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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------------------------
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
--- OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
--- OF THE SECURITIES EXCHANGE ACT OF 1934
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Commission file number 1-9397
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BAKER HUGHES INCORPORATED
(Exact name of registrant as specified in its charter)
Delaware 76-0207995
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
3900 Essex Lane, Houston, Texas 77027
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (713) 439-8600
-----------------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Class Outstanding at October 31, 1998
----- -------------------------------
Common Stock, $1.00 par value per share 326,933,600 shares
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BAKER HUGHES INCORPORATED
INDEX
Page
No.
----
Part I - Financial Information:
Consolidated Condensed Statements of Operations - Three months and
nine months ended September 30, 1998 and 1997 2
Consolidated Condensed Statements of Financial Position
- September 30, 1998 and December 31, 1997 4
Consolidated Condensed Statements of Cash Flows - Nine months
ended September 30, 1998 and 1997 5
Notes to Consolidated Condensed Financial Statements 7
Management's Discussion and Analysis of Financial Condition and
Results of Operations 15
Part II - Other Information 31
-1-
PART I. FINANCIAL INFORMATION
BAKER HUGHES INCORPORATED
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(In millions, except per share amounts)
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
1998 1997 1998 1997
-------------------- --------------------
REVENUES:
Sales $ 737.5 $ 760.8 $ 2,296.1 $ 1,915.0
Services and rentals 847.4 750.6 2,596.6 2,162.4
--------- --------- --------- ---------
Total revenues 1,584.9 1,511.4 4,892.7 4,077.4
--------- --------- --------- ---------
COSTS AND EXPENSES:
Costs of sales 593.4 501.8 1,576.2 1,236.5
Costs of services and rentals 831.4 529.2 2,111.5 1,564.3
Selling, general and
administrative 393.4 309.9 1,017.8 803.1
Unusual charge 175.3 52.1 175.3 52.1
Acquired in-process research
and development 118.0 118.0
--------- --------- --------- ---------
Total costs and expenses 1,993.5 1,511.0 4,880.8 3,774.0
--------- --------- --------- ---------
Operating income(loss) (408.6) .4 11.9 303.4
Interest expense (40.5) (24.8) (108.5) (69.6)
Interest income 1.0 .8 3.0 2.7
Merger related costs (201.9) (201.9)
Spin-off related costs (8.4)
--------- --------- --------- ---------
Income(loss) from continuing
operations before income taxes (650.0) (23.6) (295.5) 228.1
Income taxes 115.5 (32.0) (8.1) (110.5)
--------- --------- --------- ---------
Income(loss) from continuing
operations (534.5) (55.6) (303.6) 117.6
Discontinued operations 14.1 (157.8)
--------- --------- --------- ---------
Net income(loss) $ (534.5)$ (41.5)$ (303.6)$ (40.2)
========= ========= ========= =========
-2-
BAKER HUGHES INCORPORATED
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS CONTINUED
(In millions, except per share amounts)
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
1998 1997 1998 1997
-------------------- --------------------
Basic earnings(loss) per share:
Continuing operations $ (1.65)$ (.18)$ (.95)$ .39
Discontinued operations .05 (.52)
--------- --------- --------- ---------
Total $ (1.65)$ (.13)$ (.95)$ (.13)
========= ========= ========= =========
Diluted earnings(loss) per share:
Continuing operations $ (1.65)$ (.18)$ (.95)$ .39
Discontinued operations .05 (.52)
--------- --------- --------- ---------
Total $ (1.65)$ (.13)$ (.95)$ (.13)
========= ========= ========= =========
Cash dividends per share of
common stock $ .115 $ .115 $ .345 $ .345
========= ========= ========= =========
See accompanying notes to consolidated condensed financial statements.
-3-
BAKER HUGHES INCORPORATED
CONSOLIDATED CONDENSED STATEMENTS OF FINANCIAL POSITION
(In millions)
(Unaudited)
ASSETS
September 30, December 31,
1998 1997
Current Assets: ---------- ----------
Cash and cash equivalents $ 24.6 $ 41.9
Accounts receivable, net 1,513.5 1,519.4
Inventories 1,082.1 1,145.0
Other current assets 242.6 213.5
---------- ----------
Total current assets 2,862.8 2,919.8
Property, net 2,213.9 1,975.9
Goodwill and other intangibles, net 1,894.6 1,537.2
Multiclient seismic data and other assets 872.6 803.2
---------- ----------
Total assets $ 7,843.9 $ 7,236.1
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Notes payable and current portion of
long-term debt $ 806.4 $ 177.4
Accounts payable 584.1 601.5
Payroll and related expenses 300.2 287.0
Other current liabilities 390.1 351.3
---------- ----------
Total current liabilities 2,080.8 1,417.2
---------- ----------
Long-term debt 1,883.4 1,610.7
---------- ----------
Deferred income taxes 226.9 283.8
---------- ----------
Deferred revenue and other long-term liabilities 417.6 405.4
---------- ----------
Stockholders' Equity:
Common stock 326.8 316.8
Capital in excess of par value 2,921.1 2,834.0
Retained earnings 131.9 494.1
Foreign currency translation adjustment (146.7) (160.5)
Unrealized gain on securities available for sale 5.6 38.1
Pension liability adjustments (3.5) (3.5)
---------- ----------
Total stockholders' equity 3,235.2 3,519.0
---------- ----------
Total liabilities and stockholders' equity $ 7,843.9 $ 7,236.1
========== ==========
See accompanying notes to consolidated condensed financial statements.
-4-
BAKER HUGHES INCORPORATED
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(In millions)
(Unaudited)
Nine Months Ended
September 30,
1998 1997
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income(loss) from continuing operations $ (303.6) $ 117.6
Adjustments to reconcile net income(loss) from
continuing operations to net cash flows from
operating activities:
Depreciation, depletion and amortization 556.9 428.8
Provision(benefit) for deferred income taxes 38.7 (14.0)
Noncash portion of nonrecurring charges 494.9 32.7
Acquired in-process research and development 118.0
Gain on disposal of assets (31.9) (11.4)
Change in receivables 5.7 (134.5)
Change in inventories (56.6) (70.4)
Change in accounts payable (54.1) 50.2
Changes in other assets and liabilities (148.6) 6.5
-------- --------
Net cash flows from continuing operations 501.4 523.5
Net operating activities from discontinued
operations 1.6
-------- --------
Net cash flows from operating activities 501.4 525.1
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Expenditures for capital assets and multiclient
seismic data (973.7) (804.7)
Proceeds from disposal of assets 74.6 45.1
Cash obtained in stock acquisition 65.4
Acquisition of businesses, net of cash acquired (426.7) (97.6)
Proceeds from sale of investments 48.5
-------- --------
Net cash flows from continuing operations (1,325.8) (743.3)
Net investing activities from discontinued
operations (405.7)
-------- --------
Net cash flows from investing activities (1,325.8) (1,149.0)
-------- --------
-5-
BAKER HUGHES INCORPORATED
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS CONTINUED
(In millions)
(Unaudited)
Nine Months Ended
September 30,
1998 1997
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings from commercial paper and
revolving credit facilities 931.2 639.7
Repayment of indebtedness (103.5) (107.2)
Proceeds from issuance of common stock 35.8 59.4
Dividends (58.7) (52.9)
Increase in UNOVA, Inc. receivable (120.4)
-------- --------
Net cash flows from continuing operations 804.8 418.6
Net financing activities from discontinued
operations 197.2
-------- --------
Net cash flows from financing activities 804.8 615.8
Effect of exchange rate changes on cash 2.3 (2.3)
-------- --------
Decrease in cash and cash equivalents (17.3) (10.4)
Cash and cash equivalents, beginning of period 41.9 35.2
-------- --------
Cash and cash equivalents, end of period $ 24.6 $ 24.8
======== ========
Income taxes paid $ 121.8 $ 119.1
Interest paid $ 109.6 $ 61.5
See accompanying notes to consolidated condensed financial statements.
-6-
BAKER HUGHES INCORPORATED
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
Note 1. Basis of Presentation
General
In the opinion of Baker Hughes Incorporated ("Baker Hughes" or the
"Company"), the unaudited consolidated condensed financial statements
include all adjustments consisting of normal recurring accruals necessary
for a fair presentation of the Company's consolidated financial position as
of September 30, 1998, its consolidated results of operations for the three
and nine months ended September 30, 1998 and 1997 and its consolidated cash
flows for the nine months ended September 30, 1998 and 1997. Although the
Company believes that the disclosures in these financial statements are
adequate to make the information presented not misleading, certain
information and footnote disclosures normally included in annual financial
statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to the rules and
regulations of the Securities and Exchange Commission (see the Company's
Annual Report on Form 10-K for the year ended September 30, 1997 for the
most recent annual financial statements prepared in accordance with
generally accepted accounting principles). The results of operations for
the three and nine months ended September 30, 1998 are not necessarily
indicative of the results to be expected for the full year.
In the notes to consolidated condensed financial statements, all dollar
and share amounts in tabulations are in millions of dollars and shares,
respectively, unless otherwise indicated.
Merger
On August 10, 1998, Baker Hughes completed a merger with Western Atlas
Inc. ("Western Atlas") by issuing 148.6 million shares of the Company's
common stock for all of the outstanding common stock of Western Atlas (the
"Merger"). Each share of Western Atlas common stock was exchanged for 2.7
shares of Baker Hughes common stock. Western Atlas, the common stock of
which was previously publicly traded, is a leading supplier of oilfield
services and reservoir information technologies for the worldwide oil and
gas industry. It specializes in land, marine and transition-zone seismic
data acquisition and processing services, well-logging and completion
services and reservoir characterization and project management services.
The Merger was accounted for as a pooling of interests and,
accordingly, all prior period consolidated financial statements of Baker
Hughes have been restated to include the results of operations, financial
position and cash flows of Western Atlas. Information concerning common
stock, employee stock plans and per share data has been restated on an
equivalent share basis.
-7-
BAKER HUGHES INCORPORATED
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS CONTINUED
The following is a reconciliation of revenues, income(loss) from
continuing operations and net income(loss) of Baker Hughes and Western
Atlas for the periods prior to the combination.
Three Months Ended Nine Months Ended
September 30, 1997 September 30, 1997
------------------ ------------------
Revenues:
Baker Hughes $ 1,091.2 $ 2,858.7
Western Atlas 420.2 1,218.7
-------- --------
Combined $ 1,511.4 $ 4,077.4
========= ========
Income(loss) from continuing operations:
Baker Hughes $ (82.9) $ 57.6
Western Atlas 27.3 60.0
-------- --------
Combined $ (55.6) $ 117.6
========= ========
Net income(loss):
Baker Hughes $ (82.9) $ 57.6
Western Atlas 41.4 (97.8)
-------- --------
Combined $ (41.5) $ (40.2)
========= ========
There were no material adjustments required to conform the accounting
policies of the two companies. Certain amounts have been reclassified to
conform reporting practices.
In connection with the Merger, the Company recorded merger related
costs of $201.9 million which consisted of the following:
Transaction costs $ 51.5
Employee costs 130.7
Other costs 19.7
-------
Total $ 201.9
=======
The transaction costs include banking and legal fees, printing and
other costs directly related to the Merger.
The employee related costs consist of payments made to certain officers
of Western Atlas and Baker Hughes pursuant to change in control provisions
of employment contracts and other employee benefit plans, severance
benefits paid to terminated employees whose responsibilities were redundant
as a result of the Merger and a noncash charge of $45.3 million related to
the triggering of change in control rights contained in certain Western
Atlas employee stock option plans which occurred as a result of the Merger.
-8-
BAKER HUGHES INCORPORATED
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS CONTINUED
Other costs include merger integration costs that were incurred during
the three months ended September 30, 1998. The Company expects that
additional merger related expenses will be incurred in future quarters,
primarily for items that did not qualify for recognition in the three
months ended September 30, 1998.
Change in Year End
On August 27, 1998, the Board of Directors of the Company approved a
change in the Company's fiscal year end from September 30 to December 31,
effective with the calendar year beginning January 1, 1998. A three-month
transition period from October 1, 1997 through December 31, 1997 preceded
the start of the new fiscal year.
Changes in Accounting Principles
The Company adopted Statement of Financial Accounting Standards
("SFAS") No. 130, "Reporting Comprehensive Income," effective January 1,
1998. The statement establishes standards for the reporting and displaying
of comprehensive income and its components. Comprehensive income includes
all changes in equity during a period except those resulting from
investments by and distributions to owners.
The Company's total comprehensive income(loss) is as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
1998 1997 1998 1997
-------- ------- --------- ------
Net income(loss) $ (534.5) $ (41.5) $ (303.6) $ (40.2)
Other comprehensive income(loss) (17.1) 29.5 (18.7) 11.8
-------- ------- --------- ------
Total comprehensive income(loss) $ (551.6) $ (12.0) $ (322.3) $ (28.4)
======== ======= ========= ======
Note 2. Discontinued Operations
On October 31, 1997, Western Atlas distributed all the shares of UNOVA,
Inc. ("UNOVA"), its then wholly owned industrial automation systems
subsidiary, as a stock dividend to it's shareholders (the "Spin-off"). The
operations of UNOVA for the three and nine months ended September 30, 1997
are classified as discontinued operations in the Company's consolidated
condensed financial statements. For periods prior to the Spin-off, cash,
debt, and the related net interest expense were allocated based on the
capital needs of UNOVA's operations. All corporate general and
administrative costs of the Company are included in continuing operations,
and no allocation was made to UNOVA for any of the periods presented.
-9-
BAKER HUGHES INCORPORATED
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS CONTINUED
Discontinued operations of UNOVA are as follows:
Three Months Nine Months
Ended Ended
September 30, September 30,
1997 1997
------------ ------------
Net revenue $ 361.8 $ 1,094.1
Allocated interest expense 6.5 15.7
Allocated interest income .8 3.0
Income (loss) before income taxes $ 23.5 $ (127.4)
Provision for income taxes (9.4) (30.4)
-------- --------
Discontinued operations $ 14.1 $ (157.8)
======== ========
The UNOVA results of operations for the nine months ended September 30,
1997 include a $203.0 million charge related to acquired in-process
research and development activities related to it's acquisition of United
Barcode Industries in April 1997.
Note 3. Acquisitions
In addition to the acquisitions discussed below, during the nine months
ended September 30, 1998, the Company made five acquisitions with an
aggregate purchase price of $91.8 million. These acquisitions were
accounted for using the purchase method of accounting. Accordingly, the
cost of each acquisition has been allocated to assets acquired and
liabilities assumed based on their estimated fair market values at the date
of the acquisition. The operating results of these acquisitions are
included in the consolidated statement of operations from their respective
acquisition date. Pro forma results of these acquisitions have not been
presented as the pro forma revenue, net income and earnings per share would
not be materially different from the Company's actual results.
WEDGE DIA-LOG and 3-D Geophysical
In April 1998, the Company acquired all the outstanding stock of WEDGE
DIA-LOG, Inc. ("WEDGE") for $218.5 million in cash. WEDGE specializes in
cased-hole logging and pipe recovery services. Also in April 1998, the
Company acquired 3-D Geophysical, Inc. ("3-D") for $117.5 million in cash.
3-D is a supplier of primarily land-based seismic data acquisition
services. The purchase method of accounting was used to record both of
these acquisitions. The operating results of these acquisitions are
included in the consolidated statement of operations from their respective
acquisition date. Pro forma results of these two acquisitions have not
been presented as the pro forma revenue, net income and earnings per share
would not be materially different from the Company's actual results.
-10-
BAKER HUGHES INCORPORATED
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS CONTINUED
Petrolite
In July 1997, the Company acquired Petrolite Corporation ("Petrolite")
and Wm. S. Barnickel & Company ("Barnickel"), the holder of 47.1% of
Petrolite's common stock, for 19.3 million shares of the Company's common
stock having a value of $730.2 million in a three-way business combination
accounted for using the purchase method of accounting. Additionally, the
Company assumed Petrolite's outstanding vested and unvested employee stock
options which were converted into the right to acquire 1.0 million shares
of the Company's common stock. Such assumption of Petrolite options by the
Company had a fair market value of $21.0 million resulting in total
consideration in the acquisitions of $751.2 million.
The purchase price was allocated to the assets purchased and the
liabilities assumed based on their estimated fair market values at the date
of acquisition. In accordance with generally accepted accounting
principles, the amount allocated to in-process research and development,
which was determined by an independent valuation, was recorded as a charge
in the three months ended September 30, 1997 because its technological
feasibility had not been established and it had no alternative future use.
Note 4. Unusual Charge
1998
During the three months ended September 30, 1998, the Company
recognized a $175.3 million unusual charge consisting of the following:
Impairment of oil & gas properties $ 72.3
Restructurings:
Severance for 3,400 employees under existing benefit plans 41.8
Abandoned leases and other contractual obligations 30.7
Write down of property and other assets 30.5
-------
Total $ 175.3
=======
During the three months ended September 30, 1998, the Company decided
to significantly reduce the scope and level of its start-up oil and gas
operations in light of the capital required and risks associated with oil
and gas exploration. As a result, the Company recorded a noncash charge of
$72.3 million for the impairment of oil and gas properties and a write off
of previously capitalized costs related to countries in which the Company
has decided to no longer pursue oil and gas activity.
The Company restructured and downsized its operations to the current
and expected market conditions, which resulted in a charge of $103.0
million in the three months ended September 30, 1998. The charge included
restructuring and downsizing at most of the Company's operating divisions.
Cash provisions of the unusual charge totaled $72.5 million. The Company
spent $16.3 million in the three months ended September 30, 1998 and
-11-
BAKER HUGHES INCORPORATED
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS CONTINUED
expects to spend substantially all of the remaining $56.2 million in the
remainder of 1998 and 1999.
1997
During the three months ended September 30, 1997, the Company
recognized a $52.1 million unusual charge consisting of the following:
Baker Petrolite:
Severance for 140 employees under
existing benefit plans $ 2.2
Relocation of people and equipment 3.4
Integration costs 9.3
Inventory write-down 11.3
Write-down of other assets 9.3
Drilex:
Write-down of property and other assets 4.1
Banking and legal fees 3.0
Discontinued product lines:
Severance for 50 employees 1.5
Write-down of inventory, property and other assets 8.0
----
Total $ 52.1
=====
In connection with the acquisitions of Petrolite, accounted for as a
purchase, and Drilex, accounted for as a pooling of interests, the Company
recorded unusual charges of $35.5 million and $7.1 million, respectively,
to combine the acquired operations with those of the Company. The charges
include the cost of closing redundant facilities, eliminating or relocating
redundant personnel and equipment and rationalizing inventories which
require disposal at amounts less than their cost. A $9.5 million charge
was recorded as a result of the decision to discontinue a low margin,
oilfield product line in Latin America and to sell the Tracor Europa
subsidiary, a computer peripherals distributor, which resulted in a write-
down of the investment to net realizable value. Cash provisions of the
unusual charge totaled $19.4 million. The Company spent $5.5 million in
the three months ended September 30, 1997 and spent substantially all of
the remaining $13.9 million in the remainder of 1997 and 1998.
-12-
BAKER HUGHES INCORPORATED
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS CONTINUED
Note 5. Inventories
Inventories are comprised of the following:
September 30, December 31,
1998 1997
----------- ------------
Finished goods $ 854.5 $ 911.5
Work in process 109.3 138.2
Raw materials 118.3 95.3
---------- -----------
Total $ 1,082.1 $ 1,145.0
========== ===========
Note 6. Earnings per Share ("EPS")
Weighted average shares used in computing EPS for the three months
ended September 30, 1998 and 1997 are 323.0 million shares and 313.8
million shares, respectively. There were no adjustments in determining
diluted EPS for the three months ended September 30, 1998 and 1997.
Reconciliation of the numerators and denominators of the basic and diluted
EPS computations for the nine month periods is as follows:
Nine Months Ended Nine Months Ended
September 30, 1998 September 30, 1997
Income Shares Income Shares
------- ------ ------- ------
Income(loss) from continuing
operations $(303.6) 319.4 $ 117.6 300.2
Effect of dilutive
securities:
Stock plans 4.0
------ ------ ------- -----
Diluted EPS $(303.6) 319.4 $ 117.6 304.2
====== ====== ======= =====
Options to purchase 6.9 million shares of common stock were not
included in the computation of diluted EPS for the three months and the
nine months ended September 30, 1998 because their inclusion would be anti-
dilutive.
Note 7. Other Charges
During the three months ended September 30, 1998, the demand for the
Company's products and services declined sharply as the price of oil and
natural gas fell. This sharp decline in customer demand materialized
quickly from high growth levels experienced in the last several years and
that had continued into the early part of 1998. The Company wrote down
excess and obsolete inventory and rental tools and equipment brought about
by these changing market conditions. In the three months ended September
30, 1998, the Company provided reserves and recorded write-downs of
-13-
BAKER HUGHES INCORPORATED
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS CONTINUED
$114.5 million reflected in costs of sales and $149.0 million reflected in
costs of services and rentals. In addition, the Company increased its
environmental remediation liability by a charge to income of $8.8 million,
which is reflected in costs of sales. Other charges of $18.2 million were
recorded in selling, general and administrative expenses, that relate
primarily to litigation accruals and a loss on the sale of Tracor Europa.
The Company owns a 50% interest in Petroalliance Services Company
Limited ("PAS"), which provides seismic, well-logging and reservoir
characterization services in the former Soviet Union, including Russia.
The financial statements of PAS have been included in the consolidated
financial statements of the Company because the Company has provided all
the financial and operational support for PAS. Beginning in early 1998,
economic conditions in Russia deteriorated significantly, causing PAS to
become unprofitable and jeopardizing its relationship with its Russian
customers. As a result, the Company began exploring its options with
respect to its investment in PAS. In August 1998, the Company entered into
an agreement to sell its 50% interest in PAS, however, it was subsequently
advised by the prospective buyer that it would be unable to consummate the
transaction. As a result of the continuing deterioration of the operating
environment in Russia and the Company's decisions to divest or suspend its
participation in PAS, the Company has recorded charges totaling $83.2
million in the three months ended September 30, 1998 for the write-down of
assets related to PAS. Of this amount, $50.5 million is included in
selling, general and administrative expense and $32.7 million is included
in cost of services and rentals.
-14-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Management's Discussion and Analysis of Financial Condition and Results
of Operations ("MD&A") should be read in conjunction with the Company's
consolidated condensed financial statements and the related notes thereto.
FORWARD-LOOKING STATEMENTS
MD&A includes forward-looking statements within the meaning of Section
27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. The words "anticipate,"
"believe," "expect," "plan," "intend," "estimate," "project," "forecasts,"
"will," "could," "may" and similar expressions are intended to identify
forward-looking statements. No assurance can be given that actual results
may not differ materially from those in the forward-looking statements
herein for reasons including the effect of competition, the level of
petroleum industry exploration and production expenditures, world economic
conditions, prices of, and the demand for, crude oil and natural gas,
drilling activity, weather, the legislative environment in the United
States and other countries, OPEC policy, conflict in the Middle East and
other major petroleum producing or consuming regions, the development of
technology that lowers overall finding and development costs and the
condition of the capital and equity markets.
MERGER
On August 10, 1998, Baker Hughes Incorporated ("Baker Hughes" or the
"Company") completed a merger with Western Atlas Inc. ("Western Atlas") by
issuing 148.6 million shares of its common stock for all of the outstanding
common stock of Western Atlas (the "Merger"). Each share of Western Atlas
common stock was exchanged for 2.7 shares of Baker Hughes common stock.
Western Atlas is a leading supplier of oilfield services and reservoir
information technologies for the worldwide oil and gas industry. It
specializes in land, marine and transition-zone seismic data acquisition
and processing services, well-logging and completion services and reservoir
characterization and project management services. The Merger was accounted
for as a pooling of interests and, accordingly, all prior period
consolidated financial statements of Baker Hughes have been restated to
include the results of operations, financial position and cash flows of
Western Atlas.
CHANGE IN YEAR END
On August 27, 1998, the Board of Directors of the Company approved a
change in the Company's fiscal year end from September 30 to December 31,
effective with the calendar year beginning January 1, 1998. A three-month
transition period from October 1, 1997 through December 31, 1997 preceded
the start of the new fiscal year.
BUSINESS ENVIRONMENT
The Company is primarily engaged in the oilfield service industry.
It's oilfield operations generated 92% of the Company's consolidated
revenues in both the three and nine months ended September 30, 1998 and
-15-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS CONTINUED
consist of eight business units - Western Geophysical, Baker Atlas, Baker
Hughes INTEQ, E&P Solutions, Baker Oil Tools, Baker Petrolite, Centrilift
and Hughes Christensen - that manufacture and sell equipment and provide
services and solutions used in the drilling, completion, production and
maintenance of oil and gas wells and in reservoir measurement and
evaluation. The business environment for the Company and its corresponding
operating results are affected significantly by the petroleum industry
exploration and production expenditures. These expenditures are influenced
strongly by oil company expectations about the supply and demand for crude
oil and natural gas, energy prices and finding and development costs.
Petroleum supply and demand, pricing and finding and development costs, in
turn, are influenced by numerous factors including, but not limited to,
those described above in "--Forward-Looking Statements".
Four key factors which currently influence the worldwide crude oil
market and therefore current and future expenditures for exploration and
development by our customers are:
1) The degree to which certain large producing countries, in particular
Saudi Arabia, Venezuela, and Mexico, are willing and able to restrict
production and exports of crude oil.
2) The increasing rate of depletion of known hydrocarbon reserves.
Technological advances are resulting in accelerated decline rates and
shorter well lives. In general, accelerated decline rates require
additional customer spending to hold production levels.
3) The economic growth in certain key areas of the world, particularly
developing Asia, where the correlation between energy demand and economic
growth is particularly strong.
4) The amount of crude oil in storage relative to historic levels.
These four factors, together with oil and gas company projections for
future commodity price movement, influence overall levels of expenditures
for exploration and development by the Company's customers.
More specifically, two key factors influence the level of exploration
and development spending:
1) Technology: Advances in the design and application of more
technologically advanced products and services allow oil and gas companies
to drill fewer wells, place the wells they drill more precisely in the
higher yielding or more easily produced hydrocarbon zones of the reservoir
and allow operators to drill, complete and operate wells at lower overall
costs.
2) Price Volatility: Changes in hydrocarbon markets create uncertainty
in the future price of hydrocarbons and therefore create uncertainty about
the aggregate level of customer spending. Multi-year projects, such as
deep-water exploration and drilling, are the least likely to be impacted by
price volatility. Projects with relatively short payback periods or low
profit margins, such as workover activity or the extraction of heavy oil,
are more likely to be impacted.
-16-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS CONTINUED
Crude oil and natural gas prices and the Baker Hughes rotary rig count
are summarized in the tables below as quarterly averages followed by the
Company's outlook. While reading the Company's outlook set forth below,
caution is advised that the factors described above in "--Forward-Looking
Statements" and "--Business Environment" could negatively impact the
Company's expectations for oil demand, oil and gas prices and drilling
activity.
Oil and Gas Prices Three Months Ended Nine Months Ended
September 30, September 30,
1998 1997 1998 1997
- --------------------------------------------------------------------------
WTI ($/bbl) 14.08 19.73 14.91 20.89
U.S. Spot Natural Gas ($/mcf) 1.93 2.39 2.06 2.30
Crude oil prices were weaker compared to the same periods in 1997 due
to a slowing of worldwide demand growth, the Asian economic downturn, and
increases in OPEC and non-OPEC production in prior quarters that has
resulted in higher inventories (particularly in North America).
U.S. natural gas prices weakened during the three months ended
September 30, 1998. Prices greater than $1.80 are expected to support
natural gas drilling activity at near current levels.
Rotary Rig Count Three Months Ended Nine Months Ended
September 30, September 30,
1998 1997 1998 1997
- --------------------------------------------------------------------------
U.S. - Land 676 865 747 805
U.S. - Offshore 119 126 129 121
Canada 206 399 280 349
- --------------------------------------------------------------------------
North America 1,001 1,390 1,156 1,275
- --------------------------------------------------------------------------
Latin America 229 270 254 276
North Sea 48 55 54 59
Other Europe 45 52 47 54
Africa 65 78 77 81
Middle East 170 170 167 157
Asia Pacific 169 184 179 182
- --------------------------------------------------------------------------
International 726 809 778 809
- --------------------------------------------------------------------------
Worldwide 1,727 2,199 1,934 2,084
- --------------------------------------------------------------------------
U.S. Workover 1,000 1,411 1,140 1,420
Outlook
The Company expects oil prices to trade between $12.00 and $15.50 per
barrel for the remainder of 1998 as production cuts balance the impact of
weakened demand and inventories stabilize. The Company believes that a
-17-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS CONTINUED
sustained low price environment for crude oil may result in a period of
slower than expected customer spending through the end of 1998 and into
1999. In 1999, the willingness and ability of certain countries,
particularly Saudi Arabia, Venezuela and Mexico, to continue to restrict
production and exports, as well as increasing depletion rates, could result
in inventories that approach normal levels and ultimately lead to rising
oil prices. Growth in customer upstream spending is dependent upon
expectations for growth in worldwide hydrocarbon demand. In the long-term,
the economic rebound of developing Asia is expected to result in demand
growth approximating the long-term trend of 2 to 2-1/2% per year.
North America: The Company anticipates that North American activity
will continue to decline through the remainder of the year relative to the
prior year. Offshore activity is expected to weaken temporarily as high
day-rate rigs are recontracted at lower rates.
International: The Company expects that activity in Latin America will
decrease over the remainder of the year as budget cuts in Mexico and
Venezuela impact activity levels. Eastern Hemisphere activity is expected
to weaken further unless oil prices rise above current levels.
DISCONTINUED OPERATIONS
On October 31, 1997, Western Atlas distributed all the shares of UNOVA,
Inc. ("UNOVA"), its then wholly owned industrial automation systems
subsidiary, as a stock dividend to it's shareholders (the "Spin-off"). The
operations of UNOVA for the three and nine months ended September 30, 1997
are classified as discontinued operations in the Company's consolidated
condensed financial statements. For periods prior to the Spin-off, cash,
debt, and the related net interest expense were allocated based on the
capital needs of UNOVA's operations. All corporate general and
administrative costs of the Company are included in continuing operations
and no allocation was made to UNOVA for any of the periods presented.
The UNOVA results of operations for the nine months ended September 30,
1997 include a $203.0 million charge related to acquired in-process
research and development activities related to its acquisition of United
Barcode Industries in April 1997.
ACQUISITIONS
In April 1998, the Company acquired all the outstanding stock of WEDGE
DIA-LOG, Inc. ("WEDGE") for $218.5 million in cash. WEDGE specializes in
cased-hole logging and pipe recovery services. Also in April 1998, the
Company acquired 3-D Geophysical, Inc. ("3-D") for $117.5 million in cash.
3-D is a supplier of primarily land-based seismic data acquisition
services. The purchase method of accounting was used to record both of
these acquisitions. The operating results of these acquisitions are
included in the consolidated statement of operations from their respective
acquisition date.
-18-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS CONTINUED
Other acquisitions were made during the nine months ended September 30,
1998, that were not individually, nor in the aggregate, material to the
consolidated financial statements of the Company.
In July 1997, the Company acquired Petrolite Corporation ("Petrolite")
and Wm. S. Barnickel & Company ("Barnickel"), the holder of 47.1% of
Petrolite's common stock, for 19.3 million shares of the Company's common
stock having a value of $730.2 million in a three-way business combination
accounted for using the purchase method of accounting. Additionally, the
Company assumed Petrolite's outstanding vested and unvested employee stock
options which were converted into the right to acquire 1.0 million shares
of the Company's common stock. Such assumption of Petrolite options by the
Company had a fair market value of $21.0 million resulting in total
consideration in the acquisitions of $751.2 million.
PETROALLIANCE SERVICES COMPANY LIMITED
The Company owns a 50% interest in Petroalliance Services Company
Limited ("PAS"), which provides seismic, well-logging and reservoir
characterization services in the former Soviet Union, including Russia.
The financial statements of PAS have been included in the consolidated
financial statements of the Company because the Company has provided all
the financial and operational support for PAS. Beginning in early 1998,
economic conditions in Russia deteriorated significantly, causing PAS to
become unprofitable and jeopardizing its relationship with its Russian
customers. As a result, the Company began exploring its options with
respect to its investment in PAS. In August 1998, the Company entered into
an agreement to sell its 50% interest in PAS, however, it was subsequently
advised by the prospective buyer that it would be unable to consummate the
transaction. As a result of the continuing deterioration of the operating
environment in Russia and the Company's decisions to divest or suspend its
participation in PAS, the Company has recorded charges totaling $83.2
million in the three months ended September 30, 1998 for the write-down of
assets related to PAS.
RESULTS OF OPERATIONS
Revenues
Consolidated revenues were up $73.5 million and $815.3 million for the
three and nine months ended September 30, 1998, respectively, as compared
to the same periods in 1997. Sales revenue was down 3% and up 20% for the
three and nine months ended September 30, 1998, respectively, as compared
to the corresponding periods in 1997. Service and rentals revenue was up
13% and 20% for the three and nine months ended September 30, 1998,
respectively, as compared to the corresponding periods in 1997.
Consolidated revenues for the three and nine months ended September 30,
1998 were approximately $64.0 million and $382.0 million, respectively,
higher than the same periods in 1997 due to the various acquisitions made
by the Company in 1997 and 1998. Activity levels were lower in most areas
of the world, but the impact on the Company's business was most dramatic in
-19-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS CONTINUED
North America land based activity and in Venezuela where the lower oil and
gas prices reduced demand for the Company's products and services.
Excluding acquisitions, Western Geophysical is the only division that
reported a revenue increase for the three months ended September 30, 1998
as compared to the same period in 1997 as it benefited from strong
licensing sales of multiclient data where customer spending is impacted
less by fluctuations in oil prices in the short term. The Company expects
consolidated revenues for the three months ending December 31, 1998 to be
lower than the consolidated revenues for the three months ended September
30, 1998.
Costs and Expenses Applicable to Revenues
Costs of sales and costs of services and rentals have increased from
the prior year periods due primarily to the recording of various charges as
described below. Excluding the impact of these items from the 1998 periods
and the impact of a $21.9 million nonrecurring item in the 1997 periods
related to the Petrolite acquisition, the gross margin percentages were
29.3% and 33.2% for the three months ended September 30, 1998 and 1997,
respectively, and 30.9% and 31.8% for the nine months ended September 30,
1998 and 1997, respectively. The decline is due primarily to pricing
pressures and lower activity levels in North America and Venezuela.
During the three months ended September 30, 1998, the demand for the
Company's products and services declined sharply as the price of oil and
natural gas fell. This sharp decline in customer demand materialized
quickly from high growth levels experienced in the last several years and
continued into the early part of 1998. As a result, the Company wrote down
excess and obsolete inventory and rental tools and equipment brought about
by these changing market conditions. In the three months ended September
30, 1998, the Company provided reserves and recorded write-downs of $114.5
million reflected in costs of sales and $149.0 million reflected in costs
of service and rentals. In addition, the Company increased its
environmental remediation liability during the three months ended September
30, 1998 by a charge to income of $8.8 million, which is reflected in costs
of sales.
Additionally, the Company has written off the goodwill arising from its
investment in PAS and property, plant and equipment of PAS in the amount of
$21.8 million and $10.9 million, respectively, during the three months
ended September 30, 1998. Such charges are included in costs of services
and rentals.
Selling, General and Administrative
Selling, general and administrative ("SG&A") expense increased $83.5
million in the three months ended September 30, 1998 from the same period
in 1997. Charges totaling $68.7 million were recorded during the three
months ended September 30, 1998 that relate primarily to additional PAS
reserves, litigation accruals and a loss on the sale of Tracor Europa.
Excluding these nonrecurring items, SG&A expense as a percent of
consolidated revenues was 20.5% in both the three months ended September
-20-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS CONTINUED
30, 1998 and 1997 and 19.4% and 19.7% in the nine months ended September
30, 1998 and 1997, respectively.
Unusual Charge
1998
During the three months ended September 30, 1998, the Company
recognized a $175.3 million unusual charge consisting of the following
(in millions):
Impairment of oil & gas properties $ 72.3
Restructurings:
Severance for 3,400 employees under existing benefit plans 41.8
Abandoned leases and other contractual obligations 30.7
Write down of property and other assets 30.5
-------
Total $ 175.3
=======
During the three months ended September 30, 1998, the Company decided
to significantly reduce the scope and level of its start-up oil and gas
operations in light of the capital required and risks associated with oil
and gas exploration. As a result, the Company recorded a noncash charge of
$72.3 million for the impairment of oil and gas properties and a write off
of previously capitalized costs related to countries in which the Company
has decided to no longer pursue oil and gas activity.
The Company restructured and downsized its operations to the current
and expected market conditions which resulted in a charge of $103.0 million
in the three months ended September 30, 1998. The charge included
restructuring and downsizing at most of the Company's operating divisions
and is expected to reduce future operating costs in an attempt to offset
expected lower future revenues. Cash provisions of the unusual charge
totaled $72.5 million. The Company spent $16.3 million in the three months
ended September 30, 1998 and expects to spend substantially all of the
remaining $56.2 million in the remainder of 1998 and 1999.
-21-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS CONTINUED
1997
During the three months ended September 30, 1997, the Company
recognized a $52.1 million unusual charge consisting of the following
(in millions):
Baker Petrolite:
Severance for 140 employees under
existing benefit plans $ 2.2
Relocation of people and equipment 3.4
Integration costs 9.3
Inventory write-down 11.3
Write-down of other assets 9.3
Drilex:
Write-down of property and other assets 4.1
Banking and legal fees 3.0
Discontinued product lines:
Severance for 50 employees 1.5
Write-down of inventory, property and other assets 8.0
----
Total $ 52.1
=====
In connection with the acquisitions of Petrolite, accounted for as a
purchase, and Drilex, accounted for as a pooling of interests, the Company
recorded unusual charges of $35.5 million and $7.1 million, respectively,
to combine the acquired operations with those of the Company. The charges
include the cost of closing redundant facilities, eliminating or relocating
redundant personnel and equipment and rationalizing inventories which
require disposal at amounts less than their cost. A $9.5 million charge
was recorded as a result of the decision to discontinue a low margin,
oilfield product line in Latin America and to sell the Tracor Europa
subsidiary, a computer peripherals operation, which resulted in a write-
down of the investment to net realizable value. Cash provisions of the
unusual charge totaled $19.4 million. The Company spent $5.5 million in
the three months ended September 30, 1997 and spent substantially all of
the remaining $13.9 million in the remainder of 1997 and 1998.
Acquired In-process Research and Development
In the Petrolite acquisition, the Company allocated $118.0 million of
the purchase price to in-process research and development. In accordance
with generally accepted accounting principles, the Company recorded the
acquired in-process research and development as a charge to expense because
its technological feasibility had not been established and it had no
alternative future use at the date of acquisition.
Interest Expense
Interest expense for the three and nine months ended September 30, 1998
increased $15.7 million and $38.9 million, respectively, compared to the
-22-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS CONTINUED
corresponding periods in 1997 due to higher debt levels that funded
acquisitions, capital expenditures and increases in working capital.
Merger Related Costs
In connection with the Merger, the Company recorded merger related
costs of $201.9 million during the three months ended September 30, 1998
which consisted of the following (in millions):
Transaction costs $ 51.5
Employee costs 130.7
Other costs 19.7
-------
Total $ 201.9
=======
The transaction costs include banking and legal fees, printing and
other costs directly related to the Merger.
The employee related costs consist of payments made to certain officers
of Western Atlas and Baker Hughes pursuant to change in control provisions
of employment contracts and other employee benefit plans, severance
benefits paid to terminated employees whose responsibilities were redundant
as a result of the Merger and a noncash charge of $45.3 million related to
the triggering of change in control rights contained in certain Western
Atlas employee stock option plans which occurred as a result of the Merger.
Other costs include merger integration costs that were incurred during
the three months ended September 30, 1998. The Company expects that
additional merger related expenses will be incurred in future quarters,
primarily for items that did not qualify for recognition in the three
months ended September 30, 1998.
Spin-off Related Costs
Costs related to the spin-off of UNOVA of $8.4 million were charged to
continuing operations during the three months ended September 30, 1997.
Income Taxes
The effective income tax rate for the three and nine months ended
September 30, 1998 differs from the statutory rate due to the
nondeductibility of certain unusual, merger and other nonrecurring charges
recorded in those periods.
CAPITAL RESOURCES AND LIQUIDITY
Financing Activities
Net cash inflows from continuing operations' financing activities were
$804.8 million in the nine months ended September 30, 1998 compared to
$418.6 million for the same period in 1997. Total debt outstanding at
September 30, 1998 was $2,689.8 million, compared to $1,788.1 million at
-23-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS CONTINUED
December 31, 1997. The change from the prior year period is primarily due
to increased borrowings from commercial paper and revolving credit
facilities that funded acquisitions, capital expenditures and increases in
working capital. The debt to equity ratio was .83 at September 30, 1998,
compared to .51 at December 31, 1997.
Cash dividends increased in the nine months ended September 30, 1998
compared to the same nine months of 1997 due to an increase in the number
of shares of common stock outstanding resulting primarily from the issuance
of shares in connection with the 1997 acquisition of Petrolite. On an
annualized basis, the cash dividend of $.46 per share of common stock, will
require approximately $150.0 million of cash which compares to an annual
requirement of approximately $78.0 million before the merger with Western
Atlas.
At September 30, 1998, the Company had $2,063.4 million of credit
facilities with commercial banks, of which $1,000.0 million was committed.
These facilities are subject to normal banking terms and conditions and do
not materially restrict the Company's activities. At September 30, 1998,
the Company had borrowed $1,640.8 million against the credit facilities.
Investing Activities
Net cash outflows from continuing operations' investing activities were
$1,325.8 million in the nine months ended September 30, 1998 compared to
$743.3 million in the same period in 1997.
Property additions increased in the nine months ended September 30,
1998 to $973.7 million from $804.7 million in the nine months ended
September 30, 1997 as the Company added capacity to meet increased market
demand and due to an increase in the acquisition of multiclient seismic
data. In light of the recent activity decline, the Company is reviewing
significant capital projects and expects the rate of capital spending to
slow. Funds provided from operations and outstanding lines of credit are
expected to be adequate to meet future capital expenditure requirements.
During the nine months ended September 30, 1998, the Company used
short-term borrowings to purchase various businesses including WEDGE for
$218.5 million, net of cash acquired; 3-D for $117.5 million; and Western
Rock Bit for $31.4 million.
Proceeds from the disposal of assets generated $74.6 million and $45.1
million in the nine months ended September 30, 1998 and 1997, respectively.
The Company obtained $65.4 million of cash from the acquisition of
Petrolite in July 1997. In July 1997, the Company sold all of the
marketable securities obtained in the Barnickel acquisition for $48.5
million.
Operating Activities
Net cash inflows from continuing operations' operating activities were
$501.4 million in the first nine months of 1998 compared to $523.5 million
in the first nine months of 1997.
-24-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS CONTINUED
ACCOUNTING STANDARDS
Derivative and Hedge Accounting
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities." SFAS No. 133 establishes
accounting and reporting standards for derivative instruments and hedging
activities that require an entity to recognize all derivatives as an asset
or liability measured at its fair value. Depending on the intended use of
the derivative, changes in its fair value will be reported in the period of
change as either a component of earnings or a component of other
comprehensive income.
SFAS No. 133 is effective for all quarters of fiscal years beginning
after June 15, 1999. Retroactive application to periods prior to adoption
is not allowed. The Company has not quantified the impact of the adoption
of SFAS No. 133 on its consolidated financial statements.
QUANTITATIVE AND QUALITATIVE MARKET RISK DISCLOSURE UPDATE
At September 30, 1998, the Company had Norwegian Krone denominated
commitments of $82.7 million to purchase two seismic vessels in 1999 and
Australian dollar denominated commitments of $36.2 million to purchase
seismic vessel equipment at various times through February 2000. The
Company has entered into forward exchange contracts to purchase the
required amount of Norwegian Krone and Australian dollars for $88.9 million
and $35.7 million, respectively.
YEAR 2000 ISSUE
Forward-Looking Statements Regarding the Year 2000 Issue
"Year 2000 Issue" contains forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. The words
"expect", "believe", "will" and similar expressions are intended to
identify forward-looking statements. Although the Company expects that it
will complete various phases of its Year 2000 Program Plan as described
below, including (without limitation) the specific remedial and corrective
aspects of the program or the contingency plans described below, there can
be no assurance that the Company will be successful in completing each and
every aspect of the Program Plan and, if successful, within the expected
schedules described below. Factors that could affect the Company's
implementation of its Year 2000 Program Plan include unforeseen
difficulties in remediating a specific problem due to the complexity of
hardware and software, the inability of third parties to adequately address
their own year 2000 issues, including vendors, contractors, financial
institutions, U.S. and foreign governments and customers, the delay in
completion of a phase of the Program Plan necessary to begin a latter
phase, the discovery of a greater number of hardware and software systems
or technologies with material year 2000 issues than the Company presently
anticipates and the lack of alternatives that the Company previously
believed existed.
-25-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS CONTINUED
Overview
Many computer hardware and software products have not been engineered
with internal calendars or date-processing logic capable of accommodating
dates after December 31, 1999. In most cases, the problem is due to the
hardware or software application storing the year as a two-digit field. In
applications where this year 2000 ("Y2K") problem exists, the year 2000
will appear as 00, and current applications could interpret the year as
1900 rather than 2000. The same problem exists for years later than 2000
because the application cannot distinguish which century the date
represents. This could cause errors when dates are used in comparisons,
sorting, calculations and other forms of processing. These errors and
problems could negatively affect the Company's business application
systems, manufacturing, engineering and process control systems, products
sold to customers, equipment used in providing services, facilities and
information technology ("IT") infrastructure such as local and wide area
networks and communications systems. Additionally, Y2K issues impacting
suppliers and customers could have an indirect negative impact on the
Company.
The Company has organized a Year 2000 Program Team, reporting to a
Senior Vice President of the Company, to oversee the Company's activities
to identify, assess and correct the Company's Y2K problems. An Advisory
Team has also been organized to serve as a steering committee for the
Company's Y2K effort. The Advisory Team includes the coordinators from
each of the Company's operating divisions and representatives from the
Company's corporate office including the legal, contracts, finance, risk
management and internal audit functions. Each operating division has
organized a team with representatives from manufacturing, engineering,
management information systems, procurement, contracts, legal, finance and
marketing. The operating divisions are responsible for the specific Y2K
activities at their respective division while the Year 2000 Program Team
coordinates the activities that are common to all operating divisions.
Both internal and external resources are being utilized to identify, assess
and correct the Company's Y2K problems.
Year 2000 Program Plan
Baker Hughes has developed a Year 2000 Program Plan (the "Program
Plan") for identifying, assessing and correcting its Y2K problems. This
Program Plan sets forth the Company's overall plan to identify, assess and
correct its Y2K problems and provides direction to the operating division
teams to ensure consistency and quality in their approach. The Program
Plan addresses the following phases to identify, assess and correct the
Company's Y2K issues: program management, inventory and risk assessment,
remediation, testing and implementation, contingency planning and quality
assurance. Each phase is described as follows:
Program Management
The program management phase consists of the Year 2000 Program Team's
ongoing management of the Company's Y2K effort, establishing and promoting
awareness of Y2K issues within the Company, communicating the Company's Y2K
-26-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS CONTINUED
efforts to customers, vendors and other outside parties and establishing
guidelines for the Company's operating divisions to develop a consistent
approach to resolving Y2K issues and to oversee quality in testing and
validating that remedial action has corrected an identified Y2K problem.
Inventory and Risk Assessment
The objective of the inventory and risk assessment phase is to complete
and document an inventory of all hardware and software systems and
technologies that the Company utilizes, determine whether the inventoried
items have Y2K problems and, if such problems exist, assess the risks
associated with the problem. To date, the inventory and risk assessment
phase has been conducted and documented on an informal, ad hoc basis and
has focused on business application systems, IT infrastructure, products
sold to customers and equipment that the Company uses in providing services
to its customers. To a lesser degree, inventory and risk assessment has
been conducted for the Company's suppliers and vendors. The Company has
not actively conducted an inventory and risk assessment to date with
respect to its facilities and customers.
The lack of a formal inventory make it difficult to quantitatively
measure the progress in completing the inventory and risk assessment phase.
To address this difficulty, the Company purchased a database management
tool designed specifically for Y2K inventory and risk assessment in the
third quarter of 1998 to be used to document the inventory, assist in the
business impact analysis and risk assessment and measure the Company's
progress in addressing Y2K compliance. The multiple hardware and software
systems and technologies that the Company utilizes also make it difficult
to measure this progress. Assuming that the Company does not identify more
hardware and software systems and technologies in the areas of the Company
that it has not inventoried compared to those areas that it has
inventoried, the Company expects to complete the formalized inventory and
risk assessment phase by January 1999. The Company estimates that it has
assessed the risk for approximately 30-40% of the hardware and software
systems and technologies that the Company has inventoried to date.
Remediation
Baker Hughes has adopted the British Standards Institute Year 2000
Conformity Guidelines for determining whether software and hardware are not
materially affected by Y2K problems. When meeting these guidelines, the
Company has deemed that hardware or software is not materially affected by
Y2K problems and, thus, is "in Y2K compliance". The Company believes that
this standard is a reasonable standard to determine when hardware and
software is not materially affected by Y2K problems.
The Company's remediation efforts include the correction or replacement
of noncompliant hardware and software and are scheduled to be completed by
mid to late 1999 for all material noncompliant hardware and software that
the Company has identified to date. Both Company employees and outside
vendors and contractors are conducting remediation activities for the
Company. In some cases, the purchase of new hardware and software
-27-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS CONTINUED
equipment has been accelerated to replace equipment that is not Y2K
compliant.
Testing and Validation
Baker Hughes expects to perform testing and validation of the
compliance status for critical hardware and software as remediation is
completed. Hardware and software that is not critical may not be tested
and validated. The Company expects that Company employees will conduct
substantially all of the testing and validation work and that it will, in
large part, not utilize independent contractors for testing and validation.
Contingency Planning
The Company's operations personnel have identified contingency
scenarios, but the Company has not yet developed formal contingency plans.
The Company expects to develop contingency plans for the areas that
represent the highest business risk and for areas that are expected to take
the longest time to remediate. The Company expects this effort to begin in
January 1999.
Quality Assurance
The Year 2000 Program Team is also implementing a quality assurance
program. The Company expects to utilize external resources to evaluate its
program management and assess the completeness and adequacy of its risk
assessment and testing and validation of compliance. The Company expects
the quality assurance effort to begin in January 1999.
Year 2000 Program Costs
Baker Hughes has approximately 80 full time equivalent employees
("FTEs") involved in the Y2K effort, which the Company estimates has an
associated annual cost of approximately $5.6 million. Generally, these
FTEs are full time employees who are devoting some portion of their
schedule to the Y2K effort. With few exceptions, the Company has not hired
employees to work exclusively and specifically on the Y2K issue.
In addition to the payroll and payroll related costs of these
approximately 80 FTEs, Baker Hughes estimates spending approximately $45.0
million in the Y2K compliance effort, of which approximately $35.0 million
would be capitalized as replacement hardware and software equipment. Of
the $45.0 million, the Company has spent approximately $20 million through
September 30, 1998. The Company has funded, and expects to continue to
fund, these expenditures from cash that it generates from operating
activities or existing credit facilities. These cost estimates could
change materially based upon the completion of the inventory and risk
assessment phase of the Program Plan.
-28-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS CONTINUED
Third Party Issues
The failure of third parties with which the Company has a material
relationship to address their Y2K problems could negatively and materially
impact the Company. To address this risk, the Year 2000 Program Team is
currently assessing the effect of Y2K on key vendor and contractor
relationships and expects to do the same with respect to key customer
relationships. This assessment includes key relationships with parties
with which the Company interfaces electronically and with which the Company
has entered into strategic alliances.
The Year 2000 Program Team is evaluating vendors that the Company
believes are material to its operations and assessing the business risk of
Y2K noncompliance on their part. Based upon this assessment, the Company
is seeking to obtain written confirmation from key vendors and contractors
that they are adequately addressing their Y2K issues. Additionally, the
Company seeks to review the Y2K statements of these vendors and contractors
to the extent they exist. Where the Company cannot obtain satisfactory
confirmation from these vendors, the purchasing departments of each
operating division of the Company will identify alternate sources, if
available, for vendors if those sources are needed because of an inability
to perform due to Y2K noncompliance. The Company expects to complete this
assessment by April 1999.
Known Material Y2K Noncompliant Systems and Technologies
The Company's INTEQ operating division identified Y2K noncompliance in
one of its surface data acquisition systems, which includes both hardware
and software components. This personal computer-based system serves as the
data acquisition platform for INTEQ's well site services. The software is
in the process of being remediated. The noncompliant PC hardware cannot be
economically remediated, and the purchase of new, higher grade personal
computers is required to replace the noncompliant equipment. This
remediation began in 1997 with the replacement of personal computers being
phased in and is expected to be completed by late 1999. The Company
estimates that as of September 30, 1998, it was 60% complete in the
replacement of the noncompliant personal computer hardware and software for
the surface data acquisition system.
The Company's Baker Process operating division is implementing a new
business application system to replace its existing systems, which are not
Y2K compliant. The Company expects the implementation of the new system
will be completed by the end of 1999.
The Company's Western Geophysical operating division relies heavily
upon Global Positioning System ("GPS") equipment that the U.S. Navy
operates. Western Geophysical uses GPS to obtain accurate longitude and
latitude information for the purposes of providing its seismic services.
The Company's GPS receivers are substantially compliant but the government
controlled system, Navstar, is not compliant. This system is utilized to
process information that Western Geophysical GPS receivers use. Navstar's
non-compliance is a known problem outside the control of the Company that
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS CONTINUED
affects other businesses, the government, the military services and
individuals that rely upon GPS services, including most of the Company's
competitors. Based upon information obtained from the U.S. government, the
Company believes that the government is adequately addressing Navstar's Y2K
noncompliance problem. However, there can be no assurance that Navstar's
Y2K noncompliance, or any other Y2K noncompliance with respect to the
government's GPS equipment or the equipment of its contractors and
subcontractors will be corrected on schedule. The Company is not aware of
any contingency system that its GPS receivers can utilize if Navstar is not
made Y2K compliant. A failure to correct the Y2K problems of this
equipment could have a material adverse impact on the Company's results of
operations.
The Company is unable to reasonably estimate the absolute dollar effect
on the Company's results of operation, liquidity or financial condition if
its remediation efforts are unsuccessful, although the Company believes the
effect would be material. Additionally, contingency plans have not been
developed for these known material noncompliant systems and technologies
because the Company believes that the remediation efforts will be
successful and does not anticipate a problem with the roll-out of the
compliant systems. However, the Company may develop contingency plans as
appropriate during 1999.
As the Company completes its inventory and risk assessment phase,
additional material, noncompliant systems and technologies may be
identified.
Potential Material Noncompliant Systems and Technologies
The Company's Baker Process operating division provides mechanical
equipment that, in some cases, has been customized at the request of the
customer to include control panels and circuit boards. The Company
obtained these control panels and circuit boards from third-party vendors
at the request of various customers. The Company is researching the Y2K
compliance status of these boards. This status is often dependent upon the
purchase date and serial number of the product. The warranties from the
Company or its subcontractors have, in many instances, lapsed with respect
to these panels and circuit boards. The Company expects to have completed
its investigation of these systems by mid 1999.
-30-
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
A Special Meeting of Stockholders was held on August 10, 1998, to
vote upon a proposal to issue shares of Baker Hughes common stock in
connection with the Merger. The number of affirmative votes, the number of
negative votes, the number of abstentions and the number of broker nonvotes
with respect to the approval of the issuance of shares in connection with
the Merger were as follows:
Number of Affirmative Votes 120,484,740
Number of Negative Votes 7,364,589
Number of Abstentions 600,301
Number of Broker Nonvotes 41,316,039
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
(3)(ii) Bylaws as amended on October 28, 1998
(27.1) Financial Data Schedule
(b) Reports on Form 8-K:
A report on Form 8-K was filed with the Commission on August 14,
1998, reporting that the Company had completed the acquisition of Western
Atlas Inc. pursuant to the Agreement and Plan of Merger dated as of May 10,
1998 and amended on July 22, 1998.
A report on Form 8-K was filed with the Commission on September 11,
1998, reporting that the Company changed its fiscal year end from September
30 to December 31, effective the calendar year beginning January 1, 1998.
-31-
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
BAKER HUGHES INCORPORATED
(Registrant)
Date: November 16, 1998 By /s/LAWRENCE O'DONNELL, III
------------------------------------
Lawrence O'Donnell, III
Vice President and General Counsel
Date: November 16, 1998 By /s/JAMES E. BRAUN
------------------------------------
James E. Braun
Vice President and Controller
-32-
BYLAWS
OF
BAKER HUGHES INCORPORATED
As Amended
October 28, 1998
Table of Contents
Page No.
ARTICLE I - Offices 1
Section 1. Registered Office 1
Section 2. Other Offices 1
ARTICLE II - Meetings of Stockholders 1
Section 1. Place of Meetings 1
Section 2. Annual Meeting of Stockholders 1
Section 3. Quorum; Adjourned Meetings and Notice Thereof 1
Section 4. Voting 2
Section 5. Proxies 2
Section 6. Special Meetings 2
Section 7. Notice of Stockholders' Meetings 2
Section 8. Waiver of Notice 2
Section 9. Maintenance and Inspection of Stockholder List 3
Section 10. Stockholder Action by Written Consent Without a
Meeting 3
Section 11. Inspectors of Election 3
Section 12. Procedure for Stockholders' Meetings 4
Section 13. Order of Business 4
Section 14. Procedures for Bringing Business before an Annual
Meeting 4
Section 15. Procedures for Nominating Directors 5
ARTICLE III - Directors 5
Section 1. Number and Qualification of Directors 5
Section 2. Election and Term of Office 6
Section 3. Resignation and Removal of Directors 6
Section 4. Vacancies 7
Section 5. Powers 7
Section 6. Place of Directors' Meetings 7
Section 7. Regular Meetings 7
Section 8. Special Meetings 7
Section 9. Quorum 8
Section 10. Action Without Meeting 8
Section 11. Telephonic Meetings 8
Section 12. Meetings and Action of Committees 8
Section 13. Special Meetings of Committees 9
Section 14. Minutes of Committee Meetings 9
Section 15. Compensation of Directors 9
Section 16. Indemnification 9
-i-
ARTICLE IV - Officers 11
Section 1. Officers 11
Section 2. Election of Officers 11
Section 3. Subordinate Officers 11
Section 4. Removal and Resignation of Officers 12
Section 5. Vacancies in Offices 12
Section 6. Chairman of the Board 12
Section 7. Vice Chairman of the Board 12
Section 8. President 12
Section 9. Vice Presidents 12
Section 10. Secretary 12
Section 11. Chief Financial Officer 13
Section 12. Treasurer and Controller 13
ARTICLE V - Certificate of Stock 13
Section 1. Certificates 13
Section 2. Signatures on Certificates 13
Section 3. Statement of Stock Rights, Preferences, Privileges 14
Section 4. Lost Certificates 14
Section 5. Transfers of Stock 14
Section 6. Fixing Record Date 14
Section 7. Registered Stockholders 15
ARTICLE VI - General Provisions - Dividends 15
Section 1. Dividends 15
Section 2. Payment of Dividends; Directors' Duties 15
Section 3. Checks 15
Section 4. Corporate Contracts and Instruments 15
Section 5. Fiscal Year 15
Section 6. Manner of Giving Notice 16
Section 7. Waiver of Notice 16
Section 8. Annual Statement 16
ARTICLE VII - Amendments 16
Section 1. Amendment by Directors 16
Section 2. Amendment by Stockholders 17
-ii-
BYLAWS
OF
BAKER HUGHES INCORPORATED
ARTICLE I
Offices
Section 1. The registered office shall be in the City of Wilmington,
County of New Castle, State of Delaware.
Section 2. The Corporation may also have offices at such other places
both within and without the State of Delaware as the Board of Directors may
from time to time determine or the business of the Corporation may require.
ARTICLE II
Meetings of Stockholders
Section 1. All meetings of the stockholders shall be held at such
place either within or without the State of Delaware as shall be designated
from time to time by the Board of Directors and stated in the notice of the
meeting.
Section 2. An annual meeting of stockholders shall be held on the
fourth Wednesday in January in each year, if not a legal holiday, and if a
legal holiday, then on the next business day following, at 2:00 p.m. or at
such other date and time as may be determined from time to time by
resolution adopted by the Board of Directors, for the purpose of electing,
subject to Article III, Section 17 hereof, one class of the directors of
the Corporation, and transacting such other business as may properly be
brought before the meeting.
Section 3. A majority of the stock issued and outstanding and entitled
to vote at any meeting of stockholders, the holders of which are present in
person or represented by proxy, without regard to class or series, shall
constitute a quorum for the transaction of business except as otherwise
provided by law, by the Certificate of Incorporation, or by these Bylaws.
A quorum, once established, shall not be broken by the withdrawal of enough
votes to leave less than a quorum and the votes present may continue to
transact business until adjournment provided that any action taken (other
than adjournment) is approved by at least a majority of the shares required
to constitute a quorum. If, however, such quorum shall not be present or
represented at any meeting of the stockholders, a majority of the voting
stock represented in person or by proxy may adjourn the meeting from time
to time, without notice other than announcement at the meeting, until a
quorum shall be present or represented. At such adjourned meeting at which
a quorum shall be present or represented, any business may be transacted
which might have been transacted at the meeting as originally noticed. If
the adjournment is for more than thirty (30) days, or if after the
adjournment a new record date is fixed for the adjourned meeting, a notice
of the adjourned meeting shall be given to each stockholder of record
entitled to vote thereat.
Section 4. When a quorum is present at any meeting, the vote of the
holders of a majority of the stock having voting power present in person or
represented by proxy shall decide any question brought before such meeting,
unless the question is one upon which by express provision of the statutes
or the Certificate of Incorporation or these Bylaws, a different vote is
required in which case such express provision shall govern and control the
decision of such question.
Section 5. At each meeting of the stockholders, each stockholder
having the right to vote may vote in person or may authorize another person
or persons to act for him by proxy appointed by an instrument in writing
subscribed by such stockholder and bearing a date not more than three years
prior to said meeting, unless said instrument provides for a longer period.
All proxies must be filed with the Secretary of the Corporation at the
beginning of each meeting in order to be counted in any vote at the
meeting. A proxy shall be deemed signed if the stockholder's name is
placed on the proxy (whether by manual signature, telegraphic transmission
or otherwise) by the stockholder or the stockholder's attorney in fact.
Each stockholder shall have one vote for each share of stock having voting
power, registered in his name on the books of the Corporation on the record
date set by the Board of Directors as provided in Article V, Section 6
hereof.
Section 6. Special meetings of the stockholders, for any purpose, or
purposes, unless otherwise prescribed by statute or by the Certificate of
Incorporation, may be called at any time by the Board of Directors or by a
committee of the Board of Directors which has been duly designated by the
Board of Directors and whose powers and authority, as provided in a
resolution of the Board of Directors or in these Bylaws, include the power
to call such meetings. Special meetings of stockholders of the Corporation
may not be called by any other person or persons. Business transacted at
any special meeting of stockholders shall be limited to the purposes stated
in the notice.
Section 7. Any notice requested to be given to stockholders by
statute, the Certificate of Incorporation or these Bylaws, including notice
of any meeting of stockholders, shall be given personally, by first-class
mail or by telegraphic communication, charges prepaid, addressed to the
stockholder at the address of such stockholder appearing on the books of
the Corporation or given by the stockholder to the Corporation for the
purpose of notice. If no such address appears on the Corporation's books
or has been so given, notice shall be deemed to have been given if sent by
first-class mail or telegraphic communication to the Corporation's
principal executive office, or if published at least once in a newspaper of
general circulation in the county where such principal executive office is
located. Notice shall be deemed to have been given at the time when
delivered personally or deposited in the mail or sent by telegram.
If any notice addressed to a stockholder at the address of such
stockholder appearing on the books of a Corporation is returned to the
Corporation by the United States Postal Service marked to indicate that the
United States Postal Service is unable to deliver the notice to the
stockholder at such address, all further notices shall be deemed to have
been duly given without further mailing if the same shall be available to
the stockholder upon written demand of the stockholder at the principal
executive office of the Corporation for a period of one year from the date
of the giving of such notice.
Section 8. Attendance of a person at a meeting shall constitute a
waiver of notice to such person of such meeting, except when the person
objects at the beginning of the meeting to the transaction of any business
because the meeting is not lawfully called or convened, or objects to the
consideration of matters not included in the notice of the meeting.
Section 9. The officer or agent who has charge of the stock ledger of
the Corporation shall prepare and make, at least ten days before every
meeting of stockholders, a complete list of the stockholders entitled to
vote at the meeting, arranged in alphabetical order, and showing the
address of each stockholder and the number of shares registered in the name
of each stockholder. Such list shall be open to the examination of any
stockholder, for any purpose germane to the meeting, during ordinary
business hours, for a period of at least ten days prior to the meeting,
either at a place within the city where their meeting is to be held, which
place shall be specified in the notice of the meeting, or, if not so
specified, at the place where the meeting is to be held. The list shall
also be produced and kept open at the time and place of the meeting during
the whole time thereof, and may be inspected by any stockholder who is
present. The stock ledger of the Corporation shall be the only evidence as
to who are the stockholders entitled to examine such list or to vote at any
meetings of stockholders.
Section 10. No action shall be taken by stockholders except at an
annual or special meeting of stockholders, and stockholders may not act by
written consent.
Section 11. Before any meeting of stockholders, the Board of Directors
may appoint any persons other than nominees for office to act as inspectors
of election at the meeting or its adjournment. If no inspectors of
election are so appointed, the chairman of the meeting may, and on the
request of any stockholder or a stockholder's proxy shall, appoint
inspectors of election at the meeting. The number of inspectors shall be
either one or three. If inspectors are appointed at a meeting on the
request of one or more stockholders or proxies, the holders of a majority
of shares or their proxies present at the meeting shall determine whether
one or three inspectors are to be appointed. If any person appointed as
inspector fails to appear or fails or refuses to act, the chairman of the
meeting may, and upon the request of any stockholder or a stockholder's
proxy shall, appoint a person to fill such vacancy.
The duties of these inspectors shall be as follows:
(a) Determine the number of shares outstanding and the voting
power of each, the shares represented at the meeting, the
existence of a quorum, and the authenticity, validity and effect
of proxies;
(b) Receive votes or ballots;
(c) Hear and determine all challenges and questions in any way
arising in connection with the right to vote;
(d) Count and tabulate all votes;
(e) Determine when the polls shall close;
(f) Determine the results; and
(g) Do any other acts that may be proper to conduct the
election or vote with fairness to all stockholders.
Section 12. Meetings of the stockholders shall be presided over by the
Chairman of the Board of Directors, or in his absence, by the Vice
Chairman, the President or by any Vice President, or, in the absence of any
of such officers, by a chairman to be chosen by a majority of the
stockholders entitled to vote at the meeting who are present in person or
by proxy. The Secretary, or, in his absence, any person appointed by the
chairman, shall act as secretary of all meetings of the stockholders.
Section 13. The order of business at all meetings of stockholders
shall be as determined by the chairman of the meeting.
Section 14. Notwithstanding anything in these Bylaws to the contrary,
no business shall be conducted at an annual meeting of the stockholders
except in accordance with the procedures hereinafter set forth in this
Section 14; provided, however, that nothing in this Section 14 shall be
deemed to preclude discussion by any stockholder of any business properly
brought before the annual meeting in accordance with said procedures.
At an annual meeting of the stockholders, only such business shall be
conducted as shall have been properly brought before the meeting. To be
properly brought before an annual meeting, business must be (1) specified
in the notice of meeting (or any supplement thereto) given by or at the
direction of the Board, (2) otherwise properly brought before the meeting
by or at the direction of the Board, or (3) otherwise properly brought
before the meeting by a stockholder. In addition to any other applicable
requirements, for business to be properly brought before an annual meeting
by a stockholder, the stockholder must have given timely notice thereof in
writing to the Secretary of the Corporation. To be timely, a stockholder's
notice must be delivered to or mailed and received at the principal
executive offices of the Corporation not less than one hundred twenty (120)
days in advance of the first annual anniversary of the date of the
Corporation's proxy statement released to stockholders in connection with
the previous year's annual meeting of stockholders, except that if no
annual meeting was held in the previous year or the date of the annual
meeting has been changed by more than thirty (30) calendar days from the
date contemplated at the time of the previous year's proxy statement,
notice by the stockholder to be timely must be so received not later than
the close of business on the tenth (10th) day following the day on which
such notice of the date of the annual meeting was mailed or such public
disclosure was made. Any adjournment(s) or postponement(s) of the original
meeting whereby the meeting will reconvene within 30 days from the original
date shall be deemed for purposes of notice to be a continuation of the
original meeting and no business may be brought before any such reconvened
meeting unless timely notice of such business was given to the Secretary of
the Corporation for the meeting as originally scheduled. A stockholder's
notice to the Secretary shall set forth as to each matter the stockholder
proposes to bring before the annual meeting (i) a brief description of the
business desired to be brought before the annual meeting and their reasons
for conducting such business at the annual meeting, (ii) the name and
record address of the stockholder proposing such business, (iii) the class
and number of shares of the Corporation which are beneficially owned by the
stockholders, and (iv) any material interest of the stockholder in such
business.
The Chairman of an annual meeting shall, if the facts warrant,
determine and declare to the meeting that business was not properly brought
before the meeting in accordance with the provisions of this Section 14,
and if he should so determine, he shall so declare to the meeting and any
such business not properly brought before the meeting shall not be
transacted.
Section 15. Notwithstanding anything in these Bylaws to the contrary,
only persons who are nominated in accordance with the procedures
hereinafter set forth in this Section 15 shall be eligible for election as
directors of the Corporation.
Nominations of persons for election to the Board of Directors of the
Corporation may be made at a meeting of stockholders only (1) by or at the
direction of the Board of Directors or (2) by any stockholder of the
Corporation entitled to vote for the election of directors at the meeting
who complies with the notice procedures set forth in this Section 15. Such
nominations, other than those made by or at the direction of the Board of
Directors, shall be made pursuant to timely notice in writing to the
Secretary of the Corporation. To be timely, a stockholder's notice shall
be delivered to or mailed and received at the principal executive offices
of the Corporation not less than 120 days, nor more than 150 days, in
advance of the first annual anniversary of the date of the Corporation's
proxy statement released to stockholders in connection with the previous
year's annual meeting of stockholders, except that if no annual meeting was
held in the previous year or the date of the annual meeting has been
changed by more than 30 calendar days from the date contemplated at the
time of the previous year's proxy statement, notice by the stockholder to
be timely must be so received not later than the close of business on the
tenth day following the day on which such notice of the date of the annual
meeting was mailed or such public disclosure was made. Any adjournment(s)
or postponement(s) of the original meeting whereby the meeting will
reconvene within thirty (30) days from the original date shall be deemed
for purposes of notice to be a continuation of the original meeting and no
nominations by a shareholder of persons to be elected directors of the
Corporation may be made at any such reconvened meeting other than pursuant
to a notice that was timely for the meeting on the date originally
scheduled. Such stockholder's notice shall set forth: (i) as to each
person whom the stockholder proposes to nominate for election or re-
election as a director, all information relating to such person that is
required to be disclosed in solicitations of proxies for election of
directors, or is otherwise required, in each case pursuant to Regulation
14A under the Securities Exchange Act of 1934, as amended, or any successor
regulation thereto (including such person's written consent to being named
in the proxy statement as a nominee and to serving as a director if
elected); and (ii) as to the stockholder giving notice (A) the name and
address, as they appear on the Corporation's books, of such stockholder,
and (B) the class and number of shares of the Corporation which are
beneficially owned by such stockholder. At the request of the Board of
Directors, any person nominated by the Board of Directors for election as a
director shall furnish to the Secretary of the Corporation that information
required to be set forth in a stockholder's notice of nomination which
pertains to the nominee.
The Chairman of the meeting shall, if the facts warrant, determine and
declare to the meeting that a nomination was not made in accordance with
the procedures prescribed by this Section 15, and if he should so
determine, he shall so declare to the meeting and the defective nomination
shall be disregarded.
ARTICLE III
Directors
Section 1. The Board of Directors shall consist of a minimum of twelve
(12) and a maximum of sixteen (16) directors. The number of directors
shall be fixed from time to time within the minimum and the maximum number
established by the then elected Board of Directors. The number of directors
until changed by the Board shall be sixteen (16). The maximum number of
directors may not be increased by the Board of Directors to exceed sixteen
without the affirmative vote of 75% of the members of the entire Board.
The directors need not be stockholders. No officer of the Corporation may
serve on a board of directors of any company having a present or retired
employee on the Corporation's Board of Directors. No person may stand for
election as a director if within the previous one (1) year he has resigned
from the Board as a result of the tenure provisions of Article III, Section
3 hereof regarding service for more than ten (10), eleven (11) or twelve
(12) consecutive years on the Board. No person associated with an
organization whose services are contracted by the Corporation shall serve
on the Corporation's Board of Directors; provided, however, that this
prohibition may be waived by a majority of the members of the whole Board
if the Board in its judgment determines that such waiver would be in the
best interest of the Corporation.
Section 2. The Board of Directors shall be divided into three classes,
Class I, Class II and Class III. The number of directors in each class
shall be the whole number contained in the quotient arrived at by dividing
the authorized number of directors by three, and if a fraction is also
contained in such quotient then if such fraction is one-third (1/3), the
extra director shall be a member of Class III, and if the fraction is two-
thirds (2/3), one of the extra directors shall be a member of Class III and
the other a member of Class II. Each director shall serve for a term
ending on the date of the third annual meeting following the annual meeting
at which such director was elected; provided, however, that the directors
initially appointed to Class I shall serve for a term ending on the date of
the first annual meeting next following September 30, 1988, the directors
initially appointed to Class II shall serve for a term ending on the date
of the second annual meeting next following September 30, 1988, and the
directors initially appointed to Class III shall serve for a term ending on
the date of the third annual meeting next following September 30, 1988.
One class of the directors shall be elected at each annual meeting of the
stockholders. If any such annual meeting is not held or the directors are
not elected thereat, the directors may be elected at any special meeting of
stockholders held for that purpose. All directors shall hold office until
their respective successors are elected and qualified or until their
earlier death, resignation or removal.
Section 3. Directors who are employees of the Corporation must resign
from the Board of Directors at the time of any diminution in their duties
or responsibilities as an officer, at the time they leave the employ of the
Corporation for any reason or on their 70th birthday. A director's term of
office shall automatically terminate on the date of the annual meeting of
stockholders following: (i) his seventieth (70th) birthday; (ii) the third
anniversary of his retirement from his principal occupation; (iii) unless
he is an officer of the Corporation, the date on which he has served on the
Corporation's Board of Directors a total of ten (10) complete years; (iv)
any fiscal year in which he has failed to attend at least sixty-six percent
(66%) of the meetings of the Board of Directors and any committees of the
Board of Directors on which such director serves; or (v) the first
anniversary of any change in his employment (other than a promotion or
lateral movement within the same organization). The above requirements of
Section 3 of Article III may be waived by a majority of the members of the
whole Board (excluding the director whose resignation would otherwise be
required) if the Board in its judgment determines that such waiver would be
in the best interest of the Corporation. Any director may be removed for
cause by the holders of a majority of the shares of the Corporation
entitled to vote in the election of directors; stockholders may not remove
any director without cause. The Board of Directors may not remove any
director for or without cause, and no recommendation by the Board of
Directors that a director be removed for cause may be made to the
stockholders except by the affirmative vote of not less than seventy-five
percent (75%) of the members of the whole Board; provided that the Board
may remove any director who fails to resign as required by the provisions
of these Bylaws.
Section 4. Except as otherwise provided by statute or the Certificate
of Incorporation, in the case of any increase in the number of directors,
such additional director or directors shall be proposed for election to
terms of office that will most nearly result in each class of directors
containing one-third (1/3) of the entire number of members of the whole
Board, and, unless such position is to be filled by a vote of the
stockholders at an annual or special meeting, shall be elected by a
majority vote of the directors in such class or classes, voting separately
by class. In the case of any vacancy in the Board of Directors, however
created, the vacancy or vacancies shall be filled by majority vote of the
directors remaining in the class in which the vacancy occurs or, if only
one such director remains, by such director. In the event one or more
directors shall resign, effective at a future date, such vacancy or
vacancies shall be filled as provided herein. Directors so chosen or
elected shall hold office for the remaining term of the directorship to
which appointed. Any director elected or chosen as provided herein shall
serve for the unexpired term of office or until his successor is elected
and qualified or until his earlier death, resignation or removal.
In the event of any decrease in the authorized number of directors, (a)
each director then serving as such shall nevertheless continue as a
director of the class of which he is a member until the expiration of this
current term, or his prior death, resignation or removal, and (b) the newly
eliminated directorships resulting from such decrease shall be apportioned
by the Board of Directors to such class or classes as shall, so far as
possible, bring the number of directors in the respective classes into
conformity with the formula in Section 2 hereof as applied to the newly
authorized number of directors.
Section 5. The property and business of the Corporation shall be
managed by or under the direction of its Board of Directors. In addition
to the powers and authorities by these Bylaws expressly conferred upon
them, the Board may exercise all such powers of the Corporation and do all
such lawful acts and things as are not by statute, by the Certificate of
Incorporation or by these Bylaws directed or required to be exercised or
done by the stockholders.
Meetings of the Board of Directors
Section 6. The directors may hold their meetings and have one or more
offices, and keep the books of the Corporation outside the State of
Delaware.
Section 7. Regular meetings of the Board of Directors may be held
without notice at such time and place as shall from time to time be
determined by the Board. Except as otherwise provided by statute, any
business may be transacted at any regular meeting of the Board of
Directors.
Section 8. Special meetings of the Board of Directors may be called by
the Chairman of the Board, the Vice Chairman or the President on at least
twenty-four hours' notice, or such shorter period as the person calling
deems appropriate, to each director. Special meetings shall be called by
the President or the Secretary in like manner and on like notice on the
written request of any two directors unless the Board consists of only one
director, in which case special meetings shall be called by the President
or Secretary in like manner and on like notice on the written request of
the sole director.
Section 9. At all meetings of the Board of Directors a majority of the
authorized number of directors shall be necessary and sufficient to
constitute a quorum for the transaction of business, and the vote of a
majority of the directors present at any meeting at which there is a
quorum, shall be the act of the Board of Directors, except as may be
otherwise specifically provided by statute, by the Certificate of
Incorporation or by these Bylaws. If a quorum shall not be present at any
meeting of the Board of Directors, the directors present thereat may
adjourn the meeting from time to time, without notice other than
announcement at the meeting, until a quorum shall be present. If only one
director is authorized, such sole director shall constitute a quorum. A
meeting at which a quorum is initially present may continue to transact
business notwithstanding the withdrawal of directors, if any action is
approved by at least a majority of the required quorum for such meeting.
Section 10. Unless otherwise restricted by statute, the Certificate of
Incorporation or these Bylaws, any action required or permitted to be taken
at any meeting of the Board of Directors or of any committee thereof may be
taken without a meeting, if all members of the Board or committee, as the
case may be, consent thereto in writing, and the writing or writings are
filed with the minutes of proceedings of the Board or committee.
Section 11. Unless otherwise restricted by the Certificate of
Incorporation or these Bylaws, members of the Board of Directors, or any
committee designated by the Board of Directors, may participate in a
meeting of the Board of Directors, or any committee, by means of conference
telephone or similar communications equipment by means of which all persons
participating in a meeting can hear each other, and such participation in a
meeting shall constitute presence in person at such meeting.
Committees of Directors
Section 12. The Board of Directors may, by resolution passed by a
majority of the whole Board, designate one or more committees, each such
committee to consist of one or more of the directors of the Corporation.
The Board may designate one or more directors as alternate members of any
committee, who may replace any absent or disqualified member at any meeting
of the committee. If no alternate members have been appointed, the
committee member or members thereof present at any meeting and not
disqualified from voting, whether or not he or they constitute a quorum,
may unanimously appoint another member of the Board of Directors to act at
the meeting in the place of any absent or disqualified member. The Board
of Directors shall, by resolution passed by a majority of the whole Board,
designate one member of each committee as chairman of such committee. Each
such chairman shall hold such office for a period not in excess of five
years, and shall upon surrender of such chairmanship resign from membership
on such committee. Any such committee, to the extent provided in the
resolution of the Board of Directors, shall have and may exercise all the
powers and authority of the Board of Directors in the management of the
business and affairs of the Corporation, but no such committee shall have
the power or authority to authorize an amendment to the Certificate of
Incorporation (except that a committee may, to the extent authorized in the
resolution or resolutions providing for the issuance of shares of stock
adopted by the Board of Directors, fix the designations and any of the
preferences or rights of such shares relating to dividends, redemption,
dissolution, any distribution of assets of the Corporation or the
conversion into, or the exchange of such shares for, shares of any other
class or classes or any other series of the same or any other class or
classes of stock of the Corporation, or fix the number or shares of any
series of stock or authorize the increase or decrease of the shares of any
series), adopt an agreement of merger or consolidation, recommend to the
stockholders the sale, lease or exchange of all or substantially all of the
Corporation's property and assets, recommend to the stockholders a
dissolution of the Corporation or a revocation of a dissolution, or amend
the Bylaws of the Corporation; and, unless the resolution or the
Certificate of Incorporation expressly so provide, no such committee shall
have the power or authority to declare a dividend, to authorize the
issuance of stock or to adopt a certificate of ownership and merger.
Section 13. Special meetings of committees may be called by the
Chairman of such committee, the Chairman of the Board or the President, on
at least forty-eight (48) hours notice to each member and alternate member.
Alternate members shall have the right to attend all meetings of the
committee. The Board of Directors may adopt rules of the government of any
committee not inconsistent with the provisions of these Bylaws. If a
committee is comprised of an odd number of members, a quorum shall consist
of a majority of that number. If the committee is comprised of an even
number of members, a quorum shall consist of one-half (1/2) of that number.
If a committee is comprised of two members, a quorum shall consist of both
members.
Section 14. Each Committee shall keep regular minutes of its meetings
and report the same to the Board of Directors when requested.
Compensation of Directors
Section 15. Unless otherwise restricted by the Certificate of
Incorporation or these Bylaws, the Board of Directors shall have the
authority to fix the compensation of directors. The directors may be paid
their expenses, if any, of attendance at each meeting of the Board of
Directors and may be paid a fixed sum for attendance at each meeting of the
Board of Directors or a stated salary as director. No such payment shall
preclude any director from serving the Corporation in any other capacity
and receiving compensation therefor. Members of special or standing
committees may be allowed like compensation for attending committee
meetings.
Indemnification
Section 16. (a) The Corporation shall indemnify every person who is
or was a party or is or was threatened to be made a party to any
threatened, pending or completed action, suit, or proceeding, whether
civil, criminal, administrative or investigative (other than an action by
or in the right of the Corporation), by reason of the fact that he is or
was a director, officer or employee of the Corporation or any of its direct
or indirect wholly-owned subsidiaries or, while a director, officer or
employee of the Corporation or any of its direct or indirect wholly-owned
subsidiaries, is or was serving at the request of the Corporation or any of
its direct or indirect wholly-owned subsidiaries, as a director, officer or
employee, of another corporation, partnership, joint venture, trust,
employee benefit plan or other enterprise, against expenses (including
counsel fees), judgments, fines, and amounts paid in settlement actually
and reasonably incurred by him in connection with such action, suit or
proceeding, to the full extent permitted by applicable law; provided that
the Corporation shall not be obligated to indemnify any such person against
any such action, suit or proceeding which is brought by such person against
the Corporation or any of its direct or indirect wholly-owned subsidiaries
or the directors of the Corporation or any of its direct or indirect
wholly-owned subsidiaries, other than an action brought by such person to
enforce his rights to indemnification hereunder, unless a majority of the
Board of Directors of the Corporation shall have previously approved the
bringing of such action, suit or proceeding, and provided further that the
Corporation shall not be obligated to indemnify any such person against any
action, suit or proceeding arising out of any adjudicated criminal,
dishonest or fraudulent acts, errors or omissions of such person or any
adjudicated willful, intentional or malicious acts, errors or omissions of
such person.
(b) The Corporation shall indemnify every person who is or was a party
or is or was threatened to be made a party to any threatened, pending or
completed action, suit, or proceeding, whether civil, criminal,
administrative or investigative, by reason of the fact that he is or was
licensed to practice law and an employee (including an employee who is or
was an officer) of the Corporation or any of its direct or indirect wholly-
owned subsidiaries and, while acting in the course of such employment
committed or is alleged to have committed any negligent acts, errors or
omissions in rendering professional legal services at the request of the
Corporation or pursuant to his employment (including, without limitation,
rendering written or oral legal opinions to third parties) against expenses
(including counsel fees), judgments, fines, and amounts paid in settlement
actually and reasonably incurred by him in connection with such action,
suit or proceeding, to the full extent permitted by applicable law;
provided that the Corporation shall not be obligated to indemnify any such
person against any action, suit or proceeding arising out of any
adjudicated criminal, dishonest or fraudulent acts, errors or omissions of
such person or any adjudicated willful, intentional or malicious acts,
errors or omissions of such person.
(c) The Corporation shall indemnify every person who was or is a party
or is threatened to be made a party to any threatened, pending or completed
action or suit by or in the right of the Corporation to procure a judgment
in its favor by reason of the fact that he is or was a director, officer,
or employee of the Corporation, or any of its direct or indirect wholly-
owned subsidiaries or, while a director, officer, or employee of the
Corporation or any of its direct or indirect wholly-owned subsidiaries, is
or was serving at the request of the Corporation or any of its direct or
indirect wholly-owned subsidiaries, as a director, officer, or employee of
another corporation, partnership, joint venture, trust, employee benefit
plan, or other enterprise against expenses (including attorneys' fees)
actually and reasonably incurred by him in connection with the defense or
settlement of such action or suit if he acted in good faith and in a manner
he reasonably believed to be in or not opposed to the best interests of the
Corporation and except that no indemnification shall be made in respect of
any claim, issue or matter as to which such person shall have been adjudged
to be liable to the Corporation unless and only to the extent that the
Court of Chancery or the court in which such action or suit was brought
shall determine upon application that, despite the adjudication of
liability but in view of all the circumstances of the case, such person is
fairly and reasonably entitled to indemnity for such expenses which the
Court of Chancery or such other court shall deem proper.
(d) To the extent that a director, officer, or employee of the
Corporation, or any of its direct or indirect wholly-owned subsidiaries,
has been successful on the merits or otherwise in defense of any action,
suit or proceeding referred to in subsections (a), (b) and (c) of this
section, or in defense of any claim, issue or matter therein, he shall be
indemnified against expenses (including attorneys' fees) actually and
reasonably incurred by him in connection therewith.
(e) Any indemnification under subsections (a), (b) and (c) of this
section (unless ordered by a court) shall be made by the Corporation only
as authorized in the specific case upon a determination that
indemnification of the director, officer, or employee is proper in the
circumstances because he has met the applicable standard of conduct set
forth in subsections (a), (b) and (c) of this section. Such determination
shall be made (1) by the Board of Directors by a majority vote of a quorum
consisting of Directors who were not parties to such action, suit or
proceeding, or (2) if such a quorum is not obtainable, or, even if
obtainable a quorum of disinterested directors so directs, by independent
legal counsel in a written opinion, or (3) by the stockholders.
(f) Expenses (including attorneys' fees) incurred by an officer or
director of the Corporation or any of its direct or indirect wholly-owned
subsidiaries in defending a civil, criminal, administrative or
investigative action, suit or proceeding shall be paid by the Corporation
in advance of the final disposition of such action, suit or proceeding upon
receipt of an undertaking by or on behalf of such director or officer to
repay such amount if it shall ultimately be determined that he is not
entitled to be indemnified by the Corporation as authorized in this Section
16. Such expenses incurred by other employees and agents may be so paid
upon such terms and conditions, if any, as the Board of Directors deems
appropriate.
(g) The indemnification and advancement of expenses provided by, or
granted pursuant to, this Section 16 shall not be deemed exclusive of any
other rights to which those seeking indemnification or advancement of
expenses may be entitled under any provision of law, the Corporation's
Certificate of Incorporation, the Certificate of Incorporation or Bylaws or
other governing documents of any direct or indirect wholly-owned subsidiary
of the Corporation, or any agreement, vote of stockholders or disinterested
directors or otherwise, both as to action in his official capacity and as
to action in another capacity while holding any of the positions or having
any of the relationships referred to in this Section 16.
(h) The indemnification and advancement of expenses provided by, or
granted pursuant to, this Section 16 shall, unless otherwise provided when
authorized or ratified, continue as to a person who has ceased to be a
director, officer or employee and shall inure to the benefit of the heirs,
executors and administrators of such a person.
ARTICLE IV
Officers
Section 1. The officers of the Corporation shall be a Chairman of the
Board, a Vice Chairman of the Board, a President, a Chief Financial
Officer, a Vice President, a Secretary, a Treasurer and a Controller. The
Corporation may also have, at the discretion of the Board of Directors, one
or more additional Vice Presidents, and such other officers as may be
appointed in accordance with the provisions of Section 3 of this Article.
Section 2. The officers of the Corporation, except such officers as
may be appointed in accordance with the provisions of Section 3 or Section
5 of this Article, shall be chosen by the Board of Directors, and each
shall serve at the pleasure of the Board, subject to the rights, if any, of
any officer under any contract of employment.
Section 3. The Board of Directors may appoint, and may empower the
President to appoint, such other officers as the business of the
Corporation may require, each of whom shall hold office for such period,
have such authority and perform such duties as are provided in the Bylaws
or as the Board of Directors may from time to time determine.
Section 4. Any officer may be removed, either with or without cause,
by the Board of Directors, at any regular or special meeting thereof, or
except in case of an officer chosen by the Board of Directors, by any
officer upon whom such power of removal may be conferred by the Board of
Directors, provided that such removal shall not prejudice the remedy of
such officer for breach of any contract of employment.
Any officer may resign at any time by giving written notice to the
Corporation. Any such resignation shall take effect on receipt of such
notice or at any later time specified therein. Unless otherwise specified
therein, the acceptance of such resignation shall not be necessary to make
it effective. Any such resignation is without prejudice to the rights, if
any, of the Corporation under any contract to which the officer is a party.
Section 5. A vacancy in any office because of death, resignation,
removal, disqualification or any other cause shall be filled in the manner
prescribed in these Bylaws for regular appointments to such office.
Section 6. The Chairman of the Board shall, if present, preside at all
meetings of the Board of Directors and of the stockholders, and shall
exercise and perform such other powers and duties as may be from time to
time assigned to him by the Board of Directors or prescribed by the Bylaws.
Section 7. The Vice Chairman of the Board shall exercise and perform
such powers and duties as may be from time to time assigned to him by the
Board of Directors or prescribed in these Bylaws. In the absence of the
Chairman of the Board, the Vice Chairman of the Board shall preside at all
meetings of the stockholders and the Board of Directors.
Section 8. The President shall be the chief executive officer of the
Corporation and shall, subject to the control of the Board of Directors,
have general supervision, direction and control of the business and the
officers of the Corporation. In the absence of the Chairman of the Board
and the Vice Chairman of the Board, the President shall preside at all
meetings of the stockholders and the Board of Directors. He shall have the
general powers and duties of management usually vested in the office of
President of a corporation, and shall have such other powers and duties as
may be prescribed by the Board of Directors or the Bylaws.
Section 9. In the absence or disability of the President, the Vice
Presidents, if any, in order of their rank as fixed by the Board of
Directors, or if not ranked, the Vice President designated by the
President, shall perform all the duties of the President, and when so
acting shall have all the powers of, and be subject to all the restrictions
upon, the President. The Vice Presidents shall have such other powers and
perform such other duties as from time to time may be prescribed for them
respectively by the Board of Directors, these Bylaws or the President.
Section 10. The Secretary shall keep or cause to be kept, at the
principal office or such other place as the Board of Directors may order, a
book of minutes of all meetings and actions of directors, committees of
directors and stockholders, with the time and place of holding, whether
regular or special, and, if special, how authorized, the notice thereof
given, the names of those present at directors' and committee meetings, the
number of shares present or represented at stockholders' meetings, and the
proceedings thereof.
The Secretary shall keep, or cause to be kept, at the principal office
or at the office of the Corporation's transfer agent or registrar, a share
register, or a duplicate share register, showing the names of all
stockholders and their addresses, the number and classes of shares held by
each, the number and date of certificates issued for the same, and the
number and date of cancellation of every certificate surrendered for
cancellation.
The Secretary shall give, or cause to be given, notice of all meetings
of the stockholders and of the Board of Directors required by these Bylaws
or by law to be given, and he shall keep the seal of the Corporation, if
one be adopted, in safe custody, and shall have such other powers and
perform such other duties as may be prescribed by the Board of Directors or
by the Bylaws.
Section 11. The Chief Financial Officer shall keep and maintain, or
cause to be kept and maintained, adequate and correct books and records of
accounts of the properties and business transactions of the Corporation,
including accounts of its assets, liabilities, receipts, disbursements,
gains, losses, capital, retained earnings and shares. The books of account
shall be open at all times to inspection by any director.
The Chief Financial Officer shall deposit all moneys and other
valuables in the name and to the credit of the Corporation with such
depositories as may be designated by the Board of Directors. He shall
disburse the funds of the Corporation as may be ordered by the Board of
Directors, shall render to the President and Directors, whenever they
request it, an account of all of his transactions as Chief Financial
Officer and of the financial condition of the Corporation, and shall have
other powers and perform such other duties as may be prescribed by the
Board of Directors or the Bylaws.
Section 12. The Treasurer and the Controller shall each have such
powers and perform such duties as from time to time may be prescribed for
him by the Board of Directors, the President or these Bylaws.
ARTICLE V
Certificate of Stock
Section 1. Shares of the stock of the Corporation may be represented
by certificates or uncertificated. Owners of shares of the stock of the
Corporation shall be recorded in the share register of the Corporation, and
ownership of such shares shall be evidenced by a certificate or book-entry
notation in the share register of the Corporation. Any certificates
representing such shares shall be signed by, or in the name of the
Corporation by, the Chairman or Vice Chairman of the Board of Directors, or
the President or a Vice President, and by the Secretary or any Assistant
Secretary, if one be appointed, or the Treasurer or an Assistant Treasurer
of the Corporation, certifying the number of shares represented by the
certificate owned by such stockholder in the Corporation.
Section 2. Any or all of the signatures on the certificate may be a
facsimile. In case any officer, transfer agent or registrar who has signed
or whose facsimile signature has been placed upon a certificate shall have
ceased to be such officer, transfer agent or registrar before such
certificate is issued, it may be issued by the Corporation with the same
effect as if he were such officer, transfer agent or registrar at the date
of issue.
Section 3. If the Corporation shall be authorized to issue more than
one class of stock or more than one series of any class, the powers,
designations, preferences and relative, participating, optional or other
special rights of each class of stock or series thereof and the
qualification, limitations or restrictions of such preferences and/or
rights shall be set forth in full or summarized on the face or back of the
certificate which the Corporation shall issue to represent such class or
series of stock, provided that, except as otherwise provided by statute, in
lieu of the foregoing requirements, there may be set forth on the face or
back of the certificate which the Corporation shall issue to represent such
class or series of stock, a statement that the Corporation will furnish
without charge to each stockholder who so requests the powers,
designations, preferences and relative, participating, optional or other
special rights of each class of stock or series thereof and the
qualifications, limitations or restrictions of such preferences and/or
rights.
Lost, Stolen or Destroyed Certificates
Section 4. The Board of Directors, the Secretary and the Treasurer
each may direct a new certificate or certificates to be issued in place of
any certificate or certificates theretofore issued by the Corporation
alleged to have been lost, stolen or destroyed, upon the making of an
affidavit of that fact by the owner of such certificate, or his legal
representative. When authorizing such issue of a new certificate or
certificates, the Board of Directors may, in its discretion and as a
condition precedent to the issuance thereof, require the owner of such
lost, stolen or destroyed certificate or certificates, or his legal
representative, to advertise the same in such manner as it shall require
and/or to furnish the Corporation a bond in such form and substance and
with such surety as it may direct as indemnity against any claim that may
be made against the Corporation with respect to the certificate alleged to
have been lost, stolen or destroyed.
Transfers of Stock
Section 5. Upon surrender to the Corporation, or the transfer agent of
the Corporation, of a certificate for shares duly endorsed or accompanied
by proper evidence of succession, assignation or authority to transfer, it
shall be the duty of the Corporation to issue a new certificate or other
evidence of such new shares to the person entitled thereto, cancel the old
certificate and record the transaction upon its books. Uncertificated
shares shall be transferred in the share register of the Corporation upon
the written instruction originated by the appropriate person to transfer
the shares.
Fixing Record Date
Section 6. In order that the Corporation may determine the
stockholders entitled to notice of or to vote at any meeting of the
stockholders, or any adjournment thereof, or entitled to receive payment of
any dividend or other distribution or allotment of any rights, or entitled
to exercise any rights in respect of any change, conversion or exchange of
stock or for the purpose of any other lawful action, the Board of Directors
may fix a record date which shall not be more than 60 nor less than 10 days
before the date of such meeting, nor more than 60 days prior to any other
action. A determination of stockholders of record entitled to notice of or
to vote at a meeting of stockholders shall apply to any adjournment of the
meeting; provided, however, that the Board of Directors may fix a new
record date for the adjourned meeting.
Registered Stockholder
Section 7. The Corporation shall be entitled to treat the holder of
record of any share or shares of stock as the holder in fact thereof and,
accordingly, shall not be bound to recognize any equitable or other claim
or interest in such share on the part of any other person, whether or not
it shall have express or other notice thereof, save as expressly provided
by the laws of the State of Delaware.
ARTICLE VI
General Provisions
Dividends
Section 1. Dividends upon the capital stock of the Corporation,
subject to the provisions of the Certificate of Incorporation, if any, may
be declared by the Board of Directors at any regular or special meeting,
pursuant to law. Dividends may be paid in cash, in property or in shares
of the Corporation's capital stock, subject to the provisions of the
Certificate of Incorporation.
Section 2. Before declaration of any dividend, there may be set aside
out of any funds of the Corporation available for dividends such sum or
sums as the Board of Directors from time to time, in its absolute
discretion, thinks proper as a reserve fund to meet contingencies, or for
equalizing dividends, or for repairing or maintaining any property of the
Corporation, or for such other purpose as the Board of Directors shall
think conducive to the interests of the Corporation, and the Board of
Directors may thereafter abolish any such reserve in its absolute
discretion.
Checks
Section 3. All checks, drafts or other orders for payment of money,
notes or other evidences of indebtedness, issued in the name of or payable
to the Corporation shall be signed by such officer or officers as the Board
of Directors or the President or any Vice President, acting jointly, may
from time to time designate.
Section 4. The President, any Vice President, the Secretary or the
Treasurer may enter into contracts and execute instruments on behalf of the
Corporation. The Board of Directors, the President or any Vice President
may authorize any officer or officers, and any employee or employees or
agent or agents of the Corporation or any of its subsidiaries, to enter
into any contract or execute any instrument in the name of and on behalf of
the Corporation, and such authority may be general or confined to specific
instances.
Fiscal Year
Section 5. The fiscal year of the Corporation shall be January 1
through December 31, unless otherwise fixed by resolution of the Board of
Directors.
Notices
Section 6. Whenever, under the provisions of the statutes, the
Certificate of Incorporation or these Bylaws, notice is required to be
given to any director, it shall not be construed to require personal
notice, but such notice may be given in writing, by mail, addressed to such
director, at his address as it appears on the records of the Corporation
(unless prior to mailing of such notice he shall have filed with the
Secretary a written request that notices intended for him be mailed to some
other address, in which case such notice shall be mailed to the address
designated in the request) with postage thereon prepaid, and such notice
shall be deemed to be given at the time when the same shall be deposited in
the United States mail; provided, however, that, in the case of notice of a
special meeting of the Board of Directors, if such meeting is to be held
within seven calendar days after the date of such notice, notice shall be
deemed given as of the date such notice shall be accepted for delivery by a
courier service that provides "opening of business next day" delivery, so
long as at least one attempt shall have been made, on or before the date
such notice is accepted for delivery by such courier service, to provide
notice by telephone to each director at his principal place of business and
at his principal residence. Notice to directors may also be given by
telegram, by personal delivery, by telephone or by facsimile.
Section 7. Whenever any notice is required to be given under the
provisions of the statutes, the Certificate of Incorporation or these
Bylaws, a waiver thereof in writing, or by telegraph, cable or other
written form of recorded communication, signed by the person or persons
entitled to said notice, whether before or after the time stated therein,
shall be deemed equivalent thereto.
Annual Statement
Section 8. The Board of Directors shall present at each annual
meeting, and at any special meeting of the stockholders when called for by
vote of the stockholders, a full and clear statement of the business and
condition of the Corporation.
ARTICLE VII
Amendments
Section 1. Except any amendment to this Article VII and to Article II,
Section 6, Article II, Section 10, Article III, Section 1 (as it relates to
increases in the number of directors), Article III, Section 2, the last
sentence of Article III, Section 3 (as it relates to removal of directors),
Article III, Section 4, Article III, Section 16 and Article VI, Section 6
of these Bylaws, or any of such provisions, which shall require approval by
the affirmative vote of directors representing at least seventy-five
percent (75%) of the number of directors provided for in accordance with
Article III, Section 1, and except as otherwise expressly provided in a
bylaw adopted by the stockholders as hereinafter provided, the directors,
by the affirmative vote of a majority of the whole Board and without the
assent or vote of the stockholders, may at any meeting, make, repeal,
alter, amend or rescind any of these Bylaws, provided the substance of the
proposed amendment or other action shall have been stated in a notice of
the meeting.
Section 2. These Bylaws may not be altered, amended or rescinded, and
new Bylaws may not be adopted, by the stockholders of the Corporation
except by the vote of the holders of not less than seventy-five percent
(75%) of the total voting power of all shares of stock of the Corporation
entitled to vote in the election of directors, considered for such purpose
as one class.
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<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Consolidated Statements of Operations and consoidated Statements of Financial
Position and is qualified in its entirety by reference to such financial
statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<CASH> 24,600
<SECURITIES> 0
<RECEIVABLES> 1,623,800
<ALLOWANCES> 110,300
<INVENTORY> 1,082,100
<CURRENT-ASSETS> 2,862,800
<PP&E> 4,016,100
<DEPRECIATION> 1,802,200
<TOTAL-ASSETS> 7,843,900
<CURRENT-LIABILITIES> 2,080,800
<BONDS> 1,883,400
0
0
<COMMON> 326,800
<OTHER-SE> 2,908,400
<TOTAL-LIABILITY-AND-EQUITY> 7,843,900
<SALES> 2,296,100
<TOTAL-REVENUES> 4,892,700
<CGS> 1,576,200
<TOTAL-COSTS> 3,687,700
<OTHER-EXPENSES> 1,193,100
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 108,500
<INCOME-PRETAX> (295,500)
<INCOME-TAX> 8,100
<INCOME-CONTINUING> (303,600)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (303,600)
<EPS-PRIMARY> (.95)
<EPS-DILUTED> (.95)
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