The Board of Directors adopted the Baker Hughes Incorporated Employee
Stock Purchase Plan ("ESPP" or the "Plan"), as amended and restated March 5,
2003, to be effective March 5, 2003, subject to stockholder approval. A copy of
the ESPP is attached as Annex A to this Proxy Statement. The ESPP is intended to
qualify as an "employee stock purchase plan" under section 423 of the Internal
Revenue Code of 1986, as amended. The Plan was adopted to encourage and enable
Company employees to acquire the Company's Common Stock at a favorable price and
upon favorable terms in order to furnish an incentive to advance the best
interests of the Company for the mutual benefit of the employees, the Company
and the Company's stockholders. The ESPP currently has a stockholder-approved
9.5 million shares authorized for issuance, with a remaining balance of
approximately 0.7 million shares to be issued. The amended and restated Plan is
being presented to the stockholders for approval of the increase in the shares
authorized for issuance by 5.0 million, for a total of 14.5 million shares
authorized for issuance under the Plan and as further amended, with the
additional amendments of the Plan described below in " - General."
GENERAL
All employees of the Company and any affiliate of the Company that has
adopted the Plan are eligible to participate if the employee is scheduled to
work at least 20 hours per pay period during the option period, is an employee
at the beginning of the option period, and his employment continues
uninterrupted throughout the option period until the date of exercise, except
the following employees are not eligible to participate: (i) any employee who is
a citizen of a foreign country that prohibits foreign corporations from granting
stock options to its citizens, and (ii) any employee who, immediately after the
option is granted, owns 5% or more of the total combined voting power or value
of all classes of stock of the Company or of a subsidiary. Through payroll
deductions ranging from 1% to 10%, employees accumulate funds which are used at
the end of the year to purchase shares of the Company's Common Stock at the
"option price," which is equal to 85% of the lower of the fair market value of
the stock on the "date of grant" (i.e., the first business day of the option
period) or on the "date of exercise" (i.e., the last business day of the option
period). An employee must authorize payroll deductions prior to the start of the
option period in order to participate. Payroll deductions are accumulated
interest free until the end of the option period. On the last business day of
the option period, a participant is deemed to have exercised the option to
purchase as many whole and fractional shares as the participant's payroll
deductions will allow at the option price.
The provisions of the Plan have been amended to provide the Board of
Directors or the Compensation Committee with the discretion (i) to revise the
discounted purchase price to a percentage that is higher than 85% (e.g., 95% of
the fair market value of the price of a share of Common Stock on the date of
valuation), (ii) to determine the option price as the fair market value on the
date of exercise instead of the lower of the fair market value on the date of
grant or the date of exercise, and (iii) to establish an option period that is
other than the current 12-month period provided in the Plan (e.g., 3 months or 6
months). These additional changes provide the flexibility to address the stock
option expensing provisions of the Financial Accounting Standards Board
Statement of Financial Accounting Standards ("SFAS") No. 123, Accounting for
Stock-Based Compensation, as amended by SFAS No. 148, Stock-Based Compensation -
Transition and Disclosure. Under the current provisions of SFAS No. 123, stock
options are not required to be expensed if the discounted price is 95% or higher
and if the option price is determined as the fair market value on the date of
exercise.
A participant can decrease (but not increase) his or her contribution
percentage once during the year and can discontinue participation in the ESPP by
reducing his or her contribution percentage to zero. If a participant
discontinues participation, any payroll contributions accumulated up to that
point will be held until the end of the option period, when shares of the
Company's Common Stock will be purchased. A participant may withdraw completely
from the ESPP, and all payroll contributions up to the date of withdrawal will
be refunded. If a participant withdraws completely from the ESPP, he or she
cannot participate in the ESPP until the next option period.
An employee is not eligible to participate in the ESPP if, immediately
after the option is granted, the employee owns stock possessing 5% or more of
the total combined voting power or value of all classes of stock of the Company
or of a subsidiary. Further, the fair market value of shares of Common Stock
purchased in any calendar year is limited to $25,000, and the ESPP limits the
number of shares purchased to a maximum of 2,500 shares in any calendar year.
ADMINISTRATION; AMENDMENT AND TERMINATION
The Board of Directors or the Compensation Committee may amend the Plan
at any time and from time to time, subject to the limitation that approval by a
majority vote of the holders of the outstanding securities of the Company are
required to amend the Plan (i) to materially increase the benefits accruing to
participants, (ii) to materially increase the
22
number of securities which may be issued under the Plan, or (iii) to materially
modify the requirements as to eligibility for participation in the Plan.
NEW PLAN BENEFITS
The number of shares that may be purchased by a participant under the
ESPP is discretionary, and the value of the Common Stock purchased by ESPP
participants will vary based on the fair market value of the Company's Common
Stock at the commencement of the option period or at the end of the option
period. Accordingly, the number of shares that will be purchased by the senior
executives, executive officers as a group, non-executive directors as a group
and non-executive officers as a group in the future are not currently
determinable. Directors who are also not employees of the Company are not
eligible to participate in the ESPP.
FEDERAL INCOME TAX CONSEQUENCES RELATING TO THE ESPP
The following discussion of certain federal income tax consequences
relating to the ESPP is based on the provisions of the Internal Revenue Code of
1986, as amended (the "Code"), including related regulations and the Internal
Revenue Service guidance, in effect on the date of this Proxy Statement. The
discussion is limited to the United States tax consequences, and the tax
consequences may vary depending on the personal circumstances of the individual
participants.
The Plan and the right of the Plan participants to purchase shares of
Common Stock under the Plan are intended to qualify as an "employee stock
purchase plan" under the provisions of section 423 of the Code. A participant's
payroll contributions are made on an after-tax basis, but the grant of the
option and the purchase of shares on the date of exercise are not taxable events
for the participant. However, a participant may become liable for income tax
upon dispositions of shares acquired under the Plan, and the tax consequences
will depend on how long a participant has held the shares prior to the
disposition. The Company may also have a deduction as a result of the
disposition.
If a participant disposes of the shares in a "qualifying disposition" -
a disposition of the shares that occurs (a) at least two years after the date of
grant, which is the date of the beginning of the option period and (b) at least
one year after the date of exercise, which is the date shares are purchased
under the Plan (or if the participant dies while owning the shares) the
participant will have the following tax consequences. In the year of the
disposition, the participant will include in his taxable ordinary income the
lesser of (a) the excess of fair market value of the shares at the date of grant
of the option over the option price (i.e., the 85% discounted price), or (b) the
excess of the fair market value of the shares at the time of the disposition (or
death) over the option price. Any further gain on the disposition will generally
be taxed as long-term capital gain. If the shares are sold at a price that is
less than the option price, the difference would be a long-term capital loss for
the participant. No deduction is allowed to the Company in a qualifying
disposition.
When shares are disposed of prior to the expiration of either the
two-year or one-year holding period described above, the disposition is a
"disqualifying disposition." In the year of the disqualifying disposition, the
participant will include in his taxable ordinary income the amount by which the
fair market value of the shares on the date of exercise exceeds the option price
(i.e., the 85% discounted price). This excess amount is taxable to the
participant even if no gain is realized on the disposition and even if the
shares are disposed of for less than the fair market value on the date of
exercise. The participant will have capital gain if there is any gain above the
ordinary income amount, and he will have capital loss if the shares are sold for
an amount that is less than the fair market value on the date of exercise. The
capital gain or capital loss will be short- or long-term capital gain or loss
depending on the period of time which the participant held the shares. In the
event of a disqualifying disposition, the Company will be allowed a deduction
for federal income tax purposes equal to the ordinary income realized by the
participant disposing of the shares.
Currently, the Company is not required to withhold employment or income
taxes upon the exercise of options under the Plan. However, the Internal Revenue
Service may issue guidance in the future requiring the Company to withhold
employment and income taxes upon the exercise of options granted under plans
that qualify under section 423 of the Code.
RECOMMENDATION OF THE BOARD OF DIRECTORS
Your Board of Directors recommends a vote FOR approval of amendment of
the Baker Hughes Incorporated Employee Stock Purchase Plan.
23
EQUITY COMPENSATION PLANS INFORMATION
The information in the following table is presented as of December 31,
2002 with respect to shares of the Company's Common Stock that may be issued
under the Company's existing equity compensation plans, including the Baker
Hughes Incorporated 1993 Stock Option Plan, the Baker Hughes Incorporated Long
Term Incentive Plan and the Baker Hughes Incorporated 2002 Directors & Officers
Long-Term Incentive Plan, all of which have been approved by the Company's
stockholders.
The table does not include information with respect to shares subject
to outstanding options granted under an equity compensation plan that is no
longer in effect and the equity compensation plans assumed by the Company in
connection with mergers and acquisitions of entities which originally granted
those options. No additional options may be granted under the expired and
assumed plans. Information on the expired and assumed plans is provided in
Footnote 5 below.
(In millions of shares)
<Table>
<Caption>
(c)
NUMBER OF SECURITIES
(a) (b) REMAINING AVAILABLE FOR
NUMBER OF SECURITIES TO WEIGHTED-AVERAGE FUTURE ISSUANCE UNDER
BE ISSUED UPON EXERCISE EXERCISE PRICE OF EQUITY COMPENSATION PLANS
EQUITY COMPENSATION OF OUTSTANDING OPTIONS, OUTSTANDING OPTIONS, (EXCLUDING SECURITIES
PLAN CATEGORY WARRANTS AND RIGHTS WARRANTS AND RIGHTS REFLECTED IN COLUMN (a))
------------- ----------------------- -------------------- -------------------------
Stockholder-approved plans
(excluding ESPP) 5.4 $32.43 7.8(1)
Nonstockholder-approved plans (2) 5.5 32.92 13.8(1)
----- -----
Subtotal (except for weighted 10.9 32.68 21.6
average exercise price)
Employee Stock Purchase Plan -- (3) .7(4)
----- -----
Total 10.9 22.3
Less:
Shares that will be carried forward
in other registrations (1) (2.5)
Shares that will expire in 2003 (1) (1.2)
-----
Total 18.6
=====
</Table>
- ----------
(1) Approximately 0.5 million shares of the Long Term Incentive Plan
(stockholder approved) and approximately 2.0 million shares of the 1998 Employee
Stock Option Plan (nonstockholder approved) will be carried forward for
registration and issuance under the Company's 2002 Director & Officer Long-Term
Incentive Plan (stockholder approved) and the Director Compensation Deferral
Plan (nonstockholder approved), and the shares carried forward will no longer be
available for future issuance under the Long Term Incentive Plan and the 1998
Employee Stock Option Plan.
Also, included in the nonstockholder approved plans are approximately
1.2 million shares available for issuance under the 1993 Employee Stock Bonus
Plan. Of those shares, approximately 4,000 shares will be issued in fiscal year
2003 prior to the expiration of the plan. After the expiration of the plan in
October 2003, no additional shares will be issued.
(2) Included in the nonstockholder approved plans are the Company's 1993
Employee Stock Bonus Plan (expiring in October 2003), 1998 Employee Stock Option
Plan, the 1998 Special Employee Stock Option Plan, the 2002 Employee Long-Term
Incentive Plan and the Director Compensation Deferral Plan. A description of
each of these plans follows.
(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 4.5 million
shares occurring from 1998 through 2002, the weighted average exercise price for
the Employee Stock Purchase Plan was $19.02.
(4) Does not include the 5.0 million additional shares requested in the Proposal
to approve amendment of the Baker Hughes Incorporated Employee Stock Purchase
Plan.
24
(5) Expired and Assumed Plans. The Company's equity compensation plan that has
expired, the 1991 Employee Stock Bonus Plan, has approximately 20,000 shares of
the Company's Common Stock that would be issuable upon the exercise of the
outstanding options as of December 31, 2002.
In addition to the foregoing, when the Company acquired the stock of
Western Atlas, Inc. in a transaction completed in August 1998, the Company
assumed the Western Atlas Director Stock Option Plan and the Western Atlas 1993
Stock Incentive Plan. As of December 31, 2002, approximately 68,000 shares and
approximately 8,000 shares of the Company's Common Stock would be issuable upon
the exercise of outstanding options 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 $24.20, respectively.
NONSTOCKHOLDER APPROVED PLANS
1993 EMPLOYEE STOCK BONUS PLAN
The Baker Hughes Incorporated 1993 Employee Stock Bonus Plan (the "1993
Bonus Plan") was adopted effective as of October 27, 1993. The number of shares
authorized for issuance under the 1993 Bonus Plan is 1.3 million shares. Shares
will be issued under the 1993 Bonus Plan to those employees of the Company and
its subsidiaries (excluding non-employee directors) who are issued option shares
under the Baker Hughes Incorporated 1993 Stock Option Plan (the "1993 Option
Plan") and who retain for a minimum of 3 years the shares of the Company's
Common Stock acquired upon the exercise of the options received under the 1993
Option Plan. Shares issued under the 1993 Bonus Plan will be in the ratio of one
share for every five shares acquired by exercise of 1993 Option Plan shares,
subject to certain forfeiture provisions related to the holding period of the
shares. As of December 31, 2002, approximately 60,000 shares had been issued
under the 1993 Bonus Plan. Prior to the expiration of the plan in October 2003,
approximately 4,300 additional shares will be issued. After the expiration of
the plan, no further shares will be issued.
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 the Company's
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 optionee's 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, 2002, options covering approximately 3.3 million
shares of the Company's Common Stock were outstanding under the 1998 ESOP,
options covering approximately 0.4 million shares were exercised during fiscal
year 2002, and approximately 2.1 million shares remained available for future
options. See Footnote (1) above for information on the carryforward of
approximately 2.0 million shares of the remaining 2.1 million shares.
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 the Company's Board of Directors has the authority to grant
nonqualified stock options to purchase shares of the Company's Common Stock to a
broad-based group of employees. The exercise price of the options will be equal
to the fair market value per share of the Company's 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 the
Company's United States employees in October 1997 and to its international
employees in May 1998. As of December 31, 2002, options covering approximately
0.7 million shares of the Company's Common Stock were outstanding under the 1998
SESOP, no options were exercised during fiscal year 2002, and approximately 1.8
million shares remained available for future options.
25
2002 EMPLOYEE LONG-TERM INCENTIVE PLAN.
The Baker Hughes Incorporated 2002 Employee Long-Term 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 cash-based awards to corporate
officers and key employees of the Company. 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 the capital stock of the Company). As of
December 31, 2002, only stock option awards have been granted under the 2002
Employee LTIP.
The 2002 Employee LTIP is the companion plan to the Baker Hughes
Incorporated 2002 Director & Officer Long-Term Incentive Plan, which was
approved by the Company's 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 the Company would issue compensation
awards.
Options. The exercise price of the options will not be less than the
fair market value of the shares of the Company's Common Stock on the date of
grant, and options terms may be up to ten years. The maximum number of shares of
the Company's 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 optionee's 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, 2002, stock option grants covering approximately 0.7 million shares
of the Company's Common Stock were outstanding under the 2002 Employee LTIP,
options covering 500 shares were exercised during fiscal year 2002 and
approximately 8.8 million shares remained available for future options.
Performance Shares and Units; Cash-Based Awards. Performance shares may
be granted to employees in the amounts and upon the terms determined by the
Compensation Committee of the Company's Board of Directors, but must be limited
to no more than one 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 the Company's Common Stock at the date of the award. Performance
units and cash-based 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 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 owner's 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 metric that measures 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 the Company's Common Stock
on the date of grant. The maximum number of shares of the Company's Common Stock
that may be utilized for purposes of determining an employee's 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, subject to
adjustment under the antidilution provisions of the 2002 Employee LTIP.
26
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
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 the Company's Board of Directors to defer
compensation otherwise payable and provide flexibility with respect to the
Company's 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 option-related deferrals or cash-based
deferrals. The stock option-related deferrals may be either market-priced stock
options or discounted stock options. The number of shares to be issued for the
market-priced 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 the Company's 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 the Company's Common Stock on the last day of the quarter.
The discounted price is 50% of the fair market value of the Company's 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 director's 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 the Company's Common
Stock that may be issued under the Deferral Plan is 0.5 million. As of December
31, 2002, no stock option grants had been made under the Deferral Plan.
27
STOCKHOLDER PROPOSAL NO. 1
REGARDING POISON PILLS
The following proposal was submitted to Baker Hughes by Nick Rossi
(with an address of P.O. Box 249, Boonville, California 95415 and a legal proxy
to Mr. John Chevedden and/or his designee, with an address of 2215 Nelson Ave.,
No. 205, Redondo Beach, CA 90278), who is the owner of 1,000 shares of the
Company's Common Stock, and is included in this Proxy Statement in compliance
with SEC rules and regulations.
"1 - SHAREHOLDER VOTE ON POISON PILLS
THIS TOPIC WON AN AVERAGE 60%-YES VOTE AT 50
COMPANIES IN 2002
This is to recommend that the Board of Directors redeem any poison pill
previously issued (if applicable) and not adopt or extend any poison pill unless
such adoption or extension has been submitted to a shareholder vote.
HARVARD REPORT
A 2001 Harvard Business School study found that good corporate governance (which
took into account whether a company has a poison pill) was positively and
significantly related to company value. This study, conducted with the
University of Pennsylvania's Wharton School, reviewed the relationship between
the corporate governance index for 1,500 companies and company performance from
1990 to 1999.
Some believe that a company with good governance will perform better over time,
leading to a higher stock price. Others see good governance as a means of
reducing risk, as they believe it decreases the likelihood of bad things
happening to a company.
Since the 1980s Fidelity, a mutual fund giant with $800 billion invested, has
withheld votes for directors at companies that have approved poison pills, Wall
Street Journal, June 12, 2002.
COUNCIL OF INSTITUTIONAL INVESTORS RECOMMENDATION
The Council of Institutional Investors www.cii.org, an organization of 120
pension funds which invests $1.5 trillion, called for shareholder approval of
poison pills. In recent years, various companies have been willing to redeem
existing poison pills or seek shareholder approval for their poison pill. This
includes Columbia/HCA, McDermott International and Bausch & Lomb. I believe that
our company should follow suit and allow shareholder participation.
SHAREHOLDER VOTE ON POISON PILLS
YES ON 1"
----------------------------------------
28
STATEMENT OF THE BOARD OF DIRECTORS AND
MANAGEMENT IN OPPOSITION TO PROPOSAL NO. 1
The Board of Directors has not adopted a "poison pill," also known as a
"shareholder rights plan," and has no present intention of adopting such a plan.
However, the Board believes that circumstances could arise in the future where
the adoption of such a plan would be an important tool for protecting the
interests of the Company's stockholders.
The primary fiduciary duty of the Board is to preserve and maximize
stockholders' value in the Company. Shareholder rights plans are designed to
encourage potential acquirors to negotiate directly with the stockholder-elected
Board, which is in the best position to negotiate on behalf of all stockholders,
evaluate the adequacy of any potential offer and protect stockholders against
unfair and abusive takeover tactics. Additionally, shareholder rights plans can
provide the Board with a greater period of time within which it can properly
evaluate an acquisition offer to determine if it is in best interest of, and
will deliver full value to, all of the Company's stockholders. These attributes
strengthen the Board's bargaining position so that the Board can protect and
further the interests of all of the Company's stockholders. Without the
protection of a shareholder rights plan, the Board could lose important
bargaining power in negotiating with a potential acquiror or pursuing
potentially superior alternatives.
There is evidence that suggests shareholder rights plans are beneficial
to stockholders' interests. Studies have shown that companies adopting such
plans receive higher takeover premiums than those companies without rights
plans. For example, a 1997 study by Georgeson Shareholder Communications Inc., a
nationally recognized proxy solicitor and investor relations firm, found that
premiums paid to acquire companies with shareholder rights plans were 8% higher
than the premiums paid to companies without shareholder rights plans. In fact,
shareholder rights plans contributed an additional $13 billion in shareholder
value during the five-year study period (1992 through 1996) compared to the
$14.5 billion in potential premiums that were given up by companies without a
shareholder rights plan. At the same time, such plans did not prevent companies
from being acquired at prices that were fair and adequate to shareholders.
Furthermore, shareholder rights plans did not increase the likelihood of the
withdrawal of a friendly takeover bid nor defeat a hostile bid or reduce the
likelihood that a company would be a takeover target. In research subsequent to
1997, the value of having a poison pill continues to be demonstrated. In U.S.
companies with a net worth in excess of $1 billion and with poison pills in
place received a median premium of 35.9% versus the 31.9% premium received by
companies without poison pills (from Business Week online, "The Bids Sure Are
Getting Hostile," January 14, 2002). Shareholder rights plans may prevent
abusive takeovers that include hostile tender offers made at less than fair
price and partial and two-tiered offers that discriminate among the Company's
stockholders.
A shareholder rights plan is consistent with good corporate governance
principles that decisions involving a potential sale of the Company rest with
the Board of Directors, which will evaluate the merits of any bona fide
acquisition proposal in accordance with its fiduciary duty to all stockholders
of the Company. Because a shareholder rights plan can be an effective tool in a
hostile takeover attempt, the Company believes the adoption of such a plan is
appropriately within the scope of the Board's responsibilities. Furthermore,
requiring stockholder approval could, in fact, impede the Board's ability to
maximize stockholder value because the Company may not be able to adopt a
shareholder rights plan in a timely fashion to be effective against any
impending unfair and abusive takeover attempt.
RECOMMENDATION OF THE BOARD OF DIRECTORS
Your Board of Directors recommends a vote AGAINST approval of Stockholder
Proposal No. 1 regarding poison pills.
29
STOCKHOLDER PROPOSAL NO. 2
REGARDING CLASSIFIED BOARDS
The following proposal was submitted to Baker Hughes by Harold J.
Mathis, Jr. (with an address of P.O. Box 1209, Richmond, Texas 77406-1209 and an
e-mail address of: cengulfmar@aol.com), who is the owner of 810 shares of the
Company's Common Stock, and is included in this Proxy Statement in compliance
with SEC rules and regulations.
"RESOLVED: That the stockholders of Baker Hughes Incorporated,
assembled in annual meeting in person or by proxy, hereby request that
the Board of Directors take the needed steps to provide that at future
elections of directors, new directors be elected annually and not by
classes, as is now provided, and that on expiration of present terms of
directors their subsequent elections shall also be on an annual basis."
PROPONENT'S STATEMENT IN SUPPORT OF PROPOSAL:
"REASONS
Strong support was shown at the last annual meeting of Baker Hughes,
Incorporated when 81.49%*, 223,630,445 shares were cast in favor of this
proposal. For two consecutive years, shareholders have adopted this proposal
with a strong majority vote.
Shareholders must certainly be confused when the Board recommends a vote against
this proposal that shareholders approved by an 81.49%* majority last year.
Shareholders must really be confused when the board and management infer that
directors are acting in the best interest of shareholders by rejecting last
year's majority vote. In truth, it is highly unlikely that 81.49%* of the
shareholders casting votes would vote against their own best interest. It says
"we know what is best for you better than you do," and it is simply not
consistent for directors to assert that they were acting in the best interest of
shareholders by opposing last year's strong mandate. Last year 50,782,131, only
18.5% of the yes/no votes and only 15.1% of the total shares outstanding were
cast in Baker Hughes favor on this issue. These results indicate that the time
has come for the board to place the declassification issue on the ballot as an
amendment to the certificate of incorporation and by-laws allowing it to stand
the 75% test of approval so often mentioned in the board's opposition to this
proposal.
Baker Hughes directors adhere to a double standard by accepting votes for their
own election while rejecting a proposal adopted by the same shareholders.
Apparently, CALPERS recognized this aberration last year when it cast all of
it's votes for this proposal, as well as, taking the significant additional step
of withholding votes from all directors being elected to the board.
It is this proponent's belief that classification of the Board of Directors is
not in the best interest of Baker Hughes Incorporated and its shareholders. This
proponent also believes that it makes a Board less accountable to shareholders
when all directors do not stand for election each year; the piecemeal election
insulating directors and senior management from the impact of poor performance.
"SEC, JUSTICE PROBE BAKER HUGHES ALLEGATIONS OF BRIBERY AT ISSUE"
HOUSTON CHRONICLE - MARCH 30, 2002
What measures are in place to insure that provisions of the Foreign Corrupt
Practices Act are not being violated? A question asked by this proponent at the
annual shareholders meetings in 1999 and once again in 2002. Where is the
director oversight that should be in place to prevent the recurrence of this
problem? Where is the year to year board continuity so often touted as a feature
of the staggered system, that would supercede frequent management changes?
PLEASE MARK YOUR PROXY IN FAVOR OF THIS PROPOSAL; otherwise, it is
automatically cast as a vote against, even if you abstain."
*81.49% of yes/no votes cast.
30
STATEMENT OF THE BOARD OF DIRECTORS AND
MANAGEMENT IN OPPOSITION TO PROPOSAL NO. 2
Since the Company's formation in 1987 with the combination of Baker
International Corporation and Hughes Tool Company, the Board of Directors has
been divided into three classes. Under this system, each director serves a
three-year term, each class is nearly as equal as possible in size and one of
the three classes is elected each year. This staggered election of directors is
a common practice that has been approved by the stockholders of many major
corporations. In a 2002 report by the Investor Responsibility Research Center,
60% of the nearly 2,000 companies included in the report had classified boards.
The Corporate Governance Committee of the Board of Directors, which
consists of five independent non-employee directors, has considered both the
proposal to declassify the Board that was submitted by Mr. Mathis for
consideration at the 2002 Annual Meeting and the stockholder vote on that
proposal. For the reasons described below, the Committee believes that no change
is needed to the Company's classified board structure.
The Committee believes that the interests of the stockholders and the
Company are best served by focusing on achieving the best in corporate
governance. The best in corporate governance is achieved by having an active,
independent Board comprised of individuals with relevant expertise. The
Committee believes it is more germane to focus on the actual composition of the
Board rather than focusing on general issues, such as the terms of the Board
members.
Baker Hughes has concentrated on selecting directors who are able to
make a contribution to enhancing stockholder value. Overall, the directors have
diverse backgrounds, but each one brings a particular collection of skills,
experience and expertise to the Board. In the Company's selection of its
directors, the Company has assembled a Board with an impressive wealth of
knowledge and experience. A review of the specific backgrounds of each of the
Board members clearly evidences the high caliber of individuals that the Company
has been able to attract to the Board.
The Committee believes the election of directors in staggered terms
promotes good corporate governance by providing the stability to develop and
execute long-term, strategic planning, and the staggered election of directors
also assures that Baker Hughes will have directors with an historical
perspective of the Company and its operations, and that perspective will provide
the in-depth knowledge for continuity in pursuing the Company's strategic goals.
In the event of a proposed merger or sale of Baker Hughes, the staggered system
of electing directors could also serve to afford the Board valuable time to
negotiate the best price in order to maximize stockholder value.
The Committee also believes that at the same time the election of
directors in staggered terms promotes the best in corporate governance, Baker
Hughes has sufficient mechanisms in place to avoid an entrenchment of the Board.
For instance, it should be noted that all but one of the Company's eleven
directors are outside directors. Moreover, the Company's bylaws limit a
director's tenure to ten years and that mechanism encourages a reasonable
turnover of the Board. Eight of the current eleven Baker Hughes directors, which
equates to 73% percent, have been Board members for five years or less.
If approved by the stockholders, the proposal would not in itself
declassify the Board. Instead, it would serve as a recommendation to the Board
to take the necessary steps to end the staggered system of electing directors.
To declassify the Board, amendments in proper form would need to be proposed to
amend the relevant provisions of the Company's Restated Certificate of
Incorporation and Bylaws. For such amendments to be adopted, an affirmative vote
of 75% of the total voting power of all shares of stock of the Company entitled
to vote in the election of directors would be required. Although this proposal
received 81.49% of the votes actually cast for or against the proposal at the
2002 Annual Meeting, out of the total voting power of the Company's Common Stock
the votes in favor of the proposal represented only 66.4% of all of the
outstanding shares of Common Stock, which would be insufficient to approve an
amendment to the Company's Restated Certificate of Incorporation and Bylaws.
RECOMMENDATION OF THE BOARD OF DIRECTORS
Your Board of Directors recommends a vote AGAINST approval of
Stockholder Proposal No. 2 regarding classified boards.
31
STOCKHOLDER PROPOSAL NO. 3 REGARDING
PROHIBITION OF STOCK OPTION GRANTS TO SENIOR EXECUTIVES
The following proposal was submitted to Baker Hughes by the American
Federation of Labor and Congress of Industrial Organizations (with an address of
815 Sixteenth Street, N.W., Washington, D.C. 20006), who is the beneficial owner
of 200 shares of the Company's Common Stock, and is included in this Proxy
Statement in compliance with SEC rules and regulations.
"SHAREHOLDER PROPOSAL
RESOLVED: The shareholders of Baker Hughes Incorporated (the "Company") urge the
Board of Directors (the "Board") to adopt a policy prohibiting future stock
option grants to senior executives. The Board shall implement this policy in a
manner that does not violate any existing employment agreement or equity
compensation plan.
SUPPORTING STATEMENT
Since the accounting scandals at Enron, Worldcom, and other companies, the role
of stock options in executive compensation has come [sic] controversial. Critics
of stock options have argued that they can be a powerful incentive for
executives to manipulate earnings or engage in accounting fraud. By timing their
stock option exercises, executives can also inappropriately trade on inside
information.
Stock options provide incentives to executives that significantly differ from
the interests of shareholders. Stock option grants promise executives all of the
gain of share price increases with none of the risk of share price declines. For
this reason, they can encourage excessive risk taking by executives. In contrast
to direct stock holdings, stock options also discourage executives from
increasing dividends because option holders are not entitled to dividends.
Our Company allows executives to exercise a portion of their stock option grants
after just one year following their grant date. For this reason, senior
executives can gain substantial windfalls from the proceeds of their stock
option exercises even if the share price later falls under their watch.
We are concerned that our Company's annual stock option grants to senior
executives are excessive. In fiscal year 2001, Chairman and CEO Michael Wiley
received stock options with a grant date present value of $10.9 million,
representing 53.93 percent of the total options granted to employees at our
Company.
Banning stock options for senior executives will decouple executive pay from
short-term price movements and the temptation for executives to inappropriately
manipulate our Company's stock price in order to exercise their stock options.
In our opinion, other forms of compensation, such as restricted stock and long
term incentive plans, will better focus senior executives on building the
sustained profitability of our Company.
Leading investors and regulators have questioned the appropriateness of using
stock options in executive compensation. Portfolio manager Bill Miller, whose
Legg Mason Value Trust is the only mutual fund to beat the S&P 500 Index 11
years in a row, has said "I support the banning of stock options because
anything that can be accomplished with options can be accomplished by giving
stock directly. And it has none of the downsides of options."
Former Federal Reserve Chairman Paul Volker has stated that "Given both the very
large capricious element inherent in the returns from fixed price stock options
and the distorted incentives for management, I believe the use of such options
should be strongly discouraged for public companies. There are far better
alternatives for seeking and achieving an appropriate alignment of shareholder
and management interests."
For these reasons. please vote FOR this proposal."
32
STATEMENT OF THE BOARD OF DIRECTORS AND
MANAGEMENT IN OPPOSITION TO PROPOSAL NO. 3
The Company's primary business objective is to maximize stockholder
value over the long term, and the Company's compensation policies are intended
to facilitate the achievement of this objective. Included in the compensation
policies for the Company's senior executives are a significant amount of
long-term, at-risk compensation, which can be in the form of stock options,
performance-based awards (both cash and stock) and restricted stock. The
composition of executive compensation is intended to focus senior management on
the long-term interests of the Company's stockholders, to encourage the
achievement of corporate performance goals and to align senior management's
interests with those of the Company's stockholders. Additionally, compensation
packages for the Company's senior executives are designed with the goal of
attracting, retaining and encouraging the development of exceptionally
knowledgeable and experienced executives, while at the same time offering
compensation that is competitive in relation to current market practices in
order to maintain a stable, successful management team.
Under the Company's compensation policies, long-term incentives
comprise the largest portion of senior executives' total compensation packages.
The stock options that are granted to senior executives are granted at an option
price that is not less than fair market value on the date of grant, and
generally, the options vest over a three-year period. By issuing stock options
at the current market price and with the three-year vesting period, the options
will only have value to the Company's senior executives if the Company's stock
price increases after the date of grant. Alternatively, if the stock price of
the Company's Common Stock decreases after the date of grant, the senior
executives in effect forego the compensation represented by the stock options.
Therefore, senior executives with options do share the risk of a decrease in the
stock price because such a decline in price will have a direct impact on their
total compensation, and recoupment of that foregone compensation occurs only if
the stock price recovers and increases to the point that it exceeds the grant
price before expiration of the option.
Options may be exercised by executives only after the appropriate
vesting period has expired and the payment by the executive of the fair market
value of the stock determined on the grant date. However, the exercise of
options does not automatically translate into an immediate opportunity to sell
the shares acquired in the option exercise. As a publicly-held company, the
Company's management is subject to restrictions imposed by the federal
securities laws and by the rules of the New York Stock Exchange. These
restrictions include the trading of Company securities while the officers are in
possession of material non-public information concerning the Company. In
furtherance of those restrictions, the Company has established trading policies
for its senior executives, which include routine "black-out" periods during
which the Company's executives may not initiate any transactions involving
shares of Common Stock. For example, black-out periods exist from the time
management internally estimates results for the Company's fiscal reporting
periods until after the corresponding financial information is publicly
released. Similar black-out periods occur during the existence of any material
non-public information about the Company. When considered in the aggregate, the
black-out periods significantly restrict the time during which the Company's
senior executives are permitted to sell shares.
Stock options are commonly used by many corporations as part of the
long-term incentive compensation for senior management. The excesses that
occurred at Enron, Worldcom and other companies should not obscure or alter the
fact that stock options are an appropriate motivational tool for senior
corporate executives. The elimination of stock options at Enron, Worldcom, and
the like would not have prevented the events that occurred at those
corporations. If adopted, this Stockholder Proposal would eliminate an effective
tool to hire and retain officers and key employees, thereby impairing the
Company's ability to carry on its business operations in an optimal manner.
RECOMMENDATION OF THE BOARD OF DIRECTORS
Your Board of Directors recommends a vote AGAINST approval of
Stockholder Proposal No. 3 regarding the prohibition of stock option grants to
senior executives.
33
STOCKHOLDER PROPOSAL NO. 4 REGARDING
IMPLEMENTATION OF THE MACBRIDE PRINCIPLES IN NORTHERN IRELAND
The following proposal was submitted to Baker Hughes by the Office of
the Comptroller of the City of New York, (with an address of 1 Centre Street,
New York, New York 10007-2341), William C. Thompson, Jr. as custodian on behalf
of the New York City Teachers' Retirement System, which holds 318,170 shares of
the Company's Common Stock and by the Minnesota State Board of Investment (with
an address of 60 Empire Drive, Suite 355, St. Paul Minnesota 55103), which holds
467,991 shares of the Company's Common Stock, and is included in this Proxy
Statement in compliance with SEC rules and regulations.
"WHEREAS, Baker Hughes, Inc. has a subsidiary in Northern Ireland;
WHEREAS, the securing of a lasting peace in Northern Ireland encourages us to
promote means for establishing justice and equality;
WHEREAS, employment discrimination in Northern Ireland was cited by the
International Commission of Jurists as being one of the major causes of
sectarian strife;
WHEREAS, Dr. Sean MacBride, founder of Amnesty International and Nobel Peace
laureate, has proposed several equal opportunity employment principles to serve
as guidelines for corporations in Northern Ireland. These include:
1. Increasing the representation of individuals from underrepresented
religious groups in the workforce including managerial, supervisory,
administrative, clerical and technical jobs.
2. Adequate security for the protection of minority employees both at
the workplace and while traveling to and from work.
3. The banning of provocative religious or political emblems from the
workplace.
4. All job openings should be publicly advertised and special
recruitment efforts should be made to attract applicants from underrepresented
religious groups.
5. Layoff, recall, and termination procedures should not in practice,
favor particular religious groupings.
6. The abolition of job reservations, apprenticeship restrictions, and
differential employment criteria, which discriminate on the basis of religion or
ethnic origin.
7. The development of training programs that will prepare substantial
numbers of current minority employees for skilled jobs, including the expansion
of existing programs and the creation of new programs to train, upgrade, and
improve the skills of minority employees.
8. The establishment of procedures to assess, identify and actively
recruit minority employees with potential for further advancement.
9. The appointment of a senior management staff member to oversee the
company's affirmative action efforts and the setting up of timetables to carry
out affirmative action principles.
RESOLVED: Shareholders request the Board of Directors to:
Make all possible lawful efforts to implement and/or increase activity on each
of the nine MacBride Principles.
SUPPORTING STATEMENT
We believe that our company benefits by hiring from the widest
available talent pool. An employee's ability to do the job should be the primary
consideration in hiring and promotion decisions.
Implementation of the MacBride Principles by Baker Hughes, Inc. will
demonstrate its concern for human rights and equality of opportunity in its
international operations.
Please vote your proxy FOR these concerns."
34
STATEMENT OF THE BOARD OF DIRECTORS AND
MANAGEMENT IN OPPOSITION TO PROPOSAL NO. 4
Baker Hughes has a long-standing policy of being an equal opportunity
employer worldwide. This policy requires managers to conduct their employment
practices in a manner that does not discriminate on the basis of race, color,
religion, sex, national origin, age, handicap or veteran's status. Baker Hughes'
operating unit in Northern Ireland, Hughes Christensen Company, a division of
Baker Hughes Limited ("HCC"), has subscribed to this policy.
In addition to the Baker Hughes' policy, HCC has taken the
country-specific action of signing a Declaration of Principle and Intent under
the Northern Ireland Fair Employment Act of 1989 (the "Northern Ireland Fair
Employment Act") indicating its commitment to be an equal opportunity employer
in Northern Ireland. The Northern Ireland Fair Employment Act has as its
purposes the promotion of equal opportunity and the elimination of
discrimination in employment for persons of different religious and political
beliefs.
HCC also historically has, and continues to, cooperate fully with the
Fair Employment Commission for Northern Ireland and, in January 1997, adopted an
Affirmative Action Plan pursuant to a voluntary agreement with the Fair
Employment Commission to ensure fair participation of the Roman Catholic
community in HCC's workforce in Northern Ireland.
Your Board of Directors believes HCC's has taken the necessary steps to
provide equal employment opportunity in Northern Ireland and on a worldwide
basis, and its employment policies and practices seek to uphold that HCC does
not discriminate in its employment practices and that HCC's hiring and promotion
practices do not make it more difficult for persons of a given religious belief
to obtain employment or advancement.
Both the MacBride Principles and the Northern Ireland Fair Employment
Act seek to eliminate employment discrimination in Northern Ireland. By adopting
the MacBride Principles, HCC would become unnecessarily accountable to two sets
of similar but not identical fair employment guidelines. For these reasons, your
Board of Directors believes that implementation of the MacBride Principles would
be burdensome, superfluous and unnecessary, particularly in light of HCC's own
policies, its compliance with the requirements of the Northern Ireland Fair
Employment Act and its history of cooperation with the Fair Employment
Commission.
Your Board of Directors has determined that HCC's policies on equal
employment opportunity are entirely consistent with Baker Hughes' obligations
and goals to act as an ethical and responsible member of the business community.
Your Board of Directors does not believe that endorsement of the MacBride
Principles is necessary, appropriate, or in the best interest of Baker Hughes,
its subsidiaries or affiliates, or their respective employees.
A proposal in substantially this form has been submitted to Baker
Hughes' stockholders for their consideration every year for the last fifteen
years, and such proposal has never received more than 23.7% of the vote in favor
of the proposal, and in fact, the proposal received 11.23% of the vote at the
2002 Annual Meeting. SEC rules require that the proposal be included in this
Proxy Statement again this year since the proposal received more than 10% of the
vote in favor of the proposal last year.
RECOMMENDATION OF THE BOARD OF DIRECTORS
Your Board of Directors recommends a vote AGAINST approval of Stockholder
Proposal No. 1 on implementation of the MacBride Principles in Northern Ireland.
35
ANNUAL REPORT
The 2002 Annual Report on Form 10-K of the Company, which includes
audited financial statements for the fiscal year ended December 31, 2002,
accompanies this Proxy Statement; however, that report is not part of the proxy
soliciting information.
INCORPORATION BY REFERENCE
To the extent that this Proxy Statement is incorporated by reference
into any other filing by Baker Hughes under the Securities Act of 1933, as
amended, or the Exchange Act, the sections of this Proxy Statement entitled
"Compensation Committee Report," "Audit/Ethics Committee Report" (to the extent
permitted by the rules of the SEC) and "Corporate Performance Graph," as well as
the annex to this Proxy Statement, will not be deemed incorporated unless
specifically provided otherwise in such filing.
STOCKHOLDER PROPOSALS
Proposals of stockholders intended to be presented at the 2004 Annual
Meeting must be received by the Company by November 18, 2003 to be properly
brought before the 2004 Annual Meeting and to be considered for inclusion in the
Proxy Statement and form of proxy relating to that meeting. Such proposals
should be mailed to Baker Hughes Incorporated, Attention: Corporate Secretary,
P.O. Box 4740, Houston, Texas 77210-4740. Nominations of directors by
stockholders must be received by the Chairman of the Governance Committee of the
Company's Board of Directors (P.O. Box 4740, Houston, Texas 77210-4740) between
October 19, 2003 and November 18, 2003 to be properly nominated before the 2004
Annual Meeting, although the Company is not required to include such nominees in
its Proxy Statement.
OTHER MATTERS
The Board of Directors knows of no other matter to be presented at the
Annual Meeting. If any additional matter should be presented properly, it is
intended that the enclosed proxy will be voted in accordance with the discretion
of the persons named in the proxy.
36
ANNEX A
BAKER HUGHES INCORPORATED
EMPLOYEE STOCK PURCHASE PLAN,
(AS AMENDED AND RESTATED MARCH 5, 2003)
37
BAKER HUGHES INCORPORATED
EMPLOYEE STOCK PURCHASE PLAN,
AS AMENDED AND RESTATED EFFECTIVE AS OF MARCH 5, 2003
<Table>
<Caption>
TABLE OF CONTENTS
PAGE
ARTICLE 1 PURPOSE............................................. A-1
1.1 Purpose .................................................... A-1
ARTICLE 2 DEFINITIONS......................................... A-1
2.1 Definitions.................................................... A-1
2.2 Number and Gender.............................................. A-3
2.3 Headings .................................................... A-3
ARTICLE 3 ELIGIBILITY AND PARTICIPATION....................... A-3
3.1 Eligibility.................................................... A-3
3.2 Participation.................................................. A-3
3.3 Termination of Participation................................... A-4
ARTICLE 4 GRANT OF OPTIONS AND EXERCISE OF OPTIONS............ A-5
4.1 Grant of Options............................................... A-5
4.2 Limitations on the Grant of Options............................ A-5
4.3 Insufficient Number of Shares.................................. A-5
4.4 Restriction Upon Assignment.................................... A-6
4.5 Exercise of Options; ESPP Accounts............................. A-6
4.6 Withholding Obligations........................................ A-6
4.7 Notice of Disposition.......................................... A-6
4.8 Dispositions in Compliance with Securities Laws................ A-6
ARTICLE 5 PROVISIONS RELATED TO COMMON STOCK.................. A-6
5.1 Shares Reserved................................................ A-6
5.2 No Rights of Stockholder Until Exercise........................ A-7
5.3 Registration of Shares of Common Stock......................... A-7
5.4 Certificates for Shares........................................ A-7
5.5 Changes in Common Stock and Adjustments........................ A-7
ARTICLE 6 ADMINISTRATION OF PLAN.............................. A-8
6.1 Plan Administrator............................................. A-8
6.2 Resignation and Removal........................................ A-8
6.3 Records and Procedures......................................... A-8
6.4 Self-Interest of Plan Administrator............................ A-8
6.5 Compensation and Bonding....................................... A-8
6.6 Plan Administrator Powers and Duties........................... A-8
6.7 Reliance on Documents, Instruments, etc........................ A-9
ARTICLE 7 EXTENSION OF PLAN TO EMPLOYERS...................... A-9
7.1 Adoption by Employers.......................................... A-9
7.2 Single Plan.................................................... A-9
7.3 No Joint Venture Implied....................................... A-9
ARTICLE 8 MISCELLANEOUS....................................... A-9
8.1 Use of Funds; No Interest Paid................................. A-9
8.2 Amendment to the Plan..........................................A-10
8.3 Plan Not an Employment Contract................................A-10
8.4 Beneficiary(ies)...............................................A-10
8.5 Severability...................................................A-10
8.6 Binding Effect.................................................A-10
8.7 Limitation on Liability........................................A-10
8.8 Arbitration....................................................A-10
8.9 Governing Law..................................................A-10
</Table>
i
BAKER HUGHES INCORPORATED
EMPLOYEE STOCK PURCHASE PLAN,
AS AMENDED AND RESTATED EFFECTIVE AS OF MARCH 5, 2003
ARTICLE 1: PURPOSE
1.1 PURPOSE. The purpose of the EMPLOYEE STOCK PURCHASE PLAN (the "Plan") of
BAKER HUGHES INCORPORATED (the "Company") is to encourage and enable Eligible
Employees (defined below) to voluntarily acquire proprietary interests in the
Company through the ownership of the Company's Common Stock (defined below) at a
favorable price and upon favorable terms and to furnish to the Eligible
Employees an incentive to advance the best interests of the Company for the
mutual benefit of the Eligible Employees, the Company and the Company's
stockholders. The Plan is intended to qualify as an "employee stock purchase
plan" under section 423 of the Code (defined below). Accordingly, the provisions
of the Plan shall be construed in a manner consistent with the requirements of
that Code section.
Subject to approval by the Company's stockholders, the provisions of
Section 5.1 of this Plan shall become effective as of March 5, 2003.
ARTICLE 2: DEFINITIONS
2.1 DEFINITIONS.
"AFFILIATE" means any entity which is a member of (i) of the same
controlled group of corporations within the meaning of section 414(b)
of the Code, (ii) a trade or business (whether or not incorporated)
which is under common control (within the meaning of section 414(c) of
the Code), or (iii) an affiliated service group (within the meaning of
section 414(m) of the Code) with the Company.
"BENEFICIARY" or "BENEFICIARIES" shall be as determined pursuant to the
provisions of Section 8.4.
"BOARD" means the Board of Directors of the Company.
"CODE" means the Internal Revenue Code of 1986, as amended. References
to sections of the Code shall include the regulations issued
thereunder.
"COMMITTEE" means the Administrative Committee that may be appointed by
the Compensation Committee of the Board as a Plan Administrator.
"COMMON STOCK" means the $1 par value common stock of the Company.
"COMPANY" means Baker Hughes Incorporated, a Delaware corporation.
"COMPENSATION COMMITTEE" means the Compensation Committee of the Board.
"DATE OF EXERCISE" means, for each Option Period, the last day that the
principal securities exchange on which the Common Stock is listed is
open for trading.
"DATE OF GRANT" means the date on which Options are granted, as such
date is determined by the Board or the Compensation Committee.
"ELIGIBLE COMPENSATION" means a Participant's base salary or wages
measured on an annual basis (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 (i) any deferrals made by the
Participant pursuant to the Baker Hughes Incorporated Supplemental
Retirement Plan or (ii) elective contributions made on his behalf by
the Company 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,
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commissions, expense reimbursements or other expense allowances, fringe
benefits (cash and noncash), moving expenses, deferred compensation
(other than elective contributions to the Company's qualified cash or
deferred arrangement described in section 401(k) of the Code), welfare
benefits as defined in ERISA, overtime pay, special performance
compensation amounts and severance compensation.
"ELIGIBLE EMPLOYEE" means each Employee who is scheduled to work at
least 20 hours per pay period during the Option Period and is an
Employee at the beginning of the Option Period; provided, that the
following Employees shall not be eligible to participate in the Plan:
(i) an Employee who is a citizen of a foreign country that
prohibits foreign corporations from granting stock options to
any of its citizens; and
(ii) an Employee if such Employee, immediately after the
Option is granted, owns stock (as defined by sections
423(b)(3) and 424(d) of the Code) possessing 5% or more of the
total combined voting power or value of all classes of stock
of the Company or of a subsidiary.
"EMPLOYEE" means each individual employed by an Employer.
"EMPLOYER" means the Company and each entity that has adopted the Plan
pursuant to the provisions of Article 7.
"ESPP ACCOUNT" means the individual account established by the ESPP
Administrator for each Participant in the Plan.
"ESPP ADMINISTRATOR" means the stock brokerage or other financial
services firm designated or approved by the Plan Administrator to hold
shares purchased under the Plan for the ESPP Accounts of Participants.
"EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended,
or any successor act.
"FAIR MARKET VALUE" means the per share price of the last sale of the
Common Stock on the "composite tape" on the trading day prior to the
date on which the value is being determined. The "composite tape" is
the composite transactions in the Common Stock as reported by The Wall
Street Journal.
"OPTION" means an option to purchase shares of Common Stock under the
terms and provisions of the Plan.
"OPTION PERIOD" means the 12-month period commencing on January 1 of
each calendar year, unless the Board or the Compensation Committee
changes the duration of the Option Period with respect to future
Options, and except as modified by Sections 3.3(c)(2) and 3.3(c)(4). An
Option Period may not exceed 27 months.
"OPTION PRICE" means the price per share to be paid by each Participant
on each exercise of his Option and shall be a sum equal to 85% of the
Fair Market Value of a share of Common Stock on the Date of Exercise or
on the Date of Grant, whichever amount is lesser, unless the Board or
the Compensation Committee changes the Option Price with respect to
future Options. Prior to the commencement of any future Option Period,
the Board or the Compensation Committee may, in lieu of the Option
Price specified in the preceding sentence, establish an Option Price
that is a sum equal to 85% (or any higher percentage) of the Fair
Market Value of a share of Common Stock on the Date of Exercise.
"PARTICIPANT" means each Eligible Employee who elects to participate in
the Plan.
"PLAN" means the Baker Hughes Incorporated Employee Stock Purchase
Plan, as amended from time to time.
"PLAN ADMINISTRATOR" means the Company, acting through its delegates.
Such delegates shall include the Administrative Committee and any
individual Plan Administrator appointed by the Board with respect to
the
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employee benefit plans of the Company and its Affiliates, each of which
shall have the duties and responsibilities assigned to it from time to
time by the Board. As used in the Plan, the term "Plan Administrator"
shall refer to the applicable delegate of the Company as determined
pursuant to the actions of the Board.
"SECURITIES ACT" means the Securities Act of 1933, as amended, or any
successor statute.
2.2 NUMBER AND GENDER. Wherever appropriate herein, words used in the singular
shall be considered to include the plural and words used in the plural shall be
considered to include the singular. The masculine gender, where appearing in
this Plan, shall be deemed to include the feminine gender.
2.3 HEADINGS. The headings of Articles and Sections herein are included solely
for convenience and if there is any conflict between such headings and the text
of the Plan, the text shall control.
ARTICLE 3: ELIGIBILITY AND PARTICIPATION
3.1 ELIGIBILITY. All Eligible Employees shall be eligible to participate in the
Plan for an Option Period, provided that the Eligible Employee's employment with
an Employer continues uninterrupted throughout the Option Period. A transfer
between or among Employers shall not be treated as an interruption of the
Eligible Employee's employment.
3.2 PARTICIPATION.
(a) ELECTION TO PARTICIPATE. An Eligible Employee shall become a
Participant after satisfying the eligibility requirements and
delivering to the Plan Administrator during the enrollment period
established by the Plan Administrator an enrollment form that (1)
indicates the Eligible Employee's election to participate in the Plan
as of the next following Date of Grant; (2) authorizes the payroll
deduction and states the amount to be deducted regularly from the
Participant's Eligible Compensation and to be accrued under the Plan
for his benefit; and (3) authorizes the purchase of the Common Stock at
the end of the Option Period. The effective date of a Participant's
participation shall be the Date of Grant following the Plan
Administrator's receipt of the Participant's authorization. The
procedure established by the Plan Administrator for an Eligible
Employee to enroll in the Plan may be through any written form or any
telephonic, electronic mail, intranet, internet or any other electronic
process established by the Plan Administrator from time to time.
(b) CONTINUING ELECTION. A Participant's election to participate in the
Plan with respect to an Option Period shall continue for each
successive Option Period at the same payroll deduction percentage as in
effect at the termination of the prior Option Period unless the
Participant amends or cancels his participation pursuant to Section
3.2(d).
(c) PAYROLL DEDUCTIONS. Each Participant will designate in his
participation election the stated amount to be deducted from his
Eligible Compensation on each payday. A Participant may elect to have
deducted from 1% to 10% of his Eligible Compensation, or such other
percentages as the Committee may from time to time determine. A
Participant's percentage deduction election must be in whole
percentages, and a Participant's payroll deductions for the entire
Option Period are based on his Eligible Compensation at the beginning
of the Option Period. The stated amount may not be less than a sum that
will result in the payment into the Plan of at least $5.00 each payday.
The stated amount may not exceed either of (1) 10% of the amount of
Eligible Compensation (or such other maximum percentage as determined
by the Committee), or (2) an amount which will result in noncompliance
with the $25,000 statutory limitation described in Section 4.2.
Participant payroll deductions are maintained by the Company
as an accrual for the benefit of the Participant until the Date of
Exercise.
(d) CHANGES IN PAYROLL DEDUCTIONS. By delivering to the Plan
Administrator a new written payroll deduction authorization form, a
Participant may amend the stated amount of his payroll deduction to
reduce the rate of his payroll deductions at any time during an Option
Period. A Participant's payroll deduction designation rate may not be
increased during an Option Period. The new payroll deduction rate will
become
A-3
effective for the next payroll period, provided that the next payroll
period commences more than 15 days after receipt of the new
authorization form. Any change to the rate of payroll deduction will
continue for the remainder of the Option Period. Changes in the rate of
payroll deductions are limited to one change during any Option Period.
(e) LEAVES OF ABSENCE. During leaves of absence approved by the Plan
Administrator and in compliance with the requirements of Treasury
Regulation section 1.421-7(h)(2), a Participant may continue
participation in the Plan at the stated amount in his payroll deduction
election by making cash payments to the Company on his normal paydays
equal to any reduction in his payroll deductions caused by his leave.
(f) RE-ADMISSION TO PARTICIPATE AFTER TERMINATION OF PARTICIPATION. If
a Participant's participation in the Plan is terminated due to his
withdrawal from the Plan in accordance with the provisions of Section
3.3(a), the Participant shall be eligible to participate again in the
Plan upon the expiration of the Option Period during which such
Participant ceased participation and may participate in any subsequent
Option Period by making an election to participate in accordance with
the provisions of Section 3.2(a). If a Participant's participation in
the Plan is terminated due to his termination of employment and he is
subsequently re-employed by an Employer, he may participate in the Plan
upon his re-employment if he satisfies the eligibility requirements of
Section 3.1 and he elects to participate in the Plan in accordance with
the provisions of Section 3.2(a).
3.3 TERMINATION OF PARTICIPATION.
(a) WITHDRAWAL FROM PARTICIPATION. A Participant may withdraw
completely from participation in the Plan at any time during an Option
Period. To withdraw from the Plan, a Participant must deliver to the
Plan Administrator a notice of withdrawal in a form and manner
authorized by the Plan Administrator, and the notice of withdrawal must
be delivered within the time period established by the Plan
Administrator. After the Plan Administrator's receipt of the notice of
withdrawal, the Participant's payroll deduction authorization and his
interest in unexercised options under the Plan will terminate and the
Participant's prior payroll deductions made under the Plan will be
refunded to the Participant.
(b) VOLUNTARY TERMINATION OF PARTICIPATION. A Participant may
voluntarily terminate his participation in the Plan by lowering the
rate of his payroll deductions to zero for the remainder of the Option
Period, in accordance with the provisions of Section 3.2(d). A
Participant who has decreased his rate of payroll deduction to zero
will be deemed to continue as a Participant in the Plan until he
withdraws from the Plan in accordance with the provisions of Section
3.3(a) or his participation is terminated in accordance with the
provisions of Section 3.3(c). As long as the Participant continues as a
Participant in the Plan, the amount accrued for the Participant under
the Plan will be applied to the purchase of Common Stock at the end of
the Option Period.
(c) INVOLUNTARY TERMINATION OF PARTICIPATION.
(1) TERMINATION OF EMPLOYMENT OTHER THAN BY RETIREMENT, DEATH
OR DISPOSITION OF ASSETS, ETC. If the employment of a
Participant terminates other than by retirement, death or as a
result of a disposition of assets, a division or an entity or
as a result of a plant closing, or if he is no longer eligible
to participate in the Plan, his participation in the Plan
shall, without any action on his part, automatically terminate
as of the date of the termination of his employment or the
date of the termination of his eligibility. The Employer will
refund to the Participant the amount of the Participant's
prior payroll deductions made under the Plan, and his interest
in unexercised Options under the Plan shall terminate. A
termination of employment does not include a transfer of
employment among Employers or a transfer of employment to a
venture or entity in which the Company or an Affiliate has an
equity interest exceeding 50%.
(2) TERMINATION BY RETIREMENT. If a Participant is at least 55
years of age and has an aggregate of at least ten years of
service with all Employers, he may retire from the Plan. The
Participant may, at his election by written notice to the Plan
Administrator, either (A) exercise his Option as of his
termination date, in which event the Employer shall apply the
amount accrued
A-4
under the Plan at that time to the purchase at the Option
Price of shares of Common Stock, including fractions, or (B)
request payment of the Participant's prior payroll deductions
made under the Plan at that time, in which event the Employer
promptly shall make such payment, and thereupon the
Participant's interest in unexercised Options under the Plan
shall terminate. If the Participant elects to exercise his
Option, the date of his termination shall be deemed to be the
Date of Exercise for the purpose of computing the amount of
the Option Price of the Common Stock.
(3) TERMINATION BY DEATH. If a Participant's employment is
terminated by his death, any accrual under the Plan for the
purchase of shares of Common Stock and any shares of Common
Stock in the Participant's name shall be distributed to the
Participant's Beneficiaries.
(4) TERMINATION AS A RESULT OF A DISPOSITION OF ASSETS, A
DIVISION OR AN ENTITY OR A PLANT CLOSING. A Participant whose
employment with his Employer is terminated as a result of a
disposition of assets, a division or an entity or as a result
of a plant closing may, at his election by written notice to
the Plan Administrator, either (A) exercise his Option as of
his termination date, in which event the Employer shall apply
the amount accrued under the Plan at that time to the purchase
at the Option Price of shares of Common Stock, including
fractions, or (B) request payment of the Participant's prior
payroll deductions made under the Plan at that time, in which
event the Employer promptly shall make such payment, and
thereupon the Participant's interest in unexercised Options
under the Plan shall terminate. If the Participant elects to
exercise his Option, the date of his termination shall be
deemed to be the Date of Exercise for the purpose of computing
the amount of the Option Price of the Common Stock. As
determined by the Plan Administrator, a Participant shall be
deemed to have terminated his employment with all Employers
(A) as a result of a disposition of assets, a division or an
entity if such employment is terminated coincident with and as
a result of the disposition by the Employer, the Company or
their subsidiaries or Affiliates of assets, a division or any
other business entity (regardless of form) in connection with
a sale, exchange, merger or other business transaction, or (B)
as a result of a plant closing if such employment is
terminated coincident with and as a result of a significant
manufacturing plant closing by the Employer, but not as a
result of mere district changes or layoffs.
ARTICLE 4: GRANT OF OPTIONS AND EXERCISE OF OPTIONS
4.1 GRANT OF OPTIONS. Following the effective date of the Plan and continuing
for as long as the Plan remains in force, Options will be offered under the Plan
to all Participants to purchase shares of Common Stock. Options shall be granted
on the Date of Grant and shall be exercisable on the Date of Exercise. For each
Participant, the number of shares of Common Stock, including fractions that may
be purchased under his Option shall be the lesser of (a) the aggregate payroll
deductions authorized by the Participant in accordance with Section 3.2(c) for
the Option Period divided by the Option Price or (b) the amount specified in
Section 4.2, subject to the availability of a sufficient number of shares of
Common Stock reserved for purchase under the Plan. In the event there are an
insufficient number of shares reserved for purchase under the Plan, the number
of shares purchased shall be adjusted as provided in Section 4.3.
4.2 LIMITATIONS ON THE GRANT OF OPTIONS. No Participant shall be permitted to
purchase Common Stock under the Plan or under any other employee stock purchase
plan of the Company or of any of its subsidiaries or related corporations at a
rate which exceeds $25,000 in Fair Market Value of Common Stock (determined at
the Date of Grant of the Option), and no Employee shall be granted Options for
more than 2,500 shares under the Plan at the time the Option is granted (whether
the Option Price is determined with reference to the Date of Grant or the Date
of Exercise) for each calendar year in which any such Option granted to such
Employee is outstanding at any time.
4.3 INSUFFICIENT NUMBER OF SHARES. If the number of shares of Common Stock
reserved for purchase for any Option Period is insufficient to cover the number
of shares which Participants elect to purchase during such Option Period, then
the number of shares of Common Stock which each Participant has a right to
purchase on the Date of Exercise shall be reduced to the number of shares of
Common Stock which the Plan Administrator shall determine by multiplying the
number of shares of Common Stock reserved under the Plan for such Option Period
by a fraction, the numerator of which shall be the number of shares of Common
Stock which the Participant elected to purchase during the Option Period and the
denominator of which shall be the total number of shares of Common Stock which
all Participants elected to purchase during such Option Period.
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4.4 RESTRICTION UPON ASSIGNMENT. An Option shall not be transferable otherwise
than by will or the laws of descent and distribution and is exercisable during
the Participant's lifetime only by him. An Option may not be exercised to any
extent except by the Participant. The Plan Administrator and the ESPP
Administrator, if any, will not recognize, and shall be under no duty to
recognize, any assignment or purported assignment by a Participant of his Option
or of any rights under his Option.
4.5 EXERCISE OF OPTIONS; ESPP ACCOUNTS.
(a) EXERCISE OF OPTIONS. Each Participant will be deemed,
automatically, and without any act on his part, to have exercised his
Option on each Date of Exercise to the extent that the amount accrued
under the Plan is sufficient to purchase at the Option Price whole and
fractional shares of the Common Stock, except that the number of shares
of Common Stock purchased shall not exceed the limitations set forth in
Section 4.2. The issuance of shares of Common Stock may be effected on
a noncertificated basis to the extent not prohibited by applicable law
or the applicable rules of any stock exchange.
(b) ESPP ACCOUNTS. As soon as practicable on or before the Date of
Exercise, the Plan Administrator shall deliver, or cause to be
delivered, to the ESPP Administrator the information necessary to have
the total number of shares of the Common Stock representing exercised
Options in the aggregate (for both whole and fractional shares)
deposited into the Participants' ESPP Accounts. The shares of Common
Stock shall be allocated among the ESPP Accounts based on a fraction,
the numerator of which is the amount accrued for a Participant under
the Plan on the Date of Exercise and the denominator of which shall be
the aggregate of the amounts accrued for all Participants under the
Plan on the Date of Exercise. A Participant shall be free to dispose of
the shares of Common Stock in his ESPP Account at any time, subject to
the provisions of Sections 4.6 and 4.7 and subject to any
administrative blackout periods.
Each Participant's ESPP Account shall be administered in
accordance with procedures established from time to time by the ESPP
Administrator.
4.6 WITHHOLDING OBLIGATIONS. At the time the Option is exercised, or at the time
some or all of the Common Stock is disposed of, a Participant shall make
adequate provision for local, state, federal and foreign withholding obligations
of his Employer, if any, that arise upon exercise of the Option or upon
disposition of the Common Stock. The Employer may withhold from the
Participant's compensation the amount necessary to meet such withholding
obligations.
4.7 NOTICE OF DISPOSITION. By becoming a Participant in the Plan, each
Participant agrees to promptly give the ESPP Administrator, or in the absence of
the ESPP Administrator, the Plan Administrator, notice of any shares of Common
Stock disposed of within the later of (a) one year from the Date of Exercise and
(b) two years from the Date of Grant with respect to such Stock, and the notice
shall include the number of shares of Common Stock disposed of and the Date of
Exercise and the Date of Grant for the Common Stock.
4.8 DISPOSITIONS IN COMPLIANCE WITH SECURITIES LAWS. By becoming a Participant
in the Plan, each Participant agrees that any dispositions of shares of Common
Stock by such Participant shall be in compliance with the provisions of federal,
state and foreign securities laws, including the provisions of Section 16(b) of
the Exchange Act.
ARTICLE 5: PROVISIONS RELATED TO COMMON STOCK
5.1 SHARES RESERVED. Subject to the provisions of Section 5.5 (relating to
adjustment upon changes in stock), the number of shares of Common Stock which
may be sold pursuant to Options under the Plan shall not exceed in the aggregate
14,500,000 shares, and may be unissued shares, reacquired shares or shares
bought on the market for purposes of the Plan.
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5.2 NO RIGHTS OF STOCKHOLDER UNTIL EXERCISE. With respect to shares subject to
an Option, a Participant shall not be deemed to be a stockholder, and he shall
not have any of the rights or privileges of a stockholder until the exercise of
his Option. After the exercise of the Option, each Participant shall have full
stockholder rights with respect to all shares of Common Stock in his ESPP
Account, including, but not limited to, voting, dividend and liquidation rights.
The ESPP Administrator shall establish procedures to facilitate the
Participant's voting rights attributable to the Common Stock in his ESPP
Account.
5.3 REGISTRATION OF SHARES OF COMMON STOCK. Notwithstanding any other provision
of the Plan, the Company shall have no obligation to issue or deliver any shares
of Common Stock under the Plan or make any other distribution of benefits under
the Plan unless such issuance, delivery or distribution would comply with all
applicable laws (including, without limitation, the requirements of the
Securities Act), and the applicable requirements of any securities exchange or
similar entity.
The Company shall be under no obligation to any Participant to register
for offering or resale or to qualify for exemption under the Securities Act, or
to register or qualify under state securities laws, any shares of Common Stock,
or to continue in effect any such registrations or qualifications if made. The
Company may issue certificates for shares with such legends and subject to such
restrictions on transfer and stop-transfer instructions as counsel for the
Company deems necessary or desirable for compliance by the Company with federal
and state securities laws.
The Company shall seek to obtain from each federal, state, foreign or
other regulatory commission or agency having jurisdiction over the Plan such
authority as may be required to issue and sell shares of Common Stock upon the
exercise of the Options. If, after commercially reasonable efforts, the Company
is unable to obtain from any such regulatory commission or agency the authority
that counsel for the Company deems necessary for the lawful issuance and sale of
shares of Common Stock in any particular jurisdiction, the Company shall be
relieved from liability to any Participant, except to return to him the
Participant's prior payroll deductions made under the Plan.
5.4 CERTIFICATES FOR SHARES. For shares of Common Stock maintained in ESPP
Accounts, the ESPP Administrator shall establish procedures, including any
applicable fees, for the delivery of a certificate representing the aggregate
number of whole shares of Common Stock in a Participant's ESPP Account. In the
absence of an ESPP Administrator, the Plan Administrator, in its sole
discretion, may determine the method for delivering certificates for shares of
Common Stock to Participants. At the time of the delivery of a certificate to
(a) a Participant, (b) a former Participant or (c) the Participant's or former
Participant's Beneficiary or Beneficiaries, any fractional share of Common Stock
in the Participant's or former Participant's ESPP Account shall be converted to
cash, which shall be distributed to the Participant, former Participant
Beneficiary or Beneficiaries.
5.5 CHANGES IN COMMON STOCK AND ADJUSTMENTS. The existence of the Plan and the
Options granted hereunder shall not limit, affect or restrict in any way the
right or power of the Board or the Company's stockholders to make or authorize
any or all adjustments, recapitalizations, reorganizations or other changes in
the capital stock of the Company or its business or any merger or consolidation
of the Company, or any issue of bonds, debentures, preferred or prior preference
stock (whether or not such issue is prior to, on a parity with or junior to the
shares of Common Stock issued under the Plan) or the dissolution or liquidation
of the Company, or any sale or transfer of all or any part of its assets or
business or any other corporate act or proceeding of any kind, whether or not of
a character similar to that of the acts or proceedings enumerated above.
If there shall be any change in the shares of the Common Stock or the
capitalization of the Company through merger, consolidation, reorganization,
recapitalization, stock dividend, stock split, reverse stock split, split up,
spin-off, combination of shares, exchange of shares, dividend in kind or other
like change in capital structure or distribution (other than normal cash
dividends) to stockholders of the Company, the Board, in its sole discretion, to
prevent dilution or enlargement of Participants' rights under the Plan, will
take appropriate action to adjust accordingly the number of shares subject to
the Plan and the number and Option Price of shares subject to existing Options.
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ARTICLE 6: ADMINISTRATION OF PLAN
6.1 PLAN ADMINISTRATOR. The Company shall be the "Plan Administrator."
6.2 RESIGNATION AND REMOVAL. The members of the Committee shall serve at the
pleasure of the Board; they may be officers, directors, or employees of the
Company or any other individuals. At any time during his term of office, any
member of the Committee or any individual serving as Plan Administrator may
resign by giving written notice to the Board, such resignation to become
effective upon the appointment of a substitute or, if earlier, the lapse of
thirty days after such notice is given as herein provided. At any time during
its term of office, and for any reason, any member of the Committee or any
individual serving as Plan Administrator may be removed by the Board.
6.3 RECORDS AND PROCEDURES. The Plan Administrator shall keep appropriate
records of its proceedings and the administration of the Plan and shall make
available for examination during business hours to any Participant, former
Participant or any Beneficiary of any Participant or former Participant such
records as pertain to that individual's interest in the Plan. If the Committee
is performing duties as the Plan Administrator, the Committee shall designate
the individual or individuals who shall be authorized to sign for the Plan
Administrator and, upon such designation, the signature of such individual or
individuals shall bind the Plan Administrator.
6.4 SELF-INTEREST OF PLAN ADMINISTRATOR. Neither the members of the Committee
nor any individual Plan Administrator shall have any right to vote or decide
upon any matter relating solely to himself under the Plan or to vote in any case
in which his individual right to claim any benefit under the Plan is
particularly involved. In any case in which any Committee member or individual
Plan Administrator is so disqualified to act, the other members of the Committee
shall decide the matter in which the Committee member or individual Plan
Administrator is disqualified.
6.5 COMPENSATION AND BONDING. Neither the members of the Committee nor any
individual Plan Administrator shall receive compensation with respect to their
services on the Committee or as Plan Administrator. To the extent required by
applicable law, or required by the Company, neither the members of the Committee
nor any individual Plan Administrator shall furnish bond or security for the
performance of their duties hereunder.
6.6 PLAN ADMINISTRATOR POWERS AND DUTIES. The Plan Administrator shall supervise
the administration and enforcement of the Plan according to the terms and
provisions hereof and shall have all powers necessary to accomplish these
purposes, including, but not by way of limitation, the right, power, and
authority:
(a) to make rules, regulations, and bylaws for the administration of
the Plan that are not inconsistent with the terms and provisions
hereof, and to enforce the terms of the Plan and the rules and
regulations promulgated thereunder by the Plan Administrator;
(b) to establish procedures for the appointment of designated
beneficiaries by Participants and former Participants;
(c) to construe in its discretion all terms, provisions, conditions,
and limitations of the Plan;
(d) to correct, subject to the provisions of Section 8.2, any defect or
to supply any omission or to reconcile any inconsistency that may
appear in the Plan in such manner and to such extent as it shall deem
in its discretion expedient to effectuate the purposes of the Plan;
(e) to employ and compensate such accountants, attorneys, investment
advisors, and other agents, employees, and independent contractors as
the Plan Administrator may deem necessary or advisable for the proper
and efficient administration of the Plan;
(f) to determine in its discretion all questions relating to
eligibility; and
(g) to determine whether and when a Participant has incurred a
termination of employment and the reason for such termination.
A-8
6.7 RELIANCE ON DOCUMENTS, INSTRUMENTS, ETC. The Plan Administrator may rely on
any certificate, statement or other representation made on behalf of the
Company, any Employer, any Employee, any Participant, any former Participant or
any Beneficiary, which the Plan Administrator in good faith believes to be
genuine, and on any certificate, statement, report or other representation made
to it by any agent or any attorney, accountant or other expert retained by it or
the Company in connection with the operation and administration of the Plan.
ARTICLE 7: EXTENSION OF PLAN TO EMPLOYERS
7.1 ADOPTION BY EMPLOYERS.
(a) With the written approval of the Plan Administrator, 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 except those, if any,
specifically described in the adoption instrument, and providing all
information required by the Plan Administrator. The Plan Administrator
and the adopting Affiliate may agree to incorporate specific provisions
relating to the operation of the Plan that apply to the adopting
Affiliate only and shall become, as to such adopting Affiliate and its
employees, a part of the Plan.
(b) The provisions of the Plan may be modified so as to increase the
obligations of an adopting Affiliate only with the consent of such
Affiliate, which consent shall be conclusively presumed to have been
given by such Affiliate unless the Affiliate gives the Company written
notice of its rejection of the amendment within 30 days after the
adoption of the amendment.
(c) 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 or otherwise affect the Plan Administrator and the
power to amend or terminate the Plan shall be exercised by the Company.
The Plan Administrator shall act as the agent for each Affiliate that
adopts the Plan for all purposes of administration thereof.
(d) Any adopting Affiliate may, by appropriate action of its board of
directors or noncorporate counterpart, terminate its participation in
the Plan. Moreover, the Plan Administrator may, in its discretion,
terminate an Affiliate's participation in the Plan at any time.
(e) The Plan will terminate with respect to any Affiliate that has
adopted the Plan pursuant to this Section if the Affiliate ceases to be
an Affiliate or revokes its adoption of the Plan by resolution of its
board of directors or noncorporate counterpart evidenced by a written
instrument executed by an authorized officer of the Affiliate. If the
Plan terminates with respect to any Affiliate, the employees of that
Affiliate will no longer be eligible to be Participants in the Plan.
7.2 SINGLE PLAN. For purposes of the Code, the Plan as adopted by the Affiliates
shall constitute a single plan rather than a separate plan of each Affiliate.
7.3 NO JOINT VENTURE IMPLIED. The document which evidences the adoption of the
Plan by an Affiliate shall become a part of the Plan. However, neither the
adoption of the Plan by an Affiliate nor any act performed by it in relation to
the Plan shall ever create a joint venture or partnership relation between it
and any other Affiliate.
ARTICLE 8: MISCELLANEOUS
8.1 USE OF FUNDS; NO INTEREST PAID. All funds received or held by the Company
under the Plan will be included in the general funds of the Company free of any
trust or other restriction, and may be used for any corporate purpose.
Notwithstanding any other Plan provisions to the contrary, in the event a
Participant's employment with his Employer is terminated, and if at the time of
such termination, the Participant owes money to any Employer, his Employer shall
have the right, at its discretion prior to the exercise of the Participant's
Option or the payment of the Participant's prior payroll deductions made under
the Plan, to deduct any such monies from the funds to be paid to the
Participant.
A-9
No interest will be paid to any Participant with respect to funds held
in the Plan or funds held in the ESPP Account.
8.2 AMENDMENT TO THE PLAN. The Board or the Compensation Committee may amend the
Plan at any time and from time to time, subject to the limitation that approval
by the vote of the holders of a majority of the outstanding securities of the
Company entitled to vote shall be required to amend the Plan (i) to materially
increase the benefits accruing to Participants under the Plan, (ii) to
materially increase the number of securities which may be issued under the Plan,
or (iii) to materially modify the requirements as to eligibility for
participation in the Plan.
8.3 PLAN NOT AN EMPLOYMENT CONTRACT. The adoption and maintenance of the Plan is
not a contract between the Employers and their employees that gives any employee
the right to be retained in its employment. Likewise, it is not intended to
interfere with the rights of any Employer 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.
8.4 BENEFICIARY(IES). At the time of the Participant's or former Participant's
death, (a) any cash in the Plan or (b) any cash or shares of Common Stock in the
ESPP Account shall be distributed to such Participant's or former Participant's
(a) executor or administrator or (b) his heirs at law, if there is no
administration of such Participant's or former Participant's estate. The
Participant's or former Participant's executor or administrator or heirs at law,
if there is no administration of such Participant's or former Participant's
estate, shall be such Participant's or former Participant's Beneficiaries.
Before any distribution is made, the Plan Administrator may require appropriate
written documentation of (a) the appointment of the personal representative of
the Participant's estate or (b) heirship.
8.5 SEVERABILITY. Each provision of this Agreement 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.
8.6 BINDING EFFECT. This Agreement shall be binding upon any successor of the
Company.
8.7 LIMITATION ON LIABILITY. Under no circumstances shall the Company incur
liability 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 this Plan or the Company's role as Plan sponsor.
8.8 ARBITRATION. Any 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, Employer's employment of
Participant and the termination of that employment, shall be resolved by
arbitration in accordance with the Employee Benefit Plan Claims Arbitration
Rules of the American Arbitration Association (the "AAA") then in effect. 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 National Panel of Employee Benefit
Plan Claims 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 agrees that any judgment of the United States District Court for the
District in which the headquarters of the Company is located at the time of
initiation of an arbitration hereunder shall be entered upon the award made
pursuant to the arbitration. Nothing in this Section 8.8 shall be construed to,
in any way, limit the scope and effect of Article 6. In any arbitration
proceeding full effect shall be given to the rights, powers, and authorities of
the Plan Administrator under Article 6.
8.9 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.
A-10
PLEASE
MARK HERE
FOR ADDRESS [ ]
CHANGE OR
COMMENTS
SEE REVERSE SIDE
FOR WITHHELD
all from all
nominees nominees
1. Election of four Class III Directors
to serve for three-year terms. [ ] [ ]
01 Claire W. Gargalli
02 James A. Lash
03 James F. McCall
04 Michael E. Wiley
For, except vote withheld from the following nominee(s):
- ----------------------------------------------------------
FOR AGAINST ABSTAIN
2. Approval of amendment of the [ ] [ ] [ ]
Baker Hughes Incorporated
Employee Stock Purchase Plan.
FOR AGAINST ABSTAIN
3. Stockholder Proposal No. 1 [ ] [ ] [ ]
regarding poison pills.
FOR AGAINST ABSTAIN
4. Stockholder Proposal No. 2 [ ] [ ] [ ]
regarding classified boards.
FOR AGAINST ABSTAIN
5. Stockholder Proposal No. 3 [ ] [ ] [ ]
regarding prohibition of stock
option grants to senior executives.
FOR AGAINST ABSTAIN
6. Stockholder Proposal No. 4 on [ ] [ ] [ ]
implementation of the MacBride
Principles in Northern Ireland.
7. Such other business as may properly come before the meeting and any
reconvened meeting after an adjournment thereof.
By checking the box to the right, I consent to future delivery of annual [ ]
reports, proxy statements, prospectuses and other materials and
stockholder communications electronically via the Internet at a
webpage which will be disclosed to me. I understand that the
Company may no longer distribute printed materials to me from any
future stockholder meeting until such consent is revoked. I understand
that I may revoke my consent at any time by contacting the Company's
transfer agent, Mellon Investor Services LLC, Ridgefield Park, NJ and
that costs normally associated with electronic delivery, such as usage
and telephone charges as well as any costs I may incur in printing
documents, will be my responsibility.
SIGNATURE
-------------------------------
SIGNATURE
-------------------------------
DATE
---------------------
PLEASE SIGN NAME(S) EXACTLY AS PRINTED HEREON. IN SIGNING AS ATTORNEY,
ADMINISTRATOR, GUARDIAN OR TRUSTEE, PLEASE GIVE TITLE AS SUCH.
- --------------------------------------------------------------------------------
o FOLD AND DETACH HERE o
VOTE BY INTERNET OR TELEPHONE OR MAIL
24 HOURS A DAY, 7 DAYS A WEEK
INTERNET AND TELEPHONE VOTING IS AVAILABLE THROUGH 11 PM EASTERN TIME
THE BUSINESS DAY PRIOR TO ANNUAL MEETING DAY.
YOUR INTERNET OR TELEPHONE VOTE AUTHORIZES THE NAMED PROXIES TO VOTE YOUR SHARES
IN THE SAME MANNER AS IF YOU MARKED, SIGNED AND RETURNED YOUR PROXY CARD.
- ------------------------------------
INTERNET
http://www.eproxy.com/bhi
Use the Internet to vote your proxy.
Have your proxy card in hand when
you access the website. You will
be prompted to enter your control
number, located in the box below, to
create and submit an electronic
ballot.
- ------------------------------------
OR
- ------------------------------------
TELEPHONE
1-800-435-6710
Use any touch-tone telephone to
vote your proxy. Have your proxy
card in hand when you call. You will
be prompted to enter your control
number, located in the box below,
and then follow the directions given.
- ------------------------------------
OR
- ------------------------------------
MAIL
Mark, sign and date
your proxy card
and
return it in the
enclosed postage-paid
envelope.
- ------------------------------------
IF YOU VOTE YOUR PROXY BY INTERNET OR TELEPHONE,
YOU DO NOT NEED TO MAIL BACK YOUR PROXY CARD.
BAKER HUGHES INCORPORATED
P.O. BOX 4740, HOUSTON, TX 77210-4740
PROXY FOR ANNUAL MEETING OF STOCKHOLDERS
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned hereby appoints M.E. Wiley and G.S. Finley as Proxies, each with
the power to appoint a substitute, and hereby authorizes them to represent and
to vote as designated below, all the shares of common stock of Baker Hughes
Incorporated held of record by the undersigned on March 5, 2003, at the Annual
Meeting of Stockholders to be held on April 23, 2003, or any reconvened meeting
after an adjournment thereof.
THIS PROXY WHEN PROPERLY EXECUTED WILL BE VOTED IN THE MANNER DIRECTED HEREIN BY
THE UNDERSIGNED STOCKHOLDER. IF NO DIRECTION IS MADE, THIS PROXY WILL BE VOTED
FOR ALL NOMINEES, FOR THE APPROVAL OF AMENDMENT OF THE BAKER HUGHES INCORPORATED
EMPLOYEE STOCK PURCHASE PLAN, AND AGAINST EACH OF STOCKHOLDER PROPOSAL NOS. 1,
2, 3 AND 4. IF ANY OTHER MATTER SHOULD BE PRESENTED PROPERLY, THIS PROXY WILL BE
VOTED IN ACCORDANCE WITH THE DISCRETION OF THE PERSONS NAMED HEREIN.
-------------------------------------------------------------------------
ADDRESS CHANGE/COMMENTS (MARK THE CORRESPONDING BOX ON THE REVERSE SIDE)
-------------------------------------------------------------------------
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- --------------------------------------------------------------------------------
o FOLD AND DETACH HERE o
YOU CAN NOW ACCESS YOUR BAKER HUGHES ACCOUNT ONLINE.
Access your Baker Hughes stockholder account online via Investor
ServiceDirect(SM) (ISD).
Mellon Investor Services LLC, agent for Baker Hughes, now makes it easy and
convenient to get current information on your stockholder account. After a
simple, and secure process of establishing a Personal Identification Number
(PIN), you are ready to log in and access your account to:
o View account status o View payment history for dividends
o View certificate history o Make address changes
o View book-entry information o Obtain a duplicate 1099 tax form
o Establish/change your PIN
VISIT US ON THE WEB AT http://www.melloninvestor.com
AND FOLLOW THE INSTRUCTIONS SHOWN ON THIS PAGE.
STEP 1: FIRST TIME USERS - ESTABLISH A PIN
You must first establish a Personal Identification
Number (PIN) online by following the directions
provided in the upper right portion of the web
screen as follows. You will also need your Social
Security Number (SSN) available to establish a PIN.
INVESTOR SERVICEDIRECT(SM) IS CURRENTLY ONLY AVAILABLE
FOR U.S.-BASED INDIVIDUAL AND JOINT ACCOUNTS.
o SSN
o PIN
o Then click on the ESTABLISH PIN button
Please be sure to remember your PIN, or maintain
it in a secure place for future reference.
STEP 2: LOG IN FOR ACCOUNT ACCESS
You are now ready to log in. To access
your account please enter your:
o SSN
o PIN
o Then click on the SUBMIT button
If you have more than one account,
you will now be asked to select the
appropriate account.
STEP 3: ACCOUNT STATUS SCREEN
You are now ready to access your
account information. Click on the
appropriate button to view or initiate
transactions.
o Certificate History
o Book-Entry Information
o Issue Certificate
o Payment History
o Address Change
o Duplicate 1099
FOR TECHNICAL ASSISTANCE CALL 1-877-978-7778 BETWEEN
9AM-7PM MONDAY-FRIDAY EASTERN TIME
(BAKER HUGHES LOGO)
NOTICE OF ANNUAL MEETING
OF STOCKHOLDERS
AND PROXY STATEMENT
APRIL 23, 2003
BAKER HUGHES INCORPORATED
3900 ESSEX LANE
HOUSTON, TEXAS