UNITED STATES 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 June 30, 2003
OR
[ ] Transition Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the transition period from _____ to _____
Commission File Number 1-3492
HALLIBURTON COMPANY
(a Delaware Corporation)
75-2677995
5 Houston Center
1401 McKinney, Suite 2400
Houston, Texas 77010
(Address of Principal Executive Offices)
Telephone Number - Area Code (713) 759-2600
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
----- ----
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act).
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.
Common stock, par value $2.50 per share:
Outstanding at July 24, 2003 - 437,927,577
HALLIBURTON COMPANY
Index
Page No.
--------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements 2-33
- Condensed Consolidated Statements of Operations 2
- Condensed Consolidated Balance Sheets 3
- Condensed Consolidated Statements of Cash Flows 4
- Notes to Quarterly Condensed Consolidated Financial Statements 5-33
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 34-61
Item 3. Quantitative and Qualitative Disclosures about Market Risk 62
Item 4. Controls and Procedures 62
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds 63
Item 4. Submission of Matters to a Vote of the Security Holders 63-64
Item 6. Exhibits and Reports on Form 8-K 64-66
Signatures 67
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
- -----------------------------
HALLIBURTON COMPANY
Condensed Consolidated Statements of Operations
(Unaudited)
(Millions of dollars and shares except per share data)
Three Months Six Months
Ended June 30 Ended June 30
-----------------------------------------------------
2003 2002 2003 2002
- -------------------------------------------------------------- ------------ ----------------------------------------
Revenues:
Services $ 3,106 $ 2,750 $ 5,735 $ 5,279
Product sales 476 457 924 917
Equity in earnings of unconsolidated affiliates 17 28 - 46
- --------------------------------------------------------------------------------------------------------------------
Total revenues $ 3,599 $ 3,235 $ 6,659 $ 6,242
- --------------------------------------------------------------------------------------------------------------------
Operating costs and expenses:
Cost of services $ 3,050 $ 3,075 $ 5,504 $ 5,605
Cost of sales 425 407 829 816
General and administrative 80 97 161 150
(Gain) loss on sale of business assets, net (27) 61 (48) (47)
- --------------------------------------------------------------------------------------------------------------------
Total operating costs and expenses $ 3,528 $ 3,640 $ 6,446 $ 6,524
- --------------------------------------------------------------------------------------------------------------------
Operating income (loss) 71 (405) 213 (282)
Interest expense (25) (30) (52) (62)
Interest income 7 12 15 16
Foreign currency gains (losses), net 19 (5) 13 (13)
Other, net 2 (2) 2 2
- --------------------------------------------------------------------------------------------------------------------
Income (loss) from continuing operations before income
taxes, minority interest, and change in accounting
principle, net 74 (430) 191 (339)
(Provision) benefit for income taxes (29) 77 (79) 41
Minority interest in net income of subsidiaries, net of tax (3) (5) (11) (10)
- --------------------------------------------------------------------------------------------------------------------
Income (loss) from continuing operations
before change in accounting principle, net 42 (358) 101 (308)
Loss from discontinued operations, net of tax
benefit of $26, $19, $30 and $34 (16) (140) (24) (168)
Cumulative effect of change in accounting principle,
net of tax benefit of $5 - - (8) -
- --------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 26 $ (498) $ 69 $ (476)
====================================================================================================================
Basic income (loss) per share:
Income (loss) from continuing operations before change in
accounting principle, net $ 0.09 $ (0.83) $ 0.23 $ (0.71)
Loss from discontinued operations, net (0.03) (0.32) (0.05) (0.39)
Cumulative effect of change in accounting principle, net - - (0.02) -
- --------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 0.06 $ (1.15) $ 0.16 $ (1.10)
====================================================================================================================
Diluted income (loss) per share:
Income (loss) from continuing operations before change in
accounting principle, net $ 0.09 $ (0.83) $ 0.23 $ (0.71)
Loss from discontinued operations, net (0.03) (0.32) (0.05) (0.39)
Cumulative effect of change in accounting principle, net - - (0.02) -
- --------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 0.06 $ (1.15) $ 0.16 $ (1.10)
====================================================================================================================
Cash dividends per share $ 0.125 $ 0.125 $ 0.25 $ 0.25
Basic weighted average common shares outstanding 434 432 434 432
Diluted weighted average common shares outstanding 436 432 436 432
See notes to quarterly condensed consolidated financial statements.
2
HALLIBURTON COMPANY
Condensed Consolidated Balance Sheets
(Unaudited)
(Millions of dollars and shares except per share data)
June 30 December 31
--------------------------------
2003 2002
- ------------------------------------------------------------------------------------------------
Assets
Current assets:
Cash and equivalents $ 1,859 $ 1,107
Receivables:
Notes and accounts receivable, net 2,656 2,533
Unbilled work on uncompleted contracts 1,010 724
- ------------------------------------------------------------------------------------------------
Total receivables 3,666 3,257
Inventories 747 734
Current deferred income taxes 212 200
Other current assets 291 262
- ------------------------------------------------------------------------------------------------
Total current assets 6,775 5,560
Property, plant and equipment, net of accumulated
depreciation of $3,403 and $3,323 2,498 2,629
Equity in and advances to related companies 412 413
Goodwill, net 669 723
Noncurrent deferred income taxes 670 607
Insurance for asbestos and silica related liabilities 2,059 2,059
Other assets, net 939 853
- ------------------------------------------------------------------------------------------------
Total assets $ 14,022 $ 12,844
================================================================================================
Liabilities and Shareholders' Equity
Current liabilities:
Short-term notes payable $ 16 $ 49
Current maturities of long-term debt 166 295
Accounts payable 1,056 1,077
Accrued employee compensation and benefits 353 370
Advanced billings on uncompleted contracts 715 641
Deferred revenues 86 100
Income taxes payable 129 148
Estimated loss on uncompleted contracts 276 82
Other current liabilities 520 510
- ------------------------------------------------------------------------------------------------
Total current liabilities 3,317 3,272
Long-term debt 2,374 1,181
Employee compensation and benefits 713 756
Asbestos and silica related liabilities 3,396 3,425
Other liabilities 580 581
Minority interest in consolidated subsidiaries 83 71
- ------------------------------------------------------------------------------------------------
Total liabilities 10,463 9,286
================================================================================================
Shareholders' equity:
Common shares, par value $2.50 per share - authorized
600 shares, issued 457 and 456 shares 1,142 1,141
Paid-in capital in excess of par value 287 293
Deferred compensation (67) (75)
Accumulated other comprehensive income (260) (281)
Retained earnings 3,070 3,110
- ------------------------------------------------------------------------------------------------
4,172 4,188
Less 19 and 20 shares of treasury stock, at cost 613 630
- ------------------------------------------------------------------------------------------------
Total shareholders' equity 3,559 3,558
- ------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 14,022 $ 12,844
================================================================================================
See notes to quarterly condensed consolidated financial statements.
3
HALLIBURTON COMPANY
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(Millions of dollars)
Six Months
Ended June 30
-------------------------------------
2003 2002
- --------------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net income (loss) $ 69 $ (476)
Adjustments to reconcile net income (loss) to net cash from operations:
Loss from discontinued operations, net 24 168
Depreciation, depletion and amortization 252 266
Benefit for deferred income taxes (77) (73)
Distributions from (advances to) related companies, net of
equity in (earnings) losses 47 14
Change in accounting principle, net 8 -
Gain on sale of assets, net (53) (50)
Asbestos and silica related liabilities, net (29) 477
Other non-cash items (6) 72
Other changes, net of non-cash items:
Receivables and unbilled work on uncompleted contracts (417) 227
Sale of receivables - 200
Inventories (45) (24)
Accounts payable (50) 169
Other working capital, net 139 (239)
Other operating activities (75) (111)
- --------------------------------------------------------------------------------------------------------------------
Total cash flows from operating activities (213) 620
- --------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Capital expenditures (229) (404)
Sales of property, plant and equipment 49 54
Dispositions (acquisitions) of businesses, net of cash disposed (acquired) 224 134
Proceeds from sale of securities 57 -
Investments - restricted cash (22) (188)
Other investing activities (29) (10)
- --------------------------------------------------------------------------------------------------------------------
Total cash flows from investing activities 50 (414)
- --------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Proceeds from long-term borrowings, net of offering costs 1,178 -
Payments on long-term borrowings (140) (4)
Borrowings (repayments) of short-term debt, net (34) 14
Payments of dividends to shareholders (109) (109)
Other financing activities (2) (2)
- --------------------------------------------------------------------------------------------------------------------
Total cash flows from financing activities 893 (101)
- --------------------------------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash 22 (12)
- --------------------------------------------------------------------------------------------------------------------
Increase in cash and equivalents 752 93
Cash and equivalents at beginning of period 1,107 290
- --------------------------------------------------------------------------------------------------------------------
Cash and equivalents at end of period $ 1,859 $ 383
====================================================================================================================
Supplemental disclosure of cash flow information:
Cash payments during the period for:
Interest $ 48 $ 53
Income taxes $ 100 $ 98
See notes to quarterly condensed consolidated financial statements.
4
HALLIBURTON COMPANY
Notes to Quarterly Condensed Consolidated Financial Statements
(Unaudited)
Note 1. Management Representations
Our accounting policies are in accordance with generally accepted
accounting principles in the United States of America. The preparation of
financial statements in conformity with accounting principles generally accepted
in the United States of America requires us to make estimates and assumptions
that affect:
- the reported amounts of assets and liabilities and disclosure
of contingent assets and liabilities at the date of the
financial statements; and
- the reported amounts of revenues and expenses during the
reporting period.
Ultimate results could differ from those estimates.
The accompanying unaudited condensed consolidated financial statements
were prepared using generally accepted accounting principles for interim
financial information and the instructions to Form 10-Q and Regulation S-X.
Accordingly, these financial statements do not include all information or
footnotes required by generally accepted accounting principles for complete
financial statements and should be read together with our 2002 Annual Report on
Form 10-K. Certain prior period amounts have been reclassified to be consistent
with the current presentation.
In our opinion, the condensed consolidated financial statements
included here contain all adjustments necessary to present fairly our financial
position as of June 30, 2003, the results of our operations for the three and
six months ended June 30, 2003 and 2002 and our cash flows for the six months
ended June 30, 2003 and 2002. Such adjustments are of a normal recurring nature.
The results of operations for the six months ended June 30, 2003 and 2002 may
not be indicative of results for the full year.
Note 2. Business Segment Information
During the second quarter of 2003, we restructured our Energy Services
Group into four divisions, which is the basis for the four segments we now
report within the Energy Services Group. We grouped product lines in order to
better align ourselves with how our customers procure our services, and to
capture new business and achieve better integration, including joint research
and development of new products and technologies and other synergies. The new
segments mirror the way our chief executive officer (our chief operating
decision maker) now regularly reviews the operating results, assesses
performance and allocates resources. Our Engineering and Construction Group
(known as KBR) segment remains unchanged.
All prior period segment results have been restated to reflect these
changes.
Our five business segments are organized around how we manage the
business. These segments are:
- Drilling and Formation Evaluation;
- Fluids;
- Production Optimization;
- Landmark and Other Energy Services; and
- Engineering and Construction Group.
Drilling and Formation Evaluation. The Drilling and Formation
Evaluation segment is primarily involved in drilling and evaluating the
formations related to bore-hole construction and initial oil and gas formation
evaluation. The products and services in this segment incorporate integrated
technologies, which offer synergies related to drilling activities and data
gathering. The segment consists of drilling services, including directional
drilling and measurement-while-drilling/logging-while-drilling; logging
services; and drill bits. Included in this business segment are our Sperry-Sun,
Logging and Perforating and Security DBS product lines. Also included is our
Mono Pumps business, which we disposed of in the first quarter of 2003.
Fluids. The Fluids segment focuses on fluid management and technologies
to assist in the drilling and construction of oil and gas wells. Drilling fluids
are used to provide for well control, drilling efficiency, and as a means of
removing wellbore cuttings. Cementing services provide zonal isolation to
prevent fluid movement between formations, ensure a bond to provide support for
the casing, and provide wellbore reliability. Our Baroid and Cementing product
lines, along with our equity method investment in Enventure Global Technology,
LLC, an expandable casing joint venture, are included in this business segment.
5
Production Optimization. The Production Optimization segment primarily
tests, measures and provides means to manage and/or improve well production once
a well is drilled and, in some cases, after it has been producing. This segment
consists of:
- production enhancement services (including fracturing,
acidizing, coiled tubing, hydraulic workover, sand control,
and pipeline and process services);
- completion products and services (including well completion
equipment, slickline and safety systems);
- tools and testing services (including underbalanced
applications and tubular conveyed perforating testing
services); and
- subsea operations conducted in our 50% owned company, Subsea
7, Inc.
Landmark and Other Energy Services. This segment represents integrated
exploration and production software information systems, consulting services,
real-time operations, smartwells, subsea operations not contributed to Subsea 7,
Inc. and non-core businesses. Included in this business segment are Landmark
Graphics, Integrated Solutions, Real Time Operations and our equity method
investment in WellDynamics B.V., an intelligent well completions joint venture.
Also included are Wellstream, Bredero-Shaw and European Marine Contractors Ltd.,
all of which have been sold.
Engineering and Construction Group. The Engineering and Construction
Group provides engineering, procurement, construction, project management and
facilities operation and maintenance for oil and gas and other industrial and
governmental customers. The Engineering and Construction Group offers the
following types of products and services:
- Onshore operations consist of engineering and construction
activities, including engineering and construction of
liquefied natural gas, ammonia and natural gas plants, and
crude oil refineries;
- Offshore operations include offshore deepwater engineering and
marine technology and worldwide construction capabilities;
- Government Services provide engineering, operations,
construction, maintenance and logistics activities for
government facilities and installations;
- Operations and Maintenance services include plant operations,
construction maintenance and start-up services for both
upstream and downstream oil, gas and petrochemical facilities
as well as engineering, operations, maintenance and logistics
services for the power, commercial and industrial markets; and
- Infrastructure provides civil engineering, construction,
consulting and project management services.
6
The tables below present revenues, operating income (loss) and total
assets by business segment on a comparable basis.
Three Months Six Months
Ended June 30 Ended June 30
----------------------------------------------------
Millions of dollars 2003 2002 2003 2002
- ------------------------------------------------------------------------------------------------------
Revenues:
Drilling and Formation Evaluation $ 414 $ 413 $ 793 $ 812
Fluids 518 450 998 903
Production Optimization 693 634 1,322 1,246
Landmark and Other Energy Services 155 259 278 484
- ------------------------------------------------------------------------------------------------------
Total Energy Services Group 1,780 1,756 3,391 3,445
Engineering and Construction Group 1,819 1,479 3,268 2,797
- ------------------------------------------------------------------------------------------------------
Total $ 3,599 $ 3,235 $ 6,659 $ 6,242
======================================================================================================
Operating income (loss):
Drilling and Formation Evaluation $ 49 $ 42 $ 115 $ 80
Fluids 68 49 123 100
Production Optimization 113 106 183 189
Landmark and Other Energy Services 5 (127) (6) (130)
- ------------------------------------------------------------------------------------------------------
Total Energy Services Group 235 70 415 239
Engineering and Construction Group (148) (450) (167) (508)
General corporate (16) (25) (35) (13)
- ------------------------------------------------------------------------------------------------------
Total $ 71 $ (405) $ 213 $ (282)
======================================================================================================
Millions of dollars June 30, 2003 December 31, 2002
--------------------------------------------------------------------------------------------
Total Assets:
Drilling and Formation Evaluation $ 1,101 $ 1,163
Fluids 855 830
Production Optimization 1,425 1,365
Landmark and Other Energy Services 1,124 1,399
Shared Energy Services Assets 1,180 1,187
--------------------------------------------------------------------------------------------
Total Energy Services Group 5,685 5,944
Engineering and Construction Group 3,773 3,104
General Corporate 4,564 3,796
--------------------------------------------------------------------------------------------
Total $ 14,022 $ 12,844
============================================================================================
Within the Energy Services Group, only certain assets are associated
with specific segments. Those assets include receivables, inventories, certain
identified property, plant and equipment (including field service equipment),
equity in and advances to related companies and goodwill. The remaining assets,
such as cash and the remaining property, plant and equipment (including shared
facilities) are not associated with a segment but are considered to be shared
among the segments within the Energy Services Group.
Intersegment revenues are immaterial.
Note 3. Dispositions
Halliburton Measurement Systems. In May 2003, we sold certain assets of
Halliburton Measurement Systems, which provides flow measurement and sampling
systems, to NuFlo Technologies, Inc. for approximately $33 million in cash,
subject to post-closing adjustments. The pretax gain on the sale of Halliburton
Measurement Systems assets was $24 million ($14 million after tax, or $0.03 per
diluted share) and is included in our Production Optimization segment.
Wellstream. In March 2003, we sold the assets relating to our
Wellstream business, a global provider of flexible pipe products, systems and
solutions to Candover Partners Ltd. for $136 million in cash. The assets sold
included manufacturing plants in Newcastle on the Tyne, United Kingdom, and
Panama City, Florida, as well as certain assets and contracts in Brazil. The
transaction resulted in a pretax loss of $15 million ($12 million after tax, or
7
$0.03 per diluted share), which is included in our Landmark and Other Energy
Services segment. Included in the pretax loss is the write-off of the cumulative
translation adjustment related to Wellstream of approximately $9 million. The
cumulative translation adjustment could not be tax benefited and therefore the
effective tax benefit for this loss on disposition was only 20%.
Mono Pumps. In January 2003, we sold our Mono Pumps business to
National Oilwell, Inc. (NYSE: NOI). The sale price of approximately $88 million
was paid with $23 million in cash and 3.2 million shares of National Oilwell
common stock, which were valued at $65 million on January 15, 2003. We recorded
a pretax gain of $36 million ($21 million after tax, or $0.05 per diluted share)
on the sale, which is included in our Drilling and Formation Evaluation segment.
Included in the pretax gain is the write-off of the cumulative translation
adjustment related to Mono Pumps of approximately $5 million. The cumulative
translation adjustment could not be tax benefited and therefore the effective
tax rate for this disposition was 42%. In February 2003, we sold 2.5 million of
our 3.2 million shares of the National Oilwell common stock for $52 million,
which resulted in a gain of $2 million pretax, or $1 million after tax, that was
recorded in "Other, net".
Subsea 7 formation. In May 2002, we contributed substantially all of
our Halliburton Subsea assets, with a book value of approximately $82 million,
to a newly formed company, Subsea 7, Inc. The contributed assets were recorded
by the new company at a fair value of approximately $94 million. The $12 million
difference is being amortized over ten years representing the average remaining
useful life of the assets contributed. We own 50% of Subsea 7, Inc. and account
for this investment using the equity method in our Production Optimization
segment. The remaining 50% is owned by DSND Subsea ASA.
Bredero-Shaw. In the second quarter of 2002, we incurred an impairment
charge of $61 million ($0.14 per diluted share after tax) related to our then
pending sale of Bredero-Shaw. On September 30, 2002, we sold our 50% interest in
the Bredero-Shaw joint venture to our partner ShawCor Ltd. The sale price of
$149 million was comprised of $53 million in cash, a short-term note of $25
million and 7.7 million of ShawCor Class A Subordinate shares. Consequently, we
recorded a 2002 third quarter pretax loss on the sale of $18 million, or $0.04
per diluted share after tax, which is reflected in our Landmark and Other Energy
Services segment. Included in this loss was $15 million of cumulative
translation adjustment loss which was realized upon the disposition of our
investment in Bredero-Shaw. During the 2002 fourth quarter, we recorded in
"Other, net" a $9 million pretax loss on the sale of ShawCor shares.
European Marine Contractors Ltd. In January 2002, we sold our 50%
interest in European Marine Contractors Ltd., an unconsolidated joint venture
reported within our Landmark and Other Energy Services, to our joint venture
partner, Saipem. At the date of sale, we received $115 million in cash and a
contingent payment option valued at $16 million, resulting in a pretax gain of
$108 million. The contingent payment option was based on a formula linked to
performance of the Oil Service Index. In February 2002, we exercised our option
and received an additional $19 million and recorded a pretax gain of $3 million
in "Other, net" in the statement of operations as a result of the increase in
value of this option.
Note 4. Discontinued Operations
During the second quarter of 2003, we recorded a pretax loss from
discontinued operations of $42 million. This loss reflects a $30 million charge
for the debtor-in-possession financing provided to Harbison-Walker in connection
with their Chapter 11 bankruptcy proceeding which was funded on July 31, 2003
and is expected to be forgiven by us on the earlier of the effective date of a
plan of reorganization for DII Industries or the effective date of a plan of
reorganization for Harbison-Walker acceptable to DII Industries. In addition,
discontinued operations included professional fees associated with the due
diligence and other aspects of the proposed settlement for asbestos liabilities
offset by a release of environmental and legal accruals related to indemnities
associated with our 2001 disposition of Dresser Equipment Group that are no
longer required.
During the first quarter of 2003, we recorded as pretax expense to
discontinued operations $12 million for professional fees associated with due
diligence and other aspects of the proposed settlement for asbestos and silica
liabilities.
8
During the second quarter of 2002, in connection with our asbestos
econometric study, we recorded a pretax expense of $153 million to discontinued
operations for existing and future asbestos claims and defense costs related to
businesses disposed of, net of anticipated insurance recoveries. See Note 11. We
also recorded pretax expense of $6 million associated with the Harbison-Walker
bankruptcy filing.
During the first quarter of 2002, we recorded as pretax expense to
discontinued operations $3 million for asbestos claims and defense costs related
to businesses disposed of, net of anticipated insurance recoveries for asbestos
claims. We also recorded pretax expense for a $40 million payment associated
with the Harbison-Walker bankruptcy filing.
Note 5. Income (Loss) Per Share
Three Months Six Months
Ended June 30 Ended June 30
Millions of dollars and shares except ---------------------------------------------------
per share data 2003 2002 2003 2002
- --------------------------------------------------------------------------------------------------------------
Income (loss) from continuing operations before
change in accounting principle, net $ 42 $ (358) $ 101 $ (308)
==============================================================================================================
Basic weighted average common shares outstanding 434 432 434 432
Effect of common stock equivalents 2 - 2 -
- --------------------------------------------------------------------------------------------------------------
Diluted weighted average common shares outstanding 436 432 436 432
==============================================================================================================
Income (loss) per common share from continuing
operations before change in accounting
principle, net:
Basic $ 0.09 $ (0.83) $ 0.23 $ (0.71)
==============================================================================================================
Diluted $ 0.09 $ (0.83) $ 0.23 $ (0.71)
==============================================================================================================
Basic income (loss) per common share is based on the weighted average
number of common shares outstanding during the period. Diluted income (loss) per
common share includes additional common shares that would have been outstanding
if potential common shares with a dilutive effect had been issued. Excluded from
the computation of diluted income (loss) per common share are options to
purchase 15 million shares of common stock which were outstanding during the
three and six months ended June 30, 2003. These options were outstanding during
the applicable period, but were excluded because the option exercise price was
greater than the average market price of the common shares. The shares issuable
upon conversion of the 3.125% convertible senior notes due 2023 (see Note 15)
were not included in the computation of diluted income (loss) per common share
since the conditions for conversion had not been met as of June 30, 2003.
For the three and the six months ended June 30, 2002, we used the basic
weighted average shares in the calculation of diluted loss per common share, as
the effect of the common stock equivalents (which totaled two million shares for
each period) would be anti-dilutive based upon the net loss from continuing
operations.
Note 6. Comprehensive Income (Loss)
The components of other comprehensive income adjustments to net income
include the following:
Three Months Six Months
Ended June 30 Ended June 30
--------------------------------------------------------
Millions of dollars 2003 2002 2003 2002
- --------------------------------------------------------------------------------------------------------------
Net income (loss) $ 26 $ (498) $ 69 $ (476)
Cumulative translation adjustment 25 32 12 35
Realization of losses included in net income 1 - 15 -
- --------------------------------------------------------------------------------------------------------------
Net cumulative translation adjustment 26 32 27 35
Pension liability adjustments (7) - (7) -
Unrealized losses on investments and derivatives 2 - 1 -
- --------------------------------------------------------------------------------------------------------------
Total comprehensive income (loss) $ 47 $ (466) $ 90 $ (441)
==============================================================================================================
9
Accumulated other comprehensive income consisted of the following:
June 30 December 31
--------------------------------
Millions of dollars 2003 2002
- -------------------------------------------------------------------------------------
Cumulative translation adjustments $ (94) $ (121)
Pension liability adjustments (164) (157)
Unrealized losses on investments and derivatives (2) (3)
- -------------------------------------------------------------------------------------
Total accumulated other comprehensive income $ (260) $ (281)
=====================================================================================
Note 7. Restricted Cash
At June 30, 2003 we had restricted cash of $212 million included in
"Other assets, net". Restricted cash consists of:
- $108 million deposit that collateralizes a bond for a patent
infringement judgment on appeal;
- $78 million as collateral for potential future insurance claim
reimbursements; and
- $26 million primarily related to cash collateral agreements
for outstanding letters of credit for various projects.
At December 31, 2002 we had restricted cash of $190 million, consisting
of similar items.
Note 8. Receivables
Included in notes and accounts receivable are notes with varying
interest rates totaling $23 million at June 30, 2003 and $53 million at December
31, 2002.
On April 15, 2002, we entered into an agreement to sell accounts
receivable to a bankruptcy-remote limited-purpose funding subsidiary. Under the
terms of the agreement, new receivables are added on a continuous basis to the
pool of receivables, and collections reduce previously sold accounts receivable.
This funding subsidiary sells an undivided ownership interest in this pool of
receivables to entities managed by unaffiliated financial institutions under
another agreement. Sales to the funding subsidiary have been structured as "true
sales" under applicable bankruptcy laws. The assets of the funding subsidiary
are not available to pay any creditors of ours or of our subsidiaries or
affiliates, until such time as the agreement with the unaffiliated companies is
terminated following sufficient collections to liquidate all outstanding
undivided ownership interests. The funding subsidiary retains the interest in
the pool of receivables that are not sold to the unaffiliated companies and is
fully consolidated and reported in our financial statements.
The amount of undivided interests which can be sold under the program
varies based on the amount of eligible Energy Services Group receivables in the
pool at any given time and other factors. The funding subsidiary initially sold
a $200 million undivided ownership interest to the unaffiliated companies, and
may from time to time sell additional undivided ownership interests. The total
amount outstanding under this facility was $180 million as of June 30, 2003. The
undivided ownership interest in the pool of receivables sold to the unaffiliated
companies is reflected as a reduction of accounts receivable in our consolidated
balance sheets. In July 2003, the balance outstanding under this facility was
reduced to zero.
Note 9. Inventories
Inventories are stated at the lower of cost or market. We manufacture
in the United States certain finished products and parts inventories for drill
bits, completion products and bulk materials that are recorded using the
last-in, first-out method and totaled $45 million at June 30, 2003 and $43
million at December 31, 2002. If the average cost method had been used, total
inventories would have been $18 million higher than reported at June 30, 2003
and $17 million higher than reported at December 31, 2002.
Over 90% of remaining inventory is recorded on the average cost method,
with the remainder on the first-in, first-out method.
10
Inventories at June 30, 2003 and December 31, 2002 are composed of the
following:
June 30 December 31
--------------------------------
Millions of dollars 2003 2002
- -----------------------------------------------------------------
Finished products and parts $ 505 $ 545
Raw materials and supplies 179 141
Work in process 63 48
- -----------------------------------------------------------------
Total $ 747 $ 734
=================================================================
Note 10. Long-Term Construction Contracts and Unapproved Claims
Revenues from engineering and construction contracts are reported on
the percentage of completion method of accounting using measurements of progress
toward completion appropriate for the work performed. Progress is generally
based upon physical progress, man-hours or costs incurred based upon the
appropriate method for the type of job.
Billing practices for engineering and construction projects are
governed by the contract terms of each project based upon costs incurred,
achievement of milestones or pre-agreed schedules. Billings do not necessarily
correlate with revenues recognized under the percentage of completion method of
accounting. Billings in excess of recognized revenues are recorded in "Advanced
billings on uncompleted contracts". When billings are less than recognized
revenues, the difference is recorded in "Unbilled work on uncompleted
contracts". With the exception of claims and change orders which are in the
process of being negotiated with customers, unbilled work is usually billed
during normal billing processes following achievement of the contractual
requirements.
Recording of profits and losses on long-term contracts requires an
estimate of the total profit or loss over the life of each contract. This
estimate requires consideration of contract revenue, change orders and claims
reduced by costs incurred and estimated costs to complete. Anticipated losses on
contracts are recorded in full in the period they become evident. Except where
we, because of uncertainties in the estimation of costs on a limited number of
projects, deem it prudent to defer income recognition, we do not delay income
recognition until projects have reached a specified percentage of completion. We
have not done so during the periods presented, although we followed such a
practice for some offshore projects prior to the periods presented herein.
Otherwise, profits are recorded from the commencement date of the contract based
upon the total estimated contract profit multiplied by the current percentage
complete for the contract.
When calculating the amount of total profit or loss on a long-term
contract, we include unapproved claims as revenue when the collection is deemed
probable based upon the four criteria for recognizing unapproved claims under
the American Institute of Certified Public Accountants Statement of Position
81-1, "Accounting for Performance of Construction-Type and Certain
Production-Type Contracts". Including unapproved claims in this calculation
increases the operating income (or reduces the operating loss) that would
otherwise be recorded without consideration of the probable unapproved claims.
Unapproved claims are recorded to the extent of costs incurred and include no
profit element. In substantially all cases, the probable unapproved claims
included in determining contract profit or loss are less than the actual claim
that will be or has been presented to the customer.
When recording the revenue and the associated unbilled receivable for
unapproved claims, we only accrue an amount up to the costs incurred related to
probable unapproved claims. The difference between the probable unapproved
claims included in determining contract profit or loss and the probable
unapproved claims recorded in "Unbilled work on uncompleted contracts" relates
to forecasted costs which have not yet been incurred. The amounts included in
determining the profit or loss on contracts, and the amounts booked to "Unbilled
work on uncompleted contracts" for each period are as follows:
June 30 December 31
--------------------------------
Millions of dollars 2003 2002
- ------------------------------------------------------------------------------
Probable unapproved claims (included
in determining contract profit or loss) $ 335 $ 279
Unapproved claims in unbilled work on
uncompleted contracts $ 285 $ 210
==============================================================================
11
Our claims at June 30, 2003 are listed in the table above. These claims
relate to ten contracts, most of which are complete or substantially complete.
We are actively engaged in claims negotiation with the customers. The largest
claim relates to the Barracuda-Caratinga contract which was approximately 75%
complete at June 30, 2003. The probable unapproved claims included in
determining this contract's loss were $182 million at June 30, 2003 and at
December 31, 2002. As most of the claim elements for this contract will likely
not be settled within one year, related amounts in unbilled work on uncompleted
contracts of $134 million at June 30, 2003 and $115 million at December 31, 2002
included in the table above have been recorded to long-term unbilled work on
uncompleted contracts which is included in "Other assets, net" on the balance
sheet. All other claims included in the table above have been recorded to
"Unbilled work on uncompleted contracts" included in the "Total receivables"
amount on the balance sheet.
A summary of unapproved claims activity for the three and six months
ended June 30, 2003 is as follows:
Total Probable Unapproved Probable Unapproved Claims
Claims Unbilled Work
--------------------------------------------------------------------
Three Months Six Months Three Months Six Months
Ended Ended Ended Ended
Millions of dollars June 30, 2003 June 30, 2003 June 30, 2003 June 30, 2003
- ---------------------------------------------------------------------------------------------------------
Beginning balance $ 298 $ 279 $ 237 $ 210
Additions 42 62 41 61
Costs incurred during period - - 12 20
Other (5) (6) (5) (6)
- ---------------------------------------------------------------------------------------------------------
Ending balance $ 335 $ 335 $ 285 $ 285
=========================================================================================================
In addition, our unconsolidated related companies include probable
unapproved claims as revenue to determine the amount of profit or loss for their
contracts. Our "Equity in earnings of unconsolidated affiliates" includes our
equity percentage of unapproved claims related to unconsolidated projects
totaling $11 million at June 30, 2003 and $9 million at December 31, 2002.
Note 11. Commitments and Contingencies - Asbestos and Silica
Asbestos litigation. Several of our subsidiaries, particularly DII
Industries, LLC (DII Industries) and Kellogg Brown & Root, Inc. (Kellogg Brown &
Root), are defendants in a large number of asbestos-related lawsuits. The
plaintiffs allege injury as a result of exposure to asbestos in products
manufactured or sold by former divisions of DII Industries or in materials used
in construction or maintenance projects of Kellogg Brown & Root.
These claims are in three general categories:
- refractory claims;
- other DII Industries claims; and
- construction claims.
Refractory claims. Asbestos was used in a small number of products
manufactured or sold by Harbison-Walker Refractories Company, which DII
Industries acquired in 1967. The Harbison-Walker operations were conducted as a
division of DII Industries (then named Dresser Industries, Inc.) until those
operations were transferred to another then-existing subsidiary of DII
Industries in preparation for a spin-off. Harbison-Walker was spun-off by DII
Industries in July 1992. At that time, Harbison-Walker assumed liability for
asbestos claims filed after the spin-off and it agreed to defend and indemnify
DII Industries from liability for those claims, although DII Industries
continues to have direct liability to tort claimants for all post spin-off
refractory asbestos claims. DII Industries retained responsibility for all
asbestos claims pending as of the date of the spin-off. The agreement governing
the spin-off provided that Harbison-Walker would have the right to access DII
Industries historic insurance coverage for the asbestos-related liabilities that
Harbison-Walker assumed in the spin-off. After the spin-off, DII Industries and
Harbison-Walker jointly negotiated and entered into coverage-in-place agreements
with a number of insurance companies that had issued historic general liability
insurance policies which both DII Industries and Harbison-Walker had the right
to access for, among other things, bodily injury occurring between 1963 and
1985. These coverage-in-place agreements provide for the payment of defense
costs, settlements and court judgments paid to resolve refractory asbestos
claims.
12
As Harbison-Walker's financial condition worsened in late 2000 and
2001, Harbison-Walker began agreeing to pay more in settlement of the post
spin-off refractory claims than it historically had paid. These increased
settlement amounts led to Harbison-Walker making greater demands on the shared
insurance asset. By July 2001, DII Industries determined that the demands that
Harbison-Walker was making on the shared insurance policies were not acceptable
to DII Industries and that Harbison-Walker probably would not be able to fulfill
its indemnification obligation to DII Industries. Accordingly, DII Industries
took up the defense of unsettled post spin-off refractory claims that name it as
a defendant in order to prevent Harbison-Walker from unnecessarily eroding the
insurance coverage both companies access for these claims. These claims are now
stayed in the Harbison-Walker bankruptcy proceeding.
As of June 30, 2003, there were approximately 6,000 open and unresolved
pre-spin-off refractory claims against DII Industries. In addition, there were
approximately 153,000 post spin-off claims that name DII Industries as a
defendant.
Other DII Industries claims. As of June 30, 2003, there were
approximately 185,000 open and unresolved claims alleging injuries from asbestos
used in other products formerly manufactured by DII Industries or its
predecessors. Most of these claims involve gaskets and packing materials used in
pumps and other industrial products.
Construction claims. Our Engineering and Construction Group includes
engineering and construction businesses formerly operated by The M.W. Kellogg
Company and Brown & Root, Inc., now combined as Kellogg Brown & Root. As of June
30, 2003, there were approximately 81,000 open and unresolved claims alleging
injuries from asbestos in materials used in construction and maintenance
projects, most of which were conducted by Brown & Root, Inc. Approximately 6,000
of these claims are asserted against The M.W. Kellogg Company. We believe that
Kellogg Brown & Root has a good defense to these claims, and a prior owner of
The M.W. Kellogg Company provides Kellogg Brown & Root a contractual
indemnification for claims against The M.W. Kellogg Company.
Harbison-Walker Chapter 11 bankruptcy. On February 14, 2002,
Harbison-Walker filed a voluntary petition for reorganization under Chapter 11
of the United States Bankruptcy Code in the Bankruptcy Court in Pittsburgh,
Pennsylvania. In its initial bankruptcy-related filings, Harbison-Walker said
that it would seek to utilize Sections 524(g) and 105 of the Bankruptcy Code to
propose and seek confirmation of a plan of reorganization that would provide for
distributions for all legitimate, pending and future asbestos claims asserted
directly against Harbison-Walker or asserted against DII Industries for which
Harbison-Walker is required to indemnify and defend DII Industries.
Harbison-Walker's failure to fulfill its indemnity obligations, and its
erosion of insurance coverage shared with DII Industries, required DII
Industries to assist Harbison-Walker in its bankruptcy proceeding in order to
protect the shared insurance from dissipation. At the time that Harbison-Walker
filed its bankruptcy, DII Industries agreed to provide up to $35 million of
debtor-in-possession financing to Harbison-Walker during the pendency of the
Chapter 11 proceeding, of which $5 million was advanced during the first quarter
of 2002. Halliburton funded the remaining $30 million on July 31, 2003. We
recorded a pretax charge of $30 million in "Loss from discontinued operations"
in our condensed consolidated statements of operations for the second quarter
2003, as the debtor-in-possession financing is expected to be forgiven on the
earlier of the effective date of a plan of reorganization for DII Industries or
the effective date of a plan of reorganization for Harbison-Walker acceptable to
DII Industries. On February 14, 2002, in accordance with the terms of a letter
agreement, DII Industries paid $40 million to Harbison-Walker's United States
parent holding company, RHI Refractories Holding Company. This payment was
charged to discontinued operations in our financial statements in the first
quarter of 2002.
The terms of the letter agreement also require DII Industries to pay to
RHI Refractories an additional $35 million if a plan of reorganization is
proposed in the Harbison-Walker bankruptcy proceedings, and an additional $85
million if a plan is confirmed in the Harbison-Walker bankruptcy proceedings, in
each case acceptable to DII Industries in its sole discretion. The letter
agreement provides that a plan acceptable to DII Industries must include an
injunction channeling to a Section 524(g)/105 trust all present and future
asbestos claims against DII Industries arising out of the Harbison-Walker
business or other DII Industries' businesses that share insurance with
Harbison-Walker.
13
Harbison-Walker filed a proposed plan of reorganization on July 31,
2003. However, the proposed plan does not provide for a Section 524(g)/105
injunction for the benefit of DII Industries and other DII Industries businesses
that share insurance with Harbison-Walker, and DII Industries has not consented
to the plan. Although possible, at this time we do not believe it likely that
Harbison-Walker will propose or will be able to confirm a plan of reorganization
in its bankruptcy proceeding that is acceptable to DII Industries within the
meaning of the letter agreement with RHI Refractories.
In general, in order for a Harbison-Walker plan of reorganization
involving a Section 524(g)/105 trust to be confirmed, the plan would need, among
other things, to be structured to provide substantially similar treatment to
current and future asbestos claimants and the creation of the trust would
require the approval of 75% of those asbestos claimant creditors of
Harbison-Walker voting on the plan. A plan also would be subject to completion
of negotiations of material terms and definitive plan documentation with the
asbestos claimants committee, a futures representative for asbestos claimants in
the Harbison-Walker bankruptcy cases and DII Industries. There can be no
assurance that any plan proposed by Harbison-Walker would be structured to meet
the requirements for obtaining an injunction or that Harbison-Walker could
obtain the necessary approval.
As an alternative, DII Industries has entered into a settlement in
principle with Harbison-Walker which would resolve substantially all of the
issues between them. This agreement is subject to negotiation of definitive
documentation and court approval in Harbison-Walker's bankruptcy case. If
approved by the court in Harbison-Walker's bankruptcy case, this agreement would
provide for:
- channeling of asbestos and silica personal injury claims
against Harbison-Walker and certain of its affiliates to the
trusts created in the Chapter 11 cases being contemplated for
DII Industries and Kellogg Brown & Root;
- release by Harbison-Walker and its affiliates of any rights in
insurance shared with DII Industries on occurrence of the
effective date of the plan of reorganization for DII
Industries;
- release by DII Industries of any right to be indemnified by
Harbison-Walker for asbestos or silica personal injury claims;
- forgiveness by DII Industries of all of Harbison-Walker's
obligations under the debtor-in-possession financing provided
by DII Industries on the earlier of the effective date of a
plan of reorganization for DII Industries or the effective
date of a plan of reorganization for Harbison-Walker
acceptable to DII Industries;
- purchase by DII Industries of Harbison-Walker's outstanding
insurance receivables for an amount of approximately $50
million on the earliest of the effective date of a plan of
reorganization for DII Industries, the effective date of a
plan of reorganization for Harbison-Walker acceptable to DII
Industries or December 31, 2003. It is expected that a portion
of this receivable would require a reserve for
uncollectibility due to the insolvency of the insurance
carriers. This receivable and related allowance will be
recorded in the third quarter 2003;
- guarantee of the insurance receivable purchase price by
Halliburton on a subordinated basis; and
- negotiation between the parties on a mutually-agreeable
structure for resolving other products or tort claims.
We do not believe it probable that DII Industries will be obligated to
make either of the additional $35 million or $85 million payments to RHI
Refractories described above because the plan of reorganization filed by
Harbison-Walker on July 31, 2003 in its bankruptcy proceeding would not, if
confirmed, create a Section 524(g) and/or 105 channeling injunction in favor of
DII Industries and because the plan of reorganization filed by Harbison-Walker
is not acceptable to DII Industries within the meaning of the February 14, 2002
letter agreement. RHI A.G., the ultimate corporate parent of RHI Refractories,
has indicated that it believes otherwise, and has announced an intent to take
legal action against us to recover $35 million they believe is presently owing.
On August 8, 2003, we filed a declaratory judgment lawsuit against RHI
Refractories in the District Court of Harris County, Texas, 80th Judicial
District seeking a declaration from the court that we do not owe RHI
Refractories any money pursuant to the letter agreement.
14
In connection with the Chapter 11 filing by Harbison-Walker, the
Bankruptcy Court on February 14, 2002 issued a temporary restraining order
staying all further litigation of more than 200,000 asbestos claims currently
pending against DII Industries in numerous courts throughout the United States.
The period of the stay contained in the temporary restraining order has been
extended through September 30, 2003. At present, the stay will terminate at
close of business on September 30, 2003, but DII Industries does have the
ability, provided the asbestos claimants committee in the Harbison-Walker
bankruptcy agrees, to request that the Court extend the stay further. Currently,
there is no assurance that a stay will remain in effect beyond September 30,
2003, that a plan of reorganization will be confirmed for Harbison-Walker, or
that any plan that is confirmed will provide relief to DII Industries. Should
the stay expire on September 30, 2003, the Bankruptcy Court established that
discovery on the claims that had been stayed cannot begin until November 1, 2003
and that trials on any of the claims that had been stayed cannot commence before
January 1, 2004.
The stayed asbestos claims are those covered by insurance that DII
Industries and Harbison-Walker each access to pay defense costs, settlements and
judgments attributable to both refractory and non-refractory asbestos claims.
The stayed claims include approximately 153,000 post-1992 spin-off refractory
claims, 6,000 pre-spin-off refractory claims and approximately 135,000 other
types of asbestos claims pending against DII Industries. Approximately 51,000 of
the claims in the third category are claims made against DII Industries based on
more than one ground for recovery and the stay affects only the portion of the
claim covered by the shared insurance. The stay prevents litigation from
proceeding while the stay is in effect and also prohibits the filing of new
claims. One of the purposes of the stay is to allow Harbison-Walker and DII
Industries time to develop and propose a plan of reorganization.
Asbestos insurance coverage. DII Industries has substantial insurance
for reimbursement for portions of the costs incurred defending asbestos and
silica claims, as well as amounts paid to settle claims and court judgments.
This coverage is provided by a large number of insurance policies written by
dozens of insurance companies. The insurance companies wrote the coverage over a
period of more than 30 years for DII Industries, its predecessors or its
subsidiaries and their predecessors. Large amounts of this coverage are now
subject to coverage-in-place agreements that resolve issues concerning amounts
and terms of coverage. The amount of insurance available to DII Industries and
its subsidiaries depends on the nature and time of the alleged exposure to
asbestos or silica, the specific subsidiary against which an asbestos or silica
claim is asserted and other factors.
Refractory claims insurance. DII Industries has approximately $2.1
billion in aggregate limits of insurance coverage for refractory asbestos and
silica claims, of which over one-half is with Equitas or other London-based
insurance companies. Most of this insurance is shared with Harbison-Walker. Many
of the issues relating to the majority of this coverage have been resolved by
coverage-in-place agreements with dozens of companies, including Equitas and
other London-based insurance companies. Coverage-in-place agreements are
settlement agreements between policyholders and the insurers specifying the
terms and conditions under which coverage will be applied as claims are
presented for payment. These agreements in an asbestos claims context govern
such things as what events will be deemed to trigger coverage, how liability for
a claim will be allocated among insurers and what procedures the policyholder
must follow in order to obligate the insurer to pay claims. Beginning in 2001
however, Equitas and other London-based companies have attempted to impose new
restrictive documentation requirements on DII Industries and other insureds.
Equitas and the other London-based companies have stated that the new
requirements are part of an effort to limit payment of settlements to claimants
who are truly impaired by exposure to asbestos and can identify the product or
premises that caused their exposure.
On March 21, 2002, Harbison-Walker filed a lawsuit in the United States
Bankruptcy Court for the Western District of Pennsylvania in its Chapter 11
bankruptcy proceeding. This lawsuit is substantially similar to DII Industries
lawsuit filed in Texas State Court in 2001 and seeks, among other relief, a
determination as to the rights of DII Industries and Harbison-Walker to the
shared general liability insurance. The lawsuit also seeks damages against
specific insurers for breach of contract and bad faith, and a declaratory
judgment concerning the insurers' obligations under the shared insurance.
Although DII Industries is also a defendant in this lawsuit, it has asserted its
own claim to coverage under the shared insurance and is cooperating with
Harbison-Walker to secure both companies' rights to the shared insurance. The
Bankruptcy Court has ordered the parties to this lawsuit to engage in
non-binding mediation. The first mediation session was held on July 26, 2002 and
additional sessions have since taken place and further sessions will be
scheduled to take place, provided the Bankruptcy Court's mediation order remains
15
in effect. Given the early stages of these negotiations, DII Industries cannot
predict whether a negotiated resolution of this dispute will occur or, if such a
resolution does occur, the precise terms of such a resolution.
Prior to the Harbison-Walker bankruptcy, on August 7, 2001, DII
Industries filed a lawsuit in Dallas County, Texas, against a number of these
insurance companies asserting DII Industries rights under an existing
coverage-in-place agreement and under insurance policies not yet subject to
coverage-in-place agreements. The coverage-in-place agreements allow DII
Industries to enter into settlements for small amounts without requiring
claimants to produce detailed documentation to support their claims, when DII
Industries believes the settlements are an effective claims management strategy.
DII Industries believes that the new documentation requirements are inconsistent
with the current coverage-in-place agreements and are unenforceable. The
insurance companies that DII Industries has sued have not refused to pay larger
claim settlements where documentation is obtained or where court judgments are
entered.
On May 10, 2002, the London-based insuring entities and companies
removed DII Industries' Dallas County State Court Action to the United States
District Court for the Northern District of Texas alleging that federal court
jurisdiction existed over the case because it is related to the Harbison-Walker
bankruptcy. DII Industries has filed an opposition to that removal and has asked
the federal court to remand the case back to the Dallas County state court. On
June 12, 2002, the London-based insuring entities and companies filed a motion
to transfer the case to the federal court in Pittsburgh, Pennsylvania. DII
Industries has filed an opposition to that motion to transfer. The federal court
in Dallas has yet to rule on any of these motions. Regardless of the outcome of
these motions, because of the similar insurance coverage lawsuit filed by
Harbison-Walker in its bankruptcy proceeding, it is unlikely that DII
Industries' case will proceed simultaneously with the insurance coverage case
filed by Harbison-Walker in its bankruptcy.
Other DII Industries claims insurance. DII Industries has substantial
insurance to cover other non-refractory asbestos claims. Two coverage-in-place
agreements cover DII Industries for companies or operations that DII Industries
either acquired or operated prior to November 1, 1957. Asbestos claims that are
covered by these agreements are currently stayed by the Harbison-Walker
bankruptcy because the majority of this coverage also applies to refractory
claims and is shared with Harbison-Walker. Other insurance coverage is provided
by a number of different policies that DII Industries acquired rights to access
when it acquired businesses from other companies. Three coverage-in-place
agreements provide reimbursement for asbestos claims made against DII
Industries' former Worthington Pump division. There is also other substantial
insurance coverage with approximately $2.0 billion in aggregate limits that has
not yet been reduced to coverage-in-place agreements.
On August 28, 2001, DII Industries filed a lawsuit in the 192nd
Judicial District of the District Court for Dallas County, Texas against
specific London-based insuring entities that issued insurance policies that
provide coverage to DII Industries for asbestos-related liabilities arising out
of the historical operations of Worthington Corporation or its successors. This
lawsuit raises essentially the same issue as to the documentation requirements
as the August 7, 2001 Harbison-Walker lawsuit filed in the same court. The
London-based insuring entities filed a motion in that case seeking to compel the
parties to binding arbitration. The trial court denied that motion and the
London-based insuring entities appealed that decision to the state appellate
court. The state appellate court denied the appeal and, most recently, the
London-based insuring entities have removed the case from the state court to the
federal court. DII Industries was successful in remanding the case back to the
state court.
A significant portion of the insurance coverage applicable to
Worthington claims is alleged by Federal-Mogul Products, Inc. to be shared with
it. In 2001, Federal-Mogul Products, Inc. and a large number of its affiliated
companies filed a voluntary petition for reorganization under Chapter 11 of the
Bankruptcy Code in the Bankruptcy Court in Wilmington, Delaware.
In response to Federal-Mogul's allegations, on December 7, 2001, DII
Industries filed a lawsuit in the Delaware Bankruptcy Court asserting its rights
to insurance coverage under historic general liability policies issued to
Studebaker-Worthington, Inc. and its successor for asbestos-related liabilities
arising from, among other operations, Worthington's and its successors' historic
operations. This lawsuit also seeks a judicial declaration concerning the
competing rights of DII Industries and Federal-Mogul, if any, to this insurance
coverage. DII Industries recently filed a third amended complaint in that
lawsuit and the parties are engaged in the discovery process and summary
judgment briefing. The parties to this litigation, including Federal-Mogul, have
16
agreed to mediate this dispute. Unlike the Harbison-Walker insurance coverage
litigation, in which the litigation is stayed while the mediation proceeds, the
insurance coverage litigation concerning the Worthington-related asbestos
liabilities has not been stayed and such litigation is proceeding simultaneously
with the mediation.
At the same time, DII Industries filed its insurance coverage action in
the Federal-Mogul bankruptcy, DII Industries also filed a second lawsuit in
which it has filed a motion for preliminary injunction seeking a stay of all
Worthington asbestos-related lawsuits against DII Industries that are scheduled
for trial within the six months following the filing of the motion. The stay
that DII Industries seeks, if granted, would remain in place until the competing
rights of DII Industries and Federal-Mogul to the allegedly shared insurance are
resolved. The Court has yet to schedule a hearing on DII Industries' motion for
preliminary injunction.
A number of insurers who have agreed to coverage-in-place agreements
with DII Industries have suspended payment under the shared Worthington policies
until the Federal-Mogul Bankruptcy Court resolves the insurance issues.
Consequently, the effect of the Federal-Mogul bankruptcy on DII Industries
rights to access this shared insurance is uncertain.
Construction claims insurance. Nearly all of our construction asbestos
claims relate to Brown & Root, Inc. operations before the 1980s. Our primary
insurance coverage for these claims was written by Highlands Insurance Company
during the time it was one of our subsidiaries. Highlands was spun-off to our
shareholders in 1996. On April 5, 2000, Highlands filed a lawsuit against us in
the Delaware Chancery Court. Highlands asserted that the insurance it wrote for
Brown & Root, Inc. that covered construction asbestos claims was terminated by
agreements between Halliburton and Highlands at the time of the 1996 spin-off.
In March 2001, the Chancery Court ruled that a termination did occur and that
Highlands was not obligated to provide coverage for Brown & Root, Inc.'s
asbestos claims. This decision was affirmed by the Delaware Supreme Court on
March 13, 2002. As a result of this ruling, we wrote-off approximately $35
million in accounts receivable for amounts paid for claims and defense costs and
$45 million of accrued receivables in relation to estimated insurance recoveries
claims settlements from Highlands in the first quarter 2002. In addition, we
dismissed the April 24, 2000 lawsuit we filed against Highlands in Harris
County, Texas.
As a consequence of the Delaware Supreme Court's decision, Kellogg
Brown & Root no longer has primary insurance coverage from Highlands for
asbestos claims. However, Kellogg Brown & Root has significant excess insurance
coverage. The amount of this excess coverage that will reimburse us for an
asbestos claim depends on a variety of factors. On March 20, 2002, Kellogg Brown
& Root filed a lawsuit in the 172nd Judicial District of the District Court of
Jefferson County, Texas, against Kellogg Brown & Root's historic insurers that
issued these excess insurance policies. In the lawsuit, Kellogg Brown & Root
seeks to establish the specific terms under which it can seek reimbursement for
costs it incurs in settling and defending asbestos claims from its historic
construction operations. On January 6, 2003, this lawsuit was transferred to the
11th Judicial District of the District Court of Harris County, Texas, and the
parties are engaged in the discovery process. Until this lawsuit is resolved,
the scope of the excess insurance will remain uncertain, and as such we have not
assumed any recoveries from excess insurance coverage. We do not expect the
excess insurers will reimburse us for asbestos claims until this lawsuit is
resolved.
Significant asbestos judgments on appeal. During 2001, there were
several adverse judgments in trial court proceedings that are in various stages
of the appeal process. All of these judgments concern asbestos claims involving
Harbison-Walker refractory products. Each of these appeals, however, has been
stayed by the Bankruptcy Court in the Harbison-Walker Chapter 11 bankruptcy.
On November 29, 2001, the Texas District Court in Orange, Texas,
entered judgments against Dresser Industries, Inc. (now DII Industries) on a $65
million jury verdict rendered in September 2001 in favor of five plaintiffs. The
$65 million amount includes $15 million of a $30 million judgment against DII
Industries and another defendant. DII Industries is jointly and severally liable
for $15 million in addition to $65 million if the other defendant does not pay
its share of this judgment. Based upon what we believe to be controlling
precedent, which would hold that the judgment entered is void, we believe that
the likelihood of the judgment being affirmed in the face of DII Industries'
appeal is remote. As a result, we have not accrued any amounts for this
judgment. However, a favorable outcome from the appeal is not assured.
On November 29, 2001, the same District Court in Orange, Texas, entered
three additional judgments against Dresser Industries, Inc. (now DII Industries)
in the aggregate amount of $35.7 million in favor of 100 other asbestos
plaintiffs. These judgments relate to an alleged breach of purported settlement
17
agreements signed early in 2001 by a New Orleans lawyer hired by
Harbison-Walker, which had been defending DII Industries pursuant to the
agreement by which Harbison-Walker was spun-off by DII Industries in 1992. These
settlement agreements expressly bind Harbison-Walker Refractories Company as the
obligated party, not DII Industries, which is not a party to the agreements. For
that reason, and based upon what we believe to be controlling precedent, which
would hold that the judgment entered is void, we believe that the likelihood of
the judgment being affirmed in the face of DII Industries' appeal is remote. As
a result, we have not accrued any amounts for this judgment. However, a
favorable outcome from the appeal is not assured.
On December 5, 2001, a jury in the Circuit Court for Baltimore County,
Maryland, returned verdicts against Dresser Industries, Inc. (now DII
Industries) and other defendants following a trial involving refractory asbestos
claims. Each of the five plaintiffs alleges exposure to Harbison-Walker
products. DII Industries portion of the verdicts was approximately $30 million,
which we fully accrued in 2002. DII Industries intends to appeal the judgment to
the Maryland Supreme Court. While we believe we have a valid basis for appeal
and intend to vigorously pursue our appeal, any favorable outcome from that
appeal is not assured.
On October 25, 2001, in the Circuit Court of Holmes County,
Mississippi, a jury verdict of $150 million was rendered in favor of six
plaintiffs against Dresser Industries, Inc. (now DII Industries) and two other
companies. DII Industries share of the verdict was $21.3 million which we fully
accrued in 2002. The award was for compensatory damages. The jury did not award
any punitive damages. The trial court has entered judgment on the verdict. While
we believe we have a valid basis for appeal and intend to vigorously pursue our
appeal, any favorable outcome from that appeal is not assured.
Asbestos claims history. Since 1976, approximately 661,000 asbestos
claims have been filed against us. Almost all of these claims have been made in
separate lawsuits in which we are named as a defendant along with a number of
other defendants, often exceeding 100 unaffiliated defendant companies in total.
The approximate number of open claims pending against us is as follows:
Total Open
Period Ending Claims
- ---------------------------------------------------
June 30, 2003 425,000
March 31, 2003 389,000
December 31, 2002 347,000
September 30, 2002 328,000
June 30, 2002 312,000
March 31, 2002 292,000
December 31, 2001 274,000
===================================================
During the second quarter of 2003, we received approximately 37,000 new
claims and we closed approximately 1,000 claims. We believe that in many cases,
single claimants are filing claims against multiple Halliburton entities, and we
believe that the actual number of additional claimants is about half of the
number of new claims. If and when we confirm duplicate claims, we will adjust
our data accordingly. We believe of the 425,000 open claims as of June 30, 2003,
these represent claims made by approximately 345,000 separate claimants.
The total open claims include post spin-off Harbison-Walker refractory
related claims that name DII Industries as a defendant. All such claims have
been factored into the calculation of our asbestos liability. The approximate
number of post spin-off Harbison-Walker claims included in total open claims
pending against us is as follows:
18
Post Spin-off
Harbison-Walker
Period Ending Claims
- ------------------------------------------------------
June 30, 2003 153,000
March 31, 2003 152,000
December 31, 2002 142,000
September 30, 2002 142,000
June 30, 2002 139,000
March 31, 2002 133,000
December 31, 2001 125,000
======================================================
We manage asbestos claims to achieve settlements of valid claims for
reasonable amounts. When reasonable settlement is not possible, we contest
claims in court. Since 1976, we have closed approximately 236,000 claims through
settlements and court proceedings at a total cost of approximately $217 million.
We have received or expect to receive from our insurers all but approximately
$105 million of this cost, resulting in an average net cost per closed claim of
about $445.
Asbestos study and the valuation of unresolved current and future
asbestos claims.
Asbestos Study. In late 2001, DII Industries retained Dr. Francine F.
Rabinovitz of Hamilton, Rabinovitz & Alschuler, Inc. to estimate the probable
number and value, including defense costs, of unresolved current and future
asbestos and silica-related bodily injury claims asserted against DII Industries
and its subsidiaries. Dr. Rabinovitz is a nationally renowned expert in
conducting such analyses, has been involved in a number of asbestos-related and
other toxic tort-related valuations of current and future liabilities, has
served as the expert for three representatives of future claimants in asbestos
related bankruptcies and has had her valuation methodologies accepted by
numerous courts. Further, the methodology utilized by Dr. Rabinovitz is the same
methodology that is utilized by the expert who is routinely retained by the
asbestos claimants committee in asbestos-related bankruptcies. Dr. Rabinovitz
estimated the probable number and value of unresolved current and future
asbestos and silica-related bodily injury claims asserted against DII Industries
and its subsidiaries over a 50 year period. The report took approximately seven
months to complete.
Methodology. The methodology utilized by Dr. Rabinovitz to project DII
Industries and its subsidiaries' asbestos- and silica-related liabilities and
defense costs relied upon and included:
- an analysis of DII Industries, Kellogg Brown & Root's and
Harbison-Walker Refractories Company's historical asbestos and
silica settlements and defense costs to develop average
settlement values and average defense costs for specific
asbestos- and silica-related diseases and for the specific
business operation or entity allegedly responsible for the
asbestos- and silica-related diseases;
- an analysis of DII Industries, Kellogg Brown & Root's and
Harbison-Walker Refractories Company's pending inventory of
asbestos- and silica-related claims by specific diseases and
by the specific business operation or entity allegedly
responsible for the disease;
- an analysis of the claims filing history for asbestos- and
silica-related claims against DII Industries, Kellogg Brown &
Root and Harbison-Walker Refractories Company for the
approximate two-year period from January 2000 to May 31, 2002,
and for the approximate five-year period from January 1997 to
May 31, 2002 by specific disease and by business operation or
entity allegedly responsible for the disease;
- an analysis of the population likely to have been exposed or
claim exposure to products manufactured by DII Industries, its
predecessors and Harbison-Walker or to Brown & Root
construction and renovation projects; and
- epidemiological studies to estimate the number of people who
might allege exposure to products manufactured by DII
Industries, its predecessors and Harbison-Walker or to Brown &
Root construction and renovation projects that would be likely
to develop asbestos-related diseases. Dr. Rabinovitz's
estimates are based on historical data supplied by DII
Industries, Kellogg Brown & Root and Harbison-Walker and
19
publicly available studies, including annual surveys by the
National Institutes of Health concerning the incidence of
mesothelioma deaths.
In her estimates, Dr. Rabinovitz relied on the source data provided by
our management; she did not independently verify the accuracy of the source
data. The source data provided by us was based on our 24-year history in
gathering claimant information and defending and settling asbestos and silica
claims.
In her analysis, Dr. Rabinovitz projected that the elevated and
historically unprecedented rate of claim filings of the last several years
(particularly in 2000 and 2001), especially as expressed by the ratio of
nonmalignant claim filings to malignant claim filings, would continue into the
future for five more years. After that, Dr. Rabinovitz projected that the ratio
of nonmalignant claim filings to malignant claim filings will gradually decrease
for a 10 year period ultimately returning to the historical claiming rate and
claiming ratio. In making her calculation, Dr. Rabinovitz alternatively assumed
a somewhat lower rate of claim filings, based on an average of the last five
years of claims experience, would continue into the future for five more years
and decrease thereafter.
Other important assumptions utilized in Dr. Rabinovitz's estimates,
which we relied upon in making our accrual are:
- there will be no legislative or other systemic changes to the
tort system;
- that we will continue to aggressively defend against asbestos
and silica claims made against us;
- an inflation rate of 3% annually for settlement payments and
an inflation rate of 4% annually for defense costs; and
- we would receive no relief from our asbestos obligation due to
actions taken in the Harbison-Walker bankruptcy.
Range of Liabilities. Based upon her analysis, Dr. Rabinovitz estimated
total, undiscounted asbestos and silica liabilities, including defense costs, of
DII Industries, Kellogg Brown & Root and some of their current and former
subsidiaries. Through 2052, Dr. Rabinovitz estimated the current and future
total undiscounted liability for personal injury asbestos and silica claims,
including defense costs, would be a range between $2.2 billion and $3.5 billion
as of June 30, 2002 (which includes payments related to the claims currently
pending). The lower end of the range is calculated by using an average of the
last five years of asbestos claims experience and the upper end of the range is
calculated using the more recent two-year elevated rate of asbestos claim
filings in projecting the rate of future claims.
2nd Quarter 2002 Accrual. Based on that estimate, in the second quarter
of 2002, we accrued asbestos and silica claims liability and defense costs for
both known outstanding and future refractory, other DII Industries, and
construction asbestos and silica claims using the low end of the range of Dr.
Rabinovitz's study, or approximately $2.2 billion. In establishing our liability
for asbestos, we included all post spin-off claims against Harbison-Walker
that name DII Industries as a defendant. Our accruals were based on an estimate
of personal injury asbestos claims through 2052 based on the average claims
experience of the last five years. At the end of the second quarter of 2002, we
did not believe that any point in the expert's range was better than any other
point, and accordingly, based our accrual on the low end of the range in
accordance with FIN 14.
Agreement regarding proposed asbestos and silica settlement. In
December 2002, we announced that we had reached an agreement in principle that,
if and when consummated, would result in a settlement of asbestos and silica
personal injury claims against our subsidiaries DII Industries and Kellogg Brown
& Root and their current and former subsidiaries with United States operations.
Subsequently, DII Industries and Kellogg Brown & Root entered into definitive
written agreements finalizing the terms of the agreements in principle with
attorneys representing more than 90% of the current asbestos claimants. We have
also reached agreements in principle with 48% of current silica claimants.
The definitive agreements provide that:
- up to $2.775 billion in cash, 59.5 million Halliburton shares
(valued at $1.4 billion using the stock price at June 30, 2003
of $23.00) and notes with a net value expected to be less than
$100 million will be paid to one or more trusts for the
benefit of current and future asbestos and silica personal
injury claimants upon receiving final and non-appealable court
confirmation of a plan of reorganization;
20
- DII Industries and Kellogg Brown & Root will retain rights to
the first $2.3 billion of any insurance proceeds with any
proceeds received between $2.3 billion and $3 billion going to
the trust;
- the agreement is to be implemented through a pre-packaged
filing under Chapter 11 of the United States Bankruptcy Code
for DII Industries, Kellogg Brown & Root and some of the
subsidiaries with United States operations; and
- the funding of the settlement amounts would occur upon
receiving final and non-appealable court confirmation of a
plan of reorganization for DII Industries and Kellogg Brown &
Root and some of their subsidiaries with United States
operations in the Chapter 11 proceeding.
Among the prerequisites for concluding the proposed settlement are:
- agreement on the amounts to be contributed to the trusts for
the benefit of silica claimants;
- completion of our review of the current claims to establish
that the claimed injuries resulted from exposure to products
of DII Industries, Kellogg Brown & Root or their
subsidiaries or former businesses or subsidiaries;
- completion of our medical review of the injuries alleged to
have been sustained by plaintiffs to establish a medical basis
for payment of settlement amounts;
- finalizing the principal amount and terms of the notes to be
contributed to the trusts;
- agreement with a proposed representative of future claimants
and attorneys representing current claimants on procedures for
the distribution of settlement funds to individuals claiming
personal injury;
- definitive agreement with a proposed representative of future
claimants and the attorneys representing current asbestos
claimants on a plan of reorganization for the Chapter 11
filing of DII Industries, Kellogg Brown & Root and some of
their subsidiaries with United States operations; and
agreement with the attorneys representing current asbestos and
silica claimants with respect to a disclosure statement
explaining the pre-packaged plan of reorganization to the
current claimants;
- arrangement of financing, in addition to the proceeds of our
recent offering of $1.2 billion principal amount of
convertible senior notes, for the proposed settlement on terms
acceptable to us to fund the cash amounts to be paid in the
settlement;
- Halliburton board approval;
- distribution of a disclosure statement and obtaining approval
of a plan of reorganization from at least the required 75% of
known present asbestos claimants and from a majority of known
present silica claimants in order to complete the plan of
reorganization; and
- obtaining final and non-appealable bankruptcy court approval
and federal district court confirmation of the plan of
reorganization.
Many of these prerequisites are subject to matters and uncertainties
beyond our control. There can be no assurance that we will be able to satisfy
the prerequisities for completion of the settlement.
We are currently continuing our due diligence review of current
asbestos claims to be included in the proposed settlement. We have now received
in excess of 75% of the necessary files related to medical evidence and we have
reviewed substantially all of the information provided. In regards to the
product identification due diligence, the process is moving at a steady pace,
but not as rapidly as the medical due diligence. In addition, we have not yet
commenced any due diligence in regards to silica claims. While no assurance can
be given, if we continue to receive documentation that is consistent with the
recent quantity and quality of the documentation received to date, we expect
that this documentation will provide an acceptable basis on which to proceed
with the proposed settlement.
One result of our due diligence review is the preliminary
identification of more claims than contemplated by the proposed settlement.
However, until the more recently identified claims are subject to a complete due
diligence review, we will not be able to determine if these claims would be
appropriately included under the proposed settlement. Many of these recently
identified claims may be duplicative of previously submitted claims or may
otherwise not be appropriately included under the proposed settlement. In the
event that more claims are identified and validated than contemplated by the
proposed settlement, the cash required to fund the settlement may modestly
21
exceed $2.775 billion. If it does, we would need to decide whether to propose to
adjust the settlement matrices to reduce the overall amounts, or increase the
amounts we would be willing to pay to resolve the asbestos and silica
liabilities.
If we attempt to adjust the settlement matrices or otherwise attempt to
renegotiate the terms of the proposed settlement, the attorneys representing the
current asbestos claimants may not proceed with the settlement or may attempt to
renegotiate the settlement amount to increase the aggregate amount of the
settlement. Conversely, an increase in the amount of cash required may make
completing the proposed settlement more difficult.
In the event we elect to adjust the settlement matrices to reduce the
average amounts per claim, a supplemental disclosure statement may be required,
and if so, the claimants potentially adversely affected by the adjustment may
have an opportunity to change their votes. The additional time to make such
supplemental disclosure and opportunity to change votes may result in a delay in
the Chapter 11 filing.
Included in the next steps to complete the proposed settlement are (1)
an agreement on the procedures for the distribution of settlement funds to
individuals claiming personal injury and (2) an agreement on a plan of
reorganization for Kellogg Brown & Root and DII Industries and some of the
subsidiaries with United States operations and the related disclosure statement.
We cannot predict the exact timing of the completion of these steps, but we
expect that these prerequisites to making the Chapter 11 filing could be
completed on a timeline that would allow the Chapter 11 filing to be made late
in the third quarter or very early in the fourth quarter of 2003.
The settlement agreements with attorneys representing current asbestos
and silica claimants grant the attorneys a right to terminate their definitive
agreement on 10 days' notice. While no right to terminate any settlement
agreement has been exercised to date, there can be no assurance that claimants'
attorneys will not exercise their right to terminate the settlement agreements.
We continue to track legislative proposals for asbestos reform pending
in the United States Congress. In determining whether to approve the proposed
settlement and proceed with the Chapter 11 filing of DII Industries and Kellogg
Brown & Root and some of their subsidiaries with United States operations, the
Halliburton Board of Directors will take into account the then-current status of
these legislative initiatives.
Review of accruals. As a result of the proposed settlement, in the
fourth quarter of 2002, we re-evaluated our accruals for known outstanding and
future asbestos claims. Although we have reached an agreement in principle with
respect to a proposed settlement, we do not believe the settlement is "probable"
under Statement of Financial Standards ("SFAS") No. 5 at the current time.
Because we do not believe the settlement is currently probable as
defined by SFAS No. 5, we have continued to establish our accruals in accordance
with the analysis performed by Dr. Rabinovitz. However, as a result of the
settlement and the payment amounts contemplated thereby, we believed it
appropriate to adjust our accrual to use the upper end of the range of probable
and reasonably estimable liabilities for current and future asbestos liabilities
contained in Dr. Rabinovitz's study, which estimated liabilities through 2052
and assumed the more recent two-year elevated rate of claim filings in
projecting the rate of future claims.
As a result, in the fourth quarter of 2002, we determined that the best
estimate of the probable loss is the $3.5 billion estimate in Dr. Rabinovitz's
study, and accordingly, we increased our accrual for probable and reasonably
estimable liabilities for current and future asbestos and silica claims to $3.4
billion.
Insurance. In 2002, we retained Peterson Consulting, a
nationally-recognized consultant in asbestos liability and insurance, to work
with us to project the amount of insurance recoveries probable in light of the
projected current and future liabilities accrued by us. Using Dr. Rabinovitz's
projection of liabilities through 2052 using the two-year elevated rate of
asbestos claim filings, Peterson Consulting assisted us in conducting an
analysis to determine the amount of insurance that we estimate is probable that
we will recover in relation to the projected claims and defense costs. In
conducting this analysis, Peterson Consulting:
- reviewed DII Industries historical course of dealings with its
insurance companies concerning the payment of asbestos-related
claims, including DII Industries 15 year litigation and
settlement history;
- reviewed our insurance coverage policy database containing
information on key policy terms as provided by outside
counsel;
- reviewed the terms of DII Industries prior and current
coverage-in-place settlement agreements;
22
- reviewed the status of DII Industries and Kellogg Brown &
Root's current insurance-related lawsuits and the various
legal positions of the parties in those lawsuits in relation
to the developed and developing case law and the historic
positions taken by insurers in the earlier filed and settled
lawsuits;
- engaged in discussions with our counsel; and
- analyzed publicly-available information concerning the ability
of the DII Industries insurers to meet their obligations.
Based on review, analyses and discussions, Peterson Consulting
assisted us in making judgments concerning insurance coverage that we believe
are reasonable and consistent with our historical course of dealings with our
insurers and the relevant case law to determine the probable insurance
recoveries for asbestos liabilities. This analysis factored in the probable
effects of self-insurance features, such as self-insured retentions, policy
exclusions, liability caps and the financial status of applicable insurers, and
various judicial determinations relevant to the applicable insurance programs.
The analysis of Peterson Consulting is based on its best judgment and
information provided by us.
Probable insurance recoveries. Based on our analysis of the probable
insurance recoveries, in the second quarter of 2002, we recorded a receivable of
$1.6 billion for probable insurance recoveries.
In connection with our adjustment of our accrual for asbestos liability
and defense costs in the fourth quarter of 2002, Peterson Consulting assisted us
in re-evaluating our receivable for insurance recoveries deemed probable through
2052, assuming $3.5 billion of liabilities for current and future asbestos
claims using the same factors cited above through 2052. Based on Peterson
Consulting analysis of the probable insurance recoveries, we increased our
insurance receivable to $2.1 billion as of the fourth quarter of 2002. The
insurance receivable recorded by us does not assume any recovery from insolvent
carriers and assumes that those carriers which are currently solvent will
continue to be solvent throughout the period of the applicable recoveries in the
projections. However, there can be no assurance that these assumptions will be
correct. These insurance receivables do not exhaust the applicable insurance
coverage for asbestos-related liabilities.
Current accruals. The current accrual of $3.4 billion for probable and
reasonably estimable liabilities for current and future asbestos and silica
claims and the $2.1 billion in insurance receivables are included in noncurrent
assets and liabilities due to the extended time periods involved to settle
claims. In the second quarter of 2002, we recorded a pretax charge of $483
million ($391 million after tax), and, in the fourth quarter of 2002, we
recorded a pretax charge of $799 million ($675 million after tax).
In the fourth quarter of 2002, we recorded pretax charges of $232
million ($212 million after tax) for claims related to Brown & Root construction
and renovation projects under the Engineering and Construction Group segment.
The balance of $567 million ($463 million after tax) related to claims
associated with businesses no longer owned by us and was recorded as
discontinued operations. The low effective tax rate on the asbestos charge is
due to the recording of a valuation allowance against the United States Federal
deferred tax asset associated with the accrual as the deferred tax asset may not
be fully realizable based upon future taxable income projections.
The total estimated claims through 2052, including the 425,000 current
open claims, are approximately one million. A summary of our accrual for all
claims and corresponding insurance recoveries is as follows:
23
Six Months Ended Year Ended
Millions of dollars June 30, 2003 December 31, 2002
- -------------------------------------------------------------------------------------------------------
Gross liability - beginning balance $ 3,425 $ 737
Accrued liability - 2,820
Payments on claims (29) (132)
- -------------------------------------------------------------------------------------------------------
Gross liability - ending balance $ 3,396 $ 3,425
=======================================================================================================
Estimated insurance recoveries:
Highlands Insurance Company - beginning balance $ - $ (45)
Write-off of recoveries - 45
- -------------------------------------------------------------------------------------------------------
Highlands Insurance Company - ending balance $ - $ -
=======================================================================================================
Other insurance carriers - beginning balance $(2,059) $ (567)
Accrued insurance recoveries - (1,530)
Insurance billings - 38
- -------------------------------------------------------------------------------------------------------
Other insurance carriers - ending balance $(2,059) $ (2,059)
=======================================================================================================
Total estimated insurance recoveries $(2,059) $ (2,059)
=======================================================================================================
Net liability for asbestos claims $ 1,337 $ 1,366
=======================================================================================================
Accounts receivable for billings to insurance companies for payments
made on asbestos claims were $44 million at June 30, 2003 and December 31, 2002.
The $44 million at December 31, 2002 excludes $35 million in accounts receivable
written off at the conclusion of the Highlands litigation.
Possible additional accruals. When and if the currently proposed
settlement becomes probable under SFAS No. 5, we would increase our accrual for
probable and reasonably estimable liabilities for current and future asbestos
claims up to $4.3 billion, reflecting the amount in cash and notes we would pay
to fund the settlement combined with the value of 59.5 million shares of
Halliburton common stock, a value of $1.4 billion, using the stock price at June
30, 2003 of $23.00. In addition, at such time as the settlement becomes
probable, we would adjust our accrual for liabilities for current and future
asbestos claims and we would expect to increase the amount of our insurance
receivables to $2.3 billion. As a result, we would record at such time an
additional pretax charge of $606 million ($493 million after tax). Beginning in
the first quarter in which the settlement becomes probable, the accrual would
then be adjusted from period to period based on positive and negative changes in
the market price of our common stock until contribution of the shares into the
trust. We may enter into agreements with all or some of our insurance carriers
to negotiate an overall accelerated payment of anticipated insurance proceeds.
If this were to happen, we would expect to recover less than the $2.3 billion of
anticipated insurance receivables which would result in an additional charge to
income.
Continuing review. Projecting future events is subject to many
uncertainties that could cause the asbestos-related liabilities and insurance
recoveries to be higher or lower than those projected and booked such as:
- the number of future asbestos- and silica-related lawsuits to
be filed against DII Industries and Kellogg Brown & Root;
- the average cost to resolve such future lawsuits;
- coverage issues among layers of insurers issuing different
policies to different policyholders over extended periods of
time;
- the impact on the amount of insurance recoverable in light of
the Harbison-Walker and Federal-Mogul bankruptcies; and
- the continuing solvency of various insurance companies.
Given the inherent uncertainty in making future projections, we plan to
have the projections of current and future asbestos and silica claims
periodically reexamined, and we will update them if needed based on our
experience and other relevant factors such as changes in the tort system, the
resolution of the bankruptcies of various asbestos defendants and the
probability of our settlement of all claims becoming effective. Similarly, we
will re-evaluate our projections concerning our probable insurance recoveries in
light of any updates to Dr. Rabinovitz's projections, developments in DII
Industries and Kellogg Brown & Root's various lawsuits against its insurance
companies and other developments that may impact the probable insurance.
24
Note 12. Commitments and Contingencies - Excluding Asbestos and Silica
Barracuda-Caratinga Project. In June 2000, KBR entered into a contract
with the project owner, Barracuda & Caratinga Leasing Company B.V., to develop
the Barracuda and Caratinga crude oil fields, which are located off the coast of
Brazil. The project manager and owner's representative is Petroleo Brasilero SA
(Petrobras), the Brazilian national oil company. When completed, the project
will consist of two converted supertankers which will be used as floating
production, storage and offloading platforms, or FPSOs, 33 hydrocarbon
production wells, 18 water injection wells and all sub-sea flow lines and risers
necessary to connect the underwater wells to the FPSOs.
KBR's performance under the contract is secured by:
- three performance letters of credit, which together have an
available credit of approximately $266 million as of June 30,
2003 and which represent approximately 10% of the contract
amount, as amended to date by change orders;
- a retainage letter of credit in an amount equal to $141
million as of June 30, 2003 and which will increase in order
to continue to represent 10% of the cumulative cash amounts
paid to KBR; and
- a guarantee of KBR's performance of the agreement by
Halliburton Company in favor of the project owner.
In the event that KBR is alleged to be in default under the contract,
the project owner may assert a right to draw upon the letters of credit. If the
letters of credit were to be drawn, KBR would be required to fund the amount of
the draw to the issuing banks. To the extent KBR cannot fund the amount of the
draw, Halliburton would be required to do so, which could have a material
adverse effect on Halliburton's financial condition and results of operations.
In addition, the proposed Chapter 11 pre-packaged bankruptcy filing by
KBR in connection with the proposed settlement of its asbestos claims would
constitute an event of default under the contract that would allow the owner
(with the approval of the lenders financing the project) to assert a right to
draw the letters of credit unless waivers are obtained. The proposed Chapter 11
filing would also constitute an event of default under the owner's loan
agreements with the lenders that would allow the lenders to cease funding the
project. We believe that it is unlikely that the owner will make a draw on the
letters of credit as a result of the proposed Chapter 11 filing. We also believe
it is unlikely that the lenders will exercise any right to cease funding the
project given the current status of the project and the fact that a failure to
pay KBR may allow KBR to cease work on the project without Petrobras having a
readily available substitute contractor. However, there can be no assurance that
the lenders will continue to fund the project or that the owner will not require
funding of the letters of credit by KBR.
In the event that KBR was determined after an arbitration proceeding to
have been in default under the contract with Petrobras, and if the project was
not completed by KBR as a result of such default (i.e., KBR's services are
terminated as a result of such default), the project owner may seek direct
damages (including completion costs in excess of the contract price and interest
on borrowed funds, but excluding consequential damages) against KBR for up to
$500 million plus the return of up to $300 million in advance payments
previously received by KBR to the extent they have not been repaid.
In addition to the amounts described above, KBR may have to pay
liquidated damages if the project is delayed beyond the original contract
completion date. KBR expects that the project will likely be completed at least
16 months later than the original contract completion date. Although KBR
believes that the project's delay is due primarily to the actions of the project
owner, in the event that any portion of the delay is determined to be
attributable to KBR and any phase of the project is completed after the
milestone dates specified in the contract, KBR could be required to pay
liquidated damages. These damages would be calculated on an escalating basis of
approximately $1 million per day of delay caused by KBR, subject to a total cap
on liquidated damages of 10% of the final contract amount (yielding a cap of
approximately $266 million as of June 30, 2003).
As of June 30, 2003, the project was approximately 75% complete and KBR
had recorded a pretax loss of $345 million related to the project, of which $173
million was recorded in the second quarter of 2003. The second quarter 2003
charge was due to higher cost estimates, schedule extensions, increased project
contingencies and other factors identified during the quarterly review of the
project. The probable unapproved claims included in determining the loss on the
project were $182 million as of June 30, 2003. The claims for the project most
likely will not be settled within one year. Accordingly, based upon the contract
being approximately 75% complete, probable unapproved claims of $134 million at
25
June 30, 2003 have been recorded to long-term unbilled work on uncompleted
contracts. Those amounts are included in "Other assets, net" on the balance
sheet. KBR has asserted claims for compensation substantially in excess of $182
million. The project owner, through its project manager, Petrobras, has denied
responsibility for all such claims. Petrobras has, however, issued formal change
orders worth approximately $61 million which are not included in the $182
million in probable unapproved claims.
In June 2003, Halliburton, KBR and Petrobras, on behalf of the project
owner, entered into a non-binding heads of agreement that would resolve some of
the disputed issues between the parties, subject to final agreement and lender
approval. The original completion date for the Barracuda project was December
2003 and the original completion date for the Caratinga project was April 2004.
Under the heads of agreement, the project owner would grant an extension of time
to the original completion dates and other milestone dates that averages
approximately 12 months, delay any attempt to assess the original liquidated
damages against KBR for project delays beyond 12 months and up to 18 months,
delay any drawing of letters of credit with respect to such liquidated damages
and delay the return of any of the $300 million in advance payments until after
arbitration. The heads of agreement also provides for a separate liquidated
damages calculation of $450,000 per day for each of the Barracuda and the
Caratinga vessels for a delay from the original schedule beyond 18 months
(subject to the total cap on liquidated damages of 10% of the final contract
amount). The heads of agreement does not delay the drawing of letters of credit
for these liquidated damages. The extension of the original completion dates and
other milestones would significantly reduce the likelihood of KBR incurring
liquidated damages on the project. Nevertheless, KBR continues to have exposure
for substantial liquidated damages for delays in the completion of the project.
Under the heads of agreement, the project owner has agreed to pay $59
million of KBR's disputed claims (which are included in the $182 million of
probable unapproved claims as of June 30, 2003) and to arbitrate additional
claims. The maximum recovery from the claims to be arbitrated would be capped at
$375 million. The heads of agreement also allows the project owner or Petrobras
to arbitrate additional claims against KBR, not including liquidated damages,
the maximum recovery from which would be capped at $380 million. KBR believes
the claims made to date by the project owner are based on a delay in project
completion. KBR's contract with the project owner excludes consequential damages
and, as indicated above, provides for liquidated damages in the event of delay
in completion of the project. While there can be no assurance that the
arbitrator will agree, KBR believes if it is determined that KBR is liable
for delays, the project owner would be entitled to liquidated damages in
amounts up to those referred to above and not to an additional $380 million.
The finalization of the heads of agreement is subject to project lender
approval. The parties have had discussions with the lenders and based on these
discussions have agreed to certain modifications to the original terms of the
heads of agreement to conform to the lenders' requirements. They have agreed
that the $300 million in advance payments would be due on the earliest of
December 7, 2004, the completion of any arbitration or the resolution of all
claims between the project owner and KBR. Likewise, the project owner's
obligation to defer drawing letters of credit with respect to liquidated damages
for the delays between 12 and 18 months would extend only until December 7,
2004. The discussions with the lenders are not yet complete, and no agreement
for their approval has yet been obtained. While we believe the lenders have an
incentive to approve the heads of agreement and complete the financing of the
project, and the parties have agreed to the modifications described above to the
heads of agreement to secure the lenders' approval, there is no assurance that
they will do so. If the lenders do not consent to the heads of agreement,
Petrobras may be forced to secure other funding to complete the project. There
is no assurance that Petrobras will pursue or will be able to secure such
funding.
Absent lender approval of the heads of agreement, KBR could be subject
to additional liquidated damages and other claims, be subject to the letters of
credit being drawn and be required to return the $300 million in advance
payments in accordance with the original contract terms. The original contract
terms require repayment through $300 million of credits to the last $350 million
of invoices on the contract. No assurance can be given that the heads of
agreement will be finalized or that the lenders will approve the heads of
agreement or that the lenders will approve the heads of agreement without
revisions that could adversely affect KBR.
The project owner has procured project finance funding obligations from
various lenders to finance the payments due to KBR under the contract. The
project owner currently has no other committed source of funding on which we can
necessarily rely other than the project finance funding for the project. If the
lenders cease to fund the project, the project owner may not have the ability to
continue to pay KBR for its services. The original loan documents provide that
26
the lenders are not obligated to continue to fund the project if the project has
been delayed for more than 6 months. In November 2002, the lenders agreed to
extend the 6-month period to 12 months. Other provisions in the loan documents
may provide for additional time extensions. However, delays beyond 12 months may
require lender consent in order to obtain additional funding. While we believe
the lenders have an incentive to complete the financing of the project, there is
no assurance that they would do so. If the lenders did not consent to extensions
of time or otherwise ceased funding the project, we believe that Petrobras would
provide for or secure other funding to complete the project, although there is
no assurance that it would do so. To date, the lenders have made funds
available, and the project owner has continued to disburse funds to KBR as
payment for its work on the project even though the project completion has been
delayed.
In addition, although the project financing includes borrowing capacity
in excess of the original contract amount, only $250 million of this additional
borrowing capacity is reserved for increases in the contract amount payable to
KBR and its subcontractors. Under the loan documents, the availability date for
loan draws expires December 1, 2003. As a condition to approving the heads of
agreement, the lenders will require the project owner to draw all remaining
available funds prior to December 1, 2003, and to escrow the funds for the
exclusive use of paying project costs. No funds may be paid to Petrobras or its
subsidiary (which is funding the drilling costs of the project) until all
amounts due to KBR, including amounts due for the claims, are liquidated and
paid. While this potentially increases the funds available for payment to KBR,
KBR is not party to the arrangement between the lenders and the project owner
and can give no assurance that there will be adequate funding to cover current
or future KBR claims and change orders.
Securities and Exchange Commission ("SEC") Investigation and Fortune
500 Review. In late May 2002, we received a letter from the Fort Worth District
Office of the Securities and Exchange Commission stating that it was initiating
a preliminary inquiry into some of our accounting practices. In mid-December
2002, we were notified by the SEC that a formal order of investigation had been
issued. Since that time, the SEC has issued subpoenas calling for the production
of documents and requiring the appearance of a number of witnesses to testify
regarding those accounting practices, which relate to the recording of revenues
associated with cost overruns and unapproved claims on long-term engineering and
construction projects. Throughout the informal inquiry and during the pendency
of the formal investigation, we have provided approximately 300,000 documents to
the SEC. The production of documents is essentially complete and the process of
providing witnesses to testify is ongoing. To our knowledge, the SEC's
investigation has focused on the compliance with generally accepted accounting
principles of our recording of revenues associated with cost overruns and
unapproved claims for long-term engineering and construction projects, and the
disclosure of our accrual practices. Accrual of revenue from unapproved claims
is an accepted and widely followed accounting practice for companies in the
engineering and construction business. Although we accrued revenue related to
unapproved claims in 1998, we first made disclosures regarding the accruals in
our 1999 Annual Report on Form 10-K. We believe we properly applied the required
methodology of the American Institute of Certified Public Accountants' Statement
of Position 81-1, "Accounting for Performance of Construction-Type and Certain
Production-Type Contracts", and satisfied the relevant criteria for accruing
this revenue, although the SEC may conclude otherwise.
On December 21, 2001, the SEC's Division of Corporation Finance
announced that it would review the annual reports of all Fortune 500 companies
that file periodic reports with the SEC. We received the SEC's initial comments
in letter form dated September 20, 2002 and responded on October 31, 2002. Since
then, we have received and responded to several follow-up sets of comments.
Securities and related litigation. On June 3, 2002, a class action
lawsuit was filed against us in the United States District Court for the
Northern District of Texas on behalf of purchasers of our common stock alleging
violations of the federal securities laws. After that date, approximately twenty
similar class actions were filed against us in that or other federal district
courts. Several of those lawsuits also named as defendants Arthur Andersen, LLP
("Arthur Andersen"), our independent accountants for the period covered by the
lawsuits, and several of our present or former officers and directors. Those
lawsuits allege that we violated federal securities laws in failing to disclose
a change in the manner in which we accounted for revenues associated with
unapproved claims on long-term engineering and construction contracts, and that
we overstated revenue by accruing the unapproved claims. One such action was
subsequently dismissed voluntarily, without prejudice, upon motion by the filing
plaintiff. The federal securities fraud class actions have all been transferred
to the United States District Court for the Northern District of Texas and
27
consolidated before the Honorable Judge David Godbey. The amended consolidated
class action complaint in that case, styled Richard Moore v. Halliburton, was
filed and served upon us on or about April 11, 2003. In early May 2003, we
announced that we had entered into a written memorandum of understanding setting
forth the terms upon which the consolidated cases would be settled. The
memorandum of understanding calls for Halliburton to pay $6 million, which is to
be funded by insurance proceeds. After that announcement, one of the lead
plaintiffs announced that it was dissatisfied with the lead plaintiffs'
counsel's handling of settlement negotiations and what the dissident plaintiff
regarded as inadequate communications by the lead plaintiffs' counsel. The
dissident plaintiff has since filed a motion for an order to show cause why the
lead plaintiffs' counsel should not be held to have breached his fiduciary
duties to the class and be replaced as lead plaintiffs' counsel. It is unclear
whether this dispute within the ranks of the lead plaintiffs will have any
impact upon the process of approval of the settlement and whether the dissident
plaintiff will object to the settlement at the time of the fairness hearing or
opt out of the class action for settlement purposes. The process by which the
parties will seek approval of the settlement is ongoing.
Another case, also filed in the United States District Court for the
Northern District of Texas on behalf of three individuals, and based upon the
same revenue recognition practices and accounting treatment that is the subject
of the securities class actions, alleges only common law and statutory fraud in
violation of Texas state law. We moved to dismiss that action on October 24,
2002, as required by the court's scheduling order, on the bases of lack of
federal subject matter jurisdiction and failure to plead with the degree of
particularity required by the rules of procedure. That motion has now been fully
briefed and oral argument on it was held on July 29, 2003. No ruling has yet
been announced.
In addition to the securities class actions, one additional class
action, alleging violations of the Employee Retirement Income Security Act of
1974 ("ERISA") in connection with the Company's Benefits Committee's purchase of
our stock for the accounts of participants in our 401(k) retirement plan during
the period we allegedly knew or should have known that our revenue was
overstated as a result of the accrual of revenue in connection with unapproved
claims, was filed and subsequently voluntarily dismissed.
On October 11, 2002, a shareholder derivative action against present
and former directors and our former CFO was filed in the District Court of
Harris County, Texas alleging breach of fiduciary duty and corporate waste
arising out of the same events and circumstances upon which the securities class
actions are based. We moved to dismiss that action and, after hearings on that
motion, the court dismissed the action.
On March 12, 2003, another shareholder derivative action arising out of
the same events and circumstances was filed in the United States District Court
for the Northern District of Texas against certain of our present and former
officers and directors. Like the case filed in the state court in Harris County,
we believe that this action is without merit and we intend to vigorously defend
it. Settlement of this action is included in the memorandum of understanding in
the consolidated actions discussed above.
As of the date of this filing, the $6 million settlement amount for the
consolidated actions and the federal court derivative action was fully covered
by the Company's directors' and officers' insurance carrier. As such, we have
accrued a contingent liability for the $6 million settlement and a $6 million
insurance receivable from the insurance carrier. We have not accrued a
contingent liability as of June 30, 2003 for any other shareholder derivative
action or class action lawsuit discussed above.
BJ Services Company patent litigation. On April 12, 2002, a federal
court jury in Houston, Texas, returned a verdict against Halliburton Energy
Services, Inc. in a patent infringement lawsuit brought by BJ Services Company,
or BJ. The lawsuit alleged that our Phoenix fracturing fluid infringed a patent
issued to BJ in January 2000 for a method of well fracturing using a specific
fracturing fluid. The jury awarded BJ approximately $98 million in damages, plus
pre-judgment interest, and the court enjoined us from further use of our Phoenix
fracturing fluid. The United States Court of Appeals for the Federal Circuit
in Washington D.C. affirmed BJ Services' judgment against us in August 2003. We
currently anticipate filing a petition for rehearing before the full federal
circuit court on August 20, 2003. In light of the trial court's decision in
April 2002, a total of $102 million was accrued in the first quarter of 2002,
which was comprised of the $98 million judgment and $4 million in pre-judgment
interest costs. We do not expect the loss of the use of the Phoenix fracturing
fluid to have a material adverse impact on our overall energy services business.
We have alternative products to use in our fracturing operations and have not
been using the Phoenix fracturing fluid since April 2002.
28
Anglo-Dutch (Tenge). We have been sued in the District Court of Harris
County, Texas by Anglo-Dutch (Tenge) L.L.C. and Anglo-Dutch Petroleum
International, Inc. for allegedly breaching a confidentiality agreement related
to an investment opportunity we considered in the late 1990s in an oil field in
the former Soviet Republic of Kazakhstan. While we believe the claims raised in
that lawsuit are without merit and are vigorously defending against them, the
plaintiffs have announced their intention to seek approximately $680 million in
damages. Since we believe the probability of loss is remote, we have not accrued
a contingent liability for this matter as of June 30, 2003. In mid-July, the
court granted portions of our motions for summary judgment and on July 24, 2003
granted another portion as well and invited the parties to request
reconsideration of any other portions of the motions that have thus far been
denied. As of this date, it appears likely that the case will proceed to trial
as scheduled on August 18, 2003 on plaintiffs' claims of breach of contract,
misappropriation and misappropriation of trade secrets. In the event of an
adverse judgment, we could be called upon to post security not to exceed $25
million in the form of cash or a bond in order to postpone execution on the
judgment until after all appeals have been exhausted.
Improper payments reported to the Securities and Exchange Commission.
During the second quarter 2002, we reported to the SEC and disclosed in our
first quarter 2002 Form 10-Q that one of our foreign subsidiaries operating in
Nigeria made improper payments of approximately $2.4 million to entities owned
by a Nigerian national who held himself out as a tax consultant when in fact he
was an employee of a local tax authority. The payments were made to obtain
favorable tax treatment and clearly violated our Code of Business Conduct and
our internal control procedures. The payments were discovered during an audit of
the foreign subsidiary. We have conducted an investigation assisted by outside
legal counsel. Based on the findings of the investigation we have terminated
several employees. None of our senior officers were involved. We are cooperating
with the SEC in its review of the matter. We plan to take further action to
ensure that our foreign subsidiary pays all taxes owed in Nigeria, which may be
as much as $5 million, which has been fully accrued. A preliminary assessment
was issued by the Nigerian Tax Authorities in June of 2003 for approximately $3
million. Payment of that assessment has been made, and we are cooperating with
the Nigerian Tax Authorities to determine the total amount due as quickly as
possible.
Environmental. We are subject to numerous environmental, legal and
regulatory requirements related to our operations worldwide. In the United
States, these laws and regulations include the Comprehensive Environmental
Response, Compensation and Liability Act, the Resources Conservation and
Recovery Act, the Clean Air Act, the Federal Water Pollution Control Act and the
Toxic Substances Control Act, among others. In addition to the federal laws and
regulations, states where we do business may have equivalent laws and
regulations by which we must also abide. We evaluate and address the
environmental impact of our operations by assessing and remediating contaminated
properties in order to avoid future liabilities and comply with environmental,
legal and regulatory requirements. On occasion, we are involved in specific
environmental litigation and claims, including the remediation of properties we
own or have operated as well as efforts to meet or correct compliance-related
matters.
We do not expect costs related to these remediation requirements to
have a material adverse effect on our consolidated financial position or our
results of operations. Our accrued liabilities for environmental matters were
$36 million as of June 30, 2003 and $48 million as of December 31, 2002. The
liability covers numerous properties, and no individual property accounts for
more than $5 million of the liability balance. In some instances, we have been
named a potentially responsible party by a regulatory agency, but in each of
those cases, we do not believe we have any material liability. We have
subsidiaries that have been named as potentially responsible parties along with
other third parties for nine federal and state superfund sites for which we have
established liabilities. As of June 30, 2003, those nine sites accounted for
approximately $7 million of our total $36 million liability.
Letters of credit. In the normal course of business, we have agreements
with banks under which approximately $1.3 billion of letters of credit or bank
guarantees were issued as of June 30, 2003, including $195 million which relate
to our joint ventures' operations. Effective October 9, 2002, we amended an
agreement with banks under which $261 million of letters of credit had been
issued. The amended agreement removed the provision that previously allowed the
banks to require collateralization if ratings of Halliburton debt fell below
investment grade ratings. The revised agreements include provisions that require
us to maintain ratios of debt to total capital and of total earnings before
interest, taxes, depreciation and amortization to interest expense. The
definition of debt includes our asbestos liability. The definition of total
earnings before interest, taxes, depreciation and amortization excludes any
non-cash charges related to the proposed asbestos settlement through December
31, 2003.
29
If our debt ratings fall below investment grade, we would be in
technical breach of a bank agreement covering another $52 million of letters of
credit at June 30, 2003, which might entitle the bank to set-off rights. In
addition, a $151 million letter of credit line, of which $141 million has been
issued, includes provisions that allow the bank to require cash
collateralization for the full line if debt ratings fall below either the rating
of BBB by Standard & Poor's or Baa2 by Moody's Investors' Services. These
letters of credit and bank guarantees generally relate to our guaranteed
performance or retention payments under our long-term contracts and
self-insurance.
In the past, no significant claims have been made against letters of
credit we have issued. We do not anticipate material losses to occur as a result
of these financial instruments.
Liquidated damages. Many of our engineering and construction contracts
have milestone due dates that must be met or we may be subject to penalties for
liquidated damages if claims are asserted and we were responsible for the
delays. These generally relate to specified activities within a project by a set
contractual date or achievement of a specified level of output or throughput of
a plant we construct. Each contract defines the conditions under which a
customer may make a claim for liquidated damages. In most instances, liquidated
damages are not asserted by the customer but the potential to do so is used in
negotiating claims and closing out the contract. We had not accrued a liability
for $431 million at June 30, 2003 and $364 million at December 31, 2002 of
possible liquidated damages as we consider the imposition of liquidated damages
to be unlikely. We believe we have valid claims for schedule extensions against
the customers which would eliminate our liability for liquidated damages. Of the
total liquidated damages, $266 million at June 30, 2003 and $263 million at
December 31, 2002 relate to unasserted liquidated damages for the
Barracuda-Caratinga project.
Other. We are a party to various other legal proceedings. We expense
the cost of legal fees related to these proceedings as incurred. We believe any
liabilities we may have arising from these proceedings will not be material to
our consolidated financial position or results of operations.
Note 13. Accounting for Stock-Based Compensation
We have six stock-based employee compensation plans. We account for
those plans under the recognition and measurement principles of Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees", and
related interpretations. No cost for stock options granted is reflected in net
income, as all options granted under our plans have an exercise price equal to
the market value of the underlying common stock on the date of grant. In
addition, no cost for the Employee Stock Purchase Plan is reflected in net
income because it is not considered a compensatory plan.
The fair value of options at the date of grant was estimated using the
Black-Scholes option pricing model. For the three and six months ended June 30,
2003 and June 30, 2002, the weighted average assumptions and resulting fair
values of options granted are as follows:
Three Months Six Months
Ended June 30 Ended June 30
-------------------------------------------------------
2003 2002 2003 2002
----------------------------------------------------------------------------------------------------------
Assumptions:
Risk-free interest rate 2.4% 4.1% 2.4% 4.1%
Expected dividend yield 2.2% 3.1% 2.2% 3.1%
Expected life (in years) 5 5 5 5
Expected volatility 62.0% 60.0% 62.0% 60.0%
Weighted average fair value of options granted $ 12.68 $ 9.15 $ 12.55 $ 6.92
============================================================================================================
The following table illustrates the effect on net income and income per
share if we had applied the fair value recognition provisions of FASB Statement
No. 123, "Accounting for Stock-Based Compensation", to stock-based employee
compensation.
30
Three Months Six Months
Ended June 30 Ended June 30
-------------------------------------------------------
Millions of dollars except per share data 2003 2002 2003 2002
----------------------------------------------------------------------------------------------------------
Net income (loss), as reported $ 26 $ (498) $ 69 $ (476)
Total stock-based employee compensation
expense determined under fair value
based method for all awards, net of
related tax effects (7) (6) (13) (12)
----------------------------------------------------------------------------------------------------------
Net income (loss), pro forma $ 19 $ (504) $ 56 $ (488)
==========================================================================================================
Basic income (loss) per share:
As reported $ 0.06 $ (1.15) $ 0.16 $ (1.10)
Pro forma $ 0.04 $ (1.16) $ 0.13 $ (1.12)
Diluted income (loss) per share:
As reported $ 0.06 $ (1.15) $ 0.16 $ (1.10)
Pro forma $ 0.04 $ (1.16) $ 0.12 $ (1.12)
==========================================================================================================
Note 14. Change in Accounting Principle
In August 2001, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standard ("SFAS") No. 143, "Accounting
for Asset Retirement Obligations" which addresses the financial accounting and
reporting for obligations associated with the retirement of tangible long-lived
assets and the associated assets' retirement costs. SFAS No. 143 requires that
the fair value of a liability associated with an asset retirement be recognized
in the period in which it is incurred if a reasonable estimate of fair value can
be made. The associated retirement costs are capitalized as part of the carrying
amount of the long-lived asset and subsequently depreciated over the life of the
asset. The new standard was effective for us beginning January 1, 2003, and the
adoption of this standard resulted in a charge of $8 million after tax as a
cumulative effect of a change in accounting principle. The asset retirement
obligations primarily relate to the removal of leasehold improvements upon
exiting certain lease arrangements and restoration of land associated with the
mining of bentonite. The total liability recorded at adoption and at June 30,
2003 for asset retirement obligations and the related accretion and depreciation
expense for all periods presented is immaterial to our consolidated financial
position and results of operations.
In November 2002, the FASB issued FASB Interpretation No. 45,
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others" ("FIN 45"). This statement
requires that a liability be recorded in the guarantor's balance sheet upon
issuance of a guarantee. In addition, FIN 45 requires disclosures about the
guarantees that an entity has issued. The disclosure provisions of FIN 45 were
effective for financial statements of interim and annual periods ended after
December 15, 2002. We adopted the recognition provisions of FIN 45 as of January
1, 2003. The adoption of FIN 45 did not have a material effect on our
consolidated financial position or results of operations.
The FASB issued FASB Interpretation No. 46, "Consolidation of Variable
Interest Entities, an Interpretation of ARB No. 51" ("FIN 46"), in January 2003.
FIN 46, which we adopted effective July 1, 2003, requires the consolidation of
entities in which a company absorbs a majority of another entity's expected
losses, receives a majority of the other entity's expected residual returns, or
both, as a result of ownership, contractual or other financial interests in the
other entity. Currently, entities are generally consolidated based upon a
controlling financial interest through ownership of a majority voting interest
in the entity. At this time, we have identified the following variable interest
entities:
- during 2001, we formed a joint venture under which we own a
50% equity interest with two other unrelated partners, each
owning a 25% equity interest. We have determined that the
joint venture is a variable interest entity and that we are
the primary beneficiary. We will consolidate the entity in our
Engineering and Construction Group business segment effective
July 1, 2003. The joint venture was formed to construct,
operate and service certain assets for a third party and was
31
funded with third party debt. The construction of the assets
is expected to be completed in 2004, and the operating and
service contract related to the assets will extend for 20
years beginning in 2003. The proceeds from the debt financing
are being used to construct the assets and will be paid down
with cash flows generated during the operation and service
phase of the contract with the third party. Our aggregate
exposure to loss is immaterial. The consolidation of this
joint venture will increase total assets by approximately
$139 million and long-term debt by approximately $143
million, with corresponding decreases in equity of $2
million and minority interest of $2 million as of July 1,
2003. The joint venture is currently accounted for under
the equity method of accounting and the future
consolidation will have no impact on net income;
- during the second quarter of 2001, we formed a joint venture
with an unrelated party in which we have a 50% equity interest
and account for this investment using the equity method in our
Landmark and Other Energy Services business segment. The joint
venture was established for the further development and
deployment of new technologies related to completions and well
intervention products and services. The joint venture is
considered a variable interest entity under FIN 46. However,
we are not the primary beneficiary of the entity and will
continue to apply the equity method of accounting. Our
maximum exposure to loss as a result of our involvement in the
joint venture is $100 million as of June 30, 2003, which is
the sum of our current investment and our share of the
balance outstanding under the joint venture's revolving loan
agreement with the equity partners. We are also at risk for
our share of any future losses the joint venture may incur;
and
- our Engineering and Construction Group is involved in three
joint ventures formed to design, build, operate and maintain
roadways for certain government agencies. We have a 25%
ownership interest in these joint ventures and account for
them under the equity method. These joint ventures are
considered variable interest entities as they were
initially formed with little equity contributed by the
partners. The joint ventures have obtained financing through
third parties which is not guaranteed by us. We are not the
primary beneficiary of these joint ventures and will,
therefore, continue to account for them using the equity
method. As of June 30, 2003, these joint ventures had
total assets of $911 million and total liabilities of $906
million. Our maximum exposure to loss is limited to our
equity investments in and loans to the joint ventures
(totaling $38 million at June 30, 2003) and our share of any
future losses related to the construction, operation and
maintenance of these roadways.
Note 15. Convertible Senior Notes
In June 2003, we issued $1.2 billion of 3.125% convertible senior notes
due July 15, 2023. The notes were offered and sold in accordance with Rule 144A
under the Securities Act of 1933. The notes are our senior unsecured obligations
ranking equally with all of our existing and future senior unsecured
indebtedness. We will pay interest on the notes on January 15 and July 15 of
each year.
The notes are convertible into our common stock under any of the
following circumstances:
- during any calendar quarter (and only during such calendar
quarter) if the last reported sale price of our common stock
for at least 20 trading days during the period of 30
consecutive trading days ending on the last trading day of the
previous quarter is greater than or equal to 120% of the
conversion price per share of our common stock on such last
trading day;
- if the notes have been called for redemption;
- upon the occurrence of specified corporate transactions that
are described in the indenture relating to the offering; or
- during any period in which the credit ratings assigned to the
notes by both Moody's and Standard & Poor's are lower than Ba1
and BB+, respectively, or the notes are no longer rated by at
least one of these rating services or their successors.
32
The initial conversion price is $37.65 per share and is subject to
adjustment. Upon conversion, we will have the right to deliver, in lieu of
shares of our common stock, cash or a combination of cash and common stock.
The notes are redeemable for cash at our option on or after July 15,
2008. Holders may require us to repurchase the notes for cash on July 15 of
2008, 2013 or 2018 or, prior to July 15, 2008, in the event of a fundamental
change as defined in the indenture. In each case, we will pay a purchase price
equal to 100% of the principal amount plus accrued and unpaid interest and
additional amounts owed, if any.
We have agreed to file a shelf registration statement with the SEC with
respect to the notes and the common stock issuable upon conversion of the notes.
If we fail to fulfill this obligation within the specified time period, we will
pay additional amounts on the notes and the common stock issuable upon
conversion of the notes.
Note 16. Income Taxes
Our effective tax rate for the second quarter 2003 was 39% as compared
to 18% for the second quarter 2002. The effective tax rate was lower in 2002
due to the impact of the impairment loss on Bredero-Shaw and charges associated
with our asbestos exposure. The Bredero-Shaw loss created a capital loss for
which we have no capital gains to offset and therefore no tax benefit was
recorded for the loss as future realization of the benefit was questionable. The
asbestos accrual generates a United States Federal deferred tax asset which may
not be fully realizable based upon future taxable income projections and thus we
have recorded a partial valuation allowance.
33
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
- --------------------------------------------------------------------------------
In this section, we discuss the business environment, operating results
and general financial condition of Halliburton Company and its subsidiaries. We
explain:
- factors and risks that impact our business;
- why our revenues and operating income for the second quarter
2003 and six months ended June 30, 2003 vary from the
second quarter 2002 and six months ended June 30, 2002;
- capital expenditures;
- factors that impacted our cash flows; and
- other items that materially affect our financial condition or
earnings.
BUSINESS ENVIRONMENT
During the second quarter of 2003, we restructured our Energy Services
Group into four divisions, which is the basis for the four segments we now
report within the Energy Services Group. We grouped product lines in order to
better align ourselves with how our customers procure our services, and to
capture new business and achieve better integration, including joint research
and development of new products and technologies and other synergies. The new
segments mirror the way our chief executive officer (our chief operating
decision maker) now regularly reviews the operating results, assesses
performance and allocates resources. Our Engineering and Construction Group
(known as KBR) segment remains unchanged.
All prior period segment results have been restated to reflect these
changes.
Our five business segments are organized around how we manage the
business. These segments are:
- Drilling and Formation Evaluation;
- Fluids;
- Production Optimization;
- Landmark and Other Energy Services; and
- Engineering and Construction Group.
We currently operate in over 100 countries throughout the world,
providing a comprehensive range of discrete and integrated products and services
to the energy industry and to other industrial and governmental customers. The
majority of our consolidated revenues are derived from the sale of services and
products, including engineering and construction activities, to major, national
and independent oil and gas companies. These services and products are used
throughout the energy industry from the earliest phases of exploration,
development and production of oil and gas resources through refining, processing
and marketing.
The industries we serve are highly competitive with many substantial
competitors for each segment. In the first half of 2003, the United States
represented 33% of our total revenue and the United Kingdom represented 11%. No
other country accounted for more than 10% of our operations. Unsettled political
conditions, social unrest, acts of terrorism, force majeure, war or other armed
conflict, expropriation or other governmental actions, inflation, exchange
controls or currency devaluation may result in increased business risk in any
one country. We believe the geographic diversification of our business
activities reduces the risk that loss of business in any one country would be
material to our consolidated results of operations.
Activity levels within our five business segments are significantly
impacted by the following:
- spending on upstream exploration, development and production
programs by major, national and independent oil and gas
companies;
- capital expenditures for downstream refining, processing,
petrochemical and marketing facilities by major, national and
independent oil and gas companies; and
- government outsourcing and spending levels.
The state of the global economy also impacts our activity, which
indirectly impacts oil and gas consumption, demand for petrochemical products
and investment in infrastructure projects.
34
Energy Services Group
Some of the more significant measures of current and future spending
levels of oil and gas companies which drive worldwide exploration and production
activity and investment are the following:
- oil and gas prices;
- the quality of exploration and production drilling prospects;
and
- world economic conditions and the degree of global political
stability.
In early 2002, a surplus in working gas in storage contributed to low
prices and reduced drilling activities. Working gas in storage is the volume of
gas in underground reservoirs above the level of base gas (cushion gas) intended
as permanent inventory in a storage reservoir to maintain adequate pressure and
deliverability rates throughout the winter withdrawal season. The reduced
drilling, combined with an abnormally cold 2002/2003 winter season, drove the
working gas in storage at January 31, 2003 to 1,521 billion cubic feet,
commonly referred to as bcf, which was 287 bcf below the five year average.
This low level of working natural gas in storage in the United States
has increased the demand for natural gas resulting in Henry Hub prices averaging
above $5.00 per million cubic feet, commonly referred to as mcf, throughout the
second quarter 2003. For the second quarter 2003, natural gas prices at Henry
Hub averaged $5.63 per mcf compared to $3.40 per mcf in the second quarter 2002.
The level of natural gas storage continues to be a key driver of North American
activity. As of July 4, 2003 there was 1,773 bcf in working gas in storage in
the United States according to an Energy Information Administration (EIA)
estimate which was 580 bcf lower than a year ago and 317 bcf lower than the five
year average.
High natural gas prices tend to depress industrial demand for the gas,
which occurred during the second quarter 2003. As a result, a definite
improvement in the supply situation has occurred and the probability of reaching
adequate storage levels by November has risen.
Crude oil prices for West Texas Intermediate averaged $29.16 per barrel
for the second quarter of 2003 compared to $25.75 per barrel for the second
quarter 2002. Crude oil inventories in the United States have consistently
remained below the lower end of the normal range, which in turn has supported
crude oil prices in the United States. The situation worsened in December 2002
when oil imports from Venezuela were reduced due to strikes in that country
which created supply disruptions during most of the first quarter 2003. Despite
imports from Venezuela returning close to normal levels, United States
commercial crude oil inventories (excluding crude oil stored in the Strategic
Petroleum Reserve) have remained more than 15 million barrels below the lower
end of the normal range since the end of January, 2003. Until commercial crude
oil inventory deficits are eliminated, United States oil markets are expected to
remain tight, which should help support prices at or near current levels.
The yearly average and quarterly average rig counts based on the Baker
Hughes Incorporated rig count information are as follows:
Average Rig Counts 2002 2001
- ----------------------------------------------------------------------
United States 831 1,155
Canada 266 342
International (excluding Canada) 732 745
- ----------------------------------------------------------------------
Worldwide Total 1,829 2,242
======================================================================
Second First Fourth Third Second First
Quarter Quarter Quarter Quarter Quarter Quarter
Average Rig Counts 2003 2003 2002 2002 2002 2002
- --------------------------------------------------------------------------------------------------------------
United States 1,028 901 847 853 806 818
Canada 203 493 283 250 147 383
International
(excluding Canada) 765 744 753 718 725 731
- --------------------------------------------------------------------------------- ----------------------------
Worldwide Total 1,996 2,138 1,883 1,821 1,678 1,932
==============================================================================================================
35
Worldwide rig activity has increased since the second quarter of 2002
from an average of 1,678 rigs at the end of the second quarter 2002 to 1,996
rigs at the end of the second quarter 2003. The increase in rig activity has
been most pronounced in the United States with a 28% increase in rig counts from
806 in the second quarter 2002 to 1,028 rigs in the second quarter 2003. The
majority of this increase is related to rigs drilling for natural gas to
replenish working gas in storage for the upcoming 2003/2004 heating season. The
Canadian rig count decreased from 493 rigs in the first quarter 2003 to 203 rigs
in the second quarter 2003. Canadian rig counts decreased as a result of the
normal spring break up and thaw season, but increased 38% from 147 rigs in the
second quarter 2002 to 203 rigs in the second quarter 2003 on a comparative
basis. The international rig count increased six percent from 725 rigs in the
second quarter 2002 to 765 rigs in the second quarter 2003. The majority of this
increase was in Mexico and Argentina which was offset slightly by lower rig
counts in Venezuela and in the United Kingdom sector of the North Sea. We
believe the increased drilling activity and rig counts since the second quarter
of 2002 are due to the following factors:
- higher oil and gas prices;
- low oil inventories in the Organization for Economic
Co-operation and Development consuming countries;
- low natural gas inventories in the United States for the
upcoming winter season;
- cessation of armed conflict in Iraq;
- perception that the global economy is improving; and
- increased spending by our customers.
It is common practice in the United States oilfield services industry
to sell services and products based on a price book and then apply discounts to
the price book based upon a variety of factors. Discounts are typically applied
to partially or substantially offset price book increases immediately following
a price increase. Discounts normally decrease over time if the activity levels
remain strong. During periods of reduced activity, discounts normally increase,
reducing the net revenue for our products and services. Conversely, during
periods of higher activity, discounts normally decline resulting in net revenue
increasing for our products and services.
During 2000 and 2001, we implemented several price book increases. In
July 2000, as a result of increased consumable materials costs and a tight labor
market causing higher labor costs, we increased prices in the United States for
most product lines on average between 2% and 12%. In January 2001, as a result
of continued labor shortages and increased labor and materials costs, we
increased prices in the United States on average between 5% and 12%. In July
2001, as a result of continuing personnel and consumable material cost
increases, we increased prices on average between 6% and 15%.
Decreased rig activity in the United States in 2002 from 2001 caused
the Energy Services Group's product lines to discount prices. Although rig
activity in the United States has increased over the last twelve months,
discounts have still not decreased, particularly in some of the Western states.
Price increases that we implemented in 2000 and 2001 have mostly been eroded by
additional discounts.
Engineering and Construction Group
Our engineering and construction projects are longer term in nature
than our energy services projects and are not as significantly impacted by
short-term fluctuations in oil and gas prices. We believe that the global
economic recovery is continuing, but its strength and sustainability are not
assured. Based on the uncertain economic recovery, continuing excess capacity in
petrochemical supplies and rising unemployment, customers have continued to
delay project awards or reduce the scope of projects involving hydrocarbons and
manufacturing until growth in consumer spending is evident. A number of
large-scale gas and liquefied natural gas (LNG) development, offshore deepwater,
government and infrastructure projects are being awarded or actively considered.
However, due to the inconsistent economic growth in certain areas of the world
and the overall limited growth of the global economy, many customers continue to
delay some of their capital commitments and international investments.
We see an emerging drive to monetize gas reserves in the Middle East,
West Africa and parts of the Pacific Basin, combined with strong demand for gas
and LNG in the United States, Japan, Korea, Taiwan, China and India. The
developments have led to numerous gas-to-liquids (GTL), LNG liquefaction and gas
development projects in the three exporting regions as well as onshore or
floating regasification terminals and gas processing plants in the importing
countries. With LNG set to play a larger role as a new supply source, the shift
36
from fuel served by exclusively domestic resources to a market increasingly
served with international resources heralds a change in the United States gas
business. This will lead to an increasing internationalization of the natural
gas industry, bringing with it the integration of North America into a growing
world market.
We expect growth opportunities to exist for additional security and
defense support to government agencies in the United States and other countries.
Demand for these services is expected to grow as a result of the reconstruction
efforts in Iraq and as governmental agencies seek to control costs and promote
efficiencies by outsourcing these functions. We also expect growth due to new
demands created by increased efforts to combat terrorism and enhance homeland
security.
Engineering and construction contracts can be broadly categorized as
fixed-price, sometimes referred to as lump sum, or cost reimbursable contracts.
Some contracts can involve both fixed-price and cost reimbursable elements.
Fixed-price contracts are for a fixed sum to cover all costs and any
profit element for a defined scope of work. Fixed-price contracts entail more
risk to us as we must pre-determine both the quantities of work to be performed
and the costs associated with executing the work. The risks to us arise, among
other things, from:
- uncertainties in estimating the technical aspects and effort
involved to accomplish the work within the contract schedule;
- labor availability and productivity; and
- supplier and subcontractor pricing and performance.
Fixed-price engineering, procurement and construction and fixed-price
engineering, procurement, installation and commissioning contracts involve even
greater risks including:
- bidding a fixed-price and completion date before detailed
engineering work has been performed;
- bidding a fixed-price and completion date before locking in
price and delivery of significant procurement components
(often items which are specifically designed and fabricated
for the project);
- bidding a fixed-price and completion date before finalizing
subcontractors' terms and conditions;
- subcontractors' individual performance and combined
interdependencies of multiple subcontractors (the majority of
all construction and installation work is performed by
subcontractors);
- contracts covering long periods of time;
- contract values generally for large amounts; and
- contracts containing significant liquidated damages
provisions.
Cost reimbursable contracts include contracts where the price is
variable based upon actual costs incurred for time and materials, or for
variable quantities of work priced at defined unit rates. Profit elements on
cost reimbursable contracts may be based upon a percentage of costs incurred
and/or a fixed amount. Cost reimbursable contracts are generally less risky,
since the owner retains many of the risks. While fixed-price contracts involve
greater risk, they also are potentially more profitable for the contractor,
since the owners pay a premium to transfer many risks to the contractor.
After careful consideration, we have decided to no longer pursue
fixed-price engineering, procurement, installation and commissioning contracts
for the offshore oil and gas industry. An important aspect of our 2002
reorganization was to look closely at each of our businesses to ensure that they
are self-sufficient, including their use of capital and liquidity. In that
process, we found that the engineering, procurement, installation and
commissioning offshore business was using a disproportionate share of our
bonding and letter of credit capacity relative to its profit contribution. The
risk/reward relationship in that business is no longer attractive to us. We
provide a range of engineering, fabrication and project management services to
the offshore industry, which we will continue to service through a variety of
other contracting forms. We have seven fixed-price engineering, procurement,
installation and commissioning offshore projects underway and we are fully
committed to successful completion of these projects, all but two of which are
substantially complete. The two projects are approximately 75% complete. We plan
to retain our offshore engineering and services capabilities.
The approximate percentages of revenues attributable to fixed-price and
cost reimbursable engineering and construction segment contracts are as follows:
37
Fixed-Price Cost Reimbursable
- --------------------------------------------------------------------------
Second Quarter ended June 30, 2003 40% 60%
Year ended December 31, 2002 47% 53%
==========================================================================
Backlog
Our backlog at June 30, 2003, was $10.2 billion, comprised of $9.9
billion for the Engineering and Construction Group and $299 million for the
Energy Services Group. Our total backlog at December 31, 2002, was $10 billion.
Reorganization of Business Operations
As a part of the 2002 reorganization, we decided that the operations of
major projects, Granherne and Production Services were better aligned with KBR,
and these businesses were moved from the Energy Services Group to the
Engineering and Construction Group during the second quarter of 2002. All prior
period segment results have been restated to reflect this change. Major
projects, which currently consists of the Barracuda-Caratinga project in Brazil,
is now reported through the offshore product line, Granherne is now reported in
the onshore product line and production services is now reported under the
operations and maintenance product line.
Asbestos and Silica
In December 2002, we announced that we had reached an agreement in
principle that, if and when consummated, would result in a settlement of
asbestos and silica personal injury claims against our subsidiaries DII
Industries and Kellogg Brown & Root and their current and former subsidiaries
with United States operations. Subsequently, in 2003, DII Industries and Kellogg
Brown & Root entered into definitive written agreements finalizing the terms of
the agreements in principle with attorneys representing more than 90% of the
current asbestos claimants. We revised our best estimate of our asbestos and
silica liability based on information obtained while negotiating the agreement
in principle, and adjusted our asbestos and silica liability to $3.4 billion,
recorded additional probable insurance recoveries resulting in a total of $2.1
billion as of December 31, 2002 and recorded a net pretax charge of $799 million
($675 million after tax) in the fourth quarter of 2002.
Should the proposed settlement become probable under Statement of
Financial Accounting Standards No. 5, we would adjust our accrual for probable
and reasonably estimable liabilities for current and future asbestos and silica
claims. The settlement amount initially would be up to $4.3 billion, consisting
of up to $2.775 billion in cash, the value of 59.5 million Halliburton shares of
common stock and notes with a net present value expected to be less than $100
million. Assuming the adjusted liability would be $4.3 billion, we would also
increase our probable insurance recoveries to $2.3 billion. The impact on our
statement of operations would be an additional pretax charge of $606 million
($493 million after tax). This accrual (which values our stock to be contributed
at $1.4 billion using our stock price at June 30, 2003 of $23.00) would then be
adjusted periodically based on changes in the market price of our common stock
until the common stock is contributed to a trust for the benefit of the
claimants. We may enter into agreements with all or some of our insurance
carriers to negotiate an overall accelerated payment of anticipated insurance
proceeds. If this were to happen, we would expect to recover less than the $2.3
billion of anticipated insurance receivables which would result in an additional
charge to income.
38
RESULTS OF OPERATIONS IN 2003 COMPARED TO 2002
Second Quarter of 2003 Compared with the Second Quarter of 2002
REVENUES
Second Quarter
----------------------- Increase
Millions of dollars 2003 2002 (decrease)
- -----------------------------------------------------------------------------------
Drilling and Formation Evaluation $ 414 $ 413 $ 1
Fluids 518 450 68
Production Optimization 693 634 59
Landmark and Other Energy Services 155 259 (104)
- -----------------------------------------------------------------------------------
Total Energy Services Group 1,780 1,756 24
- -----------------------------------------------------------------------------------
Engineering and Construction Group 1,819 1,479 340
- -----------------------------------------------------------------------------------
Total revenues $ 3,599 $ 3,235 $ 364
===================================================================================
Consolidated revenues in the 2003 second quarter of $3.6 billion
increased $364 million compared to the 2002 second quarter. International
revenues were 67% of total revenues for the second quarters of both 2003 and
2002.
Drilling and Formation Evaluation segment revenues were $414 million
for the 2003 second quarter, up slightly from the 2002 second quarter.
International revenues were 72% of total revenues in both the second quarter
2003 and the second quarter 2002. Mono Pumps, which was sold in January 2003,
contributed approximately $20 million in revenues in the second quarter of 2002
to our drilling services product line. The loss of Mono Pumps revenues was
partially offset by revenues in the remainder of our drilling services product
line as contracts that were expiring in the United Kingdom were more than offset
by new contracts, primarily in West Africa and Ecuador. Drill bits revenue
increased by 6% due mainly to sales in Continental Europe.
On a geographic basis, the Middle East/Asia region's revenue for the
segment increased $3 million in all product lines, while revenues for the
segment in Latin America declined $3 million due to decreased activity in
Venezuela as activity was slow to pick up after the recent civil unrest,
partially offset by an increase in Mexico.
Fluids segment revenues were $518 million for the second quarter 2003,
an increase of 15% from the second quarter 2002. International revenues were 55%
of total revenues in the 2003 second quarter compared to 52% in the 2002 second
quarter. The increase in Fluids segment revenue was spread almost equally
between cementing and drilling fluids reflecting higher rig counts in the United
States and increased activity with PEMEX in Mexico. In addition, drilling fluids
benefited from higher activity in Angola, Canada and Algeria.
On a geographic basis, Europe/Africa revenues for the segment increased
$21 million primarily due to increased activity in Norway and Angola. North
America revenues for the segment increased $24 million primarily due to the
higher land rig count in the United States. Similar to the Drilling and
Formation Evaluation and Production Optimization segments, Latin America
revenues for the segment were impacted by decreased activity in Venezuela, but
this was more than offset by the increases in Mexico. This resulted in an
overall increase in Latin America revenue of $3 million.
Production Optimization segment revenues were $693 million for the 2003
second quarter, an increase of 9% from the 2002 second quarter. International
revenues were 55% of total revenues in the second quarter 2003 compared to 51%
in the second quarter 2002 as activity picked up in the Middle East following
the end of the war in Iraq. Our production enhancement product line was up 11%,
due to an increase in activity in the United States as a result of higher land
rig counts. In addition, Subsea 7, Inc. accounted for $11 million of the
increase due to higher activity in the North Sea. Further, the 2002 second
quarter did not include all three months of activity for Subsea 7, Inc., as it
was not formed until May 23, 2002. The sale of Halliburton Measurement Systems
during the second quarter of 2003 had a $3 million negative impact on segment
revenue.
On a geographic basis, Middle East/Asia revenues for the segment were
up $25 million due to higher sales to Kazakhstan, and higher activity in the
former Soviet Union , Australia, Brunei and Iraq. Revenues for the segment were
$10 million higher in Latin America due to increased work with PEMEX in Mexico
partially offset by lower activity in Venezuela and Brazil.
39
Landmark and Other Energy Services segment revenues were $155 million
for the second quarter 2003, a decrease of 40% from the second quarter 2002. The
decrease is due to most of our subsea activities being moved into Subsea 7, Inc.
in May 2002 plus the impact of the sale of Wellstream during the first quarter
of 2003. Revenues for Landmark Graphics were flat with the prior year quarter.
International revenues for the segment were 72% of total revenues in the second
quarter 2003 compared to 75% in the second quarter 2002.
Engineering and Construction Group revenues of $1.8 billion in the 2003
second quarter were 23% higher than in the 2002 second quarter. The improvement
was due to revenue increases in government services and onshore projects,
partially offset by declines in offshore projects. Revenues from government
related activities more than doubled on increased work in the Middle East for
the United States and the United Kingdom governments, offset slightly by lower
activity levels on the Balkans project. Onshore revenues were up by 21%,
primarily due to several new projects in Algeria, Egypt, Chad and Cameroon that
began during 2002. Offshore revenues decreased 23% reflecting reduced activity
on the Barracuda-Caratinga project in Brazil and projects in the Philippines and
Nigeria that are nearing the completion phase. Operations and maintenance
revenues were down 12% compared to the second quarter of 2002 due to the
loss of several contracts that have not been replaced.
OPERATING INCOME
Second Quarter
-------------------------- Increase
Millions of dollars 2003 2002 (decrease)
- ----------------------------------------------------------------------------------
Drilling and Formation Evaluation $ 49 $ 42 $ 7
Fluids 68 49 19
Production Optimization 113 106 7
Landmark and Other Energy Services 5 (127) 132
- ----------------------------------------------------------------------------------
Total Energy Services Group 235 70 165
- ----------------------------------------------------------------------------------
Engineering and Construction Group (148) (450) 302
General corporate (16) (25) 9
- -------------------------------------------------------------------- -------------
Total operating income $ 71 $ (405) $ 476
==================================================================================
Consolidated operating income of $71 million was $476 million higher in
the second quarter 2003 compared to the second quarter 2002. This change is
attributable to several significant items which occurred during the second
quarter of 2003 and 2002.
The significant items for the 2003 second quarter included:
- $173 million loss in the Engineering and Construction Group
related to the Barracuda-Caratinga project due to recently
identified higher cost trends and some actual and committed
costs exceeding estimated costs. In addition, schedule delays
have added to the costs of the project during the quarter; and
- $24 million gain in the Production Optimization segment
related to the sale of Halliburton Measurement Systems.
The net effect of these second quarter 2003 items was a loss of $149 million.
The significant items for the 2002 second quarter included:
- $56 million in expense related to restructuring charges;
- $119 million loss in the Engineering and Construction Group
related to the Barracuda-Caratinga project in Brazil;
- $330 million loss in the Engineering and Construction Group
related to asbestos exposures; and
- $61 million loss in the Landmark and Other Energy Services
segment for the impairment of our 50% equity investment in the
Bredero-Shaw joint venture.
The net effect of these second quarter 2002 items was a loss of $566 million.
Drilling and Formation Evaluation segment operating income for the 2003
second quarter increased $7 million, or 17%, from the second quarter 2002,
primarily due to improved logging results, where margins increased from 7% in
2002 to 13% in 2003. The improved logging results were primarily in Nigeria,
Indonesia, India and Mexico. Drilling services decreased by $2 million primarily
due to higher equipment maintenance costs and the impact from the sale of Mono
Pumps in the first quarter 2003.
40
Fluids segment operating income for the second quarter 2003 increased
$19 million, or 39%, from the second quarter 2002. Both drilling fluids and
cementing had incremental margins of about 30%.
Operating income was up in all geographic regions, as a result of
increased revenues. Drilling fluids results in the United States improved due to
a change in product mix and shift to newer environmental-friendly products.
Production Optimization segment operating income for the second quarter
2003 of $113 million increased $7 million from the second quarter 2002,
including the gain on the sale of Halliburton Measurement Systems of $24
million. Subsea 7, Inc. operating income increased $12 million from increased
activities in Norway and the United Kingdom. Also the 2002 second quarter did
not include all three months of activity for Subsea 7, Inc., as it was not
formed until May 23, 2002. Completion products and services operating income
decreased $13 million as margins were primarily affected by contract delays in
Indonesia and inventory obsolescence accruals. The production enhancement
product line decreased by $8 million as a result of increased discounts in the
United States, partially offset by increased activity in Mexico and Iraq. The
increased inventory obsolescence accruals in all product service lines decreased
segment operating income by $7 million.
Geographically, operating income in North America decreased $24 million
in the second quarter 2003 compared to the second quarter 2002 due to lower
pricing in spite of increased rig count and higher activity, which was offset by
the $24 million gain on the sale of Halliburton Measurement Systems.
Landmark and Other Energy Services segment operating income for the
second quarter 2003 was $5 million, a $132 million increase from the second
quarter 2002 reflecting the $61 million impairment of our equity investment in
Bredero-Shaw, the $37 million in restructuring charges and the $32 million of
impairment charges in integrated solutions projects in the second quarter of
2002.
Engineering and Construction Group operating loss of $148 million in
the second quarter 2003 decreased $302 million compared to the second quarter
2002. The second quarter of 2002 included a $330 million asbestos charge and a
$10 million restructuring charge. Income from government-related activities
improved by $18 million from the second quarter 2002, mainly related to
operations in the Middle East and at our shipyard in the United Kingdom. The
Barracuda-Caratinga project recognized $173 million of additional losses in the
second quarter 2003 compared to a $119 million loss in the 2002 second quarter.
The $173 million charge resulted from higher cost estimates, schedule
extensions, increased project contingencies as well as other factors. Onshore
results declined $11 million due mainly to a $29 million charge for schedule
delays on a project in Europe, which was partly offset by higher profits on LNG
projects.
General corporate expenses for the second quarter 2003 were $16 million
compared to $25 million for the 2002 second quarter, or a decrease in costs of
$9 million. The improved second quarter 2003 results reflect the $9 million of
restructuring charges incurred in the second quarter 2002.
NONOPERATING ITEMS
Interest expense of $25 million for the second quarter 2003 decreased
$5 million compared to the second quarter 2002. The decrease is due to lower
average borrowings in 2003 primarily from the reduction in debt prior to the
issuance of $1.2 billion in convertible notes at the end of the second quarter
2003.
Foreign exchange gains, net were $19 million in the current year
quarter compared to a $5 million loss in the second quarter of last year. The
increase was due to foreign exchange gains in the United Kingdom and Canada in
the second quarter 2003 and lower foreign exchange losses primarily in Argentina
as compared to the second quarter 2002.
Provision for income taxes of $29 million resulted in an effective tax
rate of 39% in the second quarter 2003, compared to a benefit for income taxes
in the second quarter 2002 of $77 million, resulting in an effective tax rate of
18%. The second quarter 2002 effective rate was low due to the tax impact of the
impairment loss on Bredero-Shaw and charges associated with our asbestos
exposure. The asbestos accrual generated a United States Federal deferred tax
asset in 2002 which may not be fully realizable based upon future taxable income
projections and thus we recorded a partial valuation allowance. The Bredero-Shaw
loss created a capital loss for which we have no capital gains to offset and
therefore no tax benefit was booked for the loss as future realization of the
benefit was questionable.
41
Loss from discontinued operations, net of tax was $16 million, or $0.03
per diluted share, for the second quarter 2003 compared to $140 million, or
$0.32 per diluted share, for the second quarter 2002. The loss in the second
quarter of 2003 reflects a $30 million pretax charge related to our July 2003
funding of the debtor-in-possession financing to Harbison-Walker in connection
with their Chapter 11 bankruptcy proceeding that is expected to be forgiven by
Halliburton on the earlier of the effective date of a plan of reorganization for
DII Industries or the effective date of a plan of reorganization for
Harbison-Walker acceptable to DII Industries. In addition, discontinued
operations included professional fees associated with the due diligence and
other aspects of the proposed settlement for asbestos and silica liabilities
offset by a release of environmental and legal reserves related to indemnities
that were part of our disposition of Dresser Equipment Group and are no longer
needed. The loss in the second quarter 2002 was due primarily to charges of $153
million pretax, $123 million after tax, booked on asbestos exposures. We also
recorded pretax expense of $6 million associated with the Harbison-Walker
bankruptcy filing.
RESULTS OF OPERATIONS IN 2003 COMPARED TO 2002
First Six Months of 2003 Compared with the First Six Months of 2002
REVENUES
First Six Months
------------------------ Increase
Millions of dollars 2003 2002 (decrease)
- ---------------------------------------------------------------------------------
Drilling and Formation Evaluation $ 793 $ 812 $ (19)
Fluids 998 903 95
Production Optimization 1,322 1,246 76
Landmark and Other Energy Services 278 484 (206)
- ---------------------------------------------------------------------------------
Total Energy Services Group 3,391 3,445 (54)
- ---------------------------------------------------------------------------------
Engineering and Construction Group 3,268 2,797 471
- ---------------------------------------------------------------------------------
Total revenues $ 6,659 $ 6,242 $ 417
=================================================================================
Consolidated revenues in the first six months of 2003 of $6.7 billion
increased 7% compared to the first six months of 2002 primarily due to increased
revenues in the Engineering and Construction Group. International revenues were
67% of total revenues for the first six months of both 2003 and 2002.
Drilling and Formation Evaluation segment revenues for the first half
of 2003 declined $19 million compared to the first half of 2002. International
revenues were 72% of total revenues in the first six months of 2003 and 2002.
Mono Pumps, which was sold in January 2003, contributed approximately $40
million in revenues in the first six months of 2002 to our drilling services
product line. The loss of Mono Pumps revenue was partially offset by revenues in
the remainder of our drilling services product line as contracts that were
expiring in the United Kingdom were more than offset by new contracts, primarily
in West Africa and Ecuador. Logging services revenues decreased by $9 million
due to lower sales in China and reduced activity in Venezuela.
On a geographic basis, the sale of Mono Pumps negatively impacted
segment revenues in North America by $17 million, in Europe/Africa by $11
million, and in Middle East/Asia by $12 million for the first six months of
2003 compared to the first six months of 2002. Increased logging services
activity in the United States and higher drill bit sales in the United States
and Canada accounted for a $10 million increase in revenues. Middle East/Asia
revenues for the segment were positively impacted by increased drilling services
activity. Revenues were $6 million lower in Latin America where an increase in
activity in Mexico was more than offset by reductions in Venezuela, as activity
was slow to pick up after the recent civil unrest, and Brazil.
Fluids segment revenues were higher by $95 million in the first half
of 2003, an increase of 11% from the first six months of 2002. International
revenues were 55% of total revenues in the first six months of 2003 compared to
52% in the first six months of 2002. Drilling fluids, which was up 12%,
contributed to the majority of the increase due to higher land rig counts in the
United States.
42
On a geographic basis, all regions had increases in segment revenue
due to increased activity in both drilling fluids and cementing. On a percentage
basis the largest increase in revenues was in Middle East/Asia due to increased
activity in the former Soviet Union, Caspian and Indonesia. In addition, Latin
America revenues were slightly higher due to increased work in Mexico which was
offset by lower activity in Venezuela.
Production Optimization segment revenues were $1.3 billion for the
first six months of 2003, an increase of $76 million, or 6% from the first six
months of 2002. International revenues were 54% of total revenues in the first
half of 2003 compared to 51% in the first half of 2002 as activity picked up in
the Middle East following the end of the war in Iraq. The sale of Halliburton
Measurement Systems had a $3 million negative impact on segment revenues during
the first half of 2003. Our production enhancement product line was up 9%,
where United States revenue was up as a result of higher land rig counts.
On a geographic basis, Middle East/Asia revenues for the segment were
up $50 million due to higher sales to Kazakhstan, and higher activity in
Australia, Brunei and Iraq offset by lower activity in Indonesia. Revenues were
$12 million higher in Latin America where an increase in Mexico was partially
offset by reductions in activity in Brazil and Venezuela.
Landmark and Other Energy Services segment revenues were $278 million
for the first six months of 2003, a decrease of $206 million, or 43%, from the
first half of 2002. International revenues were 70% of total revenues in the
2003 first half compared to 77% in the first half of 2002. Lower segment
revenues were primarily due to the contribution of most of the assets of
Halliburton Subsea to Subsea 7, Inc. which, beginning in May 2002, was reported
on an equity basis in the Production Optimization segment. The sale of
Wellstream in March 2003 and the sale of integrated solutions projects in August
2002 also contributed to the decrease.
Engineering and Construction Group revenues for the six months ended
June 30, 2003 of $3.3 billion were 17% higher than in the six months ended June
30, 2002. The improvement was due to revenue increases in government related
activities and onshore projects, partially offset by declines in offshore
projects. Revenues from government services were up 78% on increased work in the
Middle East for the United States and the United Kingdom governments, offset
slightly by lower revenues on the Balkans project, which is in its final stages.
Onshore revenues were up 17%, primarily due to increases on a project in Nigeria
and progress on several new projects. The 16% decrease in offshore project
revenue reflects reduced activity on the Barracuda-Caratinga project in Brazil
and projects in the Philippines and Nigeria that are nearing the completion
phase. Operations and maintenance revenues were down 9% compared to the first
six months of 2002 due to the loss of several contracts that have not been
replaced.
OPERATING INCOME
First Six Months
-------------------------- Increase
Millions of dollars 2003 2002 (decrease)
- ----------------------------------------------------------------------------------
Drilling and Formation Evaluation $ 115 $ 80 $ 35
Fluids 123 100 23
Production Optimization 183 189 (6)
Landmark and Other Energy Services (6) (130) 124
- ----------------------------------------------------------------------------------
Total Energy Services Group 415 239 176
- ----------------------------------------------------------------------------------
Engineering and Construction Group (167) (508) 341
General corporate (35) (13) (22)
- ----------------------------------------------------------------------------------
Total operating income $ 213 $ (282) $ 495
==================================================================================
Consolidated operating income of $213 million was $495 million higher
in the first six months of 2003 compared to the first half of 2002. This change
is attributable to several significant items incurred during the first half of
2003 and 2002.
The significant items for the first six months of 2003 included:
- $228 million loss in the Engineering and Construction Group
related to the Barracuda-Caratinga project in Brazil;
- $15 million loss in the Landmark and Other Energy Services
segment on the sale of Wellstream;
43
- $24 million gain in the Production Optimization segment on the
sale of Halliburton Measurement Systems; and
- $36 million gain in the Drilling and Formation Evaluation
segment on the sale of Mono Pumps.
The net effect of these second quarter 2003 items was a loss of $183 million.
The significant items for the first six months of 2002 included:
- $67 million in expense related to restructuring charges, of
which $42 million related to Landmark and Other Energy
Services, $14 million related to the Engineering and
Construction Group, and $11 million related to General
corporate;
- $119 million loss in the Engineering and Construction Group
related to the Barracuda-Caratinga project in Brazil;
- $410 million loss in the Engineering and Construction Group
related to asbestos exposures;
- $61 million loss in the Landmark and Other Energy Services
segment on the impairment of our 50% equity investment in the
Bredero-Shaw joint venture; and
- $108 million gain in the Landmark and Other Energy Services
segment on the sale of European Marine Contractors Ltd.
The net effect of these second quarter 2002 items was a loss of $549 million.
Drilling and Formation Evaluation segment operating income totaled $115
million for the first six months of 2003 compared to $80 million in the first
six months of 2002. Operating income decreased $10 million in drilling services
partly due to the $5 million impact of having less than a month of Mono Pumps'
operations in 2003 due to the sale of Mono Pumps in January 2003. Drill bits
operating income was down $3 million primarily due to lower activity in the
Middle East and pricing pressures in the United States while logging benefited
from lower discounts in the United States. Operating income also included a $36
million gain on the sale of Mono Pumps in January of 2003.
Geographically, segment operating income decreased $4 million in Latin
America due to lower activity across the segment in Venezuela and Brazil offset
by increased activity for logging services and drill bits in Mexico and due to a
new drilling systems contract in Ecuador. A $12 million gain on the United
Kingdom portion of the sale of Mono Pumps positively impacted segment operating
income in Europe/Africa, along with higher activity in the North Sea and West
Africa.
Fluids segment operating income for the first six months of 2003 was
up $23 million, or 23%, from the first six months of 2002. The increase was
mostly in drilling fluids.
Geographically, all regions showed improved segment operating income
in the first six months of 2003 compared to the first six months of 2002 except
North America, which was flat with increased operating income for drilling
fluids offset by lower operating income in cementing. Pricing pressures
contributed to lower operating income in cementing in North America. Drilling
fluids benefited from higher sales of environmentally friendly fluids and
improved contract terms.
Production Optimization segment operating income for the first half
of 2003 decreased $6 million from the first half of 2002 with decreases across
all product lines. Operating income included a $24 million gain on the sale of
Halliburton Measurement Systems in the second quarter 2003. Operating income and
margins decreased in all product lines due to continued pricing pressures
throughout the six months combined with higher inventory adjustments and higher
operating costs in the North American region. The largest decreases came in
completion products and services which declined $14 million and tools and
testing which declined $9 million. Subsea 7, Inc. declined $2 million for the
period due to operating losses in the first quarter of 2003.
Segment operating income was down in the first half of 2003 compared
to the first half of 2002 in all geographic regions except Latin America, which
showed a $13 million increase reflecting increased activity in Mexico offset by
lower results in Brazil. Europe/Africa had a $6 million decrease compared to the
first six months of 2002 due to higher inventory obsolescence and equipment
mobilization costs as well as costs associated with early termination of a
contract in Norway.
44
Landmark and Other Energy Services segment operating income for the
first half of 2003 increased $124 million from the first six months of 2002 due
to the following:
- improved 2003 results in integrated solutions projects in the
United States, Indonesia and Iraq;
- a $61 million impairment in our 50% equity investment in
Bredero-Shaw in the second quarter 2002;
- $42 million of restructuring charges incurred in 2002;
- BJ Services litigation damage award of $98 million accrued in
2002;
- impairment charges in the second quarter of 2002 for
integrated solutions projects of $32 million, which were
partially offset by:
- $108 million gain on the sale of European Marine Contractors
Ltd. in the first quarter of 2002; and
- loss of $15 million on the sale of our Wellstream business in
March 2003.
Engineering and Construction Group operating loss of $167 million in
the first six months of 2003 decreased $341 million compared to the first half
of 2002. The improvement in operating results was due to $410 million in
asbestos charges and a $14 million restructuring charge that impacted the first
six months of 2002 compared to a $2 million asbestos charge and no restructuring
charges in the first six months of 2003. Income from government related
activities improved by $29 million from the first half of 2002, mainly related
to operations in the Middle East and our shipyard in the United Kingdom. The
Barracuda-Caratinga project recognized a $228 million loss in the first half of
2003 compared to a $119 million loss in the first six months of 2002. The losses
on the Barracuda-Caratinga project in 2003 are due to identified higher cost
trends and some actual and committed costs exceeding estimated costs. In
addition, schedule delays have added to the costs of the project during the
first half of the year. Onshore results declined $29 million due mainly to
schedule delays on a project in Europe and a project in Malaysia nearing
completion.
General corporate expenses for the first six months of 2003 were $35
million compared to $13 million for the first six months of 2002. General
corporate expenses were higher in 2003 as the first six months of 2002 included
a $28 million pretax gain for the value of stock received from the
demutualization of an insurance provider offset by 2002 restructuring charges of
$11 million. The higher 2003 expenses also relate to preparations for the
certifications required under Section 404 of the Sarbanes-Oxley Act.
NONOPERATING ITEMS
Interest expense of $52 million for the first six months of 2003
decreased $10 million compared to the first six months of 2002. The decrease is
due to $4 million in pre-judgment interest recorded in the 2002 second quarter
related to the BJ Services patent infringement judgment and lower average
borrowings in the first six months of 2003.
Foreign exchange gains, net were $13 million in the current year
compared to a $13 million loss in the first half of last year. The increase was
due to a $15 million gain in the United Kingdom and an $8 million gain in Canada
in 2003 combined with the absence of foreign exchange losses in 2002 stemming
from the economic crisis in Argentina.
Provision for income taxes of $79 million resulted in an effective tax
rate of 41% in the first half of 2003, versus a benefit for income taxes in the
first half of 2002 of $41 million and an effective tax rate of 12%. The first
half of 2002 effective rate was low due to the tax impact of the impairment loss
on Bredero-Shaw and charges associated with our asbestos exposure. The asbestos
accrual generated a United States Federal deferred tax asset which may not be
fully realizable based upon future taxable income projections. As a result we
recorded a partial valuation allowance. The Bredero-Shaw loss created a capital
loss for which we had no capital gains to offset and therefore no tax benefit
was booked for the loss.
Loss from discontinued operations, net of tax was a $24 million loss,
or $0.05 per diluted share, for the first half of 2003 compared to $168 million,
or $0.39 per diluted share, for 2002. The loss in the first half of 2003 was due
to charges related to our July 2003 funding of the debtor-in-possession
financing to Harbison-Walker in connection with their Chapter 11 bankruptcy
proceeding that is expected to be forgiven by Halliburton on the earlier of the
effective date of a plan of reorganization for DII Industries or the effective
date of a plan of reorganization for Harbison-Walker acceptable to DII
Industries. In addition, discontinued operations included professional fees
associated with the due diligence and other aspects of the proposed settlement
for asbestos liabilities offset by a release of environmental and legal reserves
45
related to indemnities that were part of our disposition of the Dresser
Equipment Group that are no longer needed. The loss in the first half of 2002
was due primarily to charges recorded for asbestos exposures. We also recorded
pretax expense of $6 million associated with the Harbison-Walker bankruptcy
filing.
Cumulative effect of change in accounting principle, net was an $8
million after-tax charge, or $0.02 per diluted share, related to our January 1,
2003 adoption of Financial Accounting Standards Board Statement No. 143,
"Accounting for Asset Retirement Obligations".
LIQUIDITY AND CAPITAL RESOURCES
We ended the second quarter of 2003 with cash and equivalents of $1.9
billion, an increase of $752 million from the end of 2002.
Cash flows from operating activities used $213 million in the first six
months of 2003 compared to providing $620 million in the first half of 2002.
Working capital items, which include receivables, sale of receivables,
inventories, accounts payable and other working capital, net, used $373 million
of cash in the first six months of 2003 compared to providing $333 million in
the same period of 2002. The major uses of working capital during the first half
of 2003 included the commencement of the Los Alamos contract by KBR and
increased activity in the Middle East due to new work related to Iraq. Our
government services activities could continue to use significant amounts of
working capital in the short term. Included in changes to other operating
activities for the first six months of 2002 is a $40 million payment related to
the Harbison-Walker bankruptcy filing.
Cash flows from investing activities provided $50 million in the first
six months of 2003 and used $414 million in the same period of 2002. Capital
expenditures of $229 million in the first half of 2003 were about 43% lower than
in the first six months of 2002. We have emphasized increased capital discipline
in 2003 and expect our full year capital spending to be approximately $600
million, down compared to 2002. Capital spending in the first half of 2003
continued to be mainly attributable to the Energy Services Group primarily for
directional and logging-while-drilling tools used in the Drilling and Formation
Evaluation segment. In addition, in the first quarter of 2002, we invested $60
million in integrated solutions projects. Cash from dispositions of businesses
in the first half of 2003 includes $136 million collected from the sale of
Wellstream, $33 million collected from the sale of Halliburton Measurement
Systems, and $23 million collected from the sale of Mono Pumps. Also included in
cash from dispositions is $25 million collected on a note receivable that was
received as a portion of the payment for Bredero-Shaw. Dispositions of
businesses in the first half of 2002 included $134 million collected from the
sale of our European Marine Contractors, Ltd. joint venture. The change in
restricted cash for the first half of 2003 is primarily collateral for potential
future insurance claim reimbursements. Included in the change in restricted cash
for the first half of 2002 is a $106 million deposit that collateralized an
appeal bond for a patent infringement judgment on appeal and $56 million as
collateral for potential future insurance claim reimbursements. Also included in
changes in restricted cash is $26 million primarily related to cash collateral
agreements for letters of credit outstanding on several construction projects.
Proceeds from the sale of securities in the first six months of 2003 of $57
million primarily relate to the sale of 2.5 million of National Oilwell common
shares that were received in the disposition of Mono Pumps.
Cash flows from financing activities provided $893 million in the first
six months of 2003. In the first six months of 2002, financing activities used
$101 million. Proceeds from long-term borrowings include $1.2 billion in
proceeds from the issuance of convertible senior notes, net of $24 million of
debt issuance costs. We also repaid our $139 million senior unsecured notes in
the first six months of 2003. Dividends to shareholders used $109 million of
cash in the first half of 2003 and 2002.
Capital resources from internally generated funds and access to capital
markets are sufficient to fund our working capital requirements and investing
activities. We will have to raise additional funding for the proposed asbestos
and silica settlement described below. Our combined short-term notes payable and
long-term debt was 42% of total capitalization at June 30, 2003 and 30% at
December 31, 2002. At June 30, 2003, we had $212 million in restricted cash
included in "Other assets, net". See Note 7 to the financial statements. In
addition, on April 15, 2002, we entered into an agreement to sell accounts
receivable to provide additional liquidity. Subsequent to the end of the second
46
quarter 2003, we reduced the balance on our accounts receivable securitization
facility to zero. This facility remains available to us for future use. See Note
8 to the financial statements. Currently, we expect capital expenditures in 2003
to be about $600 million. We have not finalized our capital expenditures budget
for 2004 or later periods.
Proposed asbestos and silica settlement. In December 2002, we reached
an agreement in principle that, if and when consummated, would result in a
settlement of asbestos and silica personal injury claims against our
subsidiaries DII Industries, Kellogg Brown & Root and their current and former
subsidiaries with United States operations. Subsequently, in 2003, DII
Industries and Kellogg Brown & Root entered into definitive written agreements
finalizing the terms of the agreements in principle with attorneys representing
more than 90% of the current asbestos claimants. We have also reached agreements
in principle with 48% of current silica claimants.
The definitive agreements provide that:
- up to $2.775 billion in cash, 59.5 million Halliburton shares
(valued at $1.4 billion using the stock price at June 30, 2003
of $23.00) and notes with a net present value expected to be
less than $100 million will be paid to one or more trusts for
the benefit of current and future asbestos and silica personal
injury claimants upon receiving final and non-appealable court
confirmation of a plan of reorganization;
- DII Industries and Kellogg Brown & Root will retain rights to
the first $2.3 billion of any insurance proceeds with any
proceeds received between $2.3 billion and $3.0 billion going
to the trust;
- the agreement is to be implemented through a pre-packaged
filing under Chapter 11 of the United States Bankruptcy Code
for DII Industries and Kellogg Brown & Root, and some of their
subsidiaries with United States operations; and
- the funding of the settlement amounts would occur upon
receiving final and non-appealable court confirmation of a
plan of reorganization for DII Industries and Kellogg Brown &
Root and some of their subsidiaries with United States
operations in the Chapter 11 proceeding.
Among the prerequisites for concluding the proposed settlement are:
- agreement on the amounts to be contributed to the trust for
the benefit of silica claimants;
- completion of our review of the current claims to establish
that the claimed injuries are based on exposure to products of
DII Industries, Kellogg Brown & Root, their subsidiaries or
former businesses or subsidiaries;
- completion of our medical review of the injuries alleged to
have been sustained by plaintiffs to establish a medical basis
for payment of settlement amounts;
- finalizing the principal amount and terms of the notes to be
contributed to the trust;
- agreement with a proposed representative of future claimants
and attorneys representing current claimants on procedures for
distribution of settlement funds to individuals claiming
personal injury;
- definitive agreement with the attorneys representing current
asbestos claimants and a proposed representative of future
claimants on a plan of reorganization for the Chapter 11
filings of DII Industries, Kellogg Brown & Root and some of
their subsidiaries with United States operations; and
agreement with the attorneys representing current asbestos and
silica claimants with respect to a disclosure statement
explaining the pre-packaged plan of reorganization to the
current claimants;
- arrangement of financing, in addition to the proceeds of our
recent offering of $1.2 billion principal amount of
convertible senior notes, for the proposed settlement on terms
acceptable to us to fund the cash amounts to be paid in the
settlement;
- Halliburton board approval;
- distribution of a disclosure statement and obtaining approval
of a plan of reorganization from at least the required 75% of
known present asbestos claimants and from a majority of known
present silica claimants in order to complete the plan of
reorganization; and
- obtaining final and non-appealable bankruptcy court approval
and federal district court confirmation of the plan of
reorganization.
47
Many of these prerequisites are subject to matters and uncertainties
beyond our control. There can be no assurance that we will be able to satisfy
the prerequisites for completion of the settlement. If we were unable to
complete the proposed settlement, we would be required to resolve current and
future asbestos claims in the tort system or, in the case of Harbison-Walker
claims (see Note 11 to the financial statements), possibly through the
Harbison-Walker bankruptcy proceedings.
We are currently continuing our due diligence review of current
asbestos claims to be included in the proposed settlement. We have now received
in excess of 75% of the necessary files related to medical evidence and we have
reviewed substantially all of the information provided. In regards to the
product identification due diligence, the process is moving at a steady pace,
but not as rapidly as the medical due diligence. In addition, we have not yet
commenced any due diligence in regards to silica claims. While no assurance can
be given, if we continue to receive documentation that is consistent with the
recent quantity and quality of the documentation received to date, we expect
that this documentation will provide an acceptable basis on which to proceed
with the proposed settlement. One result of our due diligence review is the
preliminary identification of more claims than contemplated by the proposed
settlement. However, until the more recently identified claims are subject to a
complete due diligence review, we will not be able to determine if these claims
would be appropriately included under the proposed settlement. Many of these
recently identified claims may be duplicative of previously submitted claims or
may otherwise not be appropriately included under the proposed settlement. In
the event that more claims are identified and validated than contemplated by the
proposed settlement, the cash required to fund the settlement may modestly
exceed $2.775 billion. If it does, we would need to decide whether to propose to
adjust the settlement matrices to reduce the overall amounts, or increase the
amounts we would be willing to pay to resolve the asbestos and silica
liabilities.
If we attempt to adjust the settlement matrices or otherwise attempt to
renegotiate the terms of the proposed settlement, the attorneys representing the
current asbestos claimants may not proceed with the settlement or may attempt to
renegotiate the settlement amount to increase the aggregate amount of the
settlement. Conversely, an increase in the amount of cash required may make
completing the proposed settlement more difficult.
In the event we elect to adjust the settlement matrices to reduce the
average amounts per claim, a supplemental disclosure statement may be required,
and if so, the claimants potentially adversely affected by the adjustment may
have an opportunity to change their votes. The additional time to make such
supplemental disclosure and opportunity to change votes may result in a delay in
the Chapter 11 filing.
Included in the next steps to complete the proposed settlement are (1)
an agreement on the procedures for the distribution of settlement funds to
individuals claiming personal injury and (2) an agreement on a plan of
reorganization for Kellogg Brown & Root and DII Industries and some of their
subsidiaries with United States operations and the related disclosure statement.
We cannot predict the exact timing of the completion of these steps, but we
expect that these prerequisites to making the Chapter 11 filing could be
completed on a timeline that would allow the Chapter 11 filing to be made late
in the third quarter or very early in the fourth quarter of 2003.
The settlement agreements with attorneys representing current asbestos
and silica claimants grant the attorneys a right to terminate their definitive
agreement on 10 days' notice. While no right to terminate any settlement
agreement has been exercised to date, there can be no assurance that claimants'
attorneys will not exercise their right to terminate the settlement agreements.
In connection with the Chapter 11 filing by Harbison-Walker, the
Bankruptcy Court on February 14, 2002 issued a temporary restraining order
staying all further litigation of more than 200,000 asbestos claims currently
pending against DII Industries in numerous courts throughout the United States.
The period of the stay contained in the temporary restraining order has been
extended through September 30, 2003. Currently, there is no assurance that a
stay will remain in effect beyond September 30, 2003, that a plan of
reorganization will be proposed or confirmed for Harbison-Walker, or that any
plan that is confirmed will provide relief to DII Industries. Should the stay
expire on September 30, 2003, the Bankruptcy Court established that discovery on
the stayed claims cannot begin until November 1, 2003 and trial dates cannot be
set before January 1, 2004.
Harbison-Walker filed a proposed plan of reorganization on July 31,
2003. However, the proposed plan does not provide for a Section 524(g)/105
injunction for the benefit of DII Industries and other DII Industries businesses
that share insurance with Harbison-Walker, and DII Industries has not consented
to the plan. Although possible, at this time we do not believe it likely that
48
Harbison-Walker will propose or will be able to confirm a plan of reorganization
in its bankruptcy proceeding that is acceptable to DII Industries within the
meaning of the letter agreements with RHI Refractories.
As an alternative, DII Industries has entered into a settlement in
principle with Harbison-Walker which would resolve substantially all of the
issues between them. This agreement is subject to negotiation of definitive
documentation and court approval in Harbison-Walker's bankruptcy case. If
approved by the court in Harbison-Walker's bankruptcy case, this agreement would
provide for:
- channeling of asbestos and silica personal injury claims
against Harbison-Walker and certain of its affiliates to the
trusts created in the Chapter 11 cases being contemplated for
DII Industries and Kellogg Brown & Root;
- release by Harbison-Walker and its affiliates of any rights in
insurance shared with DII Industries on occurrence of the
effective date of plan of reorganization for DII Industries;
- release by DII Industries of any right to be indemnified by
Harbison-Walker for asbestos or silica personal injury claims;
- forgiveness by DII Industries of all of Harbison-Walker's
obligations under the debtor-in-possession financing provided
by DII Industries on the earlier of the effective date of a
plan of reorganization for DII Industries or the effective
date of a plan of reorganization for Harbison-Walker
acceptable to DII Industries;
- purchase by DII Industries of Harbison-Walker's outstanding
insurance receviables for an amount of approximately $50
million on the earliest of the effective date of a plan of
reorganization for DII Industries, the effective date of a
plan of reorganization for Harbison-Walker acceptable to DII
Industries or December 31, 2003. It is expected that a portion
of this receivable could require a reserve for
uncollectibility due to the insolvency of insurance carriers.
This receivable and related allowance will be recorded in the
third quarter 2003;
- guarantee of the insurance receivable purchase price by
Halliburton on a subordinated basis; and
- negotiation between the parties on a mutually-agreeable
structure for resolving other products or mass tort claims.
Of the up to $2.775 billion cash amount included as part of the
proposed settlement, approximately $450 million primarily relates to claims
previously settled but unpaid by Harbison-Walker (see Note 11 to the financial
statements), but not previously agreed to by us. As part of the proposed
settlement, we have agreed that, if a Chapter 11 filing by DII Industries,
Kellogg Brown & Root and their subsidiaries were to occur, we would pay this
amount within four years if not paid sooner pursuant to a final bankruptcy court
approved plan of reorganization for DII Industries, Kellogg Brown & Root and
their subsidiaries with United States operations. Effective November 30, 2002,
we are making cash payments in lieu of interest at a rate of 5% per annum to the
holders of these claims. These cash payments in lieu of interest will be made in
arrears at the end of February, May, August and November, beginning after
certain conditions are met, until the earlier of the date that the $450 million
is paid or the date the proposed settlement is abandoned.
We continue to track legislative proposals for asbestos reform pending
in the United States Congress. We understand that the United States Senate is
currently working on draft legislation that would set up a national trust fund
as the exclusive means for recovery for asbestos-related disease. We are not
certain as to what contributions we would be required to make to such a trust,
although we anticipate that they would be substantial and that they would
continue for a significant number of years. In determining whether to approve
the proposed settlement and proceed with the Chapter 11 filing of DII Industries
and Kellogg Brown & Root and some of their subsidiaries with United States
operations, the Halliburton Board of Directors will take into account the
then-current status of these legislative initiatives.
Proposed bankruptcy of DII Industries, Kellogg Brown & Root and
subsidiaries. Under the terms of the proposed settlement, the settlement would
be implemented through a pre-packaged Chapter 11 filing for DII Industries,
Kellogg Brown & Root and some of their subsidiaries with United States
operations. Other than those debtors, none of the subsidiaries of Halliburton
(including Halliburton Energy Services) or Halliburton itself will be a debtor
49
in the Chapter 11 proceedings. We anticipate that Halliburton, Halliburton
Energy Services and each of the debtors' non-debtor affiliates will continue
normal operations and continue to fulfill all of their respective obligations in
the ordinary course as they become due.
As part of any proposed plan of reorganization, the debtors intend to
seek approval of the bankruptcy court for debtor-in-possession financing to
provide for operating needs and to provide additional liquidity during the
pendency of the Chapter 11 proceeding. Halliburton intends, with the
understanding of its lenders, to provide the debtor-in-possession financing to
DII Industries and Kellogg Brown & Root. Arranging for debtor-in-possession
financing is a condition precedent to the filing of any Chapter 11 proceeding.
Any plan of reorganization will provide that all of the debtors'
obligations under letters of credit, surety bonds, corporate guaranties and
indemnity agreements (except for agreements relating to asbestos claims or
silica claims) will be unimpaired. In addition, the Bankruptcy Code allows a
debtor to assume most executory contracts without regard to bankruptcy default
provisions, and it is the intention of DII Industries, Kellogg Brown & Root and
the other filing entities to assume and continue to perform all such executory
contracts. Representatives of DII Industries, Kellogg Brown & Root and their
subsidiaries have advised their customers of this intention.
After filing any Chapter 11 proceeding, the debtors would seek an order
of the bankruptcy court scheduling a hearing to consider confirmation of the
plan of reorganization. In order to be confirmed, the Bankruptcy Code requires
that impaired classes of creditors vote to accept the plan of reorganization
submitted by the debtors. In order to carry a class, approval of over one-half
in number and at least two-thirds in amount are required. In addition, to obtain
an injunction under Section 524(g) of the Bankruptcy Code, at least 75% of
voting current asbestos claimants must vote to accept the plan of
reorganization. In addition to obtaining the required votes, the requirements
for a bankruptcy court to approve a plan of reorganization include, among other
judicial findings, that:
- the plan of reorganization complies with applicable provisions
of the Bankruptcy Code;
- the debtors have complied with the applicable provisions of
the Bankruptcy Code;
- the trust will value and pay similar present and future claims
in substantially the same manner;
- the plan of reorganization has been proposed in good faith and
not by any means forbidden by law; and
- any payment made or promised by the debtors to any person for
services, costs or expenses in or in connection with the
Chapter 11 proceeding or the plan of reorganization has been
or is reasonable.
Section 524(g) of the Bankruptcy Code authorizes the bankruptcy court
to enjoin entities from taking action to collect, recover or receive payment or
recovery with respect to any asbestos claim or demand that is to be paid in
whole or in part by a trust created by a plan of reorganization that satisfies
the requirements of the Bankruptcy Code. Section 105 of the Bankruptcy Code
authorizes a similar injunction for silica claims. The injunction also may bar
any action based on such claims or demands against the debtors that are directed
at third parties. The order confirming the plan must be issued or affirmed by
the federal district court that has jurisdiction over the case. After the
expiration of the time for appeal of the order, the injunction becomes valid and
enforceable.
The debtors believe that, if they proceed with a Chapter 11 filing,
they will be able to satisfy all the requirements of Section 524(g), so long as
the requisite number of holders of asbestos claims vote in favor of the plan of
reorganization. If the 524(g) and 105 injunctions are issued, all unsettled
current asbestos claims, all future asbestos claims and all silica claims based
on exposure that has already occurred will be channeled to a trust for payment,
and the debtors and related parties (including Halliburton, Halliburton Energy
Services and other subsidiaries and affiliates of Halliburton and the debtors)
will be released from any further liability under the plan of reorganization.
A prolonged Chapter 11 proceeding could adversely affect the debtors'
relationships with customers, suppliers and employees, which in turn could
adversely affect the debtors' competitive position, financial condition and
results of operations. A weakening of the debtors' financial condition and
results of operations could adversely affect the debtors' ability to implement
the plan of reorganization.
Financing the proposed asbestos and silica settlement. The plan of
reorganization through which the proposed settlement will be implemented will
require us to contribute approximately $2.775 billion in cash to the Section
524(g)/105 trust established for the benefit of claimants, which we will need to
finance on terms acceptable to us. On June 30, 2003, we issued $1.2 billion of
50
3.125% convertible senior notes due July 15, 2023. We intend to use a portion of
the net proceeds from the offering to fund a portion of the cash contribution
required by the proposed settlement. In addition, we are pursuing a number of
additional financing alternatives for the cash amount to be contributed to the
trust. The availability of these alternatives depends in large part on market
conditions. We are currently negotiating with several banks and non-bank lenders
over the terms of multiple credit facilities. A proposed banking syndicate is
currently performing due diligence in an effort to make a funding commitment
before the bankruptcy filing. We will not proceed with the Chapter 11 filing for
DII Industries, Kellogg Brown & Root and some of their subsidiaries until
financing commitments are in place.
The anticipated credit facilities include:
- a revolving line of credit for general working capital
purposes;
- a master letter of credit facility intended to ensure that
existing letters of credit supporting our contracts remain in
place during the filing; and
- a delayed-draw term facility to be available for cash funding
of the trust for the benefit of claimants.
The delayed-draw term facility is intended to eliminate uncertainty the
capital markets might have concerning our ability to meet our funding
requirement once final and non-appealable court confirmation of a plan of
reorganization has been obtained.
None of these credit facilities are currently in place, and there can
be no assurances that we will complete these facilities. We are not obligated to
enter into these facilities if the terms are not acceptable to us. Moreover,
these facilities would only be available for limited periods of time. As a
result, if the debtors were delayed in filing the Chapter 11 proceeding or
delayed in completing the plan of reorganization after a Chapter 11 filing, the
credit facilities may expire and no longer be available. In such circumstances,
we would have to terminate the proposed settlement if replacement financing were
not available on acceptable terms.
We have sufficient authorized and unrestricted shares to issue 59.5
million shares to the trust. No shareholder approval is required for issuance of
the shares.
Credit ratings. Late in 2001 and early in 2002, Moody's Investors'
Services lowered its ratings of our long-term senior unsecured debt to Baa2 and
our short-term credit and commercial paper ratings to P-2. In addition, Standard
& Poor's lowered its ratings of our long-term senior unsecured debt to A- and
our short-term credit and commercial paper ratings to A-2 in late 2001. In
December 2002, Standard & Poor's lowered these ratings to BBB and A-3. These
ratings were lowered primarily due to our asbestos exposure, and both agencies
have indicated that the ratings continue under consideration for possible
downgrade pending the results of the proposed settlement. Although our long-term
ratings continue at investment grade levels, the cost of new borrowing is higher
and our access to the debt markets is more volatile at the current rating
levels. Investment grade ratings are BBB- or higher for Standard & Poor's and
Baa3 or higher for Moody's Investors' Services. Our current ratings are one
level above BBB- on Standard & Poor's and one level above Baa3 on Moody's
Investors' Services.
We have $350 million of committed lines of credit from banks that are
available if we maintain an investment grade rating. This facility expires on
August 16, 2006. As of June 30, 2003, no amounts have been borrowed under these
lines. If our credit ratings were to fall below investment grade, our credit
line would be unavailable absent a successful renegotiation with our banks. In
such event, we must also enter into good faith negotiations to amend our
accounts receivable facility. Absent an agreed amendment within 60 days, amounts
outstanding would be declared due and payable. As of June 30, 2003, the
outstanding balance of our accounts receivable facility was $180 million, which
was subsequently reduced to zero in July 2003.
If our debt ratings fall below investment grade, we would also be in
technical breach of a bank agreement covering $52 million of letters of credit
at June 30, 2003, which might entitle the bank to set-off rights. In addition, a
$151 million letter of credit line, of which $141 million has been issued,
includes provisions that allow the banks to require cash collateralization for
the full line if debt ratings of either rating agency fall below the rating of
BBB by Standard & Poor's or Baa2 by Moody's Investors' Services. These letters
of credit and bank guarantees generally relate to our guaranteed performance or
retention payments under our long-term contracts and self-insurance.
51
Our Halliburton Elective Deferral Plan has a provision which states
that if the Standard & Poor's rating falls below BBB the amounts credited to the
participants' accounts will be paid to the participants in a lump-sum within 45
days. At June 30, 2003 this was approximately $48 million.
In the event the ratings of our debt by either agency fall, we may have
to issue additional debt or equity securities or obtain additional credit
facilities in order to satisfy the cash collateralization requirements under the
instruments referred to above and meet our other liquidity needs. We anticipate
that any such new financing would not be on terms as attractive as those we have
currently and that we would also be subject to increased borrowing costs and
interest rates.
Letters of credit. In the normal course of business, we have agreements
with banks under which approximately $1.3 billion of letters of credit or bank
guarantees were issued, including at least $195 million which relate to our
joint ventures' operations. The agreements with these banks contain terms and
conditions that define when the banks can require cash collateralization of the
entire line. Agreements with banks covering at least $150 million of letters of
credit allow the bank to require cash collateralization for any reason, and
agreements covering another at least $890 million of letters of credit allow the
bank to require cash collateralization for the entire line in the event of a
bankruptcy or insolvency event involving one of our subsidiaries that will be a
party to the proposed Chapter 11.
Our letters of credit also contain terms and conditions that define
when they may be drawn. At least $230 million of letters of credit permit the
beneficiary of such letters of credit to draw against the line for any reason
and another at least $560 million of letters of credit permit the beneficiary of
such letters of credit to draw against the line in the event of a bankruptcy or
insolvency event involving one of our subsidiaries who will be party to the
proposed reorganization proceedings.
Effective October 9, 2002, we amended an agreement with banks under
which $261 million of letters of credit had been issued on the
Barracuda-Caratinga project. The amended agreement removes the provision that
previously allowed the banks to require collateralization if ratings of
Halliburton debt fell below investment grade ratings. The revised agreement
includes provisions that require us to maintain ratios of debt to total capital
and of total earnings before interest, taxes, depreciation and amortization to
interest expense. The definition of debt includes our asbestos liability. The
definition of total earnings before interest, taxes, depreciation and
amortization excludes any non-cash charges related to the proposed settlement
through December 31, 2003.
As such, requirements for us to cash collateralize letters of credit
and surety bonds by issuers and beneficiaries of these instruments could be
caused by:
- our plans to place DII Industries, Kellogg Brown & Root and
some of their subsidiaries with United States operations into
a pre-packaged Chapter 11 proceeding as part of the proposed
settlement;
- in the absence of the proposed settlement, one or more
substantial adverse judgments;
- not being able to recover on a timely basis insurance
reimbursement; or
- a reduction in credit ratings.
Uncertainty may also hinder our ability to access new letters of credit
in the future. This could impede our liquidity and/or our ability to conduct
normal operations.
Our anticipated credit facilities related to the proposed asbestos and
silica settlement would include a master letter of credit facility intended to
replace any cash collateralization rights of issuers of substantially all our
existing letters of credit during the pendency of the anticipated Chapter 11
proceedings by DII Industries and Kellogg Brown & Root and some of their
subsidiaries with United States operations. The master letter of credit facility
would also provide collateral for issuers of our existing letters of credit if
such letters of credit are drawn and the issuing bank provides cash for
collateral or reimbursement. If any of such existing letters of credit are drawn
during the bankruptcy and the bank issuing the letter of credit provides cash to
collateralize or reimburse for such draws, it is anticipated that the letter of
credit facility would provide the cash needed for such draws, with any
borrowings being converted into term loans. However, this master letter of
credit facility is not currently in place, and, if we were required to cash
collateralize letters of credit prior to obtaining the facility, we would be
required to use cash on hand or existing credit facilities. Substantial cash
collateralization requirements prior to our being able to enter into a new
master letter of credit facility may have a material adverse effect on our
financial condition. We will not enter into the pre-packaged Chapter 11 filing
without having this credit facility in place. There can be no assurance that we
52
will be able to enter into such a facility on reasonable terms or on terms
acceptable to us or at all. In addition, representatives of DII Industries,
Kellogg Brown & Root and their subsidiaries are having continuing discussions
with their customers in order to reduce the possibility that any material draw
on the existing letters of credit will occur due to the anticipated Chapter 11
proceedings.
In the past, no significant claims have been made against letters of
credit issued on our behalf.
Barracuda-Caratinga Project. In June 2000, KBR entered into a contract
with the project owner, Barracuda & Caratinga Leasing Company B.V., to develop
the Barracuda and Caratinga crude oil fields, which are located off the coast of
Brazil. The project manager and owner's representative is Petroleo Brasilero SA
(Petrobras), the Brazilian national oil company. When completed, the project
will consist of two converted supertankers which will be used as floating
production, storage and offloading platforms, or FPSOs, 33 hydrocarbon
production wells, 18 water injection wells and all sub-sea flow lines and risers
necessary to connect the underwater wells to the FPSOs.
KBR's performance under the contract is secured by:
- three performance letters of credit, which together have an
available credit of approximately $266 million as of June 30,
2003 and which represent approximately 10% of the contract
amount, as amended to date by change orders;
- a retainage letter of credit in an amount equal to $141
million as of June 30, 2003 and which will increase in order
to continue to represent 10% of the cumulative cash amounts
paid to KBR; and
- a guarantee of KBR's performance of the agreement by
Halliburton Company in favor of the project owner.
In the event that KBR is alleged to be in default under the contract,
the project owner may assert a right to draw upon the letters of credit. If the
letters of credit were to be drawn, KBR would be required to fund the amount of
the draw to the issuing banks. To the extent KBR cannot fund the amount of the
draw, Halliburton would be required to do so, which could have a material
adverse effect on Halliburton's financial condition and results of operations.
In addition, the proposed Chapter 11 pre-packaged bankruptcy filing by
KBR in connection with the proposed settlement of its asbestos claims would
constitute an event of default under the contract that would allow the owner
(with the approval of the lenders financing the project) to assert a right to
draw the letters of credit unless waivers are obtained. The proposed Chapter 11
filing would also constitute an event of default under the owner's loan
agreements with the lenders that would allow the lenders to cease funding the
project. We believe that it is unlikely that the owner will make a draw on the
letters of credit as a result of the proposed Chapter 11 filing. We also believe
it is unlikely that the lenders will exercise any right to cease funding the
project given the current status of the project and the fact that a failure to
pay KBR may allow KBR to cease work on the project without Petrobras having a
readily available substitute contractor. However, there can be no assurance that
the lenders will continue to fund the project or that the owner will not require
funding of the letters of credit by KBR.
In the event that KBR was determined after an arbitration proceeding to
have been in default under the contract with Petrobras, and if the project was
not completed by KBR as a result of such default (i.e., KBR's services are
terminated as a result of such default), the project owner may seek direct
damages (including completion costs in excess of the contract price and interest
on borrowed funds, but excluding consequential damages) against KBR for up to
$500 million plus the return of up to $300 million in advance payments
previously received by KBR to the extent they have not been repaid.
In addition to the amounts described above, KBR may have to pay
liquidated damages if the project is delayed beyond the original contract
completion date. KBR expects that the project will likely be completed at least
16 months later than the original contract completion date. Although KBR
believes that the project's delay is due primarily to the actions of the project
owner, in the event that any portion of the delay is determined to be
attributable to KBR and any phase of the project is completed after the
milestone dates specified in the contract, KBR could be required to pay
liquidated damages. These damages would be calculated on an escalating basis of
approximately $1 million per day of delay caused by KBR, subject to a total cap
on liquidated damages of 10% of the final contract amount (yielding a cap of
approximately $266 million as of June 30, 2003).
53
As of June 30, 2003, the project was approximately 75% complete and KBR
had recorded a pretax loss of $345 million related to the project, of which $173
million was recorded in the second quarter of 2003. The second quarter 2003
charge was due to higher cost estimates, schedule extensions, increased project
contingencies and other factors identified during the quarterly review of the
project. The probable unapproved claims included in determining the loss on the
project were $182 million as of June 30, 2003. The claims for the project most
likely will not be settled within one year. Accordingly, based upon the contract
being approximately 75% complete, probable unapproved claims of $134 million at
June 30, 2003 have been recorded to long-term unbilled work on uncompleted
contracts. Those amounts are included in "Other assets, net" on the balance
sheet. KBR has asserted claims for compensation substantially in excess of $182
million. The project owner, through its project manager, Petrobras, has denied
responsibility for all such claims. Petrobras has, however, issued formal change
orders worth approximately $61 million which are not included in the $182
million in probable unapproved claims.
In June 2003, Halliburton, KBR and Petrobras, on behalf of the project
owner, entered into a non-binding heads of agreement that would resolve some of
the disputed issues between the parties, subject to final agreement and lender
approval. The original completion date for the Barracuda project was December
2003 and the original completion date for the Caratinga project was April 2004.
Under the heads of agreement, the project owner would grant an extension of time
to the original completion dates and other milestone dates that averages
approximately 12 months, delay any attempt to assess the original liquidated
damages against KBR for project delays beyond 12 months and up to 18 months,
delay any drawing of letters of credit with respect to such liquidated damages
and delay the return of any of the $300 million in advance payments until after
arbitration. The heads of agreement also provides for a separate liquidated
damages calculation of $450,000 per day for each of the Barracuda and the
Caratinga vessels for a delay from the original schedule beyond 18 months
(subject to the total cap on liquidated damages of 10% of the final contract
amount). The heads of agreement does not delay the drawing of letters of credit
for these liquidated damages. The extension of the original completion dates and
other milestones would significantly reduce the likelihood of KBR incurring
liquidated damages on the project. Nevertheless, KBR continues to have exposure
for substantial liquidated damages for delays in the completion of the project.
Under the heads of agreement, the project owner has agreed to pay $59
million of KBR's disputed claims (which are included in the $182 million of
probable unapproved claims as of June 30, 2003) and to arbitrate additional
claims. The maximum recovery from the claims to be arbitrated would be capped at
$375 million. The heads of agreement also allows the project owner or Petrobras
to arbitrate additional claims against KBR, not including liquidated damages,
the maximum recovery from which would be capped at $380 million. KBR believes
the claims made to date by the project owner are based on a delay in project
completion. KBR's contract with the project owner excludes consequential damages
and, as indicated above, provides for liquidated damages in the event of delay
in completion of the project. While there can be no assurance that the
arbitrator will agree, KBR believes if it is determined that KBR is liable for
delays, the project owner would be entitled to liquidated damages in amounts up
to those referred to above, and not to an additional $380 million.
The finalization of the heads of agreement is subject to project lender
approval. The parties have had discussions with the lenders and based on these
discussions have agreed to certain modifications to the original terms of the
heads of agreement to conform to the lenders' requirements. They have agreed
that the $300 million in advance payments would be due on the earliest of
December 7, 2004, the completion of any arbitration or the resolution of all
claims between the project owner and KBR. Likewise, the project owner's
obligation to defer drawing letters of credit with respect to liquidated damages
for delays between 12 and 18 months would extend only until December 7, 2004.
The discussions with the lenders are not yet complete, and no agreement for
their approval has yet been obtained. While we believe the lenders have an
incentive to approve the heads of agreement and complete the financing of the
project, and the parties have agreed to the modifications described above to the
heads of agreement to secure the lenders' approval, there is no assurance that
they will do so. If the lenders do not consent to the heads of agreement,
Petrobras may be forced to secure other funding to complete the project. There
is no assurance that Petrobras will pursue or will be able to secure such
funding.
Absent lender approval of the heads of agreement, KBR could be subject
to additional liquidated damages and other claims, be subject to the letters of
credit being drawn and be required to return the $300 million in advance
payments in accordance with the original contract terms. The original contract
terms require repayment through $300 million of credits to the last $350 million
54
of invoices on the contract. No assurance can be given that the heads of
agreement will be finalized or that the lenders will approve the heads of
agreement or that the lenders will approve the heads of agreement without
revisions that could adversely affect KBR.
The project owner has procured project finance funding obligations from
various lenders to finance the payments due to KBR under the contract. The
project owner currently has no other committed source of funding on which we can
necessarily rely other than the project finance funding for the project. If the
lenders cease to fund the project, the project owner may not have the ability to
continue to pay KBR for its services. The original loan documents provide that
the lenders are not obligated to continue to fund the project if the project has
been delayed for more than 6 months. In November 2002, the lenders agreed to
extend the 6-month period to 12 months. Other provisions in the loan documents
may provide for additional time extensions. However, delays beyond 12 months may
require lender consent in order to obtain additional funding. While we believe
the lenders have an incentive to complete the financing of the project, there is
no assurance that they would do so. If the lenders did not consent to extensions
of time or otherwise ceased funding the project, we believe that Petrobras would
provide for or secure other funding to complete the project, although there is
no assurance that it would do so. To date, the lenders have made funds
available, and the project owner has continued to disburse funds to KBR as
payment for its work on the project even though the project completion has been
delayed.
In addition, although the project financing includes borrowing capacity
in excess of the original contract amount, only $250 million of this additional
borrowing capacity is reserved for increases in the contract amount payable to
KBR and its subcontractors. Under the loan documents, the availability date for
loan draws expires December 1, 2003. As a condition to approving the heads of
agreement, the lenders will require the project owner to draw all remaining
available funds prior to December 1, 2003, and to escrow the funds for the
exclusive use of paying project costs. No funds may be paid to Petrobras or its
subsidiary (which is funding the drilling costs of the project) until all
amounts due to KBR, including amounts due for the claims, are liquidated and
paid. While this potentially increases the funds available for payment to KBR,
KBR is not party to the arrangement between the lenders and the project owner
and can give no assurance that there will be adequate funding to cover current
or future KBR claims and change orders.
KBR has now begun to fund operating cash shortfalls on the project and
would be obligated to fund such shortages over the remaining project life in an
amount we currently estimate to be approximately $500 million (assuming
generally that neither we nor the project owner are successful in recovering
claims against the other and that no liquidated damages are imposed). Under the
same assumptions, except assuming that KBR recovers unapproved claims in the
amounts currently recorded on our books, the cash shortfall would be
approximately $320 million. While KBR believes it will recover amounts in excess
of the amount of unapproved claims on its books, there can be no assurance that
it will do so.
Current maturities. We had $166 million of current maturities of
long-term debt as of June 30, 2003. Subsequent to second quarter 2003, we repaid
a $150 million medium-term note due July 2003.
Cash and cash equivalents. We ended June 30, 2003 with cash and
equivalents of $1.9 billion.
OFF BALANCE SHEET RISK
On April 15, 2002, we entered into an agreement to sell accounts
receivable to a bankruptcy-remote limited-purpose funding subsidiary. Under the
terms of the agreement, new receivables are added on a continuous basis to the
pool of receivables, and collections reduce previously sold accounts receivable.
This funding subsidiary sells an undivided ownership interest in this pool of
receivables to entities managed by unaffiliated financial institutions under
another agreement. Sales to the funding subsidiary have been structured as "true
sales" under applicable bankruptcy laws. The assets of the funding subsidiary
are not available to pay any creditors of ours or of our subsidiaries or
affiliates, until such time as the agreement with the unaffiliated companies is
terminated following sufficient collections to liquidate all outstanding
undivided ownership interests. The funding subsidiary retains the interest in
the pool of receivables that are not sold to the unaffiliated companies and is
fully consolidated and reported in our financial statements.
55
The amount of undivided interests, which can be sold under the program,
varies based on the amount of eligible Energy Services Group receivables in the
pool at any given time and other factors. The funding subsidiary initially sold
a $200 million undivided ownership interest to the unaffiliated companies, and
may from time to time sell additional undivided ownership interests. The total
amount outstanding under this facility was $180 million as of June 30, 2003. The
amount of undivided ownership interest in the pool of receivables sold to the
unaffiliated companies is reflected as a reduction of accounts receivable in our
consolidated balance sheet. In July 2003, the balance outstanding under this
facility was reduced to zero.
ENVIRONMENTAL MATTERS
We are subject to numerous environmental, legal and regulatory
requirements related to our operations worldwide. In the United States, these
laws and regulations include the Comprehensive Environmental Response,
Compensation and Liability Act, the Resources Conservation and Recovery Act, the
Clean Air Act, the Federal Water Pollution Control Act and the Toxic Substances
Control Act, among others. In addition to the federal laws and regulations,
states where we do business may have equivalent laws and regulations by which we
must also abide.
We evaluate and address the environmental impact of our operations by
assessing and remediating contaminated properties in order to avoid future
liabilities and comply with environmental, legal and regulatory requirements. On
occasion we are involved in specific environmental litigation and claims,
including the remediation of properties we own or have operated as well as
efforts to meet or correct compliance-related matters.
We do not expect costs related to these remediation requirements to
have a material adverse effect on our consolidated financial position or our
results of operations. We have subsidiaries that have been named as potentially
responsible parties along with other third parties for nine federal and state
superfund sites for which we have established a liability. As of June 30, 2003,
those nine sites accounted for approximately $7 million of our total $36 million
liability. See Note 12 to the financial statements.
FORWARD-LOOKING INFORMATION
Looking ahead, we believe United States activity levels will increase
modestly in the second half of this year. In particular, we expect continued
strong drilling activity onshore in North America provided natural gas or oil
prices do not decline significantly from current levels. Activity in the United
States Gulf of Mexico has been disappointing in the first half of this year and
we expect only a modest improvement through year end. Outside of North America,
we expect rig counts will be flat to up slightly for the balance of the year.
Mexico has also shown a significant increase in drilling activity, and we expect
this high level of activity to continue in the near term. Pricing on new
contracts for certain of our products and services began to improve in the
second quarter. We expect that the pricing environment will gradually improve
for the balance of the year. We are currently implementing price increases and
discount reductions in selected product lines and geographies.
In the longer-term, we expect increased global demand for oil and
natural gas, additional customer spending to replace depleting reserves and our
continued technological advances to provide growth opportunities.
The Private Securities Litigation Reform Act of 1995 provides safe
harbor provisions for forward-looking information. Forward-looking information
is based on projections and estimates, not historical information. Some
statements in this Form 10-Q are forward-looking and use words like "may", "may
not", "believes", "do not believe", "expects", "do not expect", "plans", "does
not plan", "anticipate", "do not anticipate", and other expressions. We may also
provide oral or written forward-looking information in other materials we
release to the public. Forward-looking information involves risks and
uncertainties and reflects our best judgment based on current information. Our
results of operations can be affected by inaccurate assumptions we make or by
known or unknown risks and uncertainties. In addition, other factors may affect
the accuracy of our forward-looking information. As a result, no forward-looking
information can be guaranteed. Actual events and the results of operations may
vary materially.
56
While it is not possible to identify all factors, we continue to face
many risks and uncertainties that could cause actual results to differ from our
forward-looking statements and potentially adversely affect our financial
condition and results of operations, including risks relating to:
Asbestos
- completion of the proposed settlement, prerequisites which
include:
- agreement on the total number of current asbestos and
silica personal injury claims and the aggregate
compensation for such claims within the parameters of
the proposed settlement;
- agreement on the amounts to be contributed to the
trust for the benefit of current silica claimants;
- our due diligence review for product exposure and
medical basis for claims;
- agreement on procedures for distribution of settlement
funds to individuals claiming personal injury;
- determining whether, after diligence and the
identification of duplicate claims, payment of the
claims submitted would exceed the $2.775 billion cash
portion of the asbestos settlement, and the manner
in which we and the claimants respond to these
matters;
- definitive agreement on a plan of reorganization and
disclosure statement relating to the proposed
settlement;
- arrangement of acceptable financing to fund the
proposed settlement;
- Board of Directors approval;
- obtaining approval from 75% of current asbestos
claimants and the requisite silica claimants to the
plan of reorganization implementing the proposed
settlement;
- obtaining final and non-appealable bankruptcy court
approval and federal district court confirmation of
the plan of reorganization;
- finalizing the settlement agreement with
Harbison-Walker and obtaining bankruptcy court
approval thereof; and
- Harbison-Walker obtaining approval of its proposed
plan of reorganization in a form satisfactory to us;
- the results of being unable to complete the proposed
settlement, including:
- continuing asbestos and silica litigation against us,
which would include the possibility of substantial
adverse judgments, the timing of which could not be
controlled or predicted, and the obligation to
provide appeals bonds pending any appeal of any such
judgment, some or all of which may require us to post
cash collateral;
- current and future asbestos claims settlement and
defense costs, including the inability to completely
control the timing of such costs and the possibility
of increased costs to resolve personal injury claims;
- the possibility of an increase in the number and type
of asbestos and silica claims against us in the
future;
- future events in the Harbison-Walker bankruptcy
proceeding, including the possibility of
discontinuation of the temporary restraining order
entered by the Harbison-Walker bankruptcy court that
applies to over 200,000 pending claims against DII
Industries; and
- any adverse changes to the tort system allowing
additional claims or judgments against us;
- the results of being unable to recover, or being delayed in
recovering, insurance reimbursement in the amounts anticipated
to cover a part of the costs incurred defending asbestos and
silica claims, and amounts paid to settle claims or as a
result of court judgments, due to:
- the inability or unwillingness of insurers to timely
reimburse for claims in the future;
- disputes as to documentation requirements for DII
Industries in order to recover claims paid;
57
- the inability to access insurance policies shared
with, or the dissipation of shared insurance assets
by, Harbison-Walker Refractories Company or
Federal-Mogul Products, Inc.;
- the insolvency or reduced financial viability of
insurers;
- the cost of litigation to obtain insurance
reimbursement; and
- adverse court decisions as to our rights to obtain
insurance reimbursement;
- the results of recovering, or agreeing in settlement of
litigation to recover, less insurance reimbursement than the
insurance receivable recorded in our financial statements;
- continuing exposure to liability even after the proposed
settlement is completed, including exposure to:
- any claims by claimants exposed outside of the United
States;
- possibly any claims based on future exposure to
silica;
- property damage claims as a result of asbestos and
silica use; or
- any claims against any other subsidiaries or business
units of Halliburton that would not be released in
the Chapter 11 proceeding through the 524(g)
injunction;
- liquidity risks resulting from being unable to complete a
settlement or timely recovery of insurance reimbursement for
amounts paid, each as discussed further below; and
- an adverse effect on our financial condition or results of
operations as a result of any of the foregoing;
Liquidity
- adverse financial developments that could affect our available
cash or lines of credit, including:
- the effects described above of not completing the
proposed settlement or not being able to timely
recover insurance reimbursement relating to amounts
paid as part of a settlement or as a result of
judgments against us or settlements paid in the
absence of a settlement;
- our inability to provide cash collateral for letters
of credit or any bonding requirements from customers
or as a result of adverse judgments that we are
appealing; and
- a reduction in our credit ratings as a result of the
above or due to other adverse developments;
- requirements to cash collateralize letters of credit and
surety bonds by issuers and beneficiaries of these instruments
in reaction to:
- our plans to place DII Industries, Kellogg Brown &
Root and some of their subsidiaries into a
pre-packaged Chapter 11 bankruptcy as part of the
proposed settlement;
- in the absence of a settlement, one or more
substantial adverse judgments;
- not being able to timely recover insurance
reimbursement; or
- a reduction in credit ratings;
- our ability to secure financing on acceptable terms to fund
our proposed settlement;
- defaults that could occur under our and our subsidiaries' debt
documents as a result of a Chapter 11 filing unless we are
able to obtain consents or waivers to those events of default,
which events of default could cause defaults under other of
our credit facilities and possibly result in an obligation to
immediately pay amounts due;
- actions by issuers and beneficiaries of current letters of
credit to draw under such letters of credit prior to our
completion of a new letter of credit facility that is intended
to provide reasonably sufficient credit lines for us to be
able to fund any such cash requirements;
- reductions in our credit ratings by rating agencies, which
could result in:
- the unavailability of borrowing capacity under our
existing $350 million line of credit facility, which
is only available to us if we maintain an investment
grade credit rating;
- reduced access to lines of credit, credit markets and
credit from suppliers under acceptable terms;
- borrowing costs in the future; and
- inability to issue letters of credit and surety bonds
with or without cash collateral;
- working capital requirements from time to time;
58
- debt and letter of credit covenants;
- volatility in the surety bond market;
- availability of financing from the United States Export/Import
Bank;
- ability to raise capital via the sale of stock; and
- an adverse effect on our financial condition or results of
operations as a result of any of the foregoing;
Legal
- litigation, including, for example, class action shareholder
and derivative lawsuits, contract disputes, patent
infringements, and environmental matters;
- any adverse outcome of the SEC's current investigation into
Halliburton's accounting policies, practices and procedures
that could result in sanctions and the payment of fines or
penalties, restatement of financials for years under review or
additional shareholder lawsuits;
- trade restrictions and economic embargoes imposed by the
United States and other countries;
- restrictions on our ability to provide products and services
to Iran, Iraq and Libya, all of which are significant
producers of oil and gas;
- protective government regulation in many of the countries
where we operate, including, for example, regulations that:
- encourage or mandate the hiring of local
contractors; and
- require foreign contractors to employ citizens of, or
purchase supplies from, a particular jurisdiction;
- potentially adverse reaction, and time and expense responding
to, the increased scrutiny of Halliburton by regulatory
authorities, the media and others;
- potential liability and adverse regulatory reaction in Nigeria
to the theft from us of radioactive material used in wireline
logging operations;
- environmental laws and regulations, including, for example,
those that:
- require emission performance standards for
facilities; and
- the potential regulation in the United States of our
Energy Services Group's hydraulic fracturing services
and products as underground injection; and
- the proposed excise tax in the United States targeted at heavy
equipment of the type we own and use in our operations would
negatively impact our Energy Services Group operating income;
Effect of Chapter 11 Proceedings
- the adverse effect on the ability of the subsidiaries that are
proposed to file a Chapter 11 proceeding to obtain new orders
from current or prospective customers;
- the potential reluctance of current and prospective customers
and suppliers to honor obligations or continue to transact
business with the Chapter 11 filing entities;
- the potential adverse effect of the Chapter 11 filing of
negotiating favorable terms with customers, suppliers and
other vendors;
- a prolonged Chapter 11 proceeding that could adversely affect
relationships with customers, suppliers and employees, which
in turn could adversely affect our competitive position,
financial condition and results of operations and our ability
to implement the proposed plan of reorganization; and
- the adverse affect on our financial condition or results of
operations as a result of the foregoing;
Geopolitical
- unrest in the Middle East that could:
- impact the demand and pricing for oil and gas;
- disrupt our operations in the region and elsewhere;
and
- increase our costs for security worldwide;
- unsettled political conditions, consequences of war or other
armed conflict, the effects of terrorism, civil unrest,
strikes, currency controls and governmental actions in many
oil producing countries and countries in which we provide
governmental logistical support that could adversely affect
our revenues and profit. Countries where we operate which have
significant amounts of political risk include Afghanistan,
59
Algeria, Angola, Colombia, Indonesia, Iraq, Libya, Nigeria,
Russia, and Venezuela. For example, the national strike in
Venezuela as well as seizures of offshore oil rigs by
protestors and cessation of operations by some of our
customers in Nigeria disrupted our Energy Services Group's
ability to provide services and products to our customers in
these countries during first quarter 2003 and likely will
continue to do so throughout the remainder of 2003; and
- changes in foreign exchange rates and exchange controls as
were experienced in Argentina in late 2001 and early 2002 and
in Venezuela in fourth quarter 2002;
Weather related
- severe weather that impacts our business, particularly in the
Gulf of Mexico where we have significant operations. Impacts
may include:
- evacuation of personnel and curtailment of services;
- weather related damage to offshore drilling rigs
resulting in suspension of operations;
- weather related damage to our facilities;
- inability to deliver materials to jobsites in
accordance with contract schedules; and
- loss of productivity; and
- demand for natural gas in the United States drives a
disproportionate amount of our Energy Services Group's United
States business. As a result, warmer than normal winters in
the United States are detrimental to the demand for our
services to gas producers. Conversely, colder than normal
winters in the United States result in increased demand for
our services to gas producers;
Customers
- the magnitude of governmental spending and outsourcing for
military and logistical support of the type that we provide,
including, for example, support services in the Balkans and
Iraq;
- changes in capital spending by customers in the oil and gas
industry for exploration, development, production, processing,
refining, and pipeline delivery networks;
- changes in capital spending by governments for infrastructure
projects of the sort that we perform;
- consolidation of customers including, for example, the merger
of Conoco and Phillips Petroleum, has caused customers to
reduce their capital spending which has negatively impacted
the demand for our services and products;
- potential adverse customer reaction, including potential draws
upon letters of credit, due to their concerns about our plans
to place DII Industries, Kellogg Brown & Root and some of
their subsidiaries into a pre-packaged bankruptcy as part of
the proposed settlement;
- customer personnel changes due to mergers and consolidation
which impacts the timing of contract negotiations and
settlements of claims;
- claim negotiations with engineering and construction customers
on cost and schedule variances and change orders on major
projects, including, for example, the Barracuda-Caratinga
project in Brazil;
- delay in customer spending due to consolidation and strategic
changes such as sales of the shallow water properties in the
Gulf of Mexico and recent sale of properties in the North Sea.
Spending is typically delayed when new operators take over;
and
- ability of our customers to timely pay the amounts due us;
Industry
- changes in oil and gas prices, among other things, result
from:
- the uncertainty as to the timing of return of Iraqi
oil production;
- OPEC's ability to set and maintain production levels
and prices for oil;
- the level of oil production by non-OPEC countries;
- the policies of governments regarding exploration for
and production and development of their oil and
natural gas reserves;
- the level of demand for oil and natural gas,
especially natural gas in the United States; and
- the level of gas storage in the northeast United
States;
60
- obsolescence of our proprietary technologies, equipment and
facilities, or work processes;
- changes in the price or the availability of commodities that
we use;
- our ability to obtain key insurance coverage on acceptable
terms;
- non-performance, default or bankruptcy of joint venture
partners, key suppliers or subcontractors;
- performing fixed-price projects, where failure to meet
schedules, cost estimates or performance targets could result
in reduced profit margins or losses;
- entering into complex business arrangements for technically
demanding projects where failure by one or more parties could
result in monetary penalties; and
- the use of derivative instruments of the sort that we use
which could cause a change in value of the derivative
instruments as a result of:
- adverse movements in foreign exchange rates, interest
rates, or commodity prices; or
- the value and time period of the derivative being
different than the exposures or cash flows being
hedged;
Systems
- the successful identification, procurement and installation of
a new financial system to replace the current system for the
Engineering and Construction Group;
Personnel and mergers/reorganizations/dispositions
- ensuring acquisitions and new products and services add value
and complement our core businesses; and
- successful completion of dispositions.
In addition, future trends for pricing, margins, revenues and
profitability remain difficult to predict in the industries we serve. We do not
assume any responsibility to publicly update any of our forward-looking
statements regardless of whether factors change as a result of new information,
future events or for any other reason. You should review any additional
disclosures we make in our press releases and Forms 10-K, 10-Q and 8-K filed
with the United States Securities and Exchange Commission. We also suggest that
you listen to our quarterly earnings release conference calls with financial
analysts.
No assurance can be given that our financial condition or results of
operations would not be materially and adversely affected by some of the events
described above, including:
- the inability to complete a settlement;
- in the absence of a settlement, adverse developments in the
tort system, including adverse judgments and increased defense
and settlement costs relating to claims against us;
- liquidity issues resulting from failure to complete a
settlement, adverse developments in the tort system, including
adverse judgments and increased defense and settlement costs,
and resulting or concurrent credit ratings downgrades and/or
demand for cash collateralization of letters of credit or
surety bonds;
- the filing of Chapter 11 proceedings by some of our
subsidiaries or a prolonged Chapter 11 proceeding; and
- adverse geopolitical developments, including armed conflict,
civil disturbance and unsettled political conditions in
foreign countries in which we operate.
61
Item 3. Quantitative and Qualitative Disclosures about Market Risk
- -------------------------------------------------------------------
We are exposed to financial instrument market risk from changes in
foreign currency exchange rates, interest rates and to a limited extent,
commodity prices. We selectively manage these exposures through the use of
derivative instruments to mitigate our market risk from these exposures. The
objective of our risk management is to protect our cash flows related to sales
or purchases of goods or services from market fluctuations in currency rates.
Our use of derivative instruments includes the following types of market risk:
- volatility of the currency rates;
- time horizon of the derivative instruments;
- market cycles; and
- the type of derivative instruments used.
We do not use derivative instruments for trading purposes. We do not
consider any of these risk management activities to be material.
Item 4. Controls and Procedures
- --------------------------------
In accordance with Exchange Act Rules 13a-15 and 15d-15, we carried out
an evaluation, under the supervision and with the participation of management,
including our Chief Executive Officer and Chief Financial Officer, of the
effectiveness of our disclosure controls and procedures as of the end of the
period covered by this report. Based on that evaluation, our Chief Executive
Officer and Chief Financial Officer concluded that our disclosure controls and
procedures were effective as of June 30, 2003 to provide reasonable assurance
that information required to be disclosed in our reports filed or submitted
under the Exchange Act is recorded, processed, summarized and reported within
the time periods specified in the Securities and Exchange Commission's rules and
forms.
There has been no change in our internal controls over financial
reporting that occurred during the three months ended June 30, 2003 that has
materially affected, or is reasonably likely to materially affect, our internal
controls over financial reporting.
62
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds
- --------------------------------------------------
On June 30, 2003, we issued $1.2 billion of 3.125% convertible senior
notes due July 15, 2023. Citigroup Global Markets Inc., Goldman, Sachs & Co.,
J.P. Morgan Securities Inc., ABN AMRO Incorporated, HSBC and The Royal Bank of
Scotland plc, the initial purchasers of the notes, agreed to sell the notes only
to persons whom they reasonably believe are "qualified institutional buyers" in
reliance on Rule 144A under the Securities Act of 1933. The initial purchasers
offered the notes at 100% of the principal amount thereof. The initial
purchasers purchased the notes from us at 98% of the principal amount thereof.
The notes are convertible into our common stock under any of the
following circumstances:
- during any calendar quarter (and only during such calendar
quarter) if the last reported sale price of our common stock
for at least 20 trading days during the period of 30
consecutive trading days ending on the last trading day of the
previous quarter is greater than or equal to 120% of the
conversion price per share of our common stock on such last
trading day;
- if the notes have been called for redemption;
- upon the occurrence of certain corporate transactions; or
- during any period in which the credit ratings assigned to the
notes by both Moody's and Standard & Poor's are lower than Ba1
and BB+, respectively, or the notes are no longer rated by at
least one of these rating services or their successors.
The initial conversion price is $37.65 per share and is subject to
adjustment. Upon conversion, we will have the right to deliver, in lieu of
shares of our common stock, cash or a combination of cash and common stock.
Item 4. Submission of Matters to a Vote of Security Holders
- ------------------------------------------------------------
At our Annual Meeting of Stockholders held on May 21, 2003,
stockholders were asked to consider and act upon:
(1) the election of Directors for the ensuing year;
(2) ratification of the selection of KPMG LLP as independent
accountants to examine the financial statements and books and
records of Halliburton for the year 2003;
(3) a proposal to amend and restate the Halliburton Company 1993 Stock
and Incentive Plan; and
(4) a stockholder proposal on executive severance agreements.
The following table sets out, for each matter where applicable, the
number of votes cast for, against or withheld, as well as the number of
abstentions and broker non-votes.
(1) Election of Directors:
Name of Nominee Votes For Votes Withheld
Robert L. Crandall 357,966,842 10,979,634
Kenneth T. Derr 358,416,648 10,529,828
Charles J. DiBona 359,872,432 9,074,044
W. R. Howell 358,195,287 10,751,189
Ray L. Hunt 358,394,321 10,552,155
David J. Lesar 357,989,553 10,956,923
Aylwin B. Lewis 359,982,433 8,964,043
J. Landis Martin 359,981,448 8,965,028
Jay A. Precourt 360,122,772 8,823,704
Debra L. Reed 360,079,926 8,866,550
C. J. Silas 358,308,083 10,638,393
63
(2) Ratification of KPMG LLP as independent accountants:
Number of Votes For 356,903,869
Number of Votes Against 9,486,518
Number of Votes Abstain 2,556,089
Number of Broker Non-Votes 0
(3) Proposal to amend and restate the Halliburton Company 1993 Stock
and Incentive Plan:
Number of Votes For 268,381,549
Number of Votes Against 27,714,726
Number of Votes Abstain 3,472,864
Number of Broker Non-Votes 69,377,337
(4) Stockholder proposal on executive severance agreements:
Number of Votes For 109,768,116
Number of Votes Against 181,647,039
Number of Votes Abstain 7,000,984
Number of Broker Non-Votes 70,530,337
Item 6. Exhibits and Reports on Form 8-K
- -----------------------------------------
(a) Exhibits
* 4.1 Senior Indenture dated as of June 30, 2003 between Halliburton
and JPMorgan Chase Bank, as Trustee.
* 4.2 Form of note of 3.125% Convertible Senior Notes due July 15,
2023 (included as Exhibit A to Exhibit 4.1 above).
* 10.1 Halliburton Company 1993 Stock and Incentive Plan, as amended
and restated effective February 12, 2003.
* 31.1 Certification of Chief Executive Officer pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.
* 31.2 Certification of Chief Financial Officer pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.
* 32.1 Certification of Chief Executive Officer pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.
* 32.2 Certification of Chief Financial Officer pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.
* Filed with this Form 10-Q
64
(b) Reports on Form 8-K
Date of
Date Filed Earliest Event Description of Event
- -------------------------------------------------------------------------------------------------------------------
During the second quarter of 2003:
April 29, 2003 April 28, 2003 Items 9 and 12. Regulation FD Disclosure and Disclosure of
Results of Operations and Financial Condition for a press release
announcing 2003 first quarter results.
May 9, 2003 May 8, 2003 Item 9. Regulation FD furnishing Certifications to the SEC
pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section
906 of the Sarbanes-Oxley act of 2002, signed by David J. Lesar
and C. Christopher Gaut.
May 23, 2003 May 21, 2003 Item 9. Regulation FD Disclosure for a press release announcing a
2003 second quarter dividend.
May 23, 2003 May 21, 2003 Item 9. Regulation FD Disclosure for a press release announcing a
correction of the 2003 second quarter dividend announcement.
May 30, 2003 May 30, 2003 Item 9. Regulation FD Disclosure for a press release announcing
an agreement reached to settle class action lawsuits.
June 10, 2003 June 6, 2003 Item 9. Regulation FD Disclosure for a press release updating the
status of the proposed global settlement.
June 11, 2003 June 9, 2003 Item 9. Regulation FD Disclosure for a press release announcing a
conference call on July 31, 2003 to discuss 2003 second quarter
financial results.
June 20, 2003 June 20, 2003 Item 9. Regulation FD Disclosure for a press release announcing
updates on the Barracuda-Caratinga project, second quarter
earnings guidance, and findings of due diligence on the proposed
asbestos settlement.
June 25, 2003 June 23, 2003 Item 9. Regulation FD Disclosure for a press release announcing
the offering of convertible senior notes to qualified
institutional buyers pursuant to Rule 144A under the Securities
Act of 1933.
June 25, 2003 June 24, 2003 Item 9. Regulation FD Disclosure for a press release announcing
the pricing of convertible senior notes which were offered to
qualified institutional buyers pursuant to Rule 144A under the
Securities Act of 1933.
65
Date of
Date Filed Earliest Event Description of Event
- -------------------------------------------------------------------------------------------------------------------
During the third quarter of 2003:
July 18, 2003 July 17, 2003 Item 9. Regulation FD Disclosure for a press release announcing a
2003 third quarter dividend.
July 21, 2003 July 21, 2003 Item 9. Regulation FD Disclosure for a press release announcing
asbestos plaintiffs agree to extend the current stay on asbestos
claims until September 30, 2003.
July 23, 2003 July 22, 2003 Item 9. Regulation FD Disclosure for a press release announcing
the Harbison-Walker bankruptcy court approved an agreement to
extend the current stay on asbestos claims through September 30,
2003.
August 4, 2003 July 31, 2003 Item 12.Disclosure of Results of Operations and Financial
Condition for a press release announcing 2003 second quarter
results.
66
SIGNATURES
As required by the Securities Exchange Act of 1934, the registrant has
authorized this report to be signed on behalf of the registrant by the
undersigned authorized individuals.
HALLIBURTON COMPANY
Date: August 11, 2003 By: /s/ C. Christopher Gaut
------------------------ ----------------------------------
C. Christopher Gaut
Executive Vice President and
Chief Financial Officer
/s/ R. Charles Muchmore, Jr.
----------------------------------
R. Charles Muchmore, Jr.
Vice President and Controller and
Principal Accounting Officer
67
========================================================================
Halliburton Company
AND
JPMORGAN CHASE BANK,
as Trustee
3?% Convertible Senior Notes due July 15, 2023
INDENTURE
Dated as of June 30, 2003
========================================================================
RECONCILIATION AND TIE BETWEEN THE TRUST INDENTURE ACT OF 1939 AND THE INDENTURE
DATED AS OF JUNE 30, 2003
TRUST INDENTURE
ACT SECTION INDENTURE SECTION(S)
Section 310(a)(1)................................................11.10
(a)(2)...................................................11.10
(a)(3)...................................................Not Applicable
(a)(4)...................................................Not Applicable
(a)(5)...................................................11.10
(b)......................................................11.10
(c)......................................................Not Applicable
Section 311(a)...................................................11.11
(b)......................................................11.11
(c)......................................................Not Applicable
Section 312(a)...................................................2.5
(b)......................................................14.3
(c)......................................................14.3
Section 313(a)...................................................11.6
(b).....................................................11.6
(c).....................................................11.6
(d).....................................................11.6
Section 314(b)...................................................Not Applicable
(c)(1)...................................................14.4
(c)(2)...................................................14.4
(c)(3)...................................................Not Applicable
(d)......................................................Not Applicable
(e)......................................................14.5
Section 315(a)...................................................11.1(b)
(b)......................................................11.5
(c)......................................................11.1(a)
(d)......................................................11.1(c)
(e)......................................................10.9
Section 316(a)(1)................................................10.7
(a)(2)...................................................Not Applicable
(a)(last sentence).......................................14.6
(b)......................................................10.4
Section 317(a)(1)................................................10.2
(a)(2)...................................................10.2
(b)......................................................2.4
Section 318(a)...................................................14.1
- --------------------------------------
NOTE: This reconciliation and tie shall not, for any purpose, be deemed to be a
part of the Indenture.
TABLE OF CONTENTS
Page
----
ARTICLE I Definitions and Incorporation by Reference.........................1
SECTION 1.1. Definitions....................................1
SECTION 1.2. Incorporation by Reference of Trust
Indenture Act.................................11
SECTION 1.3. Rules of Construction.........................11
ARTICLE II The Notes........................................................12
SECTION 2.1. Form, Dating and Terms........................12
SECTION 2.2. Execution and Authentication..................21
SECTION 2.3. Registrar, Conversion Agent and Paying
Agent.........................................22
SECTION 2.4. Paying Agent To Hold Money in Trust...........22
SECTION 2.5. Holder Lists..................................23
SECTION 2.6. Transfer and Exchange of Notes................23
SECTION 2.7. Form of Certificate to be Delivered in
Connection with Transfers to Institutional
Accredited Investors..........................25
SECTION 2.8. Mutilated, Destroyed, Lost or Stolen Notes....26
SECTION 2.9. Outstanding Notes.............................27
SECTION 2.10. Temporary Notes...............................28
SECTION 2.11. Cancellation..................................28
SECTION 2.12. Payment of Interest; Defaulted Interest.......28
SECTION 2.13. Computation of Interest.......................29
SECTION 2.14. CUSIP Numbers.................................29
SECTION 2.15. Issuance, Transfer and Exchange of
Common Stock Issuable Upon Conversion
of the Notes..................................30
SECTION 2.16. Bid Solicitation Agent........................30
ARTICLE III Covenants.......................................................31
SECTION 3.1. Payment of Notes..............................31
SECTION 3.2. Restriction on Creation of Secured Debt.......31
SECTION 3.3. Restriction on Sale and Leaseback
Transactions..................................32
SECTION 3.4. Restriction on Transfer of Principal
Property to Unrestricted Subsidiary...........33
SECTION 3.5. Maintenance of Office or Agency...............33
SECTION 3.6. Money for Note Payments to Be Held
in Trust......................................34
SECTION 3.7. Corporate Existence...........................35
-i-
SECTION 3.8. Payment of Taxes and Other Claims.............35
SECTION 3.9. Further Instruments and Acts..................36
SECTION 3.10. Additional Amounts Notices....................36
ARTICLE IV Successor Company................................................36
SECTION 4.1. Merger and Consolidation......................36
ARTICLE V Redemption of Notes...............................................37
SECTION 5.1. Optional Redemption...........................37
SECTION 5.2. Applicability of Article......................37
SECTION 5.3. Election to Redeem; Notice to Trustee.........37
SECTION 5.4. Selection by Trustee of Notes to Be
Redeemed......................................37
SECTION 5.5. Notice of Redemption..........................38
SECTION 5.6. Deposit of Redemption Price...................39
SECTION 5.7. Notes Payable on Redemption Date..............39
SECTION 5.8. Notes Redeemed in Part........................39
ARTICLE VI Purchase Upon a Fundamental Change...............................40
SECTION 6.1. Purchase at the Option of the Holder
Upon a Fundamental Change.....................40
SECTION 6.2. Notice of Fundamental Change..................40
SECTION 6.3. Exercise of Option............................40
SECTION 6.4. Procedures....................................41
ARTICLE VII Optional Purchase...............................................42
SECTION 7.1. Purchase of Notes by the Company at the
Option of the Holder..........................42
ARTICLE VIII Conditions and Procedures for Purchases at Option of Holders...44
SECTION 8.1. Notice of Purchase Date or Fundamental
Change........................................44
SECTION 8.2. Effect of Purchase Notice or Fundamental
Change Purchase Notice; Effect of Event
of Default....................................45
SECTION 8.3. Notes Purchased in Part.......................46
SECTION 8.4. Covenant to Comply with Securities Laws
Upon Purchase of Notes........................46
SECTION 8.5. Repayment to the Company......................46
SECTION 8.6. Officers' Certificate.........................47
-ii-
ARTICLE IX Conversion of Notes..............................................47
SECTION 9.1. Right to Convert..............................47
SECTION 9.2. Conversion Procedures.........................48
SECTION 9.3. Cash Payments in Lieu of Fractional Shares....49
SECTION 9.4. Taxes on Conversion...........................50
SECTION 9.5. Covenants of the Company......................50
SECTION 9.6. Adjustments to Conversion Rate................50
SECTION 9.7. Calculation Methodology.......................53
SECTION 9.8. When No Adjustment Required...................54
SECTION 9.9. Notice of Adjustment..........................54
SECTION 9.10. Voluntary Increase............................54
SECTION 9.11. Notice to Holders Prior to Certain Actions....55
SECTION 9.12. Effect of Reclassification, Consolidation,
Merger, Binding Share Exchange or Sale........55
SECTION 9.13. Responsibility of Trustee.....................56
SECTION 9.14. Simultaneous Adjustments......................56
SECTION 9.15. Successive Adjustments........................57
SECTION 9.16. General Considerations........................57
SECTION 9.17. Payment of Cash in Lieu of Common Stock.......57
ARTICLE X Defaults and Remedies.............................................58
SECTION 10.1. Events of Default.............................58
SECTION 10.2. Payment of Notes On Default; Suit Therefor....60
SECTION 10.3. Application of Moneys Collected by Trustee....61
SECTION 10.4. Proceedings by Holders........................62
SECTION 10.5. Proceedings by Trustee........................63
SECTION 10.6. Remedies Cumulative and Continuing............63
SECTION 10.7. Direction of Proceedings; Waiver of
Defaults by Majority of Holders...............63
SECTION 10.8. Notice of Defaults............................63
SECTION 10.9. Undertaking to Pay Costs......................64
ARTICLE XI Trustee..........................................................64
SECTION 11.1. Duties of Trustee.............................64
SECTION 11.2. Rights of Trustee.............................65
SECTION 11.3. Individual Rights of Trustee..................67
SECTION 11.4. Trustee's Disclaimer..........................67
-iii-
SECTION 11.5. Notice of Defaults............................67
SECTION 11.6. Reports by Trustee to Holders.................67
SECTION 11.7. Compensation and Indemnity....................67
SECTION 11.8. Replacement of Trustee........................68
SECTION 11.9. Successor Trustee by Merger...................69
SECTION 11.10. Eligibility; Disqualification.................69
SECTION 11.11. Preferential Collection of Claims
Against Company...............................69
ARTICLE XII Satisfaction and Discharge of Indenture; Unclaimed Moneys.......70
SECTION 12.1. Satisfaction and Discharge of Indenture.......70
SECTION 12.2. Application by Trustee of Funds Deposited
for Payment of Notes..........................71
SECTION 12.3. Repayment of Moneys Held by Paying Agent......72
SECTION 12.4. Return of Moneys Held by Trustee and
Paying Agent Unclaimed for Two Years..........72
SECTION 12.5. Indemnity for U.S. Government Obligations.....72
ARTICLE XIII Amendments.....................................................72
SECTION 13.1. Without Consent of Holders....................72
SECTION 13.2. With Consent of Holders.......................73
SECTION 13.3. Compliance with Trust Indenture Act...........74
SECTION 13.4. Revocation and Effect of Consents
and Waivers...................................74
SECTION 13.5. Notation on or Exchange of Notes..............74
SECTION 13.6. Trustee To Sign Amendments....................74
ARTICLE XIV Miscellaneous...................................................75
SECTION 14.1. Trust Indenture Act Controls..................75
SECTION 14.2. Notices.......................................75
SECTION 14.3. Communication by Holders with Other
Holders.......................................76
SECTION 14.4. Certificate and Opinion as to Conditions
Precedent.....................................76
SECTION 14.5. Statements Required in Certificate or
Opinion.......................................76
SECTION 14.6. When Notes Disregarded........................76
SECTION 14.7. Rules by Trustee, Paying Agent and
Registrar.....................................77
SECTION 14.8. Governing Law.................................77
SECTION 14.9. No Recourse Against Others....................77
SECTION 14.10. Successors....................................77
SECTION 14.11. Multiple Originals............................77
SECTION 14.12. Variable Provisions...........................77
SECTION 14.13. Qualification of Indenture....................77
-iv-
EXHIBITS
EXHIBIT A Form of Note
EXHIBIT B Form of Transfer Certificate for Transfer of Restricted
Common Stock
-v-
INDENTURE, dated as of June 30, 2003, among Halliburton Company, a Delaware
corporation (the "Company"), and JPMorgan Chase Bank, as trustee (the
"Trustee").
Recitals of the Company
-----------------------
The Company has duly authorized the execution and delivery of this
Indenture to provide for the issuance of $1,200,000,000 principal amount of the
Company's 3?% Convertible Senior Notes due July 15, 2023, convertible into
common stock, par value $2.50 per share (the "Common Stock"), of the Company,
issued on the Issue Date (the "Notes").
Each party agrees as follows for the benefit of the other parties and for
the equal and ratable benefit of the Holders of the Notes:
ARTICLE I
Definitions and Incorporation by Reference
------------------------------------------
SECTION 1.1. Definitions.
"Actual Knowledge" has the meaning set forth in Section 11.2(g).
"Additional Amounts" has the meaning set forth in Section 3.10.
"Additional Amounts Notice" shall have the meaning set forth in Section
3.10.
"Affiliate" of any specified Person means any other Person, directly or
indirectly, controlling or controlled by or under direct or indirect common
control with such specified Person. For the purposes of this definition,
"control" when used with respect to any Person means the power to direct the
management and policies of such Person, directly or indirectly, whether through
the ownership of voting securities, by contract or otherwise; and the terms
"controlling" and "controlled" have meanings correlative to the foregoing;
provided that beneficial ownership of 10% or more of the Common Equity of a
Person shall be deemed to be control.
"Agent Members" has the meaning set forth in Section 2.1(h).
"Authenticating Agent" has the meaning set forth in Section 2.2.
"Bankruptcy Code" means the United States Bankruptcy Code, 11 United States
Code ss. 101 et seq., or any successor statute thereto.
"Beneficial Owner" has the meaning set forth in Rule 13d-3 of the Exchange
Act.
"Board of Directors" means either the Board of Directors of the Company or
other body fulfilling the function of a board of directors of a corporation or
any committee of such Board or other body duly authorized to act on its behalf.
"Board Resolution" means a copy of a resolution certified by the Secretary
or an Assistant Secretary of a company to have been duly adopted by the Board of
Directors of such company and to be in full force and effect on the date of such
certification, and delivered to the Trustee.
"Business Day" means each day that is not a Saturday, Sunday or other day
on which banking institutions in New York, New York are authorized or required
by law to close.
"Capital Stock" of any Person means any and all shares (including ordinary
shares or American Depositary Shares), interests, rights to purchase, warrants,
options, participations or other equivalents of or interests in (however
designated) of capital stock or other equity participations, including
partnership interests, whether general or limited, of such Person and any rights
(other than debt securities convertible or exchangeable into an equity
interest), warrants or options to acquire an equity interest in such Person.
"Cash Amount" has the meaning set forth in Section 9.17(c).
"Cash Settlement Averaging Period" has the meaning set forth in Section
9.17.
"Cash Settlement Notice Period" has the meaning set forth in Section 9.17.
"Clearstream" has the meaning set forth in Section 2.1(b).
"Code" means the Internal Revenue Code of 1986, as amended.
"Commission" means the Securities and Exchange Commission.
"Common Equity" of any Person means Capital Stock of such Person that is
generally entitled to (1) vote in the election of directors of such Person or
(2) if such Person is not a corporation, vote or otherwise participate in the
selection of the governing body, partners, managers or others that will control
the management or policies of such Person.
"Common Stock" means the common stock, par value $2.50 per share, of the
Company.
"Company" means Halliburton Company, until a successor replaces it and,
thereafter, means such successor.
"Company Notice" has the meaning set forth in Section 8.1.
"Company Notice Date" has the meaning set forth in Section 8.1.
"Company Order" has the meaning set forth in Section 2.2.
"Consolidated Net Tangible Assets" means the aggregate amount of assets
included on a consolidated balance sheet of the Company and its Restricted
Subsidiaries, less applicable reserves and other properly deductible items and
after deducting therefrom (a) all current liabilities, and (b) all goodwill,
trade names, trademarks, patents, unamortized debt discount and expense and
2
other like intangibles, all in accordance with generally accepted accounting
principles consistently applied (except that the accounts of any Restricted
Subsidiary engaged in the insurance business shall be included using the equity
method of accounting).
"Continuing Directors" means, as of any date of determination, any member
of the Board of Directors of the Company who: (1) was a member of such Board of
Directors on June 24, 2003; or (2) was appointed, elected or nominated for
election to such Board of Directors with the approval of a majority of the
Continuing Directors who were members of such Board at the time of the relevant
nomination or election, either by specific vote or by approval of the proxy
statement issued by the Company on behalf of the Board of Directors in which
such individual is named as a nominee for director.
"Conversion Agent" means the office or agency designated by the Company
where Notes may be presented for conversion.
"Conversion Date" has the meaning set forth in Section 9.2.
"Conversion Obligation" has the meaning set forth in Section 9.17.
"Conversion Price" means $1,000 divided by the Conversion Rate.
"Conversion Rate" has the meaning set forth in Section 9.1(f).
"Conversion Retraction Period" has the meaning set forth in Section 9.17.
"Corporate Trust Office" means the principal office of the Trustee at which
at any time its corporate trust business shall be administered, which office at
the date hereof is located at 600 Travis, Suite 1150, Houston, Texas 77002,
Attention: Institutional Trust Services, or such other address as the Trustee
may designate from time to time by notice to the Holders and the Company, or the
principal corporate trust office of any successor Trustee (or such other address
as such successor Trustee may designate from time to time by notice to the
Holders and the Company).
"CUSIP Numbers" has the meaning set forth in Section 2.14.
"Default" means any event or condition that is, or after notice or passage
of time or both would be, an Event of Default.
"Defaulted Interest" has the meaning set forth in Section 2.12.
"Definitive Notes" means certificated securities.
"DTC" means The Depository Trust Company, its nominees and their respective
successors and assigns, or such other depository institution hereinafter
appointed by the Company.
"Distributed Assets or Securities" has the meaning provided in Section
9.6(c).
3
"Distribution Adjustment Market Price" per share of Common Stock of the
Company or the Equity Interests in a subsidiary or other business unit of the
Company on any day means the average of the daily Last Reported Sale Price for
the first 10 consecutive Trading Days commencing on and including the first
Trading Day that the Common Stock trades ex distribution.
"Distribution Compliance Period" means the period which expires immediately
after one year following the later of: (a) the commencement of the offering of
the Notes to Persons other than "distributors" (as defined in Regulation S) in
reliance upon Regulation S; and (b) the last date of closing of the offering of
the Notes.
"Equity Interests" means any capital stock, partnership, joint venture,
member or limited liability or unlimited liability company interest, beneficial
interest in a trust or similar entity or other equity interest or investment of
whatever nature.
"Euroclear" has the meaning set forth in Section 2.1(b).
"ex distribution" or "ex distribution date" means the first date on which
the security trades regular way on the New York Stock Exchange or such other
national regional exchange or market in which the security trades without the
right to receive such issuance or distribution.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Event of Default" means any event or condition specified as such in
Section 10.1.
"Fair Market Value" means (i) in the case of a distribution referred to in
Section 9.6(c)(i), the value determined by the Board of Directors, whose
determination in good faith shall be conclusive and described in a certificate
filed with the Trustee and the Paying Agent, (ii) in the case of securities to
be distributed to the holders of the Common Stock in connection with a Spin-off
that is not effected simultaneously with an Initial Public Offering of the
securities being distributed in the Spin-off, the average of the Last Reported
Sale Prices of those securities over the first 10 Trading Days after the
effective date of the Spin-off, (iii) in the case of securities being
distributed in any Spin-off that is effected simultaneously with an Initial
Public Offering, the Initial Public Offering price and (iv) in all other cases,
with respect to any asset or property, the price which could be negotiated in an
arm's length, free market transaction, for cash, between a willing seller and a
willing and able buyer, neither of whom is under undue pressure or compulsion to
complete the transaction.
A "Fundamental Change" shall be deemed to have occurred at such time after
the original issuance of the Notes as any of the following occurs: (a) the
Common Stock or other common stock into which the Notes are convertible is
neither listed for trading on a United States national securities exchange nor
approved for trading on the Nasdaq National Market or another established
automated over-the-counter trading market in the United States; (b) a "person"
or "group" within the meaning of Section 13(d) of the Exchange Act, other than
the Company, any Subsidiary of the Company or any employee benefit plan of the
Company or any such Subsidiary, files a Schedule TO (or any other schedule, form
or report under the Exchange Act) disclosing that such Person or group has
4
become the direct or indirect ultimate Beneficial Owner of Common Equity of the
Company representing more than 50% of the voting power of the Company's Common
Equity; (c) consummation of any share exchange, consolidation or merger of the
Company pursuant to which the Common Stock will be converted into cash,
securities or other property or any sale, lease or other transfer (in one
transaction or a series of transactions) of all or substantially all of the
consolidated assets of the Company and its Subsidiaries, taken as a whole, to
any Person (other than the Company or one or more of the Company's
Subsidiaries); provided, however, that a transaction where the holders of the
Company's Common Equity immediately prior to such transaction own, directly or
indirectly, more than 50% of the aggregate voting power of all classes of Common
Equity of the continuing or surviving corporation or transferee immediately
after such event shall not be a Fundamental Change; (d) Continuing Directors
cease to constitute at least a majority of the Board of Directors; provided,
however, that a Fundamental Change shall not be deemed to have occurred in
respect of any of the foregoing if either (i) the Last Reported Sale Price per
share of Common Stock for any five Trading Days within the period of 10
consecutive Trading Days ending immediately before the later of the Fundamental
Change or the public announcement thereof shall equal or exceed 105% of the
Conversion Price of the Notes in effect immediately before the Fundamental
Change or the public announcement thereof; or (ii) at least 90% of the
consideration (excluding cash payments for fractional shares) in the transaction
or transactions constituting the Fundamental Change consists of shares of
capital stock traded on a national securities exchange or quoted on the NASDAQ
National Market (or which shall be so traded or quoted when issued or exchanged
in connection with such Fundamental Change) (such securities being referred to
as ("Publicly Traded Securities")) and as a result of such transaction or
transactions the Notes become convertible into such Publicly Traded Securities
(excluding cash payments for fractional shares).
"Fundamental Change Purchase Date" has the meaning set forth in Section
6.1.
"Fundamental Change Purchase Notice" has the meaning set forth in Section
6.3.
"Fundamental Change Purchase Price" has the meaning set forth in Section
6.1.
"GAAP" means generally accepted accounting principles in the United States
of America as in effect as of the Issue Date, including those set forth in: (i)
the opinions and pronouncements of the Accounting Principles Board of the
American Institute of Certified Public Accountants; (ii) and statements and
pronouncements of the Financial Accounting Standards Board; (iii) or in such
other statements by such other entity as approved by a significant segment of
the accounting profession; and (iv) the rules and regulations of the SEC
governing the inclusion of financial statements (including pro forma financial
statements) in periodic reports required to be filed pursuant to Section 13 of
the Exchange Act, including opinions and pronouncements in staff accounting
bulletins and similar written statements from the accounting staff of the SEC.
All ratios and computations based on GAAP contained in this Indenture will be
computed in conformity with GAAP.
"Global Notes" means Notes that are in the form of the Note attached hereto
as Exhibit A and that are issued to a depositary.
5
"Holder" means, in the case of any Note, the person in whose name such Note
is registered in the security register kept by the Company for that purpose in
accordance with the terms.
"Holder" means the Person in whose name a Note is registered on the
Registrar's books.
"IAI" means institutional accredited investors (as defined in Rules
501(a)(1), (2), (3) and (7) under the Securities Act) who are not QIBs.
"Indebtedness" as applied to any Person, means bonds, debentures, notes and
other instruments or arrangements representing obligations created or assumed by
any such Person, in respect of: (i) obligations for money borrowed (other than
unamortized debt discount or premium); (ii) obligations evidenced by a note or
similar instrument given in connection with the acquisition of any business,
properties or assets of any kind; (iii) any amendments, renewals, extensions,
modifications and refundings of any such indebtedness or obligations listed in
clause (i), (ii) or (iii) above. All indebtedness secured by a lien upon
property owned by such Person of such type, although such Person has not assumed
or become liable for the payment of such indebtedness, shall for all purposes
hereof be deemed to be indebtedness of such Person. All indebtedness for
borrowed money incurred by any other Persons which is directly guaranteed as to
payment of principal by such Person shall for all purposes hereof be deemed to
be indebtedness of any such Person, but no other contingent obligation of such
Person in respect of indebtedness incurred by any other Persons shall for any
purpose be deemed to be indebtedness of such Person.
"Indenture" means this Indenture as amended or supplemented from time to
time.
"Initial Public Offering" means, in the event of a Spin-off, the first time
securities of the same class or type as the securities being distributed in the
Spin-off are bona fide offered to the public for cash.
"Interest Payment Date" has the meaning set forth in the forms of Note
attached hereto as Exhibit A and Exhibit B.
"Issue Date" means June 30, 2003.
"Last Reported Sale Price" of any security on any date means the closing
sale price for such security per share (or, if no closing sale price is
reported, the average of the bid and ask prices or, if more than one in either
case, the average of the average bid and the average ask prices) on that date as
reported in composite transactions for the principal U.S. securities exchange on
which such security is traded or, if such security is not listed on a U.S.
national or regional securities exchange, as reported by the Nasdaq National
Market. If such security is not listed for trading on a U.S. national or
regional securities exchange and not reported by the Nasdaq National Market on
the relevant date, the "last reported sale price" shall be the last quoted bid
price for such security in the over-the-counter market on the relevant date as
reported by the National Quotation Bureau or similar organization. If such
security is not so quoted, the "last reported sale price" will be the average of
6
the mid-point of the last bid and ask prices for such security on the relevant
date from each of at least three nationally recognized independent investment
banking firms selected by the Company for this purpose.
"Market Price" means the average of the Last Reported Sale Prices of Common
Stock for the 20 Trading Day period ending on the applicable date of
determination (if the applicable date of determination is a Trading Day or, if
not, then on the last Trading Day prior to such applicable date of
determination), appropriately adjusted to take into account the occurrence,
during the period commencing on the first of the Trading Days during such 20
Trading Day period and ending on the applicable date of determination, of any
event that would result in an adjustment of the Conversion Rate under this
Indenture.
"Maximum Conversion Rate" has the meaning set forth in Section 9.6(g).
"Note" or "Notes" has the meaning stated in the first recital of this
Indenture.
"Note Register" means the register of Notes, maintained by the Trustee,
pursuant to Section 2.3.
"Note Registrar" means the registrar for the Notes, initially, the Trustee.
"Notes Custodian" means the custodian with respect to the Global Note (as
appointed by the DTC), or any successor Person thereto and shall initially be
the Trustee.
"Officer" means the Chief Executive Officer, the President, the Chief
Financial Officer, any Vice President, the Treasurer, the Secretary or an
Assistant Secretary of the Company.
"Officers' Certificate" means a certificate signed by two Officers or by an
Officer and either an Assistant Treasurer or an Assistant Secretary of the
Company. Each such certificate shall include the statements provided for in
Section 14.5, if and to the extent required by the provisions of Section 14.4.
"Opinion of Counsel" means a written opinion from legal counsel who is
satisfactory to the Trustee. The counsel may be an employee of or counsel to the
Company. Each such opinion shall include the statements provided for in Section
14.5, if and to the extent required by the provisions of Section 14.4.
"Paying Agent" means the office or agency designated by the Company where
Notes may be presented for payment.
"Person" means any individual, corporation, partnership, joint venture,
association, joint-stock company, trust, unincorporated organization, government
or any agency or political subdivision thereof or any other entity.
"Principal Property" means any real property, any manufacturing plant,
warehouse, office building or other physical facility, or any item of marine,
transportation or construction equipment or other like depreciable asset of the
Company or of any Restricted Subsidiary whether owned as of the date of this
Indenture or hereafter acquired (other than any facility thereafter acquired for
7
the control or abatement of atmospheric pollutants or contaminants or water,
noise, odor or other pollution), which in the opinion of the Board of Directors
is of material importance to the total business conducted by the Company and its
Restricted Subsidiaries, as a whole.
"protected purchaser" has the meaning set forth in Section 2.8.
"Publicly Traded Securities" shall have the meaning set forth in the
definition of "Fundamental Change".
"Purchase Date" has the meaning set forth in Section 7.1(a).
"Purchase Notice" has the meaning set forth in Section 7.1(a).
"Purchase Price" has the meaning provided in paragraph 7 of the Notes.
"QIB" means any "qualified institutional buyer" (as defined in Rule 144A
under the Securities Act).
"Redemption Date" means the date fixed for redemption of the Notes.
"Redemption Price" has the meaning set forth in paragraph 5 of the Note.
"Registrar" means the office or agency maintained by the Company where
Notes may be presented for registration of transfer or exchange.
"Registration Rights Agreement" means that certain registration rights
agreement dated as of the date of the Indenture by and among the Company and the
initial purchasers set forth therein.
"Regulation S" means Regulation S under the Securities Act.
"Responsible Officer" when used with respect to the Trustee, means any
officer assigned by the Trustee to administer its corporate trust matters.
"Restricted Note" means a Note that constitutes a "restricted security"
within the meaning of Rule 144(a)(3) under the Securities Act; provided,
however, that the Trustee shall be entitled to request and conclusively rely on
an opinion of counsel with respect to whether any Note constitutes a Restricted
Note.
"Restricted Note Legend" means the legend set forth in clause (A) or (B) of
Section 2.1(d), as applicable.
"Restricted Period" means the 40 consecutive days beginning on and
including the later of (A) the day on which the Initial Notes are offered to
persons other than distributors (as defined in Regulation S under the Securities
Act) and (B) the Issue Date.
"Restricted Stock Legend" means the legend required by Section 2.1(e).
8
"Restricted Subsidiary" means (a) any Subsidiary other than an Unrestricted
Subsidiary, and (b) any Subsidiary which was an Unrestricted Subsidiary but
which, subsequent to the date hereof, is designated by the Company (by certified
resolution of the Board of Directors delivered to the Trustee) to be a
Restricted Subsidiary; provided, however, that the Company may not designate any
such Subsidiary to be a Restricted Subsidiary if the Company would thereby
breach any covenant or agreement herein contained (on the assumptions that any
outstanding Secured Debt of such Subsidiary was incurred at the time of such
designation and that any Sale and Leaseback Transaction (as defined in Section
3.3) to which such Subsidiary is then a party was entered into at the time of
such designation).
"Rule 144A" means Rule 144A under the Securities Act.
"Sale and Leaseback Transaction" has the meaning set forth in Section 3.3.
"Secured Debt" means indebtedness for money borrowed by the Company or a
Restricted Subsidiary, and any other indebtedness of the Company or a Restricted
Subsidiary on which interest is paid or payable (other than indebtedness owed by
a Restricted Subsidiary to the Company, by a Restricted Subsidiary to another
Restricted Subsidiary or by the Company to a Restricted Subsidiary), which in
any such case is secured by (a) a mortgage or other lien on any Principal
Property of the Company or a Restricted Subsidiary, or (b) a pledge, lien or
other security interest on any shares of stock or indebtedness of a Restricted
Subsidiary, or (c) in the case of any such indebtedness of the Company, a
guaranty by any Restricted Subsidiary.
"Securities Act" means the Securities Act of 1933, as amended.
"Shelf Registration Statement" shall have the meaning set forth in the
Registration Rights Agreement.
"Significant Subsidiary" means any Restricted Subsidiary that is a
"Significant Subsidiary" of the Company within the meaning of Rule 1-02 under
Regulation S-X promulgated by the SEC.
"Special Record Date" has the meaning set forth in Section 2.12(a).
"Spin-off" means a dividend or other distribution of shares of Capital
Stock of any class or series, or similar Equity Interests, of or relating to a
Subsidiary or other business unit of the Company.
"Spin-off Market Price" per share of Common Stock on any day means the
average of the daily Last Reported Sale Price for the first 10 consecutive
Trading Days after the effective date of the Spin-off; provided, however, that
if an Initial Public Offering of the Equity Interests being distributed in the
Spin-off is to be effected simultaneously with the Spin-off, the Spin-off Market
Price of the Common Stock means the Last Reported Sale Price of the Common Stock
on the Trading Day on which the Initial Public Offering price of the Equity
Interests being distributed in the Spin-off is determined.
"Subsidiary" of any Person means (a) any corporation, association or other
business entity (other than a partnership, joint venture, limited liability
9
company or similar entity) of which more than 50% of the total ordinary voting
power of shares of Capital Stock entitled (without regard to the occurrence of
any contingency) to vote in the election of directors, managers or trustees
thereof (or persons performing similar functions) or (b) any partnership, joint
venture, limited liability company or similar entity of which more than 50% of
the capital accounts, distribution rights, total equity and voting interests or
general or limited partnership interests, as applicable, is, in the case of
clauses (a) and (b), at the time owned or controlled, directly or indirectly, by
(1) such Person, (2) such Person and one or more Subsidiaries of such Person or
(3) one or more Subsidiaries of such Person. Unless otherwise specified herein,
each reference to a Subsidiary will refer to a Subsidiary of the Company.
"Successor Company" shall have the meaning assigned thereto in clause (i)
of Section 4.1.
"TIA" or "Trust Indenture Act" means the Trust Indenture Act of 1939 (15
U.S.C.ss.ss. 77aaa-77bbbb), as in effect from time to time.
"Trading Day" means (a) if the applicable security is listed, admitted for
trading or quoted on the New York Stock Exchange, the NASDAQ National Market or
another national security exchange, a day on which the New York Stock Exchange,
the NASDAQ National Market or another national security exchange is open for
business or (b) if the applicable security is not so listed, admitted for
trading or quoted, any day other than a Saturday or Sunday or a day on which
banking institutions in the State of New York are authorized or obligated by
law, regulation or executive order to close.
"Transfer Restricted Notes" has the meaning set forth in Section 2.1(d).
"Trustee" means the Person identified as "Trustee" in the first paragraph
hereof and, subject to the provisions of Article XI, shall also include any
successor trustee.
"Uniform Commercial Code" means the New York Uniform Commercial Code as in
effect from time to time.
"Unrestricted Subsidiary" means (a) any subsidiary acquired or organized
after the date hereof, provided, however, that such Subsidiary shall not be a
successor, directly or indirectly, to any Restricted Subsidiary, and (b) any
Subsidiary whose principal business and assets are located outside the United
States of America, its territories and possessions and Canada or are located in
Puerto Rico, and (c) any Subsidiary the principal business of which consists of
financing or assisting in financing the acquisition or disposition of products
of the Company or a Subsidiary by dealers, distributors or other customers, and
(d) any subsidiary the principal business of which is owning, leasing, dealing
in or developing real property, and (e) any Subsidiary substantially all the
assets of which consist of stock or other securities of a Subsidiary or
subsidiaries of the character described in clauses (a) through (d) of this
paragraph, unless and until such Subsidiary shall have been designated to be a
Restricted Subsidiary pursuant to clause (b) of the definition of "Restricted
Subsidiary".
"U.S. Government Obligations" means securities that are (a) direct
obligations of the United States of America for the timely payment of which its
full faith and credit is pledged or (b) obligations of a Person controlled or
supervised by and acting as an agency or instrumentality of the United States of
10
America the timely payment of which is unconditionally guaranteed as a full
faith and credit obligation of the United States of America, which, in either
case, are not callable or redeemable at the option of the issuer thereof, and
shall also include a depositary receipt issued by a bank (as defined in Section
3(a)(2) of the Securities Act), as custodian with respect to any such U.S.
Government Obligations or a specific payment of principal of or interest on any
such U.S. Government Obligations held by such custodian for the account of the
holder of such depositary receipt; provided that (except as required by law)
such custodian is not authorized to make any deduction from the amount payable
to the holder of such depositary receipt from any amount received by the
custodian in respect of the U.S. Government Obligations or the specific payment
of principal of or interest on the U.S. Government Obligations evidenced by such
depositary receipt.
"value" has the meaning set forth in Section 3.3.
"Wholly Owned Subsidiary" means a Restricted Subsidiary of the Company, all
of the Capital Stock of which (other than directors' qualifying shares) is owned
by the Company or another Wholly Owned Subsidiary.
SECTION 1.2. Incorporation by Reference of Trust Indenture Act. This
Indenture is subject to the mandatory provisions of the TIA which are
incorporated by reference in and made a part of this Indenture. The following
TIA terms have the following meanings:
"indenture securities" means the Notes.
"indenture security holder" means a "Holder".
"indenture to be qualified" means this Indenture.
"indenture trustee" or "institutional trustee" means the Trustee.
"obligor" on the indenture securities means the Company and any other
obligor on the indenture securities.
All other TIA terms used in this Indenture that are defined by the TIA,
defined by the TIA reference to another statute or defined by SEC rule have the
meanings assigned to them by such definitions.
SECTION 1.3. Rules of Construction. Unless the context otherwise requires:
(1) a term has the meaning assigned to it;
(2) an accounting term not otherwise defined has the meaning assigned to it
in accordance with GAAP;
(3) "or" is not exclusive;
(4) each Exhibit attached to this Indenture shall be deemed incorporated
herein as if set forth in full herein;
11
(5) words in the singular include the plural and words in the plural
include the singular;
(6) unsecured "Indebtedness" shall not be deemed to be subordinate or
junior to Secured Indebtedness merely by virtue of its nature as unsecured
Indebtedness;
(7) the principal amount of any noninterest bearing or other discount
security at any date shall be the principal amount thereof that would be shown
on a balance sheet of the issuer dated such date prepared in accordance with
GAAP; and
(8) the principal amount of any "Preferred Stock" shall be (i) the maximum
liquidation value of such Preferred Stock or (ii) the maximum mandatory
redemption or mandatory repurchase price with respect to such Preferred Stock,
whichever is greater.
(9) the table of contents and headings of the Articles and Sections of this
Indenture have been inserted for convenience of reference only, are not intended
to be considered a part hereof and shall not modify or restrict any of the terms
or provisions hereof;
(10) the words "herein," "hereof' and "hereunder" and other words of
similar import refer to this Indenture as a whole and not to any particular
Article, Section or other subdivision;
(11) all references to "$" or "dollars" shall refer to the lawful currency
of the United States of America;
(12) the words "include," "included" and "including" as used herein shall
be deemed in each case to be followed by the phrase "without limitation," if not
expressly followed by such phrase or the phrase "but not limited to";
(13) any reference to a Section or Article refers to such Section or
Article of this Indenture unless otherwise indicated.
ARTICLE II
The Notes
---------
SECTION 2.1. Form, Dating and Terms.
(a) The aggregate principal amount of Notes that may be authenticated and
delivered under this Indenture is $1,200,000,000. Furthermore, Notes may be
authenticated and delivered upon registration or transfer, or in lieu of, other
Notes pursuant to Section 2.6, 2.8 or 13.5.
12
The Notes shall be known and designated as 3?% Convertible Senior Notes due
July 15, 2023. Pursuant to the provisions of Article IX, the Notes shall be
convertible into Common Stock, par value $2.50 per share (the "Common Stock"),
of the Company.
(b) The Notes are being offered and sold by the Company pursuant to a
Purchase Agreement, dated June 24, 2003, among the Company, Citigroup Global
Markets Inc., Goldman, Sachs & Co., J.P. Morgan Securities Inc. and the other
initial purchasers named therein. The Notes will be resold initially only to
QIBs. Such Notes may thereafter be transferred to, among others, QIBs and IAIs
in accordance with Rule 501 of the Securities Act in accordance with the
procedure described herein.
Notes (i) offered and sold to QIBs in reliance on Rule 144A and resold to
IAIs in the United States of America and (ii) resold outside the United States
of America in reliance on Regulation S shall be issued in the form of one or
more permanent Global Notes, without interest coupons, substantially in the form
of Exhibit A. Such Global Notes shall be deposited on behalf of the purchasers
of the Notes represented thereby with the Trustee, as custodian for the DTC for
the accounts of participants in the DTC (and, in the case of Notes held in
accordance with Regulation S, registered with the DTC for the accounts of
designated agents holding on behalf of the Euroclear S.A. N.V., as operator of
the Euroclear System ("Euroclear") or Clearstream Banking societe anonyme
("Clearstream") before the expiration of the Restricted Period and through
organizations other than Euroclear or Clearstream that are participants in the
DTC's system after the expiration of the Restricted Period), duly executed by
the Company and authenticated by the Trustee as hereinafter provided. The
aggregate principal amount of a Global Note may from time to time be increased
or decreased by adjustments made on the records of the Trustee, as custodian for
the DTC or its nominee, as hereinafter provided.
Each Note shall bear the applicable legends set forth in Section 2.1(d) and
transfers of the Notes shall be made only in accordance with the restrictions
described in the applicable legend. The Notes may have notations, legends or
endorsements required by law, stock exchange rule or usage, in addition to those
set forth on Exhibit A and in Section 2.1(d). The Company and the Trustee shall
approve the forms of the Notes and any notation, endorsement or legend on them.
Each Note shall be dated the date of its authentication. The terms of the Note
set forth in Exhibit A are part of the terms of this Indenture and, to the
extent applicable, the Company and the Trustee, by their execution and delivery
of this Indenture, expressly agree to be bound by such terms.
The principal of and interest on the Notes shall be payable at the office
or agency of the Company maintained for such purpose in the City of New York, or
at such other office or agency of the Company as may be maintained for such
purpose pursuant to Section 2.3. Payments (including principal and interest and
Additional Amounts, if any) in respect of the Notes represented by the Global
Notes, will be made by the transfer of immediately available funds to the
accounts specified by the DTC. Payments in respect of a Definitive Note
(including principal and interest) shall be payable at the office or agency
maintained by the Company for such purposes in the City of New York or, at the
Company's option, by mailing a check to the registered address of each Holder
thereof as such address shall appear on the Note Register; provided, however,
that payments on the Notes may also be made, at the Company's option, by wire
transfer to a U.S. dollar account maintained by the payee with a bank in the
13
United States if such Holder requests payment by wire transfer by giving written
notice to the Trustee or the Paying Agent to such effect designating such
account no later than 15 days immediately preceding the relevant due date for
payment (or such other date as the Trustee may accept in its discretion). If a
payment date is a date other than a Business Day, payment may be made at that
place on the next succeeding day that is a Business Day and no interest shall
accrue for the intervening period.
(c) The Notes shall be issuable only in fully registered form, without
coupons, and only in denominations of $1,000 and any integral multiple thereof.
(d) Every Note that bears or is required under this Section 2.1(d) to bear
the legend set forth in this Section 2.1(d) (the "Transfer Restricted Notes")
shall be subject to the restrictions on transfer set forth in this Section
2.1(d) (including those set forth in the legend set forth below), and the Holder
of each such Transfer Restricted Note, by such Holder's acceptance thereof,
agrees to be bound by all such restrictions on transfer. As used in Sections
2.1(d) and 2.1(e), the term "transfer" encompasses any sale, pledge, transfer or
other disposition whatsoever of any Transfer Restricted Note. The Company shall
not register any transfer of a Transfer Restricted Note not made in accordance
with the restrictions on transfer set forth in this Section 2.1.
(A) Until the expiration of the holding period applicable to
sales thereof under Rule 144(k) under the Securities Act (or any
successor provision), any certificate evidencing such Note (and all
securities issued in exchange therefor or substitution thereof, other
than Common Stock, if any, issued upon conversion thereof, which shall
bear the legend set forth in Section 2.1(e), if applicable), other than
certificates evidencing Notes resold in reliance on Regulation S, shall
bear a legend in substantially the following form, unless such Note has
been sold pursuant to a registration statement that has been declared
effective under the Securities Act (and which continues to be effective
at the time of such transfer):
"THIS NOTE AND ANY COMMON STOCK ISSUABLE UPON THE CONVERSION OF THIS
NOTE HAVE NOT BEEN REGISTERED UNDER THE U.S. SECURITIES ACT OF 1933, AS
AMENDED (THE ""SECURITIES ACT"), AND MAY NOT BE SOLD OR OTHERWISE
TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION OR AN APPLICABLE
EXEMPTION THEREFROM. EACH PURCHASER OF THIS NOTE IS HEREBY NOTIFIED
THAT THE SELLER OF THIS NOTE MAY BE RELYING ON THE EXEMPTION FROM THE
PROVISIONS OF SECTION 5 OF THE SECURITIES ACT PROVIDED BY RULE 144A
THEREUNDER.
THIS NOTE AND ANY COMMON STOCK ISSUABLE UPON THE CONVERSION OF THIS
NOTE MAY NOT BE OFFERED, SOLD, PLEDGED OR OTHERWISE TRANSFERRED EXCEPT
(A) (1) TO A PERSON WHO THE TRANSFEROR REASONABLY BELIEVES IS A
QUALIFIED INSTITUTIONAL BUYER WITHIN THE MEANING OF RULE 144A UNDER THE
SECURITIES ACT ACQUIRING FOR ITS OWN ACCOUNT OR FOR THE ACCOUNT OF A
QUALIFIED INSTITUTIONAL BUYER IN A TRANSACTION MEETING THE REQUIREMENTS
14
OF RULE 144A, (2) PURSUANT TO AN EXEMPTION FROM REGISTRATION UNDER THE
SECURITIES ACT PROVIDED BY RULE 144 THEREUNDER (IF AVAILABLE), (3) TO
AN INSTITUTIONAL INVESTOR THAT IS AN ACCREDITED INVESTOR WITHIN THE
MEANING OF RULE 501(a)(1), (2), (3) OR (7) OF REGULATION D UNDER THE
SECURITIES ACT PURSUANT TO AN EXEMPTION FROM REGISTRATION UNDER THE
SECURITIES ACT (IF AVAILABLE) OR (4) PURSUANT TO AN EFFECTIVE
REGISTRATION STATEMENT UNDER THE SECURITIES ACT, AND (B) IN ACCORDANCE
WITH ALL APPLICABLE SECURITIES LAWS OF THE STATES OF THE UNITED STATES
AND OTHER JURISDICTIONS.
THIS NOTE, ANY SHARES OF COMMON STOCK ISSUABLE UPON ITS CONVERSION AND
ANY RELATED DOCUMENTATION MAY BE AMENDED OR SUPPLEMENTED FROM TIME TO
TIME TO MODIFY THE RESTRICTIONS ON RESALES AND OTHER TRANSFERS OF THIS
NOTE AND ANY SUCH SHARES TO REFLECT ANY CHANGE IN APPLICABLE LAW OR
REGULATION (OR THE INTERPRETATION THEREOF) OR IN PRACTICES RELATING TO
THE RESALE OR TRANSFER OF RESTRICTED SECURITIES GENERALLY. THE HOLDER
OF THIS NOTE AND SUCH SHARES SHALL BE DEEMED BY THE ACCEPTANCE OF THIS
NOTE AND ANY SUCH SHARES TO HAVE AGREED TO ANY SUCH AMENDMENT OR
SUPPLEMENT."
(B) Until the expiration of the holding period applicable to
sales thereof under Rule 144(k) under the Securities Act (or any
successor provision), any certificate evidencing such Note (and all
securities issued in exchange therefor or substitution thereof, other
than Common Stock, if any, issued upon conversion thereof, which shall
bear the legend set forth in Section 2.1(e), if applicable) resold in
reliance on Regulation S shall bear a legend in substantially the
following form, unless such Note has been sold pursuant to a
registration statement that has been declared effective under the
Securities Act (and which continues to be effective at the time of such
transfer):
"THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE U.S. SECURITIES ACT OF
1933, AS AMENDED (THE "SECURITIES ACT"), AND, ACCORDINGLY, MAY NOT BE
OFFERED OR SOLD WITHIN THE UNITED STATES OR TO OR FOR THE ACCOUNT OR
BENEFIT OF U.S. PERSONS, EXCEPT AS SET FORTH IN THE FOLLOWING SENTENCE.
BY ITS ACQUISITION HEREOF, THE HOLDER (1) REPRESENTS THAT IT IS NOT A
U.S. PERSON NOR IS IT PURCHASING FOR THE ACCOUNT OF A U.S. PERSON AND
IS ACQUIRING THIS SECURITY IN AN OFFSHORE TRANSACTION IN ACCORDANCE
WITH REGULATION S UNDER THE SECURITIES ACT ("REGULATION S"), (2) BY ITS
ACCEPTANCE HEREOF AGREES TO OFFER, SELL OR OTHERWISE TRANSFER SUCH
SECURITY, PRIOR TO THE DATE THAT IS 40 DAYS AFTER THE LATER OF THE
ORIGINAL ISSUE DATE HEREOF AND THE LAST DATE ON WHICH THE COMPANY OR
ANY AFFILIATE OF THE COMPANY WAS THE OWNER OF THIS SECURITY (OR ANY
PREDECESSOR OF SUCH SECURITY) (THE "RESALE RESTRICTION TERMINATION
DATE"), ONLY (A) TO THE COMPANY, (B) PURSUANT TO A REGISTRATION
STATEMENT THAT HAS BEEN DECLARED EFFECTIVE UNDER THE SECURITIES ACT,
15
(C) FOR SO LONG AS THE SECURITIES ARE ELIGIBLE FOR RESALE PURSUANT TO
RULE 144A UNDER THE SECURITIES ACT, TO A PERSON IT REASONABLY BELIEVES
IS A "QUALIFIED INSTITUTIONAL BUYER" AS DEFINED IN RULE 144A UNDER THE
SECURITIES ACT THAT PURCHASES FOR ITS OWN ACCOUNT OR FOR THE ACCOUNT OF
A QUALIFIED INSTITUTIONAL BUYER TO WHOM NOTICE IS GIVEN THAT THE
TRANSFER IS BEING MADE IN RELIANCE ON RULE 144A, (D) PURSUANT TO OFFERS
AND SALES THAT OCCUR OUTSIDE THE UNITED STATES WITHIN THE MEANING OF
REGULATION S, (E) TO AN INSTITUTIONAL "ACCREDITED INVESTOR" WITHIN THE
MEANING OF RULE 501(a)(1), (2), (3) OR (7) UNDER THE SECURITIES ACT
THAT IS ACQUIRING THE SECURITY FOR ITS OWN ACCOUNT, OR FOR THE ACCOUNT
OF SUCH AN INSTITUTIONAL ACCREDITED INVESTOR, IN EACH CASE IN A
TRANSACTION INVOLVING A MINIMUM PRINCIPAL AMOUNT OF THE SECURITIES OF
$250,000, FOR INVESTMENT PURPOSES AND NOT WITH A VIEW TO OR FOR OFFER
OR SALE IN CONNECTION WITH ANY DISTRIBUTION IN VIOLATION OF THE
SECURITIES ACT, OR (F) PURSUANT TO ANY OTHER AVAILABLE EXEMPTION FROM
THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT, SUBJECT TO THE
COMPANY'S AND THE TRUSTEE'S RIGHT PRIOR TO ANY SUCH OFFER, SALE OR
TRANSFER (i) PURSUANT TO CLAUSE (D), (E) OR (F) TO REQUIRE THE DELIVERY
OF AN OPINION OF COUNSEL, CERTIFICATION AND/OR OTHER INFORMATION
SATISFACTORY TO EACH OF THEM AND (ii) IN THE CASE OF THE FOREGOING
CLAUSE (E), A CERTIFICATE OF TRANSFER IN THE FORM APPEARING ON THE
OTHER SIDE OF THIS SECURITY IS COMPLETED AND DELIVERED BY THE
TRANSFEROR TO THE COMPANY AND THE TRUSTEE. THIS LEGEND WILL BE REMOVED
AFTER 40 CONSECUTIVE DAYS BEGINNING ON AND INCLUDING THE LATER OF (A)
THE DAY ON WHICH THE SECURITIES ARE OFFERED TO PERSONS OTHER THAN
DISTRIBUTORS (AS DEFINED IN REGULATION S) AND (B) THE DATE OF THE
CLOSING OF THE ORIGINAL OFFERING. AS USED HEREIN, THE TERMS "OFFSHORE
TRANSACTION", "UNITED STATES" AND "U.S. PERSON" HAVE THE MEANINGS GIVEN
TO THEM BY REGULATION S UNDER THE SECURITIES ACT.
BY ITS ACQUISITION OF THIS SECURITY THE HOLDER THEREOF WILL BE DEEMED
TO HAVE REPRESENTED AND WARRANTED THAT EITHER (I) NO PORTION OF THE
ASSETS USED BY SUCH HOLDER TO ACQUIRE AND HOLD THIS SECURITY
CONSTITUTES THE ASSETS OF AN EMPLOYEE BENEFIT PLAN THAT IS SUBJECT TO
TITLE I OF THE U.S. EMPLOYEE RETIREMENT INCOME SECURITY ACT OF 1974, AS
AMENDED ("ERISA"), OF PLANS, INDIVIDUAL RETIREMENT ACCOUNTS OR OTHER
ARRANGEMENTS THAT ARE SUBJECT TO SECTION 4975 OF THE U.S. INTERNAL
REVENUE CODE OF 1986, AS AMENDED (THE "CODE") OR PROVISIONS UNDER ANY
FEDERAL, STATE, LOCAL, NON-U.S. OR OTHER LAWS OR REGULATIONS THAT ARE
SIMILAR TO SUCH PROVISIONS OF ERISA OR THE CODE ("SIMILAR LAWS"), OR OF
AN ENTITY WHOSE UNDERLYING ASSETS ARE CONSIDERED TO INCLUDE "PLAN
16
ASSETS" OF SUCH PLANS, ACCOUNTS OR ARRANGEMENTS, OR (II) THE PURCHASE
AND HOLDING OF THIS SECURITY WILL NOT CONSTITUTE A NON-EXEMPT
PROHIBITED TRANSACTION UNDER SECTION 406 OF ERISA OR SECTION 4975 OF
THE CODE OR A SIMILAR VIOLATION UNDER ANY APPLICABLE SIMILAR LAWS."
Any Note (or security issued in exchange or substitution therefor) as to
which such restrictions on transfer shall have expired in accordance with their
terms or that has been transferred pursuant to a registration statement that has
been declared effective under the Securities Act may, upon surrender of such
Note for exchange to the Registrar in accordance with the provisions of this
Section 2.1, be exchanged for a new Note or Notes, of like tenor and aggregate
principal amount, which shall not bear the Restrictive Notes Legend required by
this Section 2.1(d).
(e) Every stock certificate representing Common Stock issued upon
conversion of a Transfer Restricted Note that bears or is required under this
Section 2.1(e) to bear the legend set forth in this Section 2.1(e) shall be
subject to the restrictions on transfer set forth in this Section 2.1(e)
(including those set forth in the legend set forth below), and the Holder of
such Common Stock issued upon conversion of a Transfer Restricted Note, by such
Holder's acceptance thereof, agrees to be bound by all such restrictions on
transfer. The Company shall not register any transfer of Common Stock issued
upon conversion of such a Transfer Restricted Note not made in accordance with
the restrictions on transfer set forth in this Section 2.1.
Until the expiration of the holding period applicable to sales thereof
under Rule 144(k) under the Securities Act (or any successor provision), any
stock certificate representing Common Stock issued upon conversion of a Transfer
Restricted Note shall bear a legend in substantially the following form, unless
such Common Stock has been sold pursuant to a registration statement that has
been declared effective under the Securities Act (and which continues to be
effective at the time of such transfer) or such Common Stock has been issued
upon conversion of Notes that have been transferred pursuant to a registration
statement that has been declared effective under the Securities Act:
THIS SECURITY (OR ITS PREDECESSOR) WAS ORIGINALLY ISSUED IN A
TRANSACTION EXEMPT FROM REGISTRATION UNDER THE UNITED STATES SECURITIES
ACT OF 1933 (THE "SECURITIES ACT"), AND THIS SECURITY MAY NOT BE
OFFERED, SOLD OR OTHERWISE TRANSFERRED IN THE ABSENCE OF SUCH
REGISTRATION OR AN APPLICABLE EXEMPTION THEREFROM. EACH PURCHASER OF
THIS SECURITY IS HEREBY NOTIFIED THAT THE SELLER OF THIS SECURITY MAY
BE RELYING ON THE EXEMPTION FROM THE PROVISIONS OF SECTION 5 OF THE
SECURITIES ACT PROVIDED BY RULE 144A THEREUNDER.
THE HOLDER OF THIS SECURITY AGREES FOR THE BENEFIT OF THE COMPANY THAT
(A) THIS SECURITY MAY BE OFFERED, RESOLD, PLEDGED OR OTHERWISE
TRANSFERRED, ONLY (I) IN THE UNITED STATES TO A PERSON WHOM THE SELLER
17
REASONABLY BELIEVES IS A QUALIFIED INSTITUTIONAL BUYER (AS DEFINED IN
RULE 144A UNDER THE SECURITIES ACT) IN A TRANSACTION MEETING THE
REQUIREMENTS OF RULE 144A, (II) OUTSIDE THE UNITED STATES IN AN
OFFSHORE TRANSACTION IN ACCORDANCE WITH RULE 904 UNDER THE SECURITIES
ACT, (III) PURSUANT TO AN EXEMPTION FROM REGISTRATION UNDER THE
SECURITIES ACT PROVIDED BY RULE 144 THEREUNDER (IF AVAILABLE) OR (IV)
PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES
ACT, IN EACH OF CASES (I) THROUGH (IV) IN ACCORDANCE WITH ANY
APPLICABLE SECURITIES LAWS OF ANY STATE OF THE UNITED STATES, AND (B)
THE HOLDER WILL, AND EACH SUBSEQUENT HOLDER IS REQUIRED TO, NOTIFY ANY
PURCHASER OF THE SECURITY FROM IT OF THE RESALE RESTRICTIONS REFERRED
TO IN (A) ABOVE.
Any stock certificate (or security issued in exchange or substitution
therefor) as to which such restrictions on transfer shall have expired in
accordance with their terms or that has been transferred pursuant to a
registration statement that has been declared effective under the Securities Act
may, upon surrender of such stock certificate for exchange to the Registrar in
accordance with the provisions of this Section 2.1, be exchanged for a new stock
certificate, of like tenor and aggregate principal amount, which shall not bear
the Restrictive Stock Legend required by this Section 2.1(e).
(f) Each share of Common Stock issued upon conversion of a Note, whether or
not a Transfer Restricted Security, shall bear the following legend:
THE HOLDER OF THIS SECURITY AGREES THAT SUCH HOLDER WILL NOT ENGAGE IN
HEDGING TRANSACTIONS INVOLVING THIS SECURITY UNLESS IN COMPLIANCE WITH
THE SECURITIES ACT.
THIS SECURITY AND ANY RELATED DOCUMENTATION MAY BE AMENDED OR
SUPPLEMENTED FROM TIME TO TIME TO MODIFY THE RESTRICTIONS ON AND
PROCEDURES FOR RESALES AND OTHER TRANSFERS OF THIS SECURITY TO REFLECT
ANY CHANGE IN APPLICABLE LAW OR REGULATION (OR THE INTERPRETATION
THEREOF) OR IN PRACTICES RELATING TO THE RESALE OR TRANSFER OF
RESTRICTED SECURITIES GENERALLY. THE HOLDER OF THIS SECURITY SHALL BE
DEEMED BY THE ACCEPTANCE OF THIS SECURITY TO HAVE AGREED TO ANY SUCH
AMENDMENT OR SUPPLEMENT.
THE HOLDER OF THIS SECURITY IS SUBJECT TO, AND ENTITLED TO THE BENEFITS
OF, A REGISTRATION RIGHTS AGREEMENT, DATED AS OF JUNE 30, 2003 ENTERED
18
INTO BY THE COMPANY FOR THE BENEFIT OF CERTAIN HOLDERS OF SECURITIES
FROM TIME TO TIME.
THE HOLDER OF THIS SECURITY IS SUBJECT TO, AND ENTITLED TO THE BENEFITS
OF, A RIGHTS AGREEMENT, DATED AS OF DECEMBER 1, 1996, BETWEEN THE
COMPANY AND CHASEMELLON SHAREHOLDER SERVICES, L.L.C., AS RIGHTS AGENT.
(g) Each Global Note, whether or not a Transfer Restricted Note, shall bear
the following legend:
"UNLESS THIS CERTIFICATE IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE
OF THE DEPOSITORY TRUST COMPANY, A NEW YORK CORPORATION ("DTC"), NEW
YORK, NEW YORK, TO THE COMPANY OR ITS AGENT FOR REGISTRATION OF
TRANSFER, EXCHANGE OR PAYMENT, AND ANY CERTIFICATE ISSUED IS REGISTERED
IN THE NAME OF CEDE & CO. OR IN SUCH OTHER NAME AS IS REQUESTED BY AN
AUTHORIZED REPRESENTATIVE OF DTC (AND ANY PAYMENT IS MADE TO CEDE & CO.
OR TO SUCH OTHER ENTITY AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE
OF DTC), ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR VALUE OR
OTHERWISE BY OR TO ANY PERSON IS WRONGFUL INASMUCH AS THE REGISTERED
OWNER HEREOF, CEDE & CO., HAS AN INTEREST HEREIN.
TRANSFERS OF THIS GLOBAL SECURITY SHALL BE LIMITED TO TRANSFERS IN
WHOLE, BUT NOT IN PART, TO DTC, TO NOMINEES OF DTC OR TO A SUCCESSOR
THEREOF OR SUCH SUCCESSOR'S NOMINEE AND TRANSFERS OF PORTIONS OF THIS
GLOBAL SECURITY SHALL BE LIMITED TO TRANSFERS MADE IN ACCORDANCE WITH
THE RESTRICTIONS SET FORTH IN THE INDENTURE REFERRED TO ON THE REVERSE
HEREOF."
(h) The following book-entry provisions shall apply only to Global Notes
deposited with the Trustee, as custodian for the DTC:
(i) Each Global Note initially shall (x) be registered in the name of the
DTC for such Global Note or the nominee of such DTC, (y) be delivered to the
Trustee as custodian for such DTC and (z) bear legends as set forth in Section
2.1(d).
(ii) Members of, or participants in, the DTC ("Agent Members") shall have
no rights under this Indenture with respect to any Global Note held on their
behalf by the DTC or by the Trustee as the custodian of the DTC or under such
Global Note, and the DTC may be treated by the Company, the Trustee and any
agent of the Company or the Trustee as the absolute owner of such Global Note
for all purposes whatsoever. Notwithstanding the foregoing, nothing herein shall
prevent the Company, the Trustee or any agent of the Company or the Trustee from
giving effect to any written certification, proxy or other authorization
19
furnished by the DTC or impair, as between the DTC and its Agent Members, the
operation of customary practices of the DTC governing the exercise of the rights
of a Holder of a beneficial interest in any Global Note.
(iii) The registered Holder of a Global Note may grant proxies and
otherwise authorize any person, including Agent Members and persons that may
hold interests through Agent Members, to take any action which a Holder is
entitled to take under this Indenture or the Notes.
(iv) In connection with any transfer of a portion of the beneficial
interest in a Global Note pursuant to Section 2.1(i) to beneficial owners who
are required to hold Definitive Notes, the Trustee shall reflect on its books
and records the date and a decrease in the principal amount of such Global Note
in an amount equal to the principal amount of the beneficial interest in the
Global Note to be transferred, and the Company shall execute, and the Trustee
shall authenticate and deliver, one or more Definitive Notes of like tenor and
amount.
(v) In connection with the transfer of an entire Global Note to beneficial
owners pursuant to Section 2.1(h), such Global Note shall be deemed to be
surrendered to the Trustee for cancellation, and the Company shall execute, and
the Trustee shall authenticate and deliver, to each beneficial owner identified
by the DTC in exchange for its beneficial interest in such Global Note, an equal
aggregate principal amount of Definitive Notes of authorized denominations.
(vi) Any Holder of a Global Note shall, by acceptance of such Global Note,
agree that transfers of beneficial interests in such Global Note may be effected
only through a book-entry system maintained by (a) the Holder of such Global
Note (or its agent) or (b) any Holder of a beneficial interest in such Global
Note, and that ownership of a beneficial interest in such Global Note shall be
required to be reflected in a book entry.
(i) Except as provided below, owners of beneficial interests in Global
Notes will not be entitled to receive Definitive Notes. If required to do so
pursuant to any applicable law or regulation, beneficial owners may obtain
Definitive Notes in exchange for their beneficial interests in a Global Note
upon written request in accordance with the DTC's and the Registrar's
procedures. In addition, Definitive Notes shall be transferred to all beneficial
owners in exchange for their beneficial interests in a Global Note if (i) the
DTC notifies the Company that it is unwilling or unable to continue as
depositary for such Global Note or the DTC ceases to be a clearing agency
registered under the Exchange Act, at a time when the DTC is required to be so
registered in order to act as DTC, and in each case a successor depositary is
not appointed by the Company within 90 days of such notice or, (ii) the Company
executes and delivers to the Trustee and Registrar an Officers' Certificate
stating that such Global Note shall be so exchangeable or (iii) an Event of
Default has occurred and is continuing and the Registrar has received a request
from the DTC.
(j) Any Definitive Note delivered in exchange for an interest in a Global
Note pursuant to Section 2.1(h)(iii) or (iv) shall, except as otherwise provided
20
by Section 2.6(b), bear the applicable legend regarding transfer restrictions
applicable to the Definitive Note set forth in Section 2.1(d).
(k) In connection with the exchange of a portion of a Definitive Note for a
beneficial interest in a Global Note, the Trustee shall cancel such Definitive
Note, and the Company shall execute, and the Trustee shall authenticate and
deliver, to the transferring Holder a new Definitive Note representing the
principal amount not so transferred.
SECTION 2.2. Execution and Authentication. Two Officers shall sign the
Notes for the Company by manual or facsimile signature. If an Officer whose
signature is on a Note no longer holds that office at the time the Trustee
authenticates the Note, the Note shall be valid nevertheless.
A Note shall not be valid until an authorized signatory of the Trustee
manually authenticates the Note. The signature of the Trustee on a Note shall be
conclusive evidence that such Note has been duly and validly authenticated and
issued under this Indenture. A Note shall be dated the date of its
authentication.
At any time and from time to time after the execution and delivery of this
Indenture, the Trustee shall authenticate and make available for delivery Notes
for original issue on the Issue Date in an aggregate principal amount of
$1,200,000,000 upon a written order of the Company signed by two Officers or by
an Officer and either an Assistant Treasurer or an Assistant Secretary of the
Company (the "Company Order"). Such Company Order shall specify the amount of
the Notes to be authenticated and the date on which the original issue of Notes
is to be authenticated.
The Trustee may appoint an agent (the "Authenticating Agent") reasonably
acceptable to the Company to authenticate the Notes. Unless limited by the terms
of such appointment, any such Authenticating Agent may authenticate Notes
whenever the Trustee may do so. Each reference in this Indenture to
authentication by the Trustee includes authentication by such agent.
In case the Company pursuant to Article IV shall be consolidated or merged
with or into any other Person or shall convey, transfer, lease or otherwise
dispose of its properties and assets substantially as an entirety to any Person,
and the successor Person resulting from such consolidation, or surviving such
merger, or into which the Company shall have been merged, or the Person which
shall have received a conveyance, transfer, lease or other disposition as
aforesaid, shall have executed an indenture supplemental hereto with the Trustee
pursuant to Article IV, any of the Notes authenticated or delivered prior to
such consolidation, merger, conveyance, transfer, lease or other disposition
may, from time to time, at the request of the successor Person, be exchanged for
other Notes executed in the name of the successor Person with such changes in
phraseology and form as may be appropriate, but otherwise in substance of like
tenor as the Notes surrendered for such exchange and of like principal amount;
and the Trustee, upon Company Order of the successor Person, shall authenticate
and deliver Notes as specified in such order for the purpose of such exchange.
If Notes shall at any time be authenticated and delivered in any new name of a
successor Person pursuant to this Section 2.2 in exchange or substitution for or
21
upon registration of transfer of any Notes, such successor Person, at the option
of the Holders but without expense to them, shall provide for the exchange of
all Notes at the time outstanding for Notes authenticated and delivered in such
new name.
SECTION 2.3. Registrar, Conversion Agent and Paying Agent. The Trustee
shall initially serve as the Registrar, Conversion Agent and Paying Agent for
the Notes. The Company shall cause each of the Registrar, Conversion Agent and
the Paying Agent to maintain an office or agency in the Borough of Manhattan,
the City of New York. The Registrar shall keep a register of the Notes and of
their transfer and exchange (the "Note Register"). The Company may have one or
more co-registrars and one or more additional conversion agents and paying
agents. The term Paying Agent includes any additional paying agent, the term
Conversion Agent includes any additional conversion agent, and the term
Registrar includes any co-registrar.
The Company shall enter into an appropriate agency agreement with any
Registrar, Conversion Agent or Paying Agent not a party to this Indenture, which
shall incorporate the terms of the TIA. The agreement shall implement the
provisions of this Indenture that relate to such agent. The Company shall notify
the Trustee in writing of the name and address of each such agent. If the
Company fails to maintain a Registrar, Conversion Agent or Paying Agent, the
Trustee shall act as such and shall be entitled to appropriate compensation
therefor pursuant to Section 11.7. The Company or any of its domestically
incorporated Wholly Owned Subsidiaries may act as Paying Agent, Conversion
Agent, Registrar or transfer agent.
The Company may remove any Registrar, Conversion Agent or Paying Agent upon
written notice to such Registrar, Conversion Agent or Paying Agent and to the
Trustee; provided, however, that no such removal shall become effective until
(i) acceptance of any appointment by a successor as evidenced by an appropriate
agreement entered into by the Company and such successor Registrar, Conversion
Agent or Paying Agent, as the case may be, and delivered to the Trustee or (ii)
notification to the Trustee that the Trustee shall serve as Registrar,
Conversion Agent or Paying Agent until the appointment of a successor in
accordance with clause (i) above. The Registrar, Conversion Agent or Paying
Agent may resign at any time upon written notice to the Company and the Trustee.
SECTION 2.4. Paying Agent To Hold Money in Trust. On or before the date on
which any principal of or interest on any Note is due and payable, the Company
shall deposit with the Paying Agent a sum sufficient in immediately available
funds to pay such principal or interest when due. The Company shall require each
Paying Agent (other than the Trustee) to agree in writing that such Paying Agent
shall hold in trust for the benefit of Holders or the Trustee all money held by
such Paying Agent for the payment of principal of or interest on the Notes and
shall notify the Trustee in writing of any default by the Company in making any
such payment. If the Company or a Subsidiary acts as Paying Agent, it shall
segregate the money held by it as Paying Agent and hold it as a separate trust
fund. The Company at any time may require a Paying Agent (other than the
Trustee) to pay all money held by it to the Trustee and to account for any funds
disbursed by such Paying Agent. Upon complying with this Section 2.4, the Paying
Agent (if other than the Company or a Subsidiary) shall have no further
liability for the money delivered to the Trustee. Upon any bankruptcy,
reorganization or similar proceeding with respect to the Company, the Trustee
shall serve as Paying Agent for the Notes.
22
SECTION 2.5. Holder Lists. The Trustee shall preserve in as current a form
as is reasonably practicable the most recent list available to it of the names
and addresses of Holders and shall otherwise comply with TIA ss. 312(a). If the
Trustee is not the Registrar or to the extent otherwise required under the TIA,
the Company, on its own behalf, shall furnish to the Trustee, in writing at
least seven Business Days before each interest payment date and at such other
times as the Trustee may request in writing within 15 days, a list in such form
and as of such date as the Trustee may reasonably require of the names and
addresses of Holders and the Company shall otherwise comply with TIA ss. 312(a).
SECTION 2.6. Transfer and Exchange of Notes.
(a) The following provisions shall apply with respect to any proposed
transfer of a Note prior to the date which is two years after the later of the
date of its original issue and the last date on which the Company or any
Affiliate of the Company was the owner of such Notes (or any predecessor
thereto) (the "Resale Restriction Termination Date"):
(i) a transfer of a Note or a beneficial interest therein to a QIB shall be
made upon receipt by the Trustee or its agent of a certificate substantially in
the form of the Form of Certificate to be Delivered Upon Exchange or
Registration of Transfer of Securities set forth on the reverse of the Note from
the proposed transferee that it is purchasing the Note for its own account or an
account with respect to which it exercises sole investment discretion and that
it and any such account is a "qualified institutional buyer" within the meaning
of Rule 144A, and is aware that the sale to it is being made in reliance on Rule
144A and acknowledges that it has received such information regarding the
Company as it has requested pursuant to Rule 144A or has determined not to
request such information and that it is aware that the transferor is relying
upon its foregoing representations in order to claim the exemption from
registration provided by Rule 144A;
(ii) a transfer of a Note or a beneficial interest therein to an IAI shall
be made upon receipt by the Trustee or its agent of a certificate substantially
in the form set forth in Section 2.7 from the proposed transferee and, if
requested by the Company or the Trustee, the delivery of an opinion of counsel,
certification and/or other information satisfactory to each of them; and
(iii) a transfer of a Note or a beneficial interest therein to a Non-U.S.
Person shall be made upon receipt by the Trustee or its agent of a certificate
substantially in the form of the Form of Certificate to be Delivered in
Connection with Transfers Pursuant to Regulation S set forth on the reverse of
the Note from the proposed transferee and, if requested by the Company or the
Trustee, the delivery of an opinion of counsel, certification and/or other
information satisfactory to each of them.
(b) Upon the transfer, exchange or replacement of Notes not bearing a
Restricted Notes Legend, the Registrar shall deliver Notes that do not bear a
Restricted Notes Legend. Upon the transfer, exchange or replacement of Notes
bearing a Restricted Notes Legend, the Registrar shall deliver only Notes that
bear such Restricted Notes Legend unless (i) an Initial Note is being
transferred pursuant to an effective registration statement or (ii) there is
delivered to the Registrar an Opinion of Counsel to the effect that neither such
23
legend nor the related restrictions on transfer are required in order to
maintain compliance with the provisions of the Securities Act.
(c) The Registrar shall retain copies of all letters, notices and other
written communications received pursuant to Section 2.1 or this Section 2.6. The
Company shall have the right to inspect and make copies of all such letters,
notices or other written communications at any reasonable time upon the giving
of reasonable written notice to the Registrar.
(d) The following obligations with respect to transfers and exchanges of
Notes shall apply:
(i) To permit registrations of transfers and exchanges, the Company shall,
subject to the other terms and conditions of this Article II, execute and the
Trustee shall authenticate Definitive Notes and Global Notes at the Registrar's
request.
(ii) No service charge shall be made to a Holder for any registration of
transfer or exchange, but the Company may require payment of a sum sufficient to
cover any transfer tax, assessments, or similar governmental charge payable in
connection therewith (other than any such transfer taxes, assessments or similar
governmental charges payable upon exchange or transfer pursuant to Section
13.5).
(iii) The Registrar shall not be required to register the transfer of or
exchange of any Note for a period beginning (1) 15 Business Days before the
mailing of a notice of an offer to repurchase Notes and ending at the close of
business on the day of such mailing or (2) 15 Business Days before an interest
payment date and ending on such interest payment date.
(iv) Prior to the due presentation for registration of transfer of any
Note, the Company, the Trustee, Paying Agent, the Conversion Agent or the
Registrar may deem and treat the person in whose name a Note is registered as
the absolute owner of such Note for the purpose of receiving payment of
principal of and interest on such Note and for all other purposes whatsoever,
whether or not such Note is overdue, and none of the Company, the Trustee, the
Paying Agent, the Conversion Agent or the Registrar shall be affected by notice
to the contrary.
(v) All Notes issued upon any transfer or exchange pursuant to the terms of
this Indenture shall evidence the same debt and shall be entitled to the same
benefits under this Indenture as the Notes surrendered upon such transfer or
exchange.
(e) The following provisions shall apply with respect to Trustee
obligations:
(i) The Trustee shall have no responsibility or obligation to any
beneficial owner of a Global Note, a member of, or a participant in, the DTC or
other Person with respect to the accuracy of the records of the DTC or its
nominee or of any participant or member thereof, with respect to any ownership
interest in the Notes or with respect to the delivery to any participant,
member, beneficial owner or other Person (other than the DTC) of any notice or
the payment of any amount or delivery of any Notes (or other security or
property) under or with respect to such Notes. All notices and communications to
24
be given to the Holders and all payments to be made to Holders in respect of the
Notes shall be given or made only to or upon the order of the registered Holders
(which shall be the DTC or its nominee in the case of a Global Note). The rights
of beneficial owners in any Global Note shall be exercised only through the DTC
subject to the applicable rules and procedures of the DTC. The Trustee may rely
and shall be fully protected in relying upon information furnished by the DTC
with respect to its members, participants and any beneficial owners.
(ii) The Trustee shall have no obligation or duty to monitor, determine or
inquire as to compliance with any restrictions on transfer imposed under this
Indenture or under applicable law with respect to any transfer of any interest
in any Note (including any transfers between or among DTC participants, members
or beneficial owners in any Global Note) other than to require delivery of such
certificates and other documentation or evidence as are expressly required by,
and to do so if and when expressly required by, the terms of this Indenture, and
to examine the same to determine substantial compliance as to form with the
express requirements hereof.
SECTION 2.7. Form of Certificate to be Delivered in Connection with
Transfers to Institutional Accredited Investors.
[Date]
Halliburton Company
c/o JPMorgan Chase Bank
600 Travis, Suite 1150
Houston, Texas 77002
Attention: Institutional Trust Services
Ladies and Gentlemen:
This certificate is delivered to request a transfer of $__________
principal amount of the 3?% Convertible Senior Notes due July 15, 2023 (the
"Notes") of Halliburton Company (the "Company").
Upon transfer, the Notes would be registered in the name of the new
beneficial owner as follows:
Name:
--------------------------------------------------------
Address:
-----------------------------------------------------
Taxpayer ID Number:
------------------------------------------
The undersigned represents and warrants to you that:
1. We are an institutional accredited investor (as defined in Rule
501(a)(1), (2), (3) or (7) under the Securities Act of 1933, as amended (the
"Securities Act")) purchasing for our own account or for the account of such an
institutional accredited investor at least $250,000 principal amount of the
25
Notes, and we are acquiring the Notes not with a view to, or for offer or sale
in connection with, any distribution in violation of the Securities Act. We have
such knowledge and experience in financial and business matters as to be capable
of evaluating the merits and risk of our investment in the Notes and we invest
in or purchase securities similar to the Notes in the normal course of our
business. We and any accounts for which we are acting are each able to bear the
economic risk of our or its investment.
2. We understand that the Notes have not been registered under the
Securities Act and, unless so registered, may not be sold except as permitted in
the following sentence. We agree on our own behalf and on behalf of any investor
account for which we are purchasing Notes to offer, sell or otherwise transfer
such Notes prior to the date that is two years after the later of the date of
original issue and the last date on which the Company or any affiliate of the
Company was the owner of such Notes (or any predecessor thereto) (the "Resale
Restriction Termination Date") only (a) to the Company, (b) pursuant to a
registration statement which has been declared effective under the Securities
Act, (c) in a transaction complying with the requirements of Rule 144A under the
Securities Act ("Rule 144A"), to a person we reasonably believe is a qualified
institutional buyer under Rule 144A (a "QIB") that purchases for its own account
or for the account of a QIB and to whom notice is given that the transfer is
being made in reliance on Rule 144A, (d) pursuant to offers and sales that occur
outside the United States within the meaning of Regulation S under the
Securities Act, (e) to an institutional accredited investor within the meaning
of Rule 501(a)(1), (2), (3) or (7) under the Securities Act that is purchasing
for its own account or for the account of such an institutional accredited
investor, in each case in a minimum principal amount of Notes of $250,000 or (f)
pursuant to any other available exemption from the registration requirements of
the Securities Act, subject in each of the foregoing cases to any requirement of
law that the disposition of our property or the property of such investor
account or accounts be at all times within our or their control and in
compliance with any applicable state securities laws. The foregoing restrictions
on resale will not apply subsequent to the Resale Restriction Termination Date.
If any resale or other transfer of the Notes is proposed to be made pursuant to
clause (e) above prior to the Resale Restriction Termination Date, the
transferor shall deliver a letter from the transferee substantially in the form
of this letter to the Company and the Trustee, which shall provide, among other
things, that the transferee is an institutional accredited investor (within the
meaning of Rule 501(a)(1), (2), (3) or (7) under the Securities Act) and that it
is acquiring such Notes for investment purposes and not for distribution in
violation of the Securities Act. Each purchaser acknowledges that the Company
and the Trustee reserve the right prior to any offer, sale or other transfer
prior to the Resale Termination Date of the Notes pursuant to clause (d), (e) or
(f) above to require the delivery of an opinion of counsel, certifications
and/or other information satisfactory to the Company and the Trustee.
TRANSFEREE:
----------------------------------
BY
-------------------------------------------
SECTION 2.8. Mutilated, Destroyed, Lost or Stolen Notes. If a mutilated
Note is surrendered to the Registrar or if the Holder of a Note claims that the
Note has been lost, destroyed or wrongfully taken, the Company shall issue and
the Trustee, upon Company Order, shall authenticate a replacement Note if the
26
requirements of Section 8-405 of the Uniform Commercial Code are met such that
the Holder (a) notifies the Company and the Trustee within a reasonable time
after such Holder has notice of such loss, destruction or wrongful taking and
the Registrar has not registered a transfer prior to receiving such
notification, (b) makes such request to the Company prior to the Company having
notice that the Note has been acquired by a protected purchaser as defined in
Section 8-303 of the Uniform Commercial Code (a "protected purchaser") and (c)
satisfies any other reasonable requirements of the Company and the Trustee. Such
Holder shall furnish an indemnity bond sufficient in the judgment of the Company
and the Trustee to protect the Company, the Trustee, the Paying Agent, the
Conversion Agent and the Registrar from any loss which any of them may suffer if
a Note is replaced, then, in the absence of notice to the Company, or the
Trustee that such Note has been acquired by a protected purchaser, the Company
shall execute and upon Company Order the Trustee shall authenticate and deliver,
in exchange for any such mutilated Note or in lieu of any such destroyed, lost
or stolen Note, a new Note of like tenor and principal amount, bearing a number
not contemporaneously outstanding.
In case any such mutilated, destroyed, lost or stolen Note has become or is
about to become due and payable, the Company in its discretion may, instead of
issuing a new Note, pay such Note.
Upon the issuance of any new Note under this Section 2.8, the Company may
require the payment of a sum sufficient to cover any tax or other governmental
charge that may be imposed in relation thereto and any other expenses (including
the fees and expenses of the Trustee) in connection therewith.
Every new Note issued pursuant to this Section 2.8 in lieu of any
mutilated, destroyed, lost or stolen Note shall constitute an original
additional contractual obligation of the Company and any other obligor upon the
Notes, whether or not the mutilated, destroyed, lost or stolen Note shall be at
any time enforceable by anyone, and shall be entitled to all benefits of this
Indenture equally and proportionately with any and all other Notes duly issued
hereunder.
The provisions of this Section 2.8 are exclusive and shall preclude (to the
extent lawful) all other rights and remedies with respect to the replacement or
payment of mutilated, destroyed, lost or stolen Notes.
SECTION 2.9. Outstanding Notes. Notes outstanding at any time are all Notes
authenticated by the Trustee except for those canceled by it, those paid
pursuant to Section 2.8, those delivered to it for cancellation and those
described in this Section 2.9 as not outstanding. A Note does not cease to be
outstanding in the event the Company or an Affiliate of the Company holds the
Note except that the Company or an Affiliate of the Company shall not obtain
voting rights with respect to such Note.
If a Note is replaced pursuant to Section 2.8, it ceases to be outstanding
unless the Trustee and the Company receive proof satisfactory to them that the
replaced Note is held by a bona fide purchaser.
27
If the Paying Agent segregates and holds in trust, in accordance with this
Indenture, on a maturity date money sufficient to pay all principal and interest
payable on that date with respect to the Notes maturing and the Paying Agent is
not prohibited from paying such money to the Holders on that date pursuant to
the terms of this Indenture, then on and after that date such Notes cease to be
outstanding and interest on them ceases to accrue.
SECTION 2.10. Temporary Notes. In the event that Definitive Notes are to be
issued under the terms of this Indenture, until such Definitive Notes are ready
for delivery, the Company may prepare and the Trustee shall authenticate
temporary Notes. Temporary Notes shall be substantially in the form of
Definitive Notes but may have variations that the Company considers appropriate
for temporary Notes. Without unreasonable delay, the Company shall prepare and
the Trustee shall authenticate Definitive Notes. After the preparation of
Definitive Notes, the temporary Notes shall be exchangeable for Definitive Notes
upon surrender of the temporary Notes at any office or agency maintained by the
Company for that purpose and such exchange shall be without charge to the
Holder. Upon surrender for cancellation of any one or more temporary Notes, the
Company shall execute, and the Trustee shall authenticate and make available for
delivery in exchange therefore, one or more Definitive Notes representing an
equal principal amount of Notes. Until so exchanged, the Holder of temporary
Notes shall in all respects be entitled to the same benefits under this
Indenture as a Holder of Definitive Notes.
SECTION 2.11. Cancellation. The Company at any time may deliver Notes to
the Trustee for cancellation. The Registrar and the Paying Agent shall forward
to the Trustee any Notes surrendered to them for registration of transfer,
exchange or payment. The Trustee and no one else shall cancel and return to the
Company all Notes surrendered for registration of transfer, exchange, payment or
cancellation. The Company may not issue new Notes to replace Notes it has paid
or delivered to the Trustee for cancellation.
At such time as all beneficial interests in a Global Note have either been
exchanged for Definitive Notes, transferred, redeemed, repurchased or canceled,
such Global Note shall be returned by the DTC to the Trustee for cancellation or
retained and canceled by the Trustee. At any time prior to such cancellation, if
any beneficial interest in a Global Note is exchanged for Definitive Notes,
transferred in exchange for an interest in another Global Note, redeemed,
repurchased or canceled, the principal amount of Notes represented by such
Global Note shall be reduced and an adjustment shall be made on the Global Note
and on the books and records of the Trustee (if it is then the "Notes Custodian"
for such Global Note) with respect to such Global Note, by the Trustee or the
Notes Custodian, to reflect such reduction.
SECTION 2.12. Payment of Interest; Defaulted Interest. Interest on any Note
which is payable, and is punctually paid or duly provided for, on any Interest
Payment Date shall be paid to the Person in whose name such Note (or one or more
predecessor Notes) is registered at the close of business on the regular record
date for such interest at the office or agency of the Company maintained for
such purpose pursuant to Section 2.3.
Any interest on any Note which is payable, but is not paid when the same
becomes due and payable and such nonpayment continues for a period of 30 days
shall forthwith cease to be payable to the Holder on the regular record date by
virtue of having been such Holder, and such defaulted interest and (to the
28
extent lawful) interest on such defaulted interest at the rate borne by the
Notes (such defaulted interest and interest thereon herein collectively called
"Defaulted Interest") shall be paid by the Company, at its election in each
case, as provided in clause (a) or (b) below:
(a) The Company may elect to make payment of any Defaulted Interest to the
Persons in whose names the Notes (or their respective predecessor Notes) are
registered at the close of business on a Special Record Date (as defined below)
for the payment of such Defaulted Interest, which shall be fixed in the
following manner. The Company shall notify the Trustee in writing of the amount
of Defaulted Interest proposed to be paid on each Note and the date (not less
than 30 days after such notice) of the proposed payment (the "Special Interest
Payment Date"), and at the same time the Company shall deposit with the Trustee
an amount of money equal to the aggregate amount proposed to be paid in respect
of such Defaulted Interest or shall make arrangements satisfactory to the
Trustee for such deposit prior to the date of the proposed payment, such money
when deposited to be held in trust for the benefit of the Persons entitled to
such Defaulted Interest as in this clause provided. Thereupon the Trustee shall
fix a record date (the "Special Record Date") for the payment of such Defaulted
Interest which shall be not more than 15 days and not less than 10 days prior to
the Special Interest Payment Date and not less than 10 days after the receipt by
the Trustee of the notice of the proposed payment. The Trustee shall promptly
notify the Company of such Special Record Date, and in the name and at the
expense of the Company, shall cause notice of the proposed payment of such
Defaulted Interest and the Special Record Date and Special Interest Payment Date
therefor to be given in the manner provided for in Section 14.2, not less than
10 days prior to such Special Record Date. Notice of the proposed payment of
such Defaulted Interest and the Special Record Date and Special Interest Payment
Date therefor having been so given, such Defaulted Interest shall be paid on the
Special Interest Payment Date to the Persons in whose names the Notes (or their
respective Predecessor Notes) are registered at the close of business on such
Special Record Date and shall no longer be payable pursuant to the following
clause (b).
(b) The Company may make payment of any Defaulted Interest in any other
lawful manner not inconsistent with the requirements of any securities exchange
on which the Notes may be listed, and upon such notice as may be required by
such exchange, if, after notice given by the Company to the Trustee of the
proposed payment pursuant to this clause, such manner of payment shall be deemed
practicable by the Trustee.
Subject to the foregoing provisions of this Section 2.12, each Note
delivered under this Indenture upon registration of transfer of or in exchange
for or in lieu of any other Note shall carry the rights to interest accrued and
unpaid, and to accrue, which were carried by such other Note.
SECTION 2.13. Computation of Interest. Interest on the Notes shall be
computed on the basis of a 360-day year of twelve 30-day months.
SECTION 2.14. CUSIP Numbers. The Company in issuing the Notes and Common
Stock upon conversion of the Notes may use CUSIP numbers (if then generally in
29
use). The Trustee shall not be responsible for the use of CUSIP numbers, and the
Trustee makes no representation as to their correctness as printed on any Note,
certificate of Common Stock or notice to Holders and that reliance may be placed
only on the other identification numbers printed on the Notes, and any
redemption shall not be affected by any defect in or omission of such CUSIP
numbers. The Company shall promptly notify the Trustee in writing of any change
in the CUSIP numbers.
SECTION 2.15. Issuance, Transfer and Exchange of Common Stock Issuable Upon
Conversion of the Notes.
(a) Shares of Common Stock to be issued upon conversion of Notes prior to
the effectiveness of a Shelf Registration Statement shall be physically
delivered in certificated form to the Holders converting such Notes and the
certificate representing such shares of Common Stock shall bear the Restricted
Stock Legend unless removed in accordance with Section 2.1(e).
(b) If (i) shares of Common Stock to be issued upon conversion of Notes
prior to the effectiveness of a Shelf Registration Statement are to be
registered in a name other than that of the Holder of such Notes or (ii) shares
of Common Stock represented by a certificate bearing the Restricted Stock Legend
are transferred subsequently by such Holder, then, unless the Shelf Registration
Statement has become effective and such shares are being transferred pursuant to
the Shelf Registration Statement, the Holder must deliver to the transfer agent
for the Common Stock and to the Company a certificate in substantially the form
of Exhibit B as to compliance with the restrictions on transfer applicable to
such shares of Common Stock and neither the transfer agent nor the registrar for
the Common Stock shall be required to register any transfer of such Common Stock
not so accompanied by a properly completed certificate.
(c) Except in connection with a Shelf Registration Statement, if
certificates representing shares of Common Stock are issued upon the
registration of transfer, exchange or replacement of any other certificate
representing shares of Common Stock bearing the Restricted Stock Legend, or if a
request is made to remove such Restricted Stock Legend from certificates
representing shares of Common Stock, the certificates so issued shall bear the
Restricted Stock Legend, or the Restricted Stock Legend shall not be removed, as
the case may be, unless there is delivered to the Company such reasonably
satisfactory evidence, which, in the case of a transfer made pursuant to Rule
144 under the Securities Act, may include an opinion of counsel, as may be
reasonably required by the Company, that neither the legend nor the restrictions
on transfer set forth therein are required to ensure that transfers thereof
comply with the provisions of Rule 144A, Rule 144 under the Securities Act or
Regulation S and that such shares of Common Stock are securities that are not
"restricted" within the meaning of Rule 144 under the Securities Act. Upon
provision to the Company of such reasonably satisfactory evidence, the Company
shall cause the transfer agent for the Common Stock to countersign and deliver
certificates representing shares of Common Stock that do not bear the legend.
SECTION 2.16. Bid Solicitation Agent. The Trustee shall initially serve as
the bid solicitation agent (the "Bid Solicitation Agent") for purposes of
obtaining secondary market bid quotations for determining the trading prices of
the Notes. The Company may change the Bid Solicitation Agent at any time;
provided, however, the Bid Solicitation Agent shall not be an Affiliate of the
30
Company. The Bid Solicitation Agent shall solicit bids from nationally
recognized securities dealers that are believed by the Company to be willing to
bid for the Notes.
ARTICLE III
Covenants
---------
SECTION 3.1. Payment of Notes. The Company shall promptly pay the principal
of and interest on the Notes on the dates and in the manner provided in the
Notes and in this Indenture. Principal and interest shall be considered paid on
the date due if on such date the Trustee or the Paying Agent holds in accordance
with this Indenture money sufficient to pay all principal and interest then due
and the Trustee or the Paying Agent, as the case may be, is not prohibited from
paying such money to the Holders on that date pursuant to the terms of this
Indenture.
The Company shall pay interest on overdue principal at the rate specified
therefor in the Notes, and it shall pay interest on overdue installments of
interest at the same rate to the extent lawful.
Notwithstanding anything to the contrary contained in this Indenture, the
Company may, to the extent it is required to do so by law, deduct or withhold
income or other similar taxes imposed by the United States of America from
principal or interest payments hereunder.
SECTION 3.2. Restriction on Creation of Secured Debt. So long as any of the
Notes are outstanding, the Company shall not at any time create, incur, assume
or guarantee, and shall not cause, suffer or permit a Restricted Subsidiary to
create, incur, assume or guarantee, any Secured Debt without making effective
provision (and the Company covenants that in such case it will make or cause to
be made such effective provision) whereby the Notes then outstanding and any
other indebtedness of or guaranteed by the Company or such Restricted Subsidiary
then entitled thereto, subject to applicable priorities of payment, shall be
secured by such mortgage, security interest, pledge, lien or encumbrance equally
and ratably with any and all other obligations and indebtedness thereby secured,
so long as any such other obligations and indebtedness shall be so secured;
provided, however, that the foregoing covenants shall not be applicable to the
following:
(a) Any mortgage, security interest, pledge, lien or encumbrance on any
property hereafter acquired (including acquisition through merger or
consolidation) or constructed by the Company or a Restricted Subsidiary and
created contemporaneously with, or within twelve months after, such acquisition
or the completion of construction to secure or provide for the payment of all or
any part of the purchase price of such property or the cost of construction
thereof, as the case may be; or (ii) any mortgage on property (including any
unimproved portion of partially improved property) of the Company or a
Restricted Subsidiary created within twelve months of completion of construction
of a new plant or plants on such property to secure all or part of the cost of
such construction if, in the opinion of the Board of Directors, such property or
31
such portion thereof was prior to such construction substantially unimproved for
the use intended by the Company; or (iii) the acquisition of property subject to
any mortgage, security interest, pledge, lien or encumbrance upon such property
existing at the time of acquisition thereof, whether or not assumed by the
Company or such Restricted Subsidiary; or (iv) any mortgage, security interest,
pledge, lien or encumbrance existing on the property or on the outstanding
shares or indebtedness of a corporation at the time such corporation shall
become a Restricted Subsidiary; or (v) any mortgage, security interest, pledge,
lien or encumbrance on property of a corporation existing at the time such
corporation is merged into or consolidated with the Company or a Restricted
Subsidiary or at the time of a sale, lease or other disposition of the
properties of a corporation or firm as an entirety or substantially as an
entirety to the Company or a Restricted Subsidiary; or
(b) Mortgages on property of the Company or a Restricted Subsidiary in
favor of the United States of America or any State thereof or any foreign
government, or any department, agency or instrumentality or political
subdivision of any thereof, to secure partial progress, advance or other
payments pursuant to any contract or statute or to secure any indebtedness
incurred for the purpose of financing all or any part of the purchase price or
the cost of construction of the property subject to such mortgages; or
(c) Any extension, renewal or replacement (or successive extensions,
renewals or replacements) in whole or in part of any mortgage, security interest
pledge, lien or encumbrance referred to in the foregoing subparagraphs (a) and
(b); provided, however, that the principal amount of Secured Debt secured
thereby shall not exceed the principal amount outstanding at the time of such
extension, renewal or replacement, and that such extension, renewal or
replacement shall be limited to the property which secured the mortgage,
security interest, pledge, lien or encumbrance so extended, renewed or replaced
and additions to such property.
Notwithstanding the foregoing provisions of this Section 3.2 the Company
and any one or more Restricted Subsidiaries may create, incur, assume or
guarantee Secured Debt which would otherwise be subject to the foregoing
restrictions in an aggregate amount which, together with all other Secured Debt
of the Company and its Restricted Subsidiaries which would otherwise be subject
to the foregoing restrictions (not including Secured Debt permitted to be
secured under subparagraphs (a) through (c) above) and the aggregate value of
the Sale and Leaseback Transactions in existence at such time (not including
Sale and Leaseback Transactions the proceeds of which have been or will be
applied in accordance with clause (b) of Section 3.3), does not at the time
exceed 5% of Consolidated Net Tangible Assets.
SECTION 3.3. Restriction on Sale and Leaseback Transactions. The Company
will not, and will not permit any Restricted Subsidiary to, sell or transfer
(except to the Company or to one or more Restricted Subsidiaries, or both) any
Principal Property owned by it and which has been in full operation for more
than 120 days prior to such sale or transfer with the intention (i) of taking
back a lease on such property, except a lease for a temporary period (not
exceeding 36 months), and (ii) that the use by the Company or such Restricted
Subsidiary of such property will be discontinued on or before the expiration of
the term of such lease (any such transaction being herein referred to as a "Sale
and Leaseback Transaction"), unless (a) the Company or such Restricted
Subsidiary would be entitled, pursuant to the provisions of Section 3.2, to
32
incur Secured Debt equal in amount to the amount realized or to be realized upon
such sale or transfer secured by a mortgage on the property to be leased without
equally and ratably securing the Notes, or (b) the Company or a Restricted
Subsidiary shall apply an amount equal to the value of the property so leased to
the retirement (other than any mandatory retirement), within 120 days of the
effective date of any such arrangement, of indebtedness for money borrowed by
the Company or any Restricted Subsidiary (other than such indebtedness owned by
the Company or any Restricted Subsidiary) which was recorded as funded debt as
of the date of its creation and which, in the case of such indebtedness of the
Company, is not subordinate and junior in right of payment to the prior payment
of the Notes; provided, however, that the amount to be so applied to the
retirement of such indebtedness shall be reduced by (i) the aggregate principal
amount of any Notes delivered within 120 days of the effective date of any such
arrangement to the Trustee for retirement and cancellation, and (ii) the
aggregate principal amount of such indebtedness (other than the Notes) retired
by the Company or a Restricted Subsidiary within 120 days of the effective date
of any such arrangement.
The term "value" shall mean, with respect to a Sale and Leaseback
Transaction, as of any particular time, the amount equal to the greater of (i)
the net proceeds of the sale of the property leased pursuant to such Sale and
Leaseback Transaction, or (ii) the fair value of such property at the time of
entering into such Sale and Leaseback Transaction, as determined by the Board of
Directors, in either case divided first by the number of full years of the term
of the lease and then multiplied by the number of full years of such term
remaining at the time of determination, without regard to any renewal or
extension options contained in the lease.
SECTION 3.4. Restriction on Transfer of Principal Property to Unrestricted
Subsidiary. The Company will not itself, and will not permit any Restricted
Subsidiary to transfer (whether by merger, consolidation or otherwise) any
Principal Property to any Unrestricted Subsidiary, except for fair value as
determined by the Board of Directors, unless it shall apply an amount equal to
the fair value of such property at the time of such transfer, as so determined,
to the retirement (other than any mandatory retirement), within 120 days of the
effective date of such transfer, of indebtedness for money borrowed by the
Company or any Restricted Subsidiary (other than such indebtedness owned by the
Company or any Restricted Subsidiary) which was recorded as funded debt as of
the date of its creation and which, in case of such indebtedness of the Company,
is not subordinate and junior in right of payment to the prior payment of the
Notes; provided, however, that the amount to be so applied to the retirement of
such indebtedness shall be reduced by (i) the aggregate principal amount of any
Notes delivered within 120 days of the effective date of any such arrangement to
the Trustee for retirement and cancellation, and (ii) the aggregate principal
amount of such indebtedness (other than Notes) retired by the Company or a
Restricted Subsidiary within 120 days of the effective date of any such
arrangement.
SECTION 3.5. Maintenance of Office or Agency. The Company will maintain in
the City of New York, an office or agency where the Notes may be presented or
surrendered for payment, where, if applicable, the Notes may be surrendered for
registration of transfer or exchange and where notices and demands to or upon
the Company in respect of the Notes and this Indenture may be served. The office
of the Trustee, at 4 New York Plaza, 15th Floor, New York, New York 10004,
Attention: Institutional Trust Services, shall be such office or agency of the
Company for payment, unless the Company shall designate and maintain some other
33
office or agency for one or more of such purposes. The Company will give prompt
written notice to the Trustee of any change in the location of any such office
or agency. If at any time the Company shall fail to maintain any such required
office or agency or shall fail to furnish the Trustee with the address thereof,
such presentations, surrenders, notices and demands may be made or served at the
Corporate Trust Office of the Trustee, and the Company hereby appoints the
Trustee as its agent to receive all such presentations, surrenders, notices and
demands.
The Company may also from time to time designate one or more other offices
or agencies (in or outside of the City of New York) where the Notes may be
presented or surrendered for any or all such purposes and may from time to time
rescind any such designation; provided, however, that no such designation or
rescission shall in any manner relieve the Company of its obligation to maintain
an office or agency in the City of New York for such purposes. The Company will
give prompt written notice to the Trustee of any such designation or rescission
and any change in the location of any such other office or agency.
SECTION 3.6. Money for Note Payments to Be Held in Trust. If the Company
shall at any time act as its own Paying Agent, it will, on or before each due
date of the principal of (or Additional Amounts, if any) or interest on any of
the Notes, segregate and hold in trust for the benefit of the Persons entitled
thereto a sum sufficient to pay the principal of (or Additional Amounts, if any)
or interest so becoming due until such sums shall be paid to such Persons or
otherwise disposed of as herein provided and will promptly notify the Trustee in
writing of its action or failure to so act.
Whenever the Company shall have one or more Paying Agents for the Notes, it
will, on or before each due date of the principal of (or Additional Amounts, if
any) or interest on any Notes, deposit with any Paying Agent a sum in same day
funds (or New York Clearing House funds if such deposit is made prior to the
date on which such deposit is required to be made) that shall be available to
the Trustee by 10:00 a.m. New York City time on such due date sufficient to pay
the principal (or Additional Amounts, if any) or interest so becoming due, such
sum to be held in trust for the benefit of the Persons entitled to such
principal, Additional Amounts or interest, and (unless such Paying Agent is the
Trustee) the Company will promptly notify the Trustee in writing of such action
or any failure to so act.
The Company will cause each Paying Agent (other than the Trustee) to
execute and deliver to the Trustee an instrument in which such Paying Agent
shall agree with the Trustee, subject to the provisions of this Section 3.6,
that such Paying Agent will:
(a) hold all sums held by it for the payment of the principal of (and
Additional Amounts, if any) or interest on Notes in trust for the benefit of the
Persons entitled thereto until such sums shall be paid to such Persons or
otherwise disposed of as herein provided;
(b) give the Trustee prompt written notice of any default by the Company
(or any other obligor upon the Notes) in the making of any payment of principal
(and Additional Amounts, if any) or interest; and
34
(c) at any time during the continuance of any such default, upon the
written request of the Trustee, forthwith pay to the Trustee all sums so held in
trust by such Paying Agent.
The Company may at any time, for the purpose of obtaining the satisfaction
and discharge of this Indenture or for any other purpose, pay, or by Company
Order direct any Paying Agent to pay, to the Trustee all sums held in trust by
the Company or such Paying Agent, such sums to be held by the Trustee upon the
same trusts as those upon which such sums were held by the Company or such
Paying Agent; and, upon such payment by any Paying Agent to the Trustee, such
Paying Agent shall be released from all further liability with respect to such
sums.
Any money deposited with the Trustee or any Paying Agent, or then held by
the Company, in trust for the payment of the principal of (or Additional
Amounts, if any) or interest on any Note and remaining unclaimed for two years
after such principal, Additional Amounts or interest has become due and payable
shall be paid to the Company on Company Order, or (if then held by the Company)
shall be discharged from such trust; and the Holder of such Note shall
thereafter, as an unsecured general creditor, look only to the Company for
payment thereof, and all liability of the Trustee or such Paying Agent with
respect to such trust money, and all liability of the Company as trustee
thereof, shall thereupon cease; provided, however, that the Trustee or such
Paying Agent, before being required to make any such repayment to the Company,
shall at the expense of the Company cause to be published once, in a leading
daily newspaper (if practicable, The Wall Street Journal (Eastern Edition))
printed in the English language and of general circulation in New York City,
notice that such money remains unclaimed and that, after a date specified
therein, which shall not be less than 30 days from the date of such publication
nor shall it be later than two years after such principal (or Additional
Amounts, if any) or interest shall have become due and payable, any unclaimed
balance of such money then remaining will be repaid to the Company.
SECTION 3.7. Corporate Existence. Subject to Article IV, the Company will
do or cause to be done all things necessary to preserve and keep in full force
and effect its corporate existence and the corporate rights (charter and
statutory) licenses and franchises of the Company; provided, however, that the
Company shall not be required to preserve any such existence, right, license or
franchise if the Company shall determine that the preservation thereof is no
longer desirable in the conduct of the business of the Company and each of its
Subsidiaries, taken as a whole, and that the loss thereof is not, and will not
be, disadvantageous in any material respect to the Holders.
SECTION 3.8. Payment of Taxes and Other Claims. The Company will pay or
discharge or cause to be paid or discharged, before the same shall become
delinquent, (i) all material taxes, assessments and governmental charges levied
or imposed upon the Company or any Subsidiary or upon the income, profits or
property of the Company or any Subsidiary and (ii) all lawful claims for labor,
materials and supplies, which, if unpaid, might by law become a material
liability or lien upon the property of the Company or any Subsidiary; provided,
however, that the Company shall not be required to pay or discharge or cause to
be paid or discharged any such tax, assessment, charge or claim whose amount,
applicability or validity is being contested in good faith by appropriate
35
proceedings and for which appropriate reserves, if necessary (in the good faith
judgment of management of the Company) are being maintained in accordance with
GAAP.
SECTION 3.9. Further Instruments and Acts. Upon request of the Trustee, the
Company will execute and deliver such further instruments and do such further
acts as may be reasonably necessary or proper to carry out more effectively the
purpose of this Indenture.
SECTION 3.10. Additional Amounts Notices. In the event that the Company is
required to pay penalty interest to Holders of Notes pursuant to the
Registration Rights Agreement ("Additional Amounts"), the Company will provide
written notice ("Additional Amounts Notice") to the Trustee of its obligation to
pay Additional Amounts no later than five Business Days prior to the proposed
payment date set for the amount of Additional Amounts, and the Additional
Amounts Notice shall set forth the amount of Additional Amounts to be paid by
the Company on such Payment Date. The Trustee shall not at any time be under any
duty or responsibility to any holder of Notes to determine the Additional
Amounts, or with respect to the nature, extent, or calculation of the amount of
Additional Amounts when made, or with respect to the method employed in such
calculation of the Additional Amounts.
ARTICLE IV
Successor Company
-----------------
SECTION 4.1. Merger and Consolidation. The Company will not consolidate
with or merge with or into, or convey, transfer or lease all or substantially
all its assets to, any Person, unless:
(i) the resulting, surviving or transferee Person (the "Successor Company")
will be a corporation, partnership, trust or limited liability company organized
and existing under the laws of the United States of America, any State of the
United States or the District of Columbia and the Successor Company (if not the
Company) will expressly assume, by supplemental indenture, executed and
delivered to the Trustee, in form satisfactory to the Trustee, all the
obligations of the Company under the Notes and the Indenture; provided that if
the Successor Company is not a corporation, then a co-issuer of the Notes shall
be created that is a corporation and organized and existing under the laws of
the United States of America, any State of the United States or the District of
Columbia;
(ii) immediately after giving effect to such transaction (and treating any
Indebtedness that becomes an obligation of the Successor Company or any
Restricted Subsidiary of the Successor Company as a result of such transaction
as having been incurred by the Successor Company or such Restricted Subsidiary
at the time of such transaction), no Default or Event of Default shall have
occurred and be continuing; and
(iii) the Company shall have delivered to the Trustee an Officers'
Certificate and an Opinion of Counsel, each stating that such consolidation,
merger or transfer and such supplemental indenture (if any) comply with this
Indenture.
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For purposes of this Article IV, the sale, lease, conveyance, assignment,
transfer, or other disposition of all or substantially all of the properties and
assets of one or more Subsidiaries of the Company, which properties and assets,
if held by the Company instead of such Subsidiaries, would constitute all or
substantially all of the properties and assets of the Company on a consolidated
basis, shall be deemed to be the transfer of all or substantially all of the
properties and assets of the Company.
The Successor Company will succeed to, and be substituted for, and may
exercise every right and power of, the Company under this Indenture, but, in the
case of a lease of all or substantially all its assets, the predecessor Company
will not be released from the obligation to pay the principal of and interest on
the Notes.
Notwithstanding the preceding clause (ii), (1) any Restricted Subsidiary of
the Company may consolidate with, merge into or transfer all or part of its
properties and assets to the Company and (2) the Company may merge with an
Affiliate incorporated solely for the purpose of reincorporating the Company in
another jurisdiction so long as the amount of Indebtedness of the Company and
its Restricted Subsidiaries is not increased thereby.
ARTICLE V
Redemption of Notes
-------------------
SECTION 5.1. Optional Redemption. On or after July 15, 2008, the Notes may
be redeemed for cash, as a whole or from time to time in part, subject to the
conditions specified in the form of Note set forth in Exhibit A for the
Redemption Price.
SECTION 5.2. Applicability of Article. Redemption of Notes at the election
of the Company or otherwise, as permitted or required by any provision of this
Indenture, shall be made in accordance with such provision and this Article.
SECTION 5.3. Election to Redeem; Notice to Trustee. The election of the
Company to redeem any Notes pursuant to Section 5.1 shall be evidenced by a
Board Resolution. In case of any redemption at the election of the Company, the
Company shall, upon not later than the earlier of the date that is 45 days prior
to the Redemption Date fixed by the Company or the date on which notice is given
to the Holders (except as provided in Section 5.5 or unless a shorter notice
shall be satisfactory to the Trustee), notify the Trustee of such Redemption
Date and of the principal amount of Notes to be redeemed and shall deliver to
the Trustee such documentation and records as shall enable the Trustee to select
the Notes to be redeemed pursuant to Section 5.4. Any such notice may be
canceled at any time prior to notice of such redemption being mailed to any
Holder and shall thereby be void and of no effect.
SECTION 5.4. Selection by Trustee of Notes to Be Redeemed. If less than all
the Notes are to be redeemed at any time pursuant to an optional redemption, the
particular Notes to be redeemed shall be selected not more than 45 days prior to
the Redemption Date by the Trustee, from the outstanding Notes not previously
called for redemption, in compliance with the requirements of the principal
securities exchange, if any, on which such Notes are listed, or, if such Notes
37
are not so listed, on a pro rata basis among the classes of Notes, by lot or by
such other method as the Trustee shall deem fair and appropriate (and in such
manner as complies with applicable legal requirements) and which may provide for
the selection for redemption of portions of the principal of the Notes;
provided, however, that no such partial redemption shall reduce the portion of
the principal amount of a Note not redeemed to less than $1,000.
The Trustee shall promptly notify the Company in writing of the Notes
selected for redemption and, in the case of any Notes selected for partial
redemption, the method it has chosen for the selection of Notes and the
principal amount thereof to be redeemed, and upon the Company's written approval
of such selection, the Trustee shall redeem the selected Notes.
For all purposes of this Indenture, unless the context otherwise requires,
all provisions relating to redemption of Notes shall relate, in the case of any
Note redeemed or to be redeemed only in part, to the portion of the principal
amount of such Note which has been or is to be redeemed.
SECTION 5.5. Notice of Redemption. Notice of redemption shall be given in
the manner provided for in Section 14.2 not less than 30 nor more than 60 days
prior to the Redemption Date, to each Holder of Notes to be redeemed. At the
Company's request, the Trustee shall give notice of redemption in the Company's
name and at the Company's expense; provided, however, that the Company shall
deliver to the Trustee, at least 45 days prior to the Redemption Date, an
Officers' Certificate requesting that the Trustee give such notice at the
Company's expense and setting forth the information to be stated in such notice
as provided in the following items:
(i) the Redemption Date,
(ii) the Redemption Price and the amount of accrued interest to the
Redemption Date payable as provided in Section 5.7, if any,
(iii) if less than all outstanding Notes are to be redeemed, the aggregate
principal amount of Notes to be redeemed and the aggregate principal amount of
Notes to be outstanding after such partial redemption,
(iv) in case any Note is to be redeemed in part only, the notice that
relates to such Note shall state that on and after the Redemption Date, upon
surrender of such Note, the Holder will receive, without charge, a new Note or
Notes of authorized denominations for the principal amount thereof remaining
unredeemed,
(v) that on the Redemption Date, 100% of the principal amount of the Notes
to be redeemed (and accrued interest, if any, to the Redemption Date payable as
provided in Section 5.7) will become due and payable upon each such Note, or the
portion thereof, to be redeemed, and, unless the Company defaults in making the
redemption payment, that interest on Notes called for redemption (or the portion
thereof) will cease to accrue on and after said date,
(vi) the place or places where such Notes are to be surrendered for payment
of the redemption price and accrued interest, if any,
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(vii) the name and address of the Paying Agent,
(viii) that Notes called for redemption must be surrendered to the Paying
Agent to collect the redemption price,
(ix) the CUSIP number, that no representation is made as to the accuracy or
correctness of the CUSIP number, if any, listed in such notice or printed on the
Notes, and any redemption shall not be affected by any defect in such CUSIP
numbers,
(x) the paragraph of the Notes pursuant to which the Notes are to be
redeemed,
(xi) the then current Conversion Rate,
(xii) that the Notes called for redemption may be converted at any time
before the close of business on the Business Day immediately preceding the
Redemption Date, and
(xiii) the Holders who wish to convert Notes must comply with the
procedures in paragraph 9 of the Notes.
SECTION 5.6. Deposit of Redemption Price. On or prior to any Redemption
Date, the Company shall deposit with the Trustee or with a Paying Agent (or, if
the Company is acting as its own Paying Agent, segregate and hold in trust as
provided in Section 2.4) an amount of money sufficient to pay the redemption
price of, and accrued interest on, all the Notes which are to be redeemed on
that date, other than Notes or portions of Notes called for redemption that are
beneficially owned by the Company and have been delivered by the Company to the
Trustee for cancellation.
SECTION 5.7. Notes Payable on Redemption Date. Notice of redemption having
been given as aforesaid, the Notes or portions of Notes so to be redeemed shall,
on the Redemption Date, become due and payable at a price equal to the
Redemption Price, and from and after such date (unless the Company shall default
in the payment of the Redemption Price) such Notes shall cease to bear interest.
Upon surrender of any such Note for redemption in accordance with said notice,
such Note shall be paid by the Company at the Redemption Price on the Redemption
Date (subject to the rights of Holders of record on the relevant record date to
receive interest due on the relevant interest payment date).
If any Note called for redemption shall not be so paid upon surrender
thereof for redemption, the principal shall, until paid, bear interest from the
Redemption Date at the rate borne by the Notes.
SECTION 5.8. Notes Redeemed in Part. Any Note which is to be redeemed only
in part (pursuant to the provisions of this Article) shall be surrendered at the
office or agency of the Company maintained for such purpose pursuant to Section
2.3 (with, if the Company or the Trustee so requires, due endorsement by, or a
written instrument of transfer in form satisfactory to the Company and the
Trustee duly executed by, the Holder thereof or such Holder's attorney duly
authorized in writing), and the Company shall execute, and the Trustee shall
39
authenticate and make available for delivery to the Holder of such Note at the
expense of the Company, a new Note or Notes, of any authorized denomination as
requested by such Holder, in an aggregate principal amount equal to and in
exchange for the unredeemed portion of the principal of the Note so surrendered,
provided, that each such new Note will be in a principal amount of $1,000 or
integral multiple thereof.
If a Holder converts a portion of its Note prior to receipt of the
Redemption Notice for a Note to be redeemed only in part, the converted portion
will be deemed to be from the portion selected for redemption. In the event of
any redemption in part, the Company will not be required to (i) issue, register
the transfer of or exchange any Note during a period of 15 days before the
mailing of the redemption notice; or (ii) register the transfer of or exchange
any Note so selected for redemption, in whole or in part, except the unredeemed
portion of any Note being redeemed in part.
ARTICLE VI
Purchase Upon a Fundamental Change
----------------------------------
SECTION 6.1. Purchase at the Option of the Holder Upon a Fundamental
Change. If a Fundamental Change shall occur at any time prior to July 15, 2008,
each Holder shall have the right, at such Holder's option, to require the
Company to purchase any or all of such Holder's Notes for cash on the date that
is no later than 35 days after the date of the Company Notice of the occurrence
of such Fundamental Change (subject to extension to comply with applicable law,
as provided in Section 8.4) (the "Fundamental Change Purchase Date"). The Notes
shall be repurchased in integral multiples of $1,000 of the principal amount.
The Company shall purchase such Notes at a price (the "Fundamental Change
Purchase Price") equal to 100% of the principal amount of the Notes to be
purchased plus accrued and unpaid interest, if any, and Additional Amounts, if
any, to the Fundamental Change Purchase Date. No Notes may be purchased at the
option of the Holders upon a Fundamental Change if there has occurred and is
continuing an Event of Default (other than an Event of Default that is cured by
the payment of the Fundamental Change Purchase Price of the Notes).
SECTION 6.2. Notice of Fundamental Change. The Company, or at its request
(which must be received by the Paying Agent at least three Business Days (or
such lesser period as agreed to by the Paying Agent) prior to the date the
Paying Agent is requested to give such notice as described below), the Paying
Agent in the name of and at the expense of the Company, shall mail to all
Holders and the Trustee and the Paying Agent a Company Notice of the occurrence
of a Fundamental Change and of the purchase right arising as a result thereof,
including the information required by Section 8.1, on or before the 30th day
after the occurrence of such Fundamental Change.
SECTION 6.3. Exercise of Option. For a Note to be so purchased at the
option of the Holder, the Paying Agent must receive such Note duly endorsed for
transfer, together with a written notice of purchase (a "Fundamental Change
Purchase Notice") and the form entitled "Form of Fundamental Change Purchase
40
Notice" on the reverse thereof duly completed, on or before the 35th day after
the date of the Company Notice of the occurrence of such Fundamental Change,
subject to extension to comply with applicable law, as provided in Section 8.4.
The Fundamental Change Purchase Notice shall state:
(i) if certificated, the certificate numbers of the Notes which the Holder
shall deliver to be purchased, or, if not certificated, the Fundamental Change
Purchase Notice must comply with appropriate DTC procedures;
(ii) the portion of the principal amount of the Notes which the Holder
shall deliver to be purchased, which portion must be $1,000 in principal amount
or an integral multiple thereof; and
(iii) that such Notes shall be purchased as of the Fundamental Change
Purchase Date pursuant to the terms and conditions specified in paragraph 7 of
the Notes and in this Indenture.
SECTION 6.4. Procedures. The Company shall purchase from a Holder, pursuant
to this Article VI, Notes if the principal amount of such Notes is $1,000 or a
multiple of $1,000 if so requested by such Holder.
Any purchase by the Company contemplated pursuant to the provisions of this
Article VI shall be consummated by the delivery of the Fundamental Change
Purchase Price to be received by the Holder promptly following the later of the
Fundamental Change Purchase Date or the time of book-entry transfer or delivery
of the Notes.
Notwithstanding anything herein to the contrary, any Holder delivering to
the Paying Agent the Fundamental Change Purchase Notice contemplated by this
Section 6.4 shall have the right at any time prior to the close of business on
the Business Day prior to the Fundamental Change Purchase Date to withdraw such
Fundamental Change Purchase Notice (in whole or in part) by delivery of a
written notice of withdrawal to the Paying Agent in accordance with Section 8.2.
The Paying Agent shall promptly notify the Company of the receipt by it of
any Fundamental Change Purchase Notice or written notice of withdrawal thereof.
On or before the Fundamental Change Purchase Date, the Company shall
deposit with the Paying Agent (or if the Company or an Affiliate of the Company
is acting as the Paying Agent, shall segregate and hold in trust) money
sufficient to pay the aggregate Fundamental Change Purchase Price of the Notes
to be purchased pursuant to this Article VI. Payment by the Paying Agent of the
Fundamental Change Purchase Price for such Notes shall be made promptly
following the later of the Fundamental Change Purchase Date or the time of
book-entry transfer or delivery of such Notes. If the Paying Agent holds, in
accordance with the terms of this Indenture, money sufficient to pay the
Fundamental Change Purchase Price of such Notes on the Business Day following
the Fundamental Change Purchase Date, then, on and after such date, such Notes
shall cease to be outstanding and interest (including Additional Amounts, if
any) on such Notes shall cease to accrue, whether or not book-entry transfer of
such Notes is made or such Notes are delivered to the Paying Agent, and all
41
other rights of the Holder shall terminate (other than the right to receive the
Fundamental Change Purchase Price upon delivery or transfer of the Notes).
Nothing herein shall preclude any withholding tax required by law.
The Company shall require each Paying Agent (other than the Trustee) to
agree in writing that the Paying Agent shall hold in trust for the benefit of
Holders or the Trustee all money held by the Paying Agent for the payment of the
Fundamental Change Purchase Price and shall notify the Trustee of any default by
the Company in making any such payment. If the Company or an Affiliate of the
Company acts as Paying Agent, it shall segregate the money held by it as Paying
Agent and hold it as a separate trust fund. The Company at any time may require
a Paying Agent to deliver all money held by it to the Trustee and to account for
any funds disbursed by the Paying Agent. Upon doing so, the Paying Agent shall
have no further liability for the cash delivered to the Trustee.
All questions as to the validity, eligibility (including time of receipt)
and acceptance of any Notes for redemption shall be determined by the Company,
whose determination shall be final and binding.
ARTICLE VII
Optional Purchase
-----------------
SECTION 7.1. Purchase of Notes by the Company at the Option of the Holder.
(a) On each of July 15, 2008, July 15, 2013 and July 15, 2018 (each, a
"Purchase Date"), Holders shall have the option to require the Company to
purchase any Notes at 100% of the amount of the Notes to be purchased plus any
accrued and unpaid interest to such Purchase Date, upon:
(1) delivery to the Paying Agent by the Holder of a written notice of
purchase (a "Purchase Notice") at any time from the opening of business on the
date that is 20 Business Days prior to a Purchase Date until the close of
business on the fifth Business Day prior to such Purchase Date, stating:
(i) if certificated, the certificate numbers of the Notes which the Holder
will deliver to be purchased, or, if not certificated, the Purchase Notice must
comply with appropriate DTC procedures;
(ii) the portion of the principal amount of the Notes which the Holder will
deliver to be purchased, which portion must be $1,000 in principal amount or an
integral multiple thereof; and
(iii) that such Notes shall be purchased as of the Purchase Date pursuant
to the terms and conditions specified in paragraph 7 of the Notes and in this
Indenture; and
42
(2) delivery or book-entry transfer of such Notes to the Paying Agent prior
to, on or after the Purchase Date (together with all necessary endorsements) at
the offices of the Paying Agent, such delivery or transfer being a condition to
receipt by the Holder of the Purchase Price therefor; provided, however, that
such Purchase Price shall be so paid pursuant to this Section 7.1 only if the
Notes so delivered or transferred to the Paying Agent shall conform in all
respects to the description thereof in the related Purchase Notice.
(b) The Company shall purchase from a Holder, pursuant to the terms of this
Section 7.1, Notes if the principal amount of such Notes is $1,000 or a multiple
of $1,000 if so requested by such Holder.
(c) Any purchase by the Company contemplated pursuant to the provisions of
this Section 7.1 shall be consummated by the delivery of the Purchase Price to
be received by the Holder promptly following the later of the Purchase Date or
the time of book-entry transfer or delivery of the Notes.
(d) Notwithstanding anything herein to the contrary, any Holder delivering
to the Paying Agent the Purchase Notice contemplated by this Section 7.1 shall
have the right at any time prior to the close of business on the Business Day
prior to the Purchase Date to withdraw such Purchase Notice (in whole or in
part) by delivery of a written notice of withdrawal to the Paying Agent in
accordance with Section 8.2.
(e) The Paying Agent shall promptly notify the Company of the receipt by it
of any Purchase Notice or written notice of withdrawal thereof.
(f) On or before the Purchase Date, the Company shall deposit with the
Paying Agent (or if the Company or an Affiliate of the Company is acting as the
Paying Agent, shall segregate and hold in trust) cash sufficient to pay the
aggregate Purchase Price of the Notes to be purchased pursuant to this Section
7.1. Payment by the Paying Agent of the Purchase Price for such Notes shall be
made promptly following the later of the Purchase Date or the time of book-entry
transfer or delivery of such Notes. If the Paying Agent holds, in accordance
with the terms of the Indenture, cash sufficient to pay the Purchase Price of
such Notes on the Business Day following the Purchase Date, then, on and after
such date, such Notes shall cease to be outstanding and interest and Additional
Amounts, if any, on such Notes shall cease to accrue, whether or not book-entry
transfer of such Notes is made or such Notes are delivered to the Paying Agent,
and all other rights of the Holder shall terminate (other than the right to
receive the Purchase Price upon delivery or transfer of the Notes).
(g) The Company shall require each Paying Agent (other than the Trustee) to
agree in writing that the Paying Agent shall hold in trust for the benefit of
Holders or the Trustee all cash held by the Paying Agent for the payment of the
Purchase Price and shall notify the Trustee of any default by the Company in
making any such payment. If the Company or an Affiliate of the Company acts as
Paying Agent, it shall segregate the cash held by it as Paying Agent and hold it
as a separate trust fund. The Company at any time may require a Paying Agent to
deliver all cash held by it to the Trustee and to account for any funds
43
disbursed by the Paying Agent. Upon doing so, the Paying Agent shall have no
further liability for the cash delivered to the Trustee.
ARTICLE VIII
Conditions and Procedures for Purchases at Option of Holders
------------------------------------------------------------
SECTION 8.1. Notice of Purchase Date or Fundamental Change. The Company
shall send notices (each, a "Company Notice") to the Holders (and to beneficial
owners as required by applicable law) at their addresses shown in the Note
Register maintained by the Note Registrar, and delivered to the Trustee and
Paying Agent, not less than 20 Business Days prior to each Purchase Date, or on
or before the 30th day after the occurrence of the Fundamental Change, as the
case may be (each such date of delivery, a "Company Notice Date"). Each Company
Notice shall include a form of Purchase Notice or Fundamental Change Purchase
Notice to be completed by a Holder and shall state:
(i) the applicable Purchase Price or Fundamental Change Purchase Price,
excluding accrued and unpaid interest, Conversion Rate at the time of such
notice (and any adjustments to the Conversion Rate) and, to the extent known at
the time of such notice, the amount of interest and Additional Amounts, if any,
that will be payable with respect to the Notes on the applicable Purchase Date
or Fundamental Change Purchase Date;
(ii) if the notice relates to a Fundamental Change, the events causing the
Fundamental Change and the date of the Fundamental Change;
(iii) the Purchase Date or Fundamental Change Purchase Date;
(iv) the last date on which a Holder may exercise its purchase right;
(v) the name and address of the Paying Agent and the Conversion Agent;
(vi) that Notes must be surrendered to the Paying Agent to collect payment
of the Purchase Price or Fundamental Change Purchase Price;
(vii) that Notes as to which a Purchase Notice or Fundamental Change
Purchase Notice has been given may be converted only if the applicable Purchase
Notice or Fundamental Change Purchase Notice has been withdrawn in accordance
with the terms of this Indenture;
(viii) that the Purchase Price or Fundamental Change Purchase Price for any
Notes as to which a Purchase Notice or a Fundamental Change Purchase Notice, as
applicable, has been given and not withdrawn shall be paid by the Paying Agent
promptly following the later of the Purchase Date or Fundamental Change Purchase
Date, as applicable, or the time of book-entry transfer or delivery of such
Notes;
44
(ix) the procedures the Holder must follow under Article VI or VII, as
applicable, and Article VIII;
(x) briefly, the conversion rights of the Notes;
(xi) that, unless the Company defaults in making payment of such Purchase
Price or Fundamental Change Purchase Price on Notes covered by any Purchase
Notice or Fundamental Change Purchase Notice, as applicable, interest and
Additional Amounts, if any, will cease to accrue on and after the Purchase Date
or Fundamental Change Purchase Date, as applicable;
(xii) the CUSIP or ISIN number of the Notes; and
(xiii) the procedures for withdrawing a Purchase Notice or Fundamental
Change Purchase Notice.
In connection with providing such Company Notice, the Company will issue a
press release and publish a notice containing the information in such Company
Notice in a newspaper of general circulation in the City of New York or publish
such information on the Company's then existing website or through such other
public medium as the Company may use at the time.
At the Company's request, made at least five Business Days prior to the
date upon which such notice is to be mailed, and at the Company's expense, the
Paying Agent shall give the Company Notice in the Company's name to the Holders;
provided, however, that, in all cases, the text of the Company Notice shall be
prepared by the Company.
SECTION 8.2. Effect of Purchase Notice or Fundamental Change Purchase
Notice; Effect of Event of Default. Upon receipt by the Company of the Purchase
Notice or Fundamental Change Purchase Notice specified in Section 7.1 or Section
6.2, as applicable, the Holder of the Notes in respect of which such Purchase
Notice or Fundamental Change Purchase Notice, as the case may be, was given
shall (unless such Purchase Notice or Fundamental Change Purchase Notice is
withdrawn as specified in the following two paragraphs) thereafter be entitled
to receive solely the Purchase Price or Fundamental Change Purchase Price with
respect to such Notes. Such Purchase Price or Fundamental Change Purchase Price
shall be paid by the Paying Agent to such Holder promptly following the later of
(i) the Purchase Date or the Fundamental Change Purchase Date, as the case may
be, with respect to such Notes (provided the conditions in Section 7.1 or
Section 6.2, as applicable, have been satisfied) and (ii) the time of delivery
or book-entry transfer of such Notes to the Paying Agent by the Holder thereof
in the manner required by Section 7.1 or Section 6.4, as applicable. Notes in
respect of which a Purchase Notice or Fundamental Change Purchase Notice, as the
case may be, has been given by the Holder thereof may not be converted for
shares of Common Stock on or after the date of the delivery of such Purchase
Notice or Fundamental Change Purchase Notice, as the case may be, unless such
Purchase Notice or Fundamental Change Purchase Notice, as the case may be, has
first been validly withdrawn as specified in the following two paragraphs.
A Purchase Notice or Fundamental Change Purchase Notice, as the case may
be, may be withdrawn by means of a written notice of withdrawal delivered to the
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office of the Paying Agent at any time prior to 5:00 p.m. New York City time on
the Business Day prior to the Purchase Date or the Fundamental Change Purchase
Date, as the case may be, to which it relates specifying:
(i) if certificated, the certificate number of the Notes in respect of
which such notice of withdrawal is being submitted, or, if not certificated, the
written notice of withdrawal must comply with appropriate DTC procedures;
(ii) the principal amount of the Notes with respect to which such notice of
withdrawal is being submitted; and
(iii) the principal amount, if any, of such Notes which remains subject to
the original Purchase Notice or Fundamental Change Purchase Notice, as the case
may be, and which has been or shall be delivered for purchase by the Company.
There shall be no purchase of any Notes pursuant to Article VI or Article
VII if an Event of Default has occurred and is continuing (other than a default
that is cured by the payment of the Purchase Price or Fundamental Change
Purchase Price, as the case may be). The Paying Agent shall promptly return to
the respective Holders thereof any Notes (i) with respect to which a Purchase
Notice or Fundamental Change Purchase Notice, as the case may be, has been
withdrawn in compliance with this Indenture, or (ii) held by it during the
continuance of an Event of Default (other than a default that is cured by the
payment of the Purchase Price or Fundamental Change Purchase Price, as the case
may be) in which case, upon such return, the Purchase Notice or Fundamental
Change Purchase Notice with respect thereto shall be deemed to have been
withdrawn.
SECTION 8.3. Notes Purchased in Part. Any Notes that are to be purchased
only in part shall be surrendered at the office of the Paying Agent (with, if
the Company or the Trustee so requires, due endorsement by, or a written
instrument of transfer in form satisfactory to the Company and the Trustee duly
executed by, the Holder thereof or such Holder's attorney duly authorized in
writing) and the Company shall execute and the Trustee or the Authenticating
Agent shall authenticate and deliver to the Holder of such Notes, without
service charge, a new Note or Notes, of any authorized denomination as requested
by such Holder in aggregate principal amount equal to, and in exchange for, the
portion of the principal amount of the Notes so surrendered which is not
purchased or redeemed.
SECTION 8.4. Covenant to Comply with Securities Laws Upon Purchase of
Notes. In connection with any offer to purchase Notes under Article VI or
Article VII, the Company shall, to the extent applicable, (a) comply with Rules
13e-4 and 14e-1 (and any successor provisions thereto) under the Exchange Act,
if applicable; (b) file the related Schedule TO (or any successor schedule, form
or report) under the Exchange Act, if applicable; and (c) otherwise comply with
all applicable federal and state securities laws so as to permit the rights and
obligations under Article VI or Article VII to be exercised in the time and in
the manner specified in Article VI or Article VII.
SECTION 8.5. Repayment to the Company. The Trustee and the Paying Agent
shall return to the Company any cash or property that remains unclaimed as
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provided in paragraph 12 of the Notes, together with interest that the Trustee
or Paying Agent, as the case may be, has agreed to pay, if any, held by them for
the payment of a Purchase Price or Fundamental Change Purchase Price, as the
case may be; provided, however, that to the extent that the aggregate amount of
cash or property deposited by the Company pursuant to Section 7.1(f) or 6.4, as
applicable, exceeds the aggregate Purchase Price or Fundamental Change Purchase
Price, as the case may be, of the Notes or portions thereof which the Company is
obligated to purchase as of the Purchase Date or Fundamental Change Purchase
Date, as the case may be, then promptly on and after the Business Day following
the Purchase Date or Fundamental Change Purchase Date, as the case may be, the
Trustee and the Paying Agent shall return any such excess to the Company
together with interest that the Trustee or Paying Agent, as the case may be, has
agreed to pay, if any.
SECTION 8.6. Officers' Certificate. At least five Business Days before the
Company Notice Date, the Company shall deliver an Officers' Certificate to the
Trustee (provided, that at the Company's option, the matters to be addressed in
such Officers' Certificate may be divided among two such certificates)
specifying:
(i) the manner of payment selected by the Company; and
(ii) whether the Company desires the Trustee to give the Company Notice to
the Holders required by Section 8.1.
ARTICLE IX
Conversion of Notes
-------------------
SECTION 9.1. Right to Convert. A Holder may convert its Notes for Common
Stock at any time during which the following conditions are met:
(a) in any calendar quarter (and only during such calendar quarter) if the
Last Reported Sale Price for Common Stock for at least 20 Trading Days during
the period of 30 consecutive Trading Days ending on the last Trading Day of the
previous calendar quarter is greater than or equal to 120% of the Conversion
Price per share of Common Stock on such last Trading Day;
(b) during any period in which both (A) the credit rating assigned to the
Notes by Moody's Investors Service, Inc. is lower than Ba1 and (B) the credit
rating assigned to the Notes by Standard & Poors Rating Services is lower than
BB+;
(c) during any period in which the Notes no longer are assigned credit
ratings by at least one of Moody's Investors Services, Inc. and Standard &
Poor's Ratings Services or their successors;
(d) in the event that the Company calls the Notes for redemption, at any
time prior to the close of business on the second Business Day immediately
preceding the Redemption Date; or
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(e) the Company becomes a party to a consolidation, merger or binding share
exchange pursuant to which the Common Stock would be converted into cash or
property (other than securities), in which case a Holder may surrender Notes for
conversion at any time from and after the date which is 15 days prior to the
anticipated effective date for the transaction until 15 days after the actual
effective date of such transaction; or
(f) the Company elects to (i) distribute to all holders of Common Stock
assets, debt securities or rights to purchase securities of the Company, which
distribution has a per share value as determined by the Board of Directors
exceeding 15% of the Last Reported Sale Price of a share of Common Stock on the
Trading Day immediately preceding the declaration date for such distribution, or
(ii) distribute to all holders of Common Stock rights entitling them to
purchase, for a period expiring within 60 days after the date of such
distribution, shares of Common Stock at less than the Last Reported Sale Price
of Common Stock on the Trading Day immediately preceding the declaration date of
the distribution. In the case of the foregoing clauses (i) and (ii), the Company
must notify the Holders at least 20 Business Days immediately prior to the
ex-dividend date for such distribution. Once the Company has given such notice,
Holders may surrender their Notes for conversion at any time thereafter until
the earlier of the close of business on the Business Day immediately prior to
the ex-dividend date or the Company's announcement that such distribution will
not take place; provided, however, that a Holder may not exercise this right to
convert if the Holder may participate in the distribution without conversion. As
used herein, the term "ex-dividend date," when used with respect to any issuance
or distribution, shall mean the first date on which a sale of the Common Stock
does not automatically transfer the right to receive the relevant dividend from
the seller of the Common Stock to its buyer.
The number of shares of Common Stock issuable upon conversion of a Note per
$1,000 principal amount (the "Conversion Rate") shall be that set forth in
paragraph 9 in the Notes, subject to adjustment as herein set forth. The initial
Conversion Rate is 26.5583 shares of Common Stock issuable upon conversion of a
Convertible Note per $1,000 principal amount.
A Holder may convert a portion of the principal amount of Notes if the
portion is $1,000 or a multiple of $1,000.
SECTION 9.2. Conversion Procedures. To convert Notes, a Holder must satisfy
the requirements in this Section 9.2 and in paragraph 9 of the Notes. The date
on which the Holder satisfies all those requirements and delivers an irrevocable
conversion notice, together, if the Notes are in certificated form, with the
certificated Note, to the Conversion Agent along with appropriate endorsements
and transfer documents, if required, and pay any transfer or similar tax, if
required, is the conversion date (the "Conversion Date"). As soon as
practicable, but in no event later than the fifth Business Day following the
Conversion Date, the Company shall deliver to the Holder, through the Conversion
Agent, a certificate for the number of full shares of Common Stock issuable upon
the conversion and cash in lieu of any fractional share determined pursuant to
Section 9.3. Upon conversion, the Company may choose to deliver, in lieu of
shares of Common Stock, cash or a combination of cash and shares of Common Stock
as set forth in Section 9.17. The Person in whose name the certificate is
registered shall be treated as a stockholder of record on and after the
Conversion Date; provided, however, that no surrender of Notes on any date when
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the stock transfer books of the Company shall be closed shall be effective to
constitute the Person or Persons entitled to receive the shares of Common Stock
upon such conversion as the record holder or holders of such shares of Common
Stock on such date, but such surrender shall be effective to constitute the
Person or Persons entitled to receive such shares of Common Stock as the record
holder or holders thereof for all purposes at the close of business on the next
succeeding day on which such stock transfer books are open; such conversion
shall be at the Conversion Rate in effect on the date that such Notes shall have
been surrendered for conversion, as if the stock transfer books of the Company
had not been closed. Upon conversion of Notes, such Person shall no longer be a
Holder of such Notes.
No payment or adjustment shall be made for dividends on or other
distributions with respect to any Common Stock except as provided in Section 9.6
or as otherwise provided in this Indenture.
On conversion of Notes, that portion of accrued interest, if any, with
respect to the converted Notes shall not be canceled, extinguished or forfeited,
but rather shall be deemed to be paid in full to the Holder thereof through
delivery of the Common Stock (together with the cash payment, if any, in lieu of
fractional shares) or cash or a combination of cash and Common Stock in exchange
for the Notes being converted pursuant to the provisions hereof, and the cash or
the Fair Market Value of such shares of Common Stock (together with any such
cash payment in lieu of fractional shares) shall be treated as issued, to the
extent thereof, first in exchange for interest accrued and unpaid through the
Conversion Date and the balance, if any, of such Fair Market Value of such cash
or Common Stock (and any such cash payment) shall be treated as issued in
exchange for the principal amount of the Notes being converted pursuant to the
provisions hereof. Notwithstanding conversion of any Notes, the Holders of the
Notes and any Common Stock issuable upon conversion thereof will continue to be
entitled to receive Additional Amounts in accordance with the Registration
Rights Agreement.
If a Holder converts more than one Note at the same time, the number of
shares of Common Stock issuable upon the conversion shall be based on the total
principal amount of the Notes converted.
Upon surrender of a Note that is converted in part, the Company shall
execute, and the Trustee or the Authenticating Agent shall authenticate and
deliver to the Holder, a new Note in an authorized denomination equal in
principal amount to the unconverted portion of the Note surrendered.
If the last day on which Notes may be converted is not a Business Day in a
place where a Conversion Agent is located, the Notes may be surrendered to that
Conversion Agent on the next succeeding Business Day.
Notes in respect of which a Holder has delivered a notice of exercise of
the option to require the Company to purchase such Notes pursuant to Article VI
or VII may be converted only if the notice of exercise is withdrawn in
accordance with the terms of Section 8.2.
SECTION 9.3. Cash Payments in Lieu of Fractional Shares. The Company shall
not issue a fractional share of Common Stock upon conversion of Notes. Instead
the Company shall deliver cash for the current market value of the fractional
share. The current market value of a fractional share shall be determined to the
49
nearest 1/10,000th of a share by multiplying the Last Reported Sale Price of a
full share of Common Stock on the Trading Day immediately preceding the
Conversion Date by the fractional amount and rounding the product to the nearest
whole cent.
SECTION 9.4. Taxes on Conversion. If a Holder converts Notes, the Company
shall pay any documentary, stamp or similar issue or transfer tax due on the
issue of shares of Common Stock upon the conversion. However, the Holder shall
pay any such tax which is due because the Holder requests the shares to be
issued in a name other than the Holder's name. The Conversion Agent may refuse
to deliver the certificates representing the Common Stock being issued in a name
other than the Holder's name until the Conversion Agent receives a sum
sufficient to pay any tax which shall be due because the shares are to be issued
in a name other than the Holder's name. Nothing herein shall preclude any
withholding tax required by law.
SECTION 9.5. Covenants of the Company. The Company shall, prior to issuance
of any Notes hereunder, and from time to time as may be necessary, reserve out
of its authorized but unissued Common Stock a sufficient number of shares of
Common Stock to permit the conversion of the Notes.
All shares of Common Stock delivered upon conversion of the Notes shall be
newly issued shares or treasury shares, shall be duly and validly issued and
fully paid and nonassessable and shall be free from preemptive rights and free
of any lien or adverse claim.
The Company shall endeavor promptly to comply with all federal and state
securities laws regulating the order and delivery of shares of Common Stock upon
the conversion of Notes, if any, and shall cause to have listed or quoted all
such shares of Common Stock on each United States national securities exchange
or over-the-counter or other domestic market on which the Common Stock is then
listed or quoted.
SECTION 9.6. Adjustments to Conversion Rate. The Conversion Rate shall be
adjusted from time to time, without duplication, as follows:
(a) In case the Company shall (i) pay a dividend or make a distribution on
the Common Stock exclusively in shares of its Common Stock or other Capital
Stock; (ii) subdivide or split its outstanding Common Stock into a greater
number of shares; (iii) combine or reclassify its outstanding Common Stock into
a smaller number of shares; or (iv) issue by reclassification of the shares of
Common Stock any shares of the Company's Capital Stock, the Conversion Rate in
effect immediately prior to the record date or effective date, as the case may
be, for the adjustment pursuant to this Section 9.6(a) as described below, shall
be adjusted so that the Holder of any Notes thereafter surrendered for
conversion shall be entitled to receive the number of shares of Common Stock
which such Holder would have owned or have been entitled to receive after the
happening of any of the events described above had such Notes been converted
immediately prior to such record date or effective date, as the case may be. An
adjustment made pursuant to this Section 9.6(a) shall become effective
immediately after the applicable record date in the case of a dividend or
distribution and shall become effective immediately after the applicable
effective date in the case of subdivision, combination or reclassification of
the Common Stock. If any dividend or distribution of the type described in
50
clause (i) above is not so paid or made, the Conversion Rate shall again be
adjusted to the Conversion Rate that would then be in effect if such dividend or
distribution had not been declared.
(b) In case the Company shall issue rights or warrants to all holders of
the Common Stock entitling them (for a period expiring within 60 days after the
date of issuance of such rights or warrants) to subscribe for or purchase Common
Stock at a price per share less than the Market Price per share of Common Stock
on the record date fixed for determination of shareholders entitled to receive
such rights or warrants, the Conversion Rate in effect immediately after such
record date shall be adjusted so that the same shall equal the Conversion Rate
determined by multiplying the Conversion Rate in effect immediately after such
record date by a fraction of which (i) the numerator shall be the number of
shares of Common Stock outstanding on such record date plus the number of
additional shares of Common Stock offered for subscription or purchase, and (ii)
the denominator shall be the number of shares of Common Stock outstanding on
such record date plus the number of shares which the aggregate offering price of
the total number of shares so offered would purchase at the Market Price per
share of Common Stock on the earlier of such record date or the Trading Day
immediately preceding the ex distribution date for such issuance of rights or
warrants. Such adjustment shall be made successively whenever any such rights or
warrants are issued, and shall become effective immediately after the opening of
business on the day following the record date for the determination of
shareholders entitled to receive such rights or warrants. To the extent that
shares of Common Stock are not delivered after the expiration of such rights or
warrants, the Conversion Rate shall be readjusted to the Conversion Rate which
would then be in effect had the adjustments made upon the issuance of such
rights or warrants been made on the basis of delivery of only the number of
shares of Common Stock actually delivered. If such rights or warrants are not so
issued, the Conversion Rate shall again be adjusted to be the Conversion Rate
which would then be in effect if such record date for the determination of
shareholders entitled to receive such rights or warrants had not been fixed. In
determining whether any rights or warrants entitle the holders to subscribe for
or purchase shares of Common Stock at less than such Market Price, and in
determining the aggregate offering price of such shares of Common Stock, there
shall be taken into account any consideration received by the Company for such
rights or warrants, the value of such consideration, if other than cash, to be
determined by the Board of Directors.
(c) (i) In case the Company shall, whether by dividend or in a merger,
amalgamation or consolidation or otherwise, distribute to all holders of Common
Stock any evidence of indebtedness, shares of Capital Stock of any class or
series, other securities, cash or assets (excluding (1) any dividend,
distribution or issuance covered by those referred to in Section 9.6(a) or
9.6(b) and (2) any dividend or distribution payable exclusively in cash, shares
of Capital Stock or similar Equity Interests in the case of a Spin-off, and (3)
any dividend or distribution paid exclusively in cash referred to in Section
9.6(d) (any of the foregoing hereinafter in this Section 9.6(c) called the
"Distributed Assets or Securities") in an aggregate amount per share of Common
Stock that, combined together with the aggregate amount of any other such
distributions to all holders of its Common Stock made within the 12 months
preceding the date of payment of such distribution, and in respect of which no
adjustment pursuant to this Section 9.6(c) has been made, exceeds 15% of the
Distribution Adjustment Market Price on the Trading Day immediately preceding
the declaration of such distribution, then the Conversion Rate shall be adjusted
so that the same shall equal the Conversion Rate determined by dividing the
51
Conversion Rate in effect immediately prior to the close of business on the
record date fixed for determination of holders of Common Stock entitled to
receive that distribution by a fraction of which (A) the numerator shall be the
Distribution Adjustment Market Price per share of the Common Stock, and (B) the
denominator shall be (1) the Distribution Adjustment Market Price per share of
the Common Stock plus (2) the Fair Market Value on the earlier of such record
date or the Trading Day immediately preceding the ex date for such dividend or
distribution (as described in a certificate filed with the Trustee and the
Paying Agent) of the Distributed Assets or Securities so distributed applicable
to one share of Common Stock. Such adjustment shall become effective immediately
after the 10th consecutive Trading Day commencing on and including the first
Trading Day after the "ex distribution date" with respect to the distribution.
(ii) In the event of a Spin-off, the Conversion Rate shall be adjusted so
that the same shall equal the Conversion Rate determined by dividing the
Conversion Rate in effect immediately prior to the close of business on the
record date fixed for the determination of holders of Common Stock entitled to
receive such distribution by a fraction of which (A) the numerator shall be the
Spin-off Market Price per share of the Common Stock and (B) the denominator
shall be (x) the Spin-off Market Price per share of the Common Stock plus (y)
the Fair Market Value of the portion of those Shares of Capital Stock or similar
Equity Interests so distributed applicable to one share of Common Stock on such
record date. The adjustment to the Conversion Rate set forth in this Section
9.6(c)(ii) will occur at the earlier of (1) the 10th Trading Day from, and
including, the effective date of the Spin-off and (2) the date of the Initial
Public Offering of the securities being distributed in the Spin-off, if that
Initial Public Offering is effected simultaneously with the Spin-off.
(iii) Notwithstanding the foregoing provisions of this Section 9.6(c), if
(A) the Fair Market Value of the portion of the Distributed Assets or Securities
so distributed applicable to one share of Common Stock is equal to or greater
than the Distribution Adjustment Market Price of the Common Stock or (B) the
Distribution Adjustment Market Price of the Common Stock is greater than the
Fair Market Value per share of such Distributed Assets or Securities by less
than $1.00, then, in lieu of the foregoing adjustment, adequate provision shall
be made so that each Holder shall have the right to receive upon conversion, in
addition to the shares of Common Stock, the kind and amount of assets, debt
securities, or rights or warrants comprising the Distributed Assets or
Securities the Holder would have received had such Holder converted such Notes
immediately prior to the record date for the determination of shareholders
entitled to receive such distribution. In the event that such distribution is
not so paid or made, the Conversion Rate shall again be adjusted to the
Conversion Rate which would then be in effect if such distribution had not been
declared.
(d) In case the Company shall make any distributions, by dividend or
otherwise, during any quarterly fiscal periods consisting exclusively of cash to
all holders of outstanding shares of Common Stock in an aggregate amount that,
together with (i) other all-cash distributions made to all holders of
outstanding shares of Common Stock during such quarterly fiscal period and (ii)
any cash and the Fair Market Value, as of the expiration of any tender or
exchange offer (other than consideration payable in respect of any odd-lot
tender offer), of consideration payable in respect of any tender or exchange
offer by the Company or any of the Company's Subsidiaries for all or any portion
52
of shares of Common Stock concluded during such quarterly fiscal period, exceed
the product of $0.125 (appropriately adjusted from time to time for any stock
dividends on or subdivisions or combinations of the Common Stock) multiplied by
the number of shares of Common Stock outstanding on the record date for such
distribution, then, and in each such case, the Conversion Rate shall be adjusted
so that the same shall equal the Conversion Rate determined by dividing the
Conversion Rate in effect immediately prior to the close of business on the
record date fixed for the determination of holders of Common Stock entitled to
receive such distribution by a fraction of which (A) the numerator shall be the
Distribution Adjustment Market Price per share of the Common Stock and (B) the
denominator shall be (1) the Distribution Adjustment Market Price per share of
Common Stock plus (2) the amount per share of such dividend or distribution to
the extent it exceeds $0.125 (appropriately adjusted from time to time for any
stock dividends on or subdivisions or combination of Common Stock) at the close
of business on the day that the Common Stock trades ex distribution.
(e) Upon conversion of the Notes, the Holders shall receive, if they
receive shares of Common Stock, in addition to the Common Stock issuable upon
such conversion, the rights issued under the Rights Plan or under any future
shareholder rights plan the Company implements (notwithstanding the occurrence
of an event causing such rights to separate from the Common Stock at or prior to
the time of conversion) unless, prior to conversion, the rights have expired,
terminated or been redeemed or exchanged in accordance with the Rights Plan. If,
and only if, the Holders of Notes receive rights under such shareholder rights
plans as described in the preceding sentence upon conversion of their Notes,
then no other adjustment pursuant to this Section 9.6 shall be made in
connection with such shareholder rights plans.
(f) For purposes of this Section 9.6, the number of shares of Common Stock
at any time outstanding shall not include shares held in the treasury of the
Company but shall include shares issuable in respect of scrip certificates
issued in lieu of fractions of shares of Common Stock. The Company shall not pay
any dividend or make any distribution on shares of Common Stock held in the
treasury of the Company.
(g) Notwithstanding the foregoing, in the event of an adjustment pursuant
to Sections 9.6(c) or (d), the "Maximum Conversion Rate" shall initially be
43.8212 and shall be appropriately adjusted from time to time for any stock
dividends on or subdivisions or combinations of the Common Stock. The Maximum
Conversion Rate shall not apply to any adjustments made pursuant to any of the
events in Section 9.6(a) or Section 9.6(b).
SECTION 9.7. Calculation Methodology. No adjustment in the Conversion Price
need be made unless the adjustment would require an increase or decrease of at
least 1% in the Conversion Price then in effect, provided that any adjustment
that would otherwise be required to be made shall be carried forward and taken
into account in any subsequent adjustment. Except as stated in this Article IX,
the Conversion Rate will not be adjusted for the issuance of Common Stock or any
securities convertible into or exchangeable for Common Stock or carrying the
right to purchase any of the foregoing. Any adjustments that are made shall be
carried forward and taken into account in any subsequent adjustment. All
calculations under Article VIII, Section 9.6 and this Section 9.7 shall be made
to the nearest cent or to the nearest 1/10,000th of a share, as the case may be.
53
SECTION 9.8. When No Adjustment Required. No adjustment to the Conversion
Rate need be made:
(i) upon the issuance of any shares of Common Stock pursuant to any present
or future plan providing for the reinvestment of dividends or interest payable
on securities of the Company and the investment of additional optional amounts
in shares of Common Stock under any plan;
(ii) upon the issuance of any shares of Common Stock or options or rights
to purchase those shares pursuant to any present or future employee, director or
consultant benefit plan or program of or assumed by the Company or any of its
Subsidiaries;
(iii) upon the issuance of any shares of Common Stock pursuant to any
option, warrant, right, or exercisable, exchangeable or convertible security not
described in paragraph (ii) above and outstanding as of the date of this
Indenture;
(iv) for a change in the par value or no par value of the Common Stock; or
(v) for accrued and unpaid interest (including Additional Amounts, if any).
To the extent the Notes become convertible into cash, assets, or property
(other than Capital Stock of the Company or securities to which Section 9.12
applies), no adjustment shall be made thereafter as to the cash, assets or
property. Interest shall not accrue on such cash.
SECTION 9.9. Notice of Adjustment. Whenever the Conversion Rate is
adjusted, the Company shall promptly mail to Holders a notice of the adjustment.
The Company shall file with the Trustee and the Conversion Agent such notice.
The certificate shall, absent manifest error, be conclusive evidence that the
adjustment is correct. Neither the Trustee nor any Conversion Agent shall be
under any duty or responsibility with respect to any such certificate except to
exhibit the same to any Holder desiring inspection thereof.
SECTION 9.10. Voluntary Increase. The Company may make such increases in
the Conversion Rate, in addition to those required by Section 9.6, as the Board
of Directors considers to be advisable to avoid or diminish any income tax to
holders of Common Stock or rights to purchase Common Stock resulting from any
dividend or distribution of stock (or rights to acquire stock) or from any event
treated as such for income tax purposes. To the extent permitted by applicable
law, the Company may from time to time increase the Conversion Rate by any
amount for any period of time if the period is at least 20 days, the increase is
irrevocable during the period and the Board of Directors shall have made a
determination that such increase would be in the best interests of the Company,
which determination shall be conclusive. Whenever the Conversion Rate is so
increased, the Company shall mail to Holders and file with the Trustee and the
Conversion Agent a notice of such increase. Neither the Trustee nor any
Conversion Agent shall be under any duty or responsibility with respect to any
such notice except to exhibit the same to any Holder desiring inspection
thereof. The Company shall mail the notice at least 15 days before the date the
increased Conversion Rate takes affect. The notice shall state the increased
Conversion Rate and the period it shall be in effect.
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SECTION 9.11. Notice to Holders Prior to Certain Actions. In case:
(a) The Company shall declare a dividend (or any other distribution) on its
Common Stock that would require an adjustment in the Conversion Rate pursuant to
Section 9.6;
(b) The Company shall authorize the granting to all or substantially all
the holders of its Common Stock of rights or warrants to subscribe for or
purchase any share of any class or any other rights or warrants;
(c) Of any reclassification or reorganization of the Common Stock of the
Company (other than a subdivision or combination of its outstanding Common
Stock, or a change in par value, or from par value to no par value, or from no
par value to par value), or of any consolidation or merger to which the Company
is a party and for which approval of any shareholders of the Company is
required, or of the sale or transfer of all or substantially all of the assets
of the Company; or
(d) Of the voluntary or involuntary dissolution, liquidation or winding-up
of the Company, the Company shall cause to be filed with the Trustee and to be
mailed to each Holder at its address appearing on the Note Register, as promptly
as possible but in any event at least 15 days prior to the applicable date
hereinafter specified, a notice stating (x) the date on which a record is to be
taken for the purpose of such dividend, distribution or rights or warrants, or,
if a record is not to be taken, the date as of which the holders of Common Stock
of record to be entitled to such dividend, distribution, or rights or warrants
are to be determined or (y) the date on which such reclassification,
reorganization, consolidation, merger, sale, transfer, dissolution, liquidation
or winding-up is expected to become effective or occur, and the date as of which
it is expected that holders of Common Stock of record shall be entitled to
exchange their Common Stock for securities or other property deliverable upon
such reclassification, reorganization, consolidation, merger, sale, transfer,
dissolution, liquidation or winding-up. Failure to give such notice, or any
defect therein, shall not affect the legality or validity of such dividend,
distribution, reclassification, reorganization, consolidation, merger, sale,
transfer, dissolution, liquidation or winding-up.
SECTION 9.12. Effect of Reclassification, Consolidation, Merger, Binding
Share Exchange or Sale. If any of the following events occur, namely (a) any
reclassification or change of outstanding shares of Common Stock (other than a
change in par value, or from par value to no par value, or from no par value to
par value, or as a result of a subdivision or combination); (b) any
consolidation, merger, combination or binding share exchange of the Company with
another corporation as a result of which holders of Common Stock shall be
entitled to receive stock, securities or other property or assets (including
cash) with respect to or in exchange for such Common Stock; or (c) any sale or
conveyance of the properties and assets of the Company as, or substantially as,
an entirety to any other corporation as a result of which holders of Common
Stock shall be entitled to receive stock, securities or other property or assets
(including cash) with respect to or in exchange for such Common Stock, then the
Company or the successor or purchasing corporation, as the case may be, shall
execute with the Trustee a supplement to this Indenture, providing that each
Note shall be convertible into the kind and amount of shares of stock and other
securities or property or assets (including cash) receivable upon such
reclassification, change, consolidation, merger, combination, binding share
55
exchange, sale or conveyance by a holder of a number of shares of Common Stock
issuable upon conversion of such Note immediately prior to such
reclassification, change, consolidation, merger, combination, binding share
exchange, sale or conveyance. Such supplemental indenture shall provide for
adjustments which shall be as nearly equivalent as may be practicable to the
adjustments provided for in this Section 9.12.
The Company shall cause notice of the execution of any such supplemental
indenture to be mailed to each Holder, at its address appearing on the Note
Register, within 20 days after execution thereof. Failure to deliver such notice
shall not affect the legality or validity of such supplemental indenture.
The above provisions of this Section 9.12 shall similarly apply to
successive reclassifications, changes, consolidations, mergers, combinations,
binding share exchanges, sales and conveyances.
If this Section 9.12 applies to any event or occurrence, Section 9.6 shall
not apply.
SECTION 9.13. Responsibility of Trustee. The Trustee and any other
Conversion Agent shall not at any time be under any duty or responsibility to
any Holder to either calculate the Conversion Rate or determine whether any
facts exist which may require any adjustment of the Conversion Rate, or with
respect to the nature or extent or calculation of any such adjustment when made,
or with respect to the method employed, or herein or in any supplemental
indenture provided to be employed, in making the same and shall be protected in
relying upon an Officers' Certificate with respect to the same. The Trustee and
any other Conversion Agent shall not be accountable with respect to the validity
or value (or the kind or amount) of any shares of Common Stock, or of any
securities or property, which may at any time be issued or delivered upon the
conversion of any Notes and the Trustee and any other Conversion Agent make no
representations with respect thereto. Subject to the provisions of Article VI,
neither the Trustee nor any Conversion Agent shall be responsible for any
failure of the Company to issue, transfer or deliver any shares of Common Stock
or stock certificates or other securities or property or cash upon the surrender
of any Notes for the purpose of conversion or to comply with any of the duties,
responsibilities or covenants of the Company contained in this Section. Without
limiting the generality of the foregoing, neither the Trustee nor any Conversion
Agent shall be under any responsibility to determine the correctness of any
provisions contained in any Indenture entered into pursuant to Article VIII
relating either to the kind or amount of shares of stock or securities or
property (including cash) receivable by Holders upon the conversion of their
Notes after any event referred to in Section 9.12 or to any adjustment to be
made with respect thereto, but, subject to the provisions of Article VI, may
accept as conclusive evidence of the correctness of any such provisions, and
shall be protected in relying upon, the Officers' Certificate (which the Company
shall be obligated to file with the Trustee prior to the execution of any such
supplemental indenture) with respect thereto.
SECTION 9.14. Simultaneous Adjustments. In the event that Section 9.6
requires adjustments to the Conversion Rate under more than one of Section
9.6(a), (b), (c) or (d), and the Record Dates for the distributions giving rise
to such adjustments shall occur on the same date, then such adjustments shall be
made by applying, first, the provisions of Section 9.6(c), second, the
provisions of Section 9.6(a) and third, the provisions of Section 9.6(b);
56
provided, however, that nothing in this Section 9.14 shall be done to evade the
principle set forth in Section 9.6(g) that the Maximum Conversion Rate shall not
apply to any adjustments made with respect to any of the events in Section
9.6(a) or Section 9.6(b).
SECTION 9.15. Successive Adjustments. After an adjustment to the Conversion
Rate under Section 9.6, any subsequent event requiring an adjustment under
Section 9.6 shall cause an adjustment to the Conversion Rate as so adjusted.
SECTION 9.16. General Considerations. Whenever successive adjustments to
the Conversion Rate are called for pursuant to Article IX, such adjustments
shall be made to the Market Price as may be necessary or appropriate to
effectuate the intent of Article IX and to avoid unjust or inequitable results
as determined in good faith by the Board of Directors.
SECTION 9.17. Payment of Cash in Lieu of Common Stock. If a Holder elects
to convert all or any portion of a Note into shares of Common Stock as set forth
in Section 9.1 and delivers an irrevocable conversion notice, together, if the
Notes are in certificated form, with the certificated Note as set forth in
Section 9.2, the Company may choose to satisfy all or any portion of its
conversion obligation (the "Conversion Obligation") in cash or a combination of
cash and stock. Upon such election, the Company will notify such Holder through
the Trustee of the dollar amount to be satisfied in cash (which must be
expressed either as 100% of the Conversion Obligation or as a fixed dollar
amount) at any time on or before the date that is three Business Days following
receipt of written notice of conversion as specified in Section 9.2 (such
period, the "Cash Settlement Notice Period"). If the Company elects to pay cash
for any portion of the shares otherwise issuable to the Holder, the Holder may
retract the conversion notice at any time during the two Business Day period
beginning on the day after the final day of the Cash Settlement Notice Period (a
"Conversion Retraction Period"); no such retraction can be made (and a
conversion notice shall be irrevocable) if the Company does not elect to deliver
cash in lieu of shares (other than cash in lieu of fractional shares). If the
conversion notice has not been retracted, then settlement (in cash and/or
shares) will occur on the Business Day following the final day of the 10 Trading
Day period beginning on the day after the final day of the Conversion Retraction
Period (the "Cash Settlement Averaging Period"). Settlement amounts will be
computed as follows:
(a) if the Company elects to satisfy the entire Conversion Obligation in
shares of Common Stock, the Company will deliver to such Holder a number of
shares equal to (1) the aggregate original principal amount at maturity of the
Securities to be converted divided by 1,000, multiplied by (2) the Conversion
Rate;
(b) if the Company elects to satisfy the entire Conversion Obligation in
cash, the Company will deliver to such Holder cash in an amount equal to the
product of: (1) a number equal to (x) the aggregate original principal amount at
maturity of Securities to be converted divided by 1,000, multiplied by (y) the
Conversion Rate, and (2) the average Closing Price of the Common Stock during
the Cash Settlement Averaging Period; and
(c) if the Company elects to satisfy a fixed portion (other than 100%) of
the Conversion Obligation in cash, the Company will deliver to such Holder such
57
cash amount ("Cash Amount") and a number of shares equal to the greater of (1)
one and (2) the excess, if any, of the number of shares calculated as set forth
in clause (a) above over the number of shares equal to the sum, for each day of
the Cash Settlement Averaging Period, of (x) 10% of the Cash Amount, divided by
(y) the closing price of the Common Stock on such day.
ARTICLE X
Defaults and Remedies
---------------------
SECTION 10.1. Events of Default. "Event of Default," wherever used herein
with respect to the Notes, means any one or more of the following events:
(a) default in the payment of any installment of interest or Additional
Amounts, if any, upon any of the Notes as and when the same shall become due and
payable, and continuance of such default for a period of 30 days; or
(b) default in the payment of the principal of any of the Notes as and when
the same shall become due and payable either at maturity, upon redemption, by
declaration or otherwise; or
(c) failure on the part of the Company duly to observe or perform any other
of the covenants or agreements on the part of the Company in the Notes or in
this Indenture contained for a period of 60 days after the date on which written
notice of such failure, requiring the same to be remedied, shall have been given
to the Company by the Trustee by registered mail, or to the Company and the
Trustee by the Holders of at least 25% in aggregate principal amount of the
Notes then outstanding; or
(d) default by the Company in a scheduled payment at maturity, upon
redemption or otherwise, in the aggregate principal amount of $125 million or
more, after the expiration of any applicable grace period, of any Indebtedness
or the acceleration of any Indebtedness of the Company in such aggregate
principal amount, so that it becomes due and payable prior to the date on which
it would otherwise have become due and payable and such payment default is not
cured or such acceleration is not rescinded within 30 days after notice to the
Company in accordance with the terms of the Indebtedness; or
(e) default on the part of the Company in its obligation to convert the
Notes upon exercise of a Holder's conversion right in accordance with the terms
of the Notes and Article IX and such conversion default is not cured or such
conversion is not rescinded within 10 days after notice to the Company; or
(f) default on the part of the Company in its obligation to purchase Notes
upon the occurrence of a Fundamental Change or the exercise by a Holder of its
option to require the Company to repurchase such Holder's Notes in accordance
with the terms of Article VI or Article VII, as applicable; or
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(g) without the consent of the Company a court having jurisdiction shall
enter an order for relief with respect to the Company under the Bankruptcy Code
or without the consent of the Company a court having jurisdiction shall enter a
judgment, order or decree adjudging the Company a bankrupt or insolvent, or
enter an order for relief for reorganization, arrangement, adjustment or
composition of or in respect of the Company under the Bankruptcy Code or
applicable state insolvency law and the continuance of any such judgment, order
or decree is unstayed and in effect for a period of 90 consecutive days; or
(h) the Company shall institute proceedings for entry of an order for
relief with respect to the Company under the Bankruptcy Code or for an
adjudication of insolvency, or shall consent to the institution of bankruptcy or
insolvency proceedings against it, or shall file a petition seeking, or seek or
consent to reorganization, arrangement, composition or relief under the
Bankruptcy Code or any applicable state law, or shall consent to filing of such
petition or to the appointment of a receiver, custodian, liquidator, assignee,
trustee, sequestrator or similar official (other than a custodian pursuant to 8
Delaware Code ss.226 or any similar statute under other state laws) of the
Company or of substantially all of its property, or the Company shall make a
general assignment for the benefit of creditors as recognized under the
Bankruptcy Code.
If an Event of Default with respect to the Notes then outstanding occurs
and is continuing, then and in each and every such case, unless the principal of
all of the Notes shall have already become due and payable, either the Trustee
or the Holders of not less than 25% in aggregate principal amount of the Notes
then outstanding, by notice in writing to the Company (and to the Trustee if
given by Holders), may declare the principal of all the Notes and the interest,
if any, accrued thereon to be due and payable immediately, and upon any such
declaration the same shall become and shall be immediately due and payable,
anything in this Indenture or in the Notes contained to the contrary
notwithstanding. This provision, however, is subject to the condition that if at
any time after the principal (or such specified amount) of the Notes shall have
been so declared due and payable and before any judgment or decree for the
payment of the moneys due shall have been obtained or entered as hereinafter
provided, the Company shall pay or shall deposit with the Trustee a sum
sufficient to pay all matured installments of interest if any, upon all of the
Notes and the principal of any and all Notes, which shall have become due
otherwise than by acceleration (with interest on overdue installments of
interest, if any, to the extent that payment of such interest is enforceable
under applicable law and on such principal at the rate borne by the Notes to the
date of such payment or deposit) and the reasonable compensation, disbursements,
expenses and advances of the Trustee, and any and all defaults under this
Indenture, other than the nonpayment of principal of and accrued interest, if
any, on the Notes, which shall have become due by acceleration, shall have been
cured or shall have been waived in accordance with Section 10.7 or provision
deemed by the Trustee to be adequate shall have been made therefore, then and in
every such case the Holders of a majority in aggregate principal amount of the
Notes then outstanding, by written notice to the Company and to the Trustee, may
rescind and annul such declaration and its consequences; but no such rescission
and annulment shall extend to or shall affect any subsequent default, or shall
impair any right consequent thereon. If any Event of Default with respect to the
Company specified in Section 10.1(g) or 10.1(h) occurs, all unpaid principal and
59
accrued interest on all Notes then outstanding shall ipso facto become and be
immediately due and payable without any declaration or other act by the Trustee
or any Holder.
If the Trustee shall have proceeded to enforce any right under this
Indenture and such proceedings shall have been discontinued or abandoned because
of such rescission or annulment or for any other reason or shall have been
determined adversely to the Trustee, then and in every such case the Company,
the Trustee and the Holders shall be restored respectively to their several
positions and rights hereunder, and all rights, remedies and powers of the
Company, the Trustee and the Holders shall continue as though no such proceeding
had been taken.
Except with respect to an Event of Default pursuant to Section 10.1 (a),
(b), (d), (e) or (f), the Trustee shall not be charged with knowledge of any
Event of Default unless written notice thereof shall have been given to a
Responsible Officer by the Company, a Paying Agent or any Holder. In determining
whether the Holders of the requisite aggregate principal amount of the Notes
outstanding have given any request, demand, authorization or consent under the
Indenture, the principal amount of Notes that will be deemed to be outstanding
will be the amount of the principal of the Notes that would be due and payable
as of the date of the determination upon a declaration of acceleration of the
maturity of the Notes.
SECTION 10.2. Payment of Notes On Default; Suit Therefor. The Company
covenants that (a) if a default shall be made in the payment of any installment
of interest upon the Notes then outstanding as and when the same shall become
due and payable, and such default shall have continued for a period of 30 days,
or (b) if a default shall be made in the payment of the principal of any of the
Notes as and when the same shall have become due and payable, whether at
maturity of the Notes or upon redemption or by declaration or otherwise, then,
upon demand of the Trustee, the Company will pay to the Trustee, for the benefit
of the Holders of the Notes, the whole amount that then shall have become due
and payable on all such Notes for principal or interest, if any, or both, as the
case may be, with interest upon the overdue principal and (to the extent that
payment of such interest is enforceable under applicable law) upon the overdue
installments of interest, if any, at the rate borne by the Notes; and, in
addition thereto, such further amount as shall be sufficient to cover the costs
and expenses of collection, including a reasonable compensation to the Trustee,
its agents, attorneys and counsel and any expenses or liabilities incurred by
the Trustee hereunder other than through its negligence or bad faith.
If the Company shall fail forthwith to pay such amounts upon such demand,
the Trustee, in its own name and as trustee of an express trust, shall be
entitled and empowered to institute any actions or proceedings at law or in
equity for the collection of the sums so due and unpaid, and may prosecute any
such action or proceeding to judgment or final decree, and may enforce any such
judgment or final decree against the Company or any other obligor on the Notes
and collect in the manner provided by law out of the property of the Company or
any other obligor on the Notes, wherever situated, the moneys adjudged or
decreed to be payable.
If there shall be pending proceedings for the bankruptcy or for the
reorganization of the Company or any other obligor on the Notes then outstanding
under any bankruptcy, insolvency or other similar law now or hereafter in
effect, or if a receiver or trustee or similar official shall have been
appointed for the property of the Company or such other obligor, or in the case
of any other similar judicial proceedings relative to the Company or other
obligor upon the Notes, or to the creditors or property of the Company or such
60
other obligor, the Trustee, irrespective or whether the principal of the Notes
shall then be due and payable as therein expressed or by declaration or
otherwise and irrespective of whether the Trustee shall have made any demand
pursuant to the provisions of this Section 10.2, shall be entitled and empowered
by intervention if such proceedings or otherwise to file and prove a claim or
claims for the whole amount of principal and interest, if any, owing and unpaid
in respect of the Notes, and, in case of any judicial proceedings, to file such
proofs of claim and other papers or documents as may be necessary or advisable
in order to have the claims of the Trustee and of the Holders allowed in such
judicial proceedings relative to the Company or any other obligor on the Notes,
its or their creditors, or its or their property, and to collect and receive any
moneys or other property payable or deliverable on any such claims, and to
distribute the same after the deduction of its charges and expenses, and any
receiver, assignee or trustee or similar official in bankruptcy or
reorganization is hereby authorized by each of the Holders to make such payments
to the Trustee, and, if the Trustee shall consent to the making of such payments
directly to the Holders, to pay to the Trustee any amount due it for
compensation and expenses, including counsel fees incurred by it up to the date
of such distribution. To the extent that such payment of reasonable
compensation, expenses and counsel fees out of the estate in any such
proceedings shall be denied for any reason, payment of the same shall be secured
by a lien on, and shall be paid out of, any and all distributions, dividends,
moneys, securities and other property which the Holders of the Notes may be
entitled to receive in such proceedings, whether in liquidation or under any
plan of reorganization or arrangement or otherwise.
All rights of action and of asserting claims under this Indenture, or under
any of the Notes, may be enforced by the Trustee without the possession of any
of the Notes, or the production thereof at any trial or other proceeding
relative thereto, and any such suit or proceeding instituted by the Trustee
shall be brought in its own name as Trustee of an express trust, and any
recovery of judgment shall be for the ratable benefit of the Holders of the
Notes in respect of which such judgment has been recovered.
SECTION 10.3. Application of Moneys Collected by Trustee. Any moneys
collected by the Trustee pursuant to Section 10.2 with respect to the Notes then
outstanding shall be applied in the order following, at the date or dates fixed
by the Trustee for the distribution of such moneys, upon presentation of the
several Notes, and stamping thereon the payment, if only partially paid, and
upon surrender thereof, if fully paid:
FIRST: To the payment of costs and expenses of collection and reasonable
compensation to the Trustee, its agents, attorneys and counsel, and of all other
expenses and liabilities incurred, and all advances made, by the Trustee
pursuant to Section 11.7 except as a result of its negligence or bad faith;
SECOND: If the principal of the outstanding Notes shall not have become due
and be unpaid, to the payment of interest, if any, on the Notes, in the order of
the maturity of the installments of such interest, if any, with interest (to the
extent that such interest has been collected by the Trustee) upon the overdue
installments of interest, if any, at the rate borne by the Notes, such payment
to be made ratably to the Persons entitled thereto;
61
THIRD: If the principal of the outstanding Notes shall have become due, by
declaration or otherwise, to the payment of the whole amount then owing and
unpaid upon the Notes for principal and interest, if any, with interest on the
overdue principal and (to the extent that such interest has been collected by
the Trustee) upon overdue installments of interest, if any, at the rate borne by
the Notes; and in case such moneys shall be insufficient to pay in full the
whole amounts so due and unpaid upon the Notes, then to the payment of such
principal and interest, if any, without preference or priority of principal over
interest or of interest over principal, or of any installment of interest over
any other installment of interest, or of any Note over any other Note, ratably
to the aggregate of such principal and accrued and unpaid interest; and
FOURTH: To the payment of any surplus then remaining to the Company, its
successors or assigns, or to whomsoever may be lawfully entitled to receive the
same.
No claim for interest which in any manner at or after maturity shall have
been transferred or pledged separate or apart from the Notes to which it
relates, or which in any manner shall have been kept alive after maturity by an
extension (otherwise than pursuant to an extension made pursuant to a plan
proposed by the Company to the Holders of all of the Notes then outstanding),
purchase, funding or otherwise by or on behalf or with the consent or approval
of the Company shall be entitled, in case of a default hereunder, to any benefit
of this Indenture, except after prior payment in full of the principal of all of
the Notes then outstanding and of all claims for interest not so transferred,
pledged, kept alive, extended, purchased or funded.
SECTION 10.4. Proceedings by Holders. No Holder of any Notes then
outstanding shall have any right by virtue of or by availing of any provision of
this Indenture to institute any suit, action or proceeding in equity or at law
upon or under or with respect to this Indenture or the Notes or for the
appointment of a receiver or trustee or similar official, or for any other
remedy hereunder or thereunder, unless such Holder previously shall have given
to the Trustee written notice of default and of the continuance thereof, as
hereinbefore provided, and unless the Holders of not less than 25% in aggregate
principal amount of the Notes then outstanding shall have made written request
to the Trustee to institute such action, suit or proceeding in its own name as
Trustee hereunder and shall have offered to the Trustee such reasonable
indemnity as it may require against the costs, expenses and liabilities to be
incurred therein or thereby, and the Trustee for 60 days after its receipt of
such notice, request and offer of indemnity, shall have neglected or refused to
institute any such action, suit or proceeding, it being understood and intended,
and being expressly covenanted by the Holder of every Note with every other
taker and Holder and the Trustee, that no one or more Holders of the Notes shall
have any right in any manner whatever by virtue of or by availing of any
provision of this Indenture or of the Notes to affect, disturb or prejudice the
rights of any other Holder of such Notes or to obtain or seek to obtain priority
over or preference as to any other such Holder, or to enforce any right under
this Indenture or the Notes, except in the manner herein provided and for the
equal, ratable and common benefit of all Holders of Notes.
Notwithstanding any other provisions in this Indenture, however, the right
of any Holder of any Note to receive payment of the principal of and interest,
if any, on such Note, on or after the respective due dates expressed in such
62
Note, or to institute suit for the enforcement of any such payment on or after
such respective dates shall not be impaired or affected without the consent of
such Holder.
SECTION 10.5. Proceedings by Trustee. In case of an Event of Default
hereunder, the Trustee may in its discretion proceed to protect and enforce the
rights vested in it by this Indenture by such appropriate judicial proceedings
as the Trustee shall deem most effectual to protect and enforce any of such
rights, either by suit in equity or by action at law or by proceedings in
bankruptcy or otherwise, whether for the specific enforcement of any covenant or
agreement contained in this Indenture or in aid of the exercise of any power
granted in this Indenture, or to enforce any other legal or equitable right
vested in the Trustee by this Indenture or by law.
SECTION 10.6. Remedies Cumulative and Continuing. All powers and remedies
given by this Article X to the Trustee or to the Holders shall, to the extent
permitted by law, be deemed cumulative and not exclusive of any thereof or of
any other powers and remedies available to the Trustee or the Holders, by
judicial proceedings or otherwise, to enforce the performance or observance of
the covenants and agreements contained in this Indenture, and no delay or
omission of the Trustee or of any Holder to exercise any right or power accruing
upon any default occurring and continuing as aforesaid shall impair any such
right or power, or shall be construed to be a waiver of any such default or an
acquiescence therein; and, subject to the provisions of Section 10.4, every
power and remedy given by this Article X or by law to the Trustee or to the
Holders may be exercised from time to time, and as often as shall be deemed
expedient, by the Trustee or by the Holders.
SECTION 10.7. Direction of Proceedings; Waiver of Defaults by Majority of
Holders. The Holders of a majority in aggregate principal amount of the Notes
then outstanding shall have the right to direct the time, method, and place of
conducting any proceeding for any remedy available to the Trustee, or exercising
any trust or power conferred on the Trustee with respect to the Notes; provided,
however, that (subject to the provisions of Section 11.1) the Trustee shall have
the right to decline to follow any such direction if the Trustee shall determine
upon advice of counsel that the action or proceeding so directed may not
lawfully be taken or if the Trustee in good faith by its board of directors, its
executive committee, or a trust committee of directors or Responsible Officers
or both shall determine that the action or proceeding so directed would involve
the Trustee in personal liability. The Holders of a majority in aggregate
principal amount of the Notes then outstanding may on behalf of the Holders of
all of the Notes waive any past default or Event of Default hereunder and its
consequences except a default in the payment of interest, if any, on, or the
principal of, the Notes. Upon any such waiver the Company, the Trustee and the
Holders of the Notes shall be restored to their former positions and rights
hereunder, respectively; but no such waiver shall extend to any subsequent or
other default or Event of Default or impair any right consequent thereon.
Whenever any default or Event of Default hereunder shall have been waived as
permitted by this Section 10.7, said default or Event of Default shall for all
purposes of the Notes and this Indenture be deemed to have been cured and to be
not continuing.
SECTION 10.8. Notice of Defaults. The Trustee shall, within 90 days after
the occurrence of a default, with respect to the Notes then outstanding, mail to
all Holders of the Notes, as the names and the addresses of such Holders appear
63
upon the Notes register, notice of all defaults known to the Trustee with
respect to the Notes, unless such defaults shall have been cured before the
giving of such notice (the term "defaults" for the purpose of this Section 10.8
being hereby defined to be the events specified in clauses (a), (b), (c), (d),
(e), (f), (g) and (h) of Section 10.1, not including periods of grace, if any,
provided for therein and irrespective of the giving of the written notice
specified in said clause (c) but in the case of any default of the character
specified in said clause (c) no such notice to Holders shall be given until at
least 60 days after the giving of written notice thereof to the Company pursuant
to said clause (c).
SECTION 10.9. Undertaking to Pay Costs. All parties to this Indenture
agree, and each Holder of any Note by his acceptance thereof shall be deemed to
have agreed, that any court may in its discretion require, in any suit for the
enforcement of any right or remedy under this Indenture, or in any suit against
the Trustee for any action taken or omitted by it as Trustee, the filing by any
party litigant in such suit of an undertaking to pay the cost of such suit, and
that such court may in its discretion assess reasonable costs, including
reasonable attorney's fees, against any party litigant in such suit, having due
regard to the merits and good faith of the claims or defenses made by such party
litigant; but the provisions of this Section 10.9 shall not apply to any suit
instituted by the Trustee, to any suit instituted by any Holder or group of
Holders, holding in the aggregate more than 10% in principal amount of the Notes
then outstanding, or to any suit instituted by any Holders for the enforcement
of the payment of the principal of or interest, if any, on any Note against the
Company on or after the due date expressed in such Note.
ARTICLE XI
Trustee
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SECTION 11.1. Duties of Trustee.
(a) If an Event of Default has occurred and is continuing, the Trustee
shall exercise the rights and powers vested in it by this Indenture and use the
same degree of care and skill in their exercise as a prudent Person would
exercise or use under the circumstances in the conduct of such Person's own
affairs; provided that if an Event of Default occurs and is continuing, the
Trustee will be under no obligation to exercise any of the rights or powers
under this Indenture at the request or direction of any of the Holders unless
such Holders have provided the Trustee indemnity or security reasonably
satisfactory to the Trustee against loss, liability or expense.
(b) Except during the continuance of an Event of Default:
(i) the Trustee undertakes to perform such duties and only such duties as
are specifically set forth in this Indenture and no implied covenants or
obligations shall be read into this Indenture against the Trustee; and
(ii) in the absence of bad faith on its part, the Trustee may conclusively
rely, as to the truth of the statements and the correctness of the opinions
expressed therein, upon certificates or opinions furnished to the Trustee and
conforming to the requirements of this Indenture. However, in the case of any
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such certificates or opinions which by any provisions hereof are specifically
required to be furnished to the Trustee, the Trustee shall examine such
certificates and opinions to determine whether or not they conform to the
requirements of this Indenture (but need not confirm or investigate the accuracy
of mathematical calculations or other facts stated therein).
(c) The Trustee may not be relieved from liability for its own negligent
action, its own negligent failure to act or its own willful misconduct, except
that:
(i) this paragraph does not limit the effect of paragraph (b) of this
Section;
(ii) the Trustee shall not be liable for any error of judgment made in good
faith by a Responsible Officer unless it is proved that the Trustee was
negligent in ascertaining the pertinent facts; and
(iii) the Trustee shall not be liable with respect to any action it takes
or omits to take in good faith in accordance with a direction received by it
pursuant to Section 10.5.
(d) The Trustee shall not be liable for interest on any money received by
it except as the Trustee may agree in writing with the Company.
(e) Money held in trust by the Trustee need not be segregated from other
funds except to the extent required by law.
(f) No provision of this Indenture shall require the Trustee to expend or
risk its own funds or otherwise incur any financial liability in the performance
of any of its duties hereunder or in the exercise of any of its rights or
powers, if it shall have reasonable grounds to believe that repayment of such
funds or adequate indemnity against such risk or liability is not reasonably
assured to it.
(g) Every provision of this Indenture relating to the conduct or affecting
the liability of or affording protection to the Trustee shall be subject to the
provisions of this Section 11.1 and to the provisions of the TIA.
(h) The Trustee shall be under no obligation to exercise any of the rights
or powers vested in it by this Indenture at the request or direction of any of
the Holders unless such Holders shall have provided to the Trustee security or
indemnity satisfactory to it against the costs, expenses (including reasonable
attorneys' fees and expenses) and liabilities that might be incurred by it in
compliance with such request or direction.
SECTION 11.2. Rights of Trustee.
(a) The Trustee may conclusively rely and shall be protected in acting or
refraining from acting upon any paper or document believed by it to be genuine
and to have been signed or presented by the proper Person or Persons. The
Trustee need not investigate any fact or matter stated in the document.
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(b) Before the Trustee acts or refrains from acting, it may require an
Officers' Certificate or an Opinion of Counsel. The Trustee shall not be liable
for any action it takes or omits to take in good faith in reliance on the
Officers' Certificate or Opinion of Counsel.
(c) The Trustee may act through its attorneys and agents and shall not be
responsible for the misconduct or negligence of any attorney or agent appointed
with due care.
(d) The Trustee shall not be liable for any action it takes or omits to
take in good faith which it believes to be authorized or within its rights or
powers; provided, however, that the Trustee's conduct does not constitute
willful misconduct or negligence.
(e) The Trustee may consult with counsel of its selection, and the advice
or opinion of counsel with respect to legal matters relating to this Indenture
and the Notes shall be full and complete authorization and protection from
liability in respect to any action taken, omitted or suffered by it hereunder in
good faith and in accordance with the advice or opinion of such counsel.
(f) The Trustee shall not be bound to make any investigation into the facts
or matters stated in any resolution, certificate, statement, instrument,
opinion, notice, request, direction, consent, order, bond or other paper or
document; but the Trustee, in its discretion, may make such further inquiry or
investigation into such facts or matters as it may see fit and, if the Trustee
shall determine to make such further inquiry or investigation, it shall be
entitled to examine the books, records and premises of the Company at reasonable
times and in a reasonable manner, personally or by agent or attorney at the sole
cost of the Company and shall incur no liability or additional liability of any
kind by reason of such inquiry or investigation.
(g) The Trustee shall not be deemed to have knowledge of any Default or
Event of Default except (i), during any period it is serving as Registrar and
Paying Agent for the Notes, any Event of Default occurring pursuant to Section
10.1(a) and 10.1(b), or (ii) any Default or Event of Default of which a
Responsible Officer shall have received written notification or obtained Actual
Knowledge. "Actual Knowledge" shall mean the actual fact or statement of knowing
by a Responsible Officer without independent investigation with respect thereto.
(h) In no event shall the Trustee be responsible or liable for special,
indirect, or consequential loss or damage of any kind whatsoever (including, but
not limited to, loss of profit) irrespective of whether the Trustee has been
advised of the likelihood of such loss or damage and regardless of the form of
action.
(i) The rights, privileges, protections, immunities and benefits given to
the Trustee, including, without limitation, its right to be indemnified, are
extended to, and shall be enforceable by, the Trustee in each of its capacities
hereunder, and each agent, custodian and other Person employed to act hereunder.
(j) The Trustee may request that the Company deliver an Officers'
Certificate setting forth the names of individuals and/or titles of officers
authorized at such time to take specified actions pursuant to this Indenture,
which Officers' Certificate may be signed by any person authorized to sign an
Officers' Certificate, including any person specified as so authorized in any
such certificate previously delivered and not superseded.
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SECTION 11.3. Individual Rights of Trustee. The Trustee in its individual
or any other capacity may become the owner or pledgee of Notes and may otherwise
deal with the Company or its Affiliates with the same rights it would have if it
were not Trustee. Any Paying Agent, Registrar, co-registrar or co-paying agent
may do the same with like rights. However, the Trustee must comply with Sections
11.10 and 11.11. In addition, the Trustee shall be permitted to engage in
transactions with the Company; provided, however, that if the Trustee acquires
any conflicting interest the Trustee must (i) eliminate such conflict within 90
days of acquiring such conflicting interest or (ii) resign.
SECTION 11.4. Trustee's Disclaimer. The Trustee shall not be responsible
for and makes no representation as to the validity or adequacy of this Indenture
or the Notes, it shall not be accountable for the Company's use of the Notes or
the proceeds from the Notes, and it shall not be responsible for any statement
of the Company in this Indenture or in any document issued in connection with
the sale of the Notes or in the Notes other than the Trustee's certificate of
authentication or for the use or application of any funds received by any Paying
Agent other than the Trustee.
SECTION 11.5. Notice of Defaults. If a Default or Event of Default occurs
and is continuing and if a Responsible Officer has actual knowledge thereof, the
Trustee shall mail to each Holder notice of the Default or Event of Default
within 90 days after it occurs. Except in the case of a Default or Event of
Default in payment of principal of or interest on any Note (including payments
pursuant to the required repurchase provisions of such Note, if any), the
Trustee may withhold the notice if and so long as its board of directors, a
committee of its board of directors or a committee of its Responsible Officers
and/or a Responsible Officer in good faith determines that withholding the
notice is in the interests of Holders.
SECTION 11.6. Reports by Trustee to Holders. As promptly as practicable
after each January 15 beginning with the January 15 following the date of this
Indenture, and in any event prior to July 15 in each year, the Trustee shall
mail to each Holder a brief report dated as of such January 15 that complies
with TIA ss. 313(a), if and to the extent such report may be required by the
TIA. The Trustee also shall comply with TIA ss. 313(b). The Trustee shall also
transmit by mail all reports required by TIA ss. 313(c).
A copy of each report at the time of its mailing to Holders shall be filed
with the SEC and each stock exchange (if any) on which the Notes are listed. The
Company agrees to notify promptly the Trustee in writing whenever the Notes
become listed on any stock exchange and of any delisting thereof.
SECTION 11.7. Compensation and Indemnity. The Company shall pay to the
Trustee from time to time such compensation for its services as the parties
shall agree in writing from time to time. The Trustee's compensation shall not
be limited by any law on compensation of a trustee of an express trust. The
Company shall reimburse the Trustee upon request for all reasonable
out-of-pocket expenses incurred or made by it, including, but not limited to,
costs of collection, costs of preparing and reviewing reports, certificates and
other documents, costs of preparation and mailing of notices to Holders and
reasonable costs of counsel, in addition to the compensation for its services.
Such expenses shall include the reasonable compensation and expenses,
disbursements and advances of the Trustee's agents, counsel, accountants and
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experts. The Company shall indemnify the Trustee, and each of its officers,
directors, counsel and agents, against any and all loss, liability or expense
(including, but not limited to, reasonable attorneys' fees and expenses)
incurred by it in connection with the administration of this trust and the
performance of its duties hereunder, including the costs and expenses of
enforcing this Indenture (including this Section 11.7) and of defending itself
against any claims (whether asserted by any Holder, the Company or otherwise).
The Trustee shall notify the Company promptly of any claim for which it may seek
indemnity. Failure by the Trustee to so notify the Company shall not relieve the
Company of its obligations hereunder. The Company shall defend the claim and the
Trustee may have separate counsel and the Company shall pay the fees and
expenses of such counsel. The Company need not reimburse any expense or
indemnify against any loss, liability or expense incurred by the Trustee through
the Trustee's own willful misconduct, negligence or bad faith, subject to the
exceptions contained in Section 11.1(c).
To secure the Company's payment obligations in this Section 11.7, the
Trustee shall have a lien prior to the Notes on all money or property held or
collected by the Trustee other than money or property held in trust to pay
principal of and interest on particular Notes. The Trustee's right to receive
payment of any amounts due under this Section 11.7 shall not be subordinate to
any other liability or indebtedness of the Company.
The Company's payment obligations pursuant to this Section and any lien
arising hereunder shall survive the discharge of this Indenture and the
resignation or removal of the Trustee. When the Trustee incurs expenses after
the occurrence of a Default specified in Section 10.1(g) or (h) with respect to
the Company, the expenses are intended to constitute expenses of administration
under the Bankruptcy Code.
SECTION 11.8. Replacement of Trustee. The Trustee may resign at any time by
so notifying the Company. The Holders of a majority in principal amount of the
Notes may remove the Trustee by so notifying the Company and the Trustee in
writing and may appoint a successor Trustee. The Company shall remove the
Trustee if:
(1) the Trustee fails to comply with Section 11.10;
(2) the Trustee is adjudged bankrupt or insolvent;
(3) a receiver or other public officer takes charge of the Trustee or its
property; or
(4) the Trustee otherwise becomes incapable of acting.
If the Trustee resigns or is removed by the Company or by the Holders of a
majority in principal amount of the Notes and such Holders do not reasonably
promptly appoint a successor Trustee, or if a vacancy exists in the office of
Trustee for any reason (the Trustee in such event being referred to herein as
the retiring Trustee), the Company shall promptly appoint a successor Trustee.
A successor Trustee shall deliver a written acceptance of its appointment
to the retiring Trustee and to the Company. Thereupon the resignation or removal
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of the retiring Trustee shall become effective, and the successor Trustee shall
have all the rights, powers and duties of the Trustee under this Indenture. The
successor Trustee shall mail a notice of its succession to Holders. The retiring
Trustee shall promptly transfer all property held by it as Trustee to the
successor Trustee, subject to the lien provided for in Section 11.7.
If a successor Trustee does not take office within 60 days after the
retiring Trustee resigns or is removed, the retiring Trustee or the Holders of
10% in principal amount of the Notes may petition, at the expense of the
Company, any court of competent jurisdiction for the appointment of a successor
Trustee.
If the Trustee fails to comply with Section 11.10, unless the Trustee's
duty to resign is stayed as provided in TIA ss. 310(b), any Holder may petition
any court of competent jurisdiction for the removal of the Trustee and the
appointment of a successor Trustee.
Notwithstanding the replacement of the Trustee pursuant to this Section
11.8, the Company's obligations under Section 11.7 shall continue for the
benefit of the retiring Trustee.
SECTION 11.9. Successor Trustee by Merger. If the Trustee consolidates
with, merges or converts into, or transfers all or substantially all its
corporate trust business or assets to, another corporation or banking
association, the resulting, surviving or transferee corporation without any
further act shall be the successor Trustee.
In case at the time such successor or successors by merger, conversion or
consolidation to the Trustee shall succeed to the trusts created by this
Indenture, any of the Notes shall have been authenticated but not delivered, any
such successor to the Trustee may adopt the certificate of authentication of any
predecessor trustee, and deliver such Notes so authenticated; and in case at
that time any of the Notes shall not have been authenticated, any successor to
the Trustee may authenticate such Notes either in the name of any predecessor
hereunder or in the name of the successor to the Trustee; and in all such cases
such certificates shall have the full force which it is anywhere in the Notes or
in this Indenture provided that the certificate of the Trustee shall have.
SECTION 11.10. Eligibility; Disqualification. The Trustee shall at all
times satisfy the requirements of TIA ss. 310(a). The Trustee shall have a
combined capital and surplus of at least $50 million as set forth in its most
recent filed annual report of condition. The Trustee shall comply with TIA ss.
310(b).
SECTION 11.11. Preferential Collection of Claims Against Company. If and
when the Trustee shall be or become a creditor of the Company, the Trustee shall
comply with TIA ss. 311(a), excluding any creditor relationship listed in TIA
ss. 311(b). A Trustee who has resigned or been removed shall be subject to TIA
ss. 311(a) to the extent indicated.
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ARTICLE XII
Satisfaction and Discharge of Indenture; Unclaimed Moneys
---------------------------------------------------------
SECTION 12.1. Satisfaction and Discharge of Indenture. If at any time (a)
the Company shall have paid or caused to be paid the principal of and interest,
if any, on all the Notes outstanding (other than Notes which have been
destroyed, lost or stolen and which have been replaced or paid as provided in
Section 2.8) as and when the same shall have become due and payable, or (b) the
Company shall have delivered to the Trustee for cancellation all Notes
theretofore authenticated (other than Notes which have been destroyed, lost or
stolen and which have been replaced or paid as provided in Section 2.8); and if,
in any such case, the Company shall also pay or cause to be paid all other sums
payable hereunder by the Company, then this Indenture shall cease to be of
further effect, and the Trustee, on demand of the Company accompanied by an
Officer's Certificate and an Opinion of Counsel, each stating that all
conditions precedent relating to the satisfaction and discharge contemplated by
this provision have been complied with, and at the cost and expense of the
Company, shall execute proper instruments acknowledging such satisfaction and
discharging this Indenture. The Company agrees to reimburse the Trustee for any
costs or expenses thereafter reasonably and properly incurred, and to compensate
the Trustee for any services thereafter reasonably and properly rendered, by the
Trustee in connection with this Indenture or the Notes.
If at any time the exact amount described in clause (ii) below can be
determined at the time of making the deposit referred to in such clause (ii),
(i) all of the Notes not theretofore delivered to the Trustee for cancellation
shall have become due and payable, or are by their terms to become due and
payable within one year or are to be called for redemption within one year under
arrangements satisfactory to the Trustee for the giving of notice of redemption,
and (ii) the Company shall have irrevocably deposited or caused to be deposited
with the Trustee as funds in trust, specifically pledged as security for, and
dedicated solely to, the benefit of the Holders of the Notes, cash in an amount
(other than moneys repaid by the Trustee or any Paying Agent to the Company in
accordance with Section 12.4) or U.S. Government Obligations, maturing as to
principal and interest, if any, at such times and in such amounts as will insure
the availability of cash, or a combination thereof, sufficient in the opinion of
a nationally recognized firm of independent public accountants expressed in a
written certification thereof delivered to the Trustee, to pay the principal of
and interest, if any, on all of the Notes on each date that such principal or
interest, if any, is due and payable in accordance with the terms of this
Indenture and the Notes; then the Company shall be deemed to have paid and
discharged the entire indebtedness on all the Notes on the date of the deposit
referred to in clause (b) above and the provisions of this Indenture with
respect to the Notes shall no longer be in effect (except as to (i) rights of
registration of transfer and exchange of Notes, (ii) substitution of mutilated,
defaced, destroyed, lost or stolen Notes, (iii) rights of Holders of Notes to
receive payments of principal thereof and interest, if any, thereon upon the
original stated due dates therefor (but not upon acceleration), (iv) the rights,
obligations, duties and immunities of the Trustee hereunder, (v) the rights of
the Holders of Notes as beneficiaries hereof with respect to the property so
deposited with the Trustee payable to all or any of them and (vi) the
obligations of the Company under Section 2.3 with respect to the Notes) and the
Trustee, on demand of the Company accompanied by an Officer's Certificate and an
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Opinion of Counsel, each stating that all conditions precedent contemplated by
this provision have been complied with, and at the cost and expense of the
Company, shall execute proper instruments acknowledging the same.
In addition to discharge of this Indenture pursuant to the next preceding
paragraph, if the exact amount described in subparagraph (a) below can be
determined at the time of making the deposit referred to in such subparagraph
(a), the Company shall be deemed to have paid and discharged the entire
indebtedness on all of the Notes on the 91st day after the date of the deposit
referred to in subparagraph (a) below, and the provisions of this Indenture with
respect to the Notes shall no longer be in effect (except as to (i) rights of
registration of transfer and exchange of Notes, (ii) substitution of mutilated,
defaced, destroyed, lost or stolen Notes, (iii) rights of Holders of Notes to
receive payments of principal thereof and interest, if any, thereon upon the
original stated due dates therefor (but not upon acceleration), (iv) the rights,
obligations, duties and immunities of the Trustee hereunder, (v) the rights of
the Holders of the Notes as beneficiaries hereof with respect to the property so
deposited with the Trustee payable to all or any of them and (vi) the
obligations of the Company under Section 2.3 with respect to the Notes) and the
Trustee, on demand of the Company accompanied by an Officer's Certificate and an
Opinion of Counsel, each stating that all conditions precedent contemplated by
this provision have been complied with, and at the cost and expense of the
Company, shall execute proper instruments acknowledging the same, if
(a) with reference to this provision the Company has irrevocably deposited
or caused to be irrevocably deposited with the Trustee as funds in trust,
specifically pledged as security for, and dedicated solely to, the benefit of
the Holders of the Notes (i) cash in an amount, or (ii) U.S. Government
Obligations, maturing as to principal and interest, if any, at such times and in
such amounts as will insure the availability of cash, or (iii) a combination
thereof, sufficient, in the opinion of a nationally recognized firm of
independent public accountants expressed in a written certification thereof
delivered to the Trustee, to pay the principal of and interest, if any, on all
of the Notes on each date that such principal or interest, if any, is due and
payable in accordance with the terms of this Indenture and the Notes;
(b) such deposit will not result in a breach or violation of, or constitute
a default under, any agreement or instrument to which the Company is a party or
by which it is bound; and
(c) the Company has delivered to the Trustee an Opinion of Counsel based on
the fact that (x) the Company has received from, or there has been published by,
the Internal Revenue Service a ruling or (y), since the date hereof, there has
been a change in the applicable United States federal income tax law, in either
case to the effect that, and such opinion shall confirm that, the Holders of the
Notes of such series will not recognize income, gain or loss for federal income
tax purposes as a result of such deposit, defeasance and discharge and will be
subject to federal income tax on the same amount and in the same manner and at
the same times, as would have been the case if such deposit, defeasance and
discharge had not occurred.
SECTION 12.2. Application by Trustee of Funds Deposited for Payment of
Notes. Subject to Section 12.4, all moneys deposited with the Trustee pursuant
to Section 12.1 shall be held in trust and applied by it to the payment, either
directly or through any Paying Agent (including the Company acting as its own
paying agent), to the Holders of the Notes for the payment or redemption of
which such moneys have been deposited with the Trustee, of all sums due and to
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become due thereon for principal and interest, if any, but such money need not
be segregated from other funds except to the extent required by law.
SECTION 12.3. Repayment of Moneys Held by Paying Agent. In connection with
the satisfaction and discharge of this indenture with respect to the Notes, all
moneys then held by any Paying Agent under the provisions of this Indenture with
respect to the Notes shall, upon demand of the Company, be repaid to it or paid
to the Trustee and thereupon such Paying Agent shall be released from all
further liability with respect to such moneys.
SECTION 12.4. Return of Moneys Held by Trustee and Paying Agent Unclaimed
for Two Years. Any moneys deposited with or paid to the Trustee or any Paying
Agent for the payment of the principal of or interest, if any, on the Notes and
not applied but remaining unclaimed for two years after the date upon which such
principal or interest, if any, shall have become due and payable, shall, upon
the written request of the Company and unless otherwise required by mandatory
provisions of applicable escheat or abandoned or unclaimed property law, be
repaid to the Company by the Trustee or such Paying Agent, and the Holder of the
Notes shall, unless otherwise required by mandatory provisions of applicable
escheat or abandoned or unclaimed property laws, thereafter look only to the
Company for any payment which such Holder may be entitled to collect, and all
liability of the Trustee or any Paying Agent with respect to such moneys shall
thereupon cease; provided, however, that the Trustee or such Paying Agent,
before being required to make any such repayment with respect to moneys
deposited with it for any payment in respect of the Notes, shall, at the expense
of the Company, mail by first-class mail to Holders of the Notes at their
addresses as they shall appear on the Note register notice that such moneys
remain and that, after a date specified therein, which shall not be less than
thirty days from the date of such mailing or publication, any unclaimed balance
of such money then remaining will be repaid to the Company.
SECTION 12.5. Indemnity for U.S. Government Obligations. The Company shall
pay and indemnify the Trustee against any tax, fee or other charge imposed on or
assessed against the U.S. Government Obligations deposited pursuant to Section
12.1 or the principal or interest received in respect of such obligations.
ARTICLE XIII
Amendments
----------
SECTION 13.1. Without Consent of Holders. The Company and the Trustee may
amend this Indenture or the Notes without notice to or consent of any Holder:
(1) to cure any ambiguity or correct any inconsistency;
(2) to evidence the assumption by a Successor Company of the Company's
obligations under this Indenture and the Notes;
(3) secure the Notes;
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(4) to add additional covenants or Events of Default for the protection of
the holders of the Notes;
(5) to evidence the acceptance of appointment of a successor trustee; or
(6) to amend the Indenture or the Notes in any other manner necessary or
desirable and that will not adversely affect the rights of any Holder.
After an amendment under this Section 13.1 becomes effective, the Company
shall mail to Holders a notice briefly describing such amendment. The failure to
give such notice to all Holders, or any defect therein, shall not impair or
affect the validity of an amendment under this Section 13.1.
SECTION 13.2. With Consent of Holders. The Company and the Trustee may
amend this Indenture or the Notes without notice to any Holder but with the
written consent of the Holders of at least a majority in principal amount of the
Notes then outstanding. However, without the consent of each Note then
outstanding, an amendment may not:
(1) extend the stated maturity of the principal of any Note;
(2) reduce the amount of the principal of any Note;
(3) reduce the rate or extend the time of payment of interest on any Note;
(4) reduce or alter the method of computation of any amount payable on or
at redemption or repayment of any Note;
(5) change the coin of currency in which principal, interest and redemption
or repurchase price are payable;
(6) change the terms applicable to redemption or repurchase in a manner
adverse to the Noteholder;
(7) make any change that adversely affects the right to convert the Notes,
or decrease the conversion rate with respect to the Notes;
(8) impair of affect the right to institute suit for the enforcement of any
payment or repayment of any Note; or
(9) reduce the percentage stated above of the holders of Notes who must
consent to a modification to the Indenture or the Notes.
It shall not be necessary for the consent of the Holders under this Section
13.2 to approve the particular form of any proposed amendment, but it shall be
sufficient if such consent approves the substance thereof.
After an amendment under this Section 13.2 becomes effective, the Company
shall mail to Holders a notice briefly describing such amendment. The failure to
give such notice to all Holders, or any defect therein, shall not impair or
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affect the validity of an amendment under this Section 13.2.
SECTION 13.3. Compliance with Trust Indenture Act. Every amendment to this
Indenture or the Notes shall comply with the TIA as then in effect.
SECTION 13.4. Revocation and Effect of Consents and Waivers. A consent to
an amendment or a waiver by a Holder of a Note shall bind the Holder and every
subsequent Holder of that Note or portion of the Note that evidences the same
debt as the consenting Holder's Note, even if notation of the consent or waiver
is not made on the Note. However, any such Holder or subsequent Holder may
revoke the consent or waiver as to such Holder's Note or portion of the Note if
the Trustee receives the notice of revocation before the date the amendment or
waiver becomes effective. After an amendment or waiver becomes effective, it
shall bind every Holder. An amendment or waiver made pursuant to Section 13.2
shall become effective upon receipt by the Trustee of the requisite number of
written consents.
The Company may, but shall not be obligated to, fix a record date for the
purpose of determining the Holders entitled to give their consent or take any
other action described above or required or permitted to be taken pursuant to
this Indenture. If a record date is fixed, then notwithstanding the immediately
preceding paragraph, those Persons who were Holders at such record date (or
their duly designated proxies), and only those Persons, shall be entitled to
give such consent or to revoke any consent previously given or to take any such
action, whether or not such Persons continue to be Holders after such record
date. No such consent shall become valid or effective more than 120 days after
such record date.
SECTION 13.5. Notation on or Exchange of Notes. If an amendment changes the
terms of a Note, the Trustee may require the Holder of the Note to deliver it to
the Trustee. The Trustee may place an appropriate notation on the Note regarding
the changed terms and return it to the Holder. Alternatively, if the Company or
the Trustee so determines, the Company in exchange for the Note shall issue and
the Trustee shall authenticate a new Note that reflects the changed terms.
Failure to make the appropriate notation or to issue a new Note shall not affect
the validity of such amendment.
SECTION 13.6. Trustee To Sign Amendments. The Trustee shall sign any
amendment authorized pursuant to this Article XIII if the amendment does not
adversely affect the rights, duties, liabilities or immunities of the Trustee.
If it does, the Trustee may but need not sign it. In signing such amendment the
Trustee shall be entitled to receive indemnity satisfactory to it and to
receive, and (subject to Section 11.1) shall be fully protected in relying upon,
an Officers' Certificate and an Opinion of Counsel stating that such amendment
is authorized or permitted by this Indenture.
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ARTICLE XIV
Miscellaneous
-------------
SECTION 14.1. Trust Indenture Act Controls. If any provision of this
Indenture limits, qualifies or conflicts with another provision which is
required to be included in this Indenture by the TIA, the provision required by
the TIA shall control.
SECTION 14.2. Notices. Any notice or communication shall be in writing and
delivered in person or mailed by first-class mail addressed as follows:
if to the Company:
Halliburton Company
1401 McKinney, Suite 2400
Houston, Texas 77010
Attention: Chief Financial Officer
Facsimile No.: (713) 759-2603
With copies to:
Baker Botts L.L.P.
910 Louisiana, Suite 3200
Houston, Texas 77002
Attention: Darrell W. Taylor
Facsimile No.: (713) 229-2813
if to the Trustee:
JPMorgan Chase Bank
600 Travis, Suite 1150
Houston, Texas 77002
Attention: Institutional Trust Services
Facsimile No.: (713) 577-5200
The Company or the Trustee by notice to the other may designate additional
or different addresses for subsequent notices or communications.
Any notice or communication mailed to a Holder shall be mailed to the
Holder at the Holder's address as it appears on the registration books of the
Registrar and shall be sufficiently given if so mailed within the time
prescribed.
Failure to mail a notice or communication to a Holder or any defect in it
shall not affect its sufficiency with respect to other Holders. If a notice or
communication is mailed in the manner provided above, it is duly given, whether
or not the addressee receives it.
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SECTION 14.3. Communication by Holders with Other Holders. Holders may
communicate pursuant to TIA ss. 312(b) with other Holders with respect to their
rights under this Indenture or the Notes. The Company, the Trustee, the
Registrar and anyone else shall have the protection of TIA ss. 312(c).
SECTION 14.4. Certificate and Opinion as to Conditions Precedent. Upon any
request or application by the Company to the Trustee to take or refrain from
taking any action under this Indenture, the Company or such other obligor upon
the Notes, as the case may be, shall furnish to the Trustee such certificates
and opinions as may be required under the TIA. Each such certificate or opinion
shall be given in the form of one or more Officer's Certificates, if to be given
by an Officer, or an Opinion of Counsel, if to be given by counsel, and shall
comply with the requirements of the TIA and any other requirements set forth in
this Indenture. Notwithstanding the foregoing, in the case of any such request
or application as to which the furnishing of any Officer's Certificate or
Opinion of Counsel is specifically required by any provision of this Indenture
relating to such particular request or application, no additional certificate or
opinion need be furnished.
SECTION 14.5. Statements Required in Certificate or Opinion. Each
certificate or opinion with respect to compliance with a covenant or condition
provided for in this Indenture shall include:
(1) a statement that the individual making such certificate or opinion has
read such covenant or condition;
(2) a brief statement as to the nature and scope of the examination or
investigation upon which the statements or opinions contained in such
certificate or opinion are based;
(3) a statement that, in the opinion of such individual, he has made such
examination or investigation as is necessary to enable him to express an
informed opinion as to whether or not such covenant or condition has been
complied with; and
(4) a statement as to whether or not, in the opinion of such individual,
such covenant or condition has been complied with.
In giving such Opinion of Counsel, counsel may rely as to factual matters
on an Officers' Certificate or on certificates of public officials.
SECTION 14.6. When Notes Disregarded. In determining whether the Holders of
the required principal amount of Notes have concurred in any direction, waiver
or consent, Notes owned by the Company or by any Person directly or indirectly
controlling or controlled by or under direct or indirect common control with the
Company shall be disregarded and deemed not to be outstanding, except that, for
the purpose of determining whether the Trustee shall be protected in relying on
any such direction, waiver or consent, only Notes which a Responsible Officer of
the Trustee actually knows are so owned shall be so disregarded. Also, subject
to the foregoing, only Notes outstanding at the time shall be considered in any
such determination.
76
SECTION 14.7. Rules by Trustee, Paying Agent and Registrar. The Trustee may
make reasonable rules for action by, or a meeting of, Holders. The Registrar and
the Paying Agent may make reasonable rules for their functions.
SECTION 14.8. Governing Law. This Indenture and the Notes shall be governed
by, and construed in accordance with, the laws of the State of New York.
SECTION 14.9. No Recourse Against Others. An incorporator, director,
officer, employee, stockholder or controlling person, as such, of the Company
shall not have any liability for any obligations of the Company under the Notes
or this Indenture or for any claim based on, in respect of or by reason of such
obligations or their creation. By accepting a Note, each Holder shall waive and
release all such liability. The waiver and release shall be part of the
consideration for the issue of the Notes.
SECTION 14.10. Successors. All agreements of the Company in this Indenture
and the Notes shall bind their respective successors. All agreements of the
Trustee in this Indenture shall bind its successors.
SECTION 14.11. Multiple Originals. The parties may sign any number of
copies of this Indenture. Each signed copy shall be an original, but all of them
together represent the same agreement. One signed copy is enough to prove this
Indenture.
SECTION 14.12. Variable Provisions. The Company initially appoints the
Trustee as Paying Agent and Registrar and custodian with respect to any Global
Notes.
SECTION 14.13. Qualification of Indenture. The Company shall qualify this
Indenture under the TIA in accordance with the terms and conditions of the
Registration Rights Agreement and shall pay all reasonable costs and expenses
(including attorneys' fees and expenses for the Company and the Trustee)
incurred in connection therewith, including, but not limited to, costs and
expenses of qualification of the Indenture and the Notes and printing this
Indenture and the Notes. The Trustee shall be entitled to receive from the
Company any such Officers' Certificates, Opinions of Counsel or other
documentation as it may reasonably request in connection with any such
qualification of this Indenture under the TIA.
77
IN WITNESS WHEREOF, the parties have caused this Indenture to be duly
executed as of the date first written above.
HALLIBURTON COMPANY
By:
--------------------------------------
Name:
Title:
JPMORGAN CHASE BANK, as Trustee
By:
--------------------------------------
Name:
Title:
78
EXHIBIT A
[FORM OF FACE OF SECURITY]
[Global Note]
[Certificated Note]
[UNTIL THIS SECURITY IS SOLD UNDER AN EFFECTIVE REGISTRATION STATEMENT, IT SHALL
BEAR THE FOLLOWING LEGEND.] THIS NOTE AND ANY COMMON STOCK ISSUABLE UPON THE
CONVERSION OF THIS NOTE HAVE NOT BEEN REGISTERED UNDER THE U.S. SECURITIES ACT
OF 1933, AS AMENDED (THE "SECURITIES ACT"), AND MAY NOT BE SOLD OR OTHERWISE
TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION OR AN APPLICABLE EXEMPTION
THEREFROM. EACH PURCHASER OF THIS NOTE IS HEREBY NOTIFIED THAT THE SELLER OF
THIS NOTE MAY BE RELYING ON THE EXEMPTION FROM THE PROVISIONS OF SECTION 5 OF
THE SECURITIES ACT PROVIDED BY RULE 144A THEREUNDER.
THIS NOTE AND ANY COMMON STOCK ISSUABLE UPON THE CONVERSION OF THIS NOTE MAY NOT
BE OFFERED, SOLD, PLEDGED OR OTHERWISE TRANSFERRED EXCEPT
(A) (1) TO A PERSON WHO THE TRANSFEROR REASONABLY BELIEVES IS A QUALIFIED
INSTITUTIONAL BUYER WITHIN THE MEANING OF RULE 144A UNDER THE SECURITIES ACT
ACQUIRING FOR ITS OWN ACCOUNT OR FOR THE ACCOUNT OF A QUALIFIED INSTITUTIONAL
BUYER IN A TRANSACTION MEETING THE REQUIREMENTS OF RULE 144A,
(2) PURSUANT TO AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT
PROVIDED BY RULE 144 THEREUNDER (IF AVAILABLE),
(3) TO AN INSTITUTIONAL INVESTOR THAT IS AN ACCREDITED INVESTOR WITHIN THE
MEANING OF RULE 501(a)(1), (2), (3) OR (7) OF REGULATION D UNDER THE
SECURITIES ACT PURSUANT TO AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES
ACT (IF AVAILABLE) OR
(4) PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES
ACT, AND
(B) IN ACCORDANCE WITH ALL APPLICABLE SECURITIES LAWS OF THE STATES OF THE
UNITED STATES AND OTHER JURISDICTIONS.
THIS NOTE, ANY SHARES OF COMMON STOCK ISSUABLE UPON ITS CONVERSION AND ANY
RELATED DOCUMENTATION MAY BE AMENDED OR SUPPLEMENTED FROM TIME TO TIME TO MODIFY
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THE RESTRICTIONS ON RESALES AND OTHER TRANSFERS OF THIS NOTE AND ANY SUCH SHARES
TO REFLECT ANY CHANGE IN APPLICABLE LAW OR REGULATION (OR THE INTERPRETATION
THEREOF) OR IN PRACTICES RELATING TO THE RESALE OR TRANSFER OF RESTRICTED
SECURITIES GENERALLY. THE HOLDER OF THIS NOTE AND SUCH SHARES SHALL BE DEEMED BY
THE ACCEPTANCE OF THIS NOTE AND ANY SUCH SHARES TO HAVE AGREED TO ANY SUCH
AMENDMENT OR SUPPLEMENT.
[IF THIS SECURITY HAS BEEN TRANSFERRED PURSUANT TO REGULATION S, IT SHALL BEAR
THE FOLLOWING LEGEND.] THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE U.S.
SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), AND, ACCORDINGLY, MAY
NOT BE OFFERED OR SOLD WITHIN THE UNITED STATES OR TO OR FOR THE ACCOUNT OR
BENEFIT OF, U.S. PERSONS EXCEPT AS SET FORTH IN THE FOLLOWING SENTENCE.
BY ITS ACQUISITION HEREOF, THE HOLDER (1) REPRESENTS THAT IT IS NOT A U.S.
PERSON NOR IS IT PURCHASING FOR THE ACCOUNT OF A U.S. PERSON AND IS ACQUIRING
THIS SECURITY IN AN OFFSHORE TRANSACTION IN ACCORDANCE WITH REGULATION S UNDER
THE SECURITIES ACT ("REGULATION S"), (2) BY ITS ACCEPTANCE HEREOF AGREES TO
OFFER, SELL OR OTHERWISE TRANSFER SUCH SECURITY, PRIOR TO THE DATE THAT IS 40
DAYS AFTER THE LATER OF THE ORIGINAL ISSUE DATE HEREOF AND THE LAST DATE ON
WHICH THE COMPANY OR ANY AFFILIATE OF THE COMPANY WAS THE OWNER OF THIS SECURITY
(OR ANY PREDECESSOR OF SUCH SECURITY) (THE "RESALE RESTRICTION TERMINATION
DATE"), ONLY (A) TO THE COMPANY, (B) PURSUANT TO A REGISTRATION STATEMENT THAT
HAS BEEN DECLARED EFFECTIVE UNDER THE SECURITIES ACT, (C) FOR SO LONG AS THE
SECURITIES ARE ELIGIBLE FOR RESALE PURSUANT TO RULE 144A UNDER THE SECURITIES
ACT, TO A PERSON IT REASONABLY BELIEVES IS A "QUALIFIED INSTITUTIONAL BUYER" AS
DEFINED IN RULE 144A UNDER THE SECURITIES ACT THAT PURCHASES FOR ITS OWN ACCOUNT
OR FOR THE ACCOUNT OF A QUALIFIED INSTITUTIONAL BUYER TO WHOM NOTICE IS GIVEN
THAT THE TRANSFER IS BEING MADE IN RELIANCE ON RULE 144A, (D) PURSUANT TO OFFERS
AND SALES THAT OCCUR OUTSIDE THE UNITED STATES WITHIN THE MEANING OF REGULATION
S, (E) TO AN INSTITUTIONAL "ACCREDITED INVESTOR" WITHIN THE MEANING OF RULE
501(a)(1), (2), (3) OR (7) UNDER THE SECURITIES ACT THAT IS ACQUIRING THE
SECURITY FOR ITS OWN ACCOUNT, OR FOR THE ACCOUNT OF SUCH AN INSTITUTIONAL
ACCREDITED INVESTOR, IN EACH CASE IN A TRANSACTION INVOLVING A MINIMUM PRINCIPAL
AMOUNT OF THE SECURITIES OF $250,000, FOR INVESTMENT PURPOSES AND NOT WITH A
VIEW TO OR FOR OFFER OR SALE IN CONNECTION WITH ANY DISTRIBUTION IN VIOLATION OF
THE SECURITIES ACT, OR (F) PURSUANT TO ANY OTHER AVAILABLE EXEMPTION FROM THE
REGISTRATION REQUIREMENTS OF THE SECURITIES ACT, SUBJECT TO THE COMPANY'S AND
THE TRUSTEE'S RIGHT PRIOR TO ANY SUCH OFFER, SALE OR TRANSFER (i) PURSUANT TO
CLAUSE (D), (E) OR (F) TO REQUIRE THE DELIVERY OF AN OPINION OF COUNSEL,
CERTIFICATION AND/OR OTHER INFORMATION SATISFACTORY TO EACH OF THEM AND (ii) IN
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THE CASE OF THE FOREGOING CLAUSE (E), A CERTIFICATE OF TRANSFER IN THE FORM
APPEARING ON THE OTHER SIDE OF THIS SECURITY IS COMPLETED AND DELIVERED BY THE
TRANSFEROR TO THE COMPANY AND THE TRUSTEE. THIS LEGEND WILL BE REMOVED AFTER 40
CONSECUTIVE DAYS BEGINNING ON AND INCLUDING THE LATER OF (A) THE DAY ON WHICH
THE SECURITIES ARE OFFERED TO PERSONS OTHER THAN DISTRIBUTORS (AS DEFINED IN
REGULATION S) AND (B) THE DATE OF THE CLOSING OF THE ORIGINAL OFFERING. AS USED
HEREIN, THE TERMS "OFFSHORE TRANSACTION", "UNITED STATES" AND "U.S. PERSON" HAVE
THE MEANINGS GIVEN TO THEM BY REGULATION S UNDER THE SECURITIES ACT. BY ITS
ACQUISITION OF THIS SECURITY THE HOLDER THEREOF WILL BE DEEMED TO HAVE
REPRESENTED AND WARRANTED THAT EITHER (I) NO PORTION OF THE ASSETS USED BY SUCH
HOLDER TO ACQUIRE AND HOLD THIS SECURITY CONSTITUTES THE ASSETS OF AN EMPLOYEE
BENEFIT PLAN THAT IS SUBJECT TO TITLE I OF THE U.S. EMPLOYEE RETIREMENT INCOME
SECURITY ACT OF 1974, AS AMENDED ("ERISA"), OF PLANS, INDIVIDUAL RETIREMENT
ACCOUNTS OR OTHER ARRANGEMENTS THAT ARE SUBJECT TO SECTION 4975 OF THE U.S.
INTERNAL REVENUE CODE OF 1986, AS AMENDED (THE "CODE") OR PROVISIONS UNDER ANY
FEDERAL, STATE, LOCAL, NON-U.S. OR OTHER LAWS OR REGULATIONS THAT ARE SIMILAR TO
SUCH PROVISIONS OF ERISA OR THE CODE ("SIMILAR LAWS"), OR OF AN ENTITY WHOSE
UNDERLYING ASSETS ARE CONSIDERED TO INCLUDE "PLAN ASSETS" OF SUCH PLANS,
ACCOUNTS OR ARRANGEMENTS, OR (II) THE PURCHASE AND HOLDING OF THIS SECURITY WILL
NOT CONSTITUTE A NON-EXEMPT PROHIBITED TRANSACTION UNDER SECTION 406 OF ERISA OR
SECTION 4975 OF THE CODE OR A SIMILAR VIOLATION UNDER ANY APPLICABLE SIMILAR
LAWS.
[IF THIS SECURITY IS TO BE A GLOBAL NOTE- ] THIS SECURITY IS A GLOBAL SECURITY
WITHIN THE MEANING OF THE INDENTURE HEREINAFTER REFERRED TO AND IS REGISTERED IN
THE NAME OF A DEPOSITARY OR A NOMINEE OF A DEPOSITARY. THIS SECURITY IS
EXCHANGEABLE FOR SECURITIES REGISTERED IN THE NAME OF A PERSON OTHER THAN THE
DEPOSITARY OR ITS NOMINEE ONLY IN THE LIMITED CIRCUMSTANCES DESCRIBED IN THE
INDENTURE AND MAY NOT BE TRANSFERRED EXCEPT AS A WHOLE BY THE DEPOSITARY TO A
NOMINEE OF THE DEPOSITARY OR BY A NOMINEE OF THE DEPOSITARY TO THE DEPOSITARY OR
ANOTHER NOMINEE OF THE DEPOSITARY.
[FOR AS LONG AS THIS GLOBAL SECURITY IS DEPOSITED WITH OR ON BEHALF OF THE
DEPOSITORY TRUST COMPANY IT SHALL BEAR THE FOLLOWING LEGEND.] UNLESS THIS
CERTIFICATE IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE OF THE DEPOSITORY TRUST
COMPANY, A NEW YORK CORPORATION ("DTC"), NEW YORK, NEW YORK, TO HALLIBURTON
COMPANY OR IS AGENT FOR REGISTRATION OF TRANSFER, EXCHANGE OR PAYMENT, AND ANY
CERTIFICATE ISSUED IS REGISTERED I THE NAME OF CEDE & CO. OR IN SUCH OTHER NAME
AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC (AND ANY PAYMENT IS MADE
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TO CEDE & CO. OR TO SUCH OTHER ENTITY AS IS REQUESTED BY AN AUTHORIZED
REPRESENTATIVE OF DTC), ANY TRANSFER, PLEDGE, OR OTHER USE HEREOF FOR VALUE OR
OTHERWISE BY OR TO ANY PERSON IS WRONGFUL INASMUCH AS THE REGISTERED OWNER
HEREOF, CEDE & CO., HAS AN INTEREST HEREIN.
TRANSFERS OF THIS GLOBAL SECURITY SHALL BE LIMITED TO TRANSFERS N WHOLE, BUT
NOT IN PART, TO DTC, TO NOMINEES OF DTC OR TO A SUCCESSOR THEREOF OR SUCH
SUCCESSOR'S NOMINEE AND TRANSFERS OF PORTIONS OF THIS GLOBAL SECURITY SHALL BE
LIMITED TO TRANSFERS MADE IN ACCORDANCE WITH THE RESTRICTIONS SET FORTH IN THE
INDENTURE REFERRED TO ON THE REVERSE HEREOF.
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No. Principal Amount $
----------------- -----------------
as revised by the Schedule of
Increases and Decreases in the
Global Note attached hereto
CUSIP NO.
--------------------------
HALLIBURTON COMPANY
3?% Convertible Senior Note due July 15, 2023
Halliburton Company, a Delaware corporation, promises to pay to Cede & Co.,
or registered assigns, the principal sum of $ Dollars, as revised by the
Schedule of Increases and Decreases in the Global Note attached hereto, on July
15, 2023.
Interest Payment Dates: January 15 and July 15.
Record Dates: January 1 and July 1.
Additional provisions of this Note are set forth on the other side of this
Note.
HALLIBURTON COMPANY
By:
--------------------------------------
By:
--------------------------------------
TRUSTEE'S CERTIFICATE OF
AUTHENTICATION
Dated:
JPMORGAN CHASE BANK
as Trustee, certifies
that this is one of
the Notes referred
to in the Indenture.
By:
------------------------------------------
Authorized Signatory
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[FORM OF REVERSE SIDE OF SECURITY]
HALLIBURTON COMPANY
3?% Convertible Senior Note due July 15, 2023
1. Interest
Halliburton Company, a Delaware corporation (such corporation, and its
successors and assigns under the Indenture hereinafter referred to, being herein
called the "Company"), promises to pay interest on the principal amount of this
Note at the rate per annum shown above.
The Company will pay interest semiannually on January 15 and July 15 of
each year. Interest on the Notes will accrue from the most recent date to which
interest has been paid on the Notes or, if no interest has been paid, from June
30, 2003. The Company shall pay interest on overdue principal (plus interest on
such interest to the extent lawful), at the rate borne by the Notes to the
extent lawful. Interest will be computed on the basis of a 360-day year of
twelve 30-day months. The amount of interest payable for any partial period
shall be computed on the basis of a 360-day year of twelve 30-day months and the
days elapsed in any partial month.
2. Method of Payment
On or before the date on which any principal of or interest in any Note is
due and payable, the Company shall irrevocably deposit with the Trustee or the
Paying Agent money sufficient to pay such principal and/or interest. The Company
will pay interest (except Defaulted Interest) on the principal amount of the
Notes on each January 15 and July 15, beginning January 15, 2004, to the Persons
who are registered Holders of Notes at the close of business on the January 1
and July 1 next preceding the Interest Payment Date even if Notes are canceled
or repurchased after the record date and on or before the Interest Payment Date.
The Company will pay principal and interest and Additional Amounts, if any,
in money of the United States that at the time of payment is legal tender for
payment of public and private debts. Payments (including principal and interest
and Additional Amounts, if any) in respect of the Notes represented by the
Global Notes, will be made by the transfer of immediately available funds to the
accounts specified by the Depositary. The Company will make all payments in
respect of a Definitive Note (including principal and interest) at the office or
agency maintained by the Company for such purposes in the City of New York or,
at the Company's option, by mailing a check to the registered address of each
Holder thereof as such address shall appear on the Note Register; provided,
however, that payments on the Notes may also be made, at the Company's option,
by wire transfer to a U.S. dollar account maintained by the payee with a bank in
the United States if such Holder requests payment by wire transfer by giving
written notice to the Trustee or the Paying Agent to such effect designating
such account no later than 15 days immediately preceding the relevant due date
for payment (or such other date as the Trustee may accept in its discretion). If
a payment date is a date other than a Business Day, payment may be made at that
place on the next succeeding day that is a Business Day and no interest shall
accrue for the intervening period.
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3. Paying Agent and Registrar
Initially, JPMorgan Chase Bank ("Trustee"), will act as Paying Agent,
Conversion Agent and Registrar. The Company may appoint and change any Paying
Agent, Conversion Agent, Registrar or co-registrar without notice to any Holder.
The Company or any of its domestically incorporated Wholly Owned Subsidiaries
may act as Paying Agent, Conversion Agent, Registrar or co-registrar.
4. Indenture
The Company issued the Notes under an Indenture dated as of June 30, 2003
(as it may be amended or supplemented from time to time in accordance with the
terms thereof, the "Indenture"), among the Company and the Trustee. Capitalized
terms herein are used as defined in the Indenture unless otherwise indicated.
The terms of the Notes include those stated in the Indenture and those made part
of the Indenture by reference to the Trust Indenture Act of 1939 as in effect
from time to time (the "Act"). The Notes are subject to all such terms, and
Holders are referred to the Indenture and the Act for a statement of those
terms. To the extent permitted by applicable law, in the event of any
inconsistency between the terms of this Note and the terms of the Indenture, the
terms of the Indenture shall control.
The Notes are general unsecured senior obligations of the Company limited
to $1,200,000,000 aggregate principal amount.
5. Redemption at the Option of the Company
No sinking fund is provided for the Notes. The Notes are redeemable for
cash in whole, or in part, at any time on or after July 15, 2008 at the option
of the Company at a redemption price ("Redemption Price") equal to 100% of the
principal amount of the Notes to be redeemed plus any accrued and unpaid
interest (including Additional Amounts, if any) to the Redemption Date.
6. Notice of Redemption at the Option of the Company
Notice of redemption at the option of the Company shall be mailed at least
30 days but not more than 60 days before a Redemption Date to the Trustee, the
Paying Agent and each Holder of Notes to be redeemed at the Holder's registered
address. If money sufficient to pay the Redemption Price of all Notes (or
portions thereof) to be redeemed on the Redemption Date is deposited with the
Paying Agent prior to or on the Redemption Date, on and after the Redemption
Date interest (including Additional Amounts, if any), if any, shall cease to
accrue on such Notes or portions thereof. Notes in denominations larger than
$1,000 principal amount may be redeemed in part but only in integral multiples
of $1,000 principal amount.
7. Purchase by the Company at the Option of the Holder; Purchase at the Option
of the Holder Upon a Fundamental Change
(a) Subject to the terms and conditions of the Indenture, a Holder shall
have the option to require the Company to purchase the Notes held by such Holder
on July 15, 2008, July 15, 2013 and July 15, 2018 (each, a "Purchase Date") at a
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purchase price (the "Purchase Price") equal to 100% of the principal amount of
the Notes to be purchased plus any accrued and unpaid interest (including
Additional Amounts, if any) to such Purchase Date, upon delivery of a Purchase
Notice containing the information set forth in the Indenture, from the opening
of business on the date that is 20 Business Days prior to such Purchase Date
until the close of business on the fifth Business Day prior to such Purchase
Date and upon delivery of the Notes to the Paying Agent by the Holder as set
forth in the Indenture. The Company will pay the Purchase Price in cash.
Notes in denominations larger than $1,000 principal amount may be purchased
in part, but only in integral multiples of $1,000 principal amount.
(b) If a Fundamental Change shall occur at any time prior to July 15, 2008,
each Holder shall have the right, at such Holder's option and subject to the
terms and conditions of the Indenture, to require the Company to purchase any or
all of such Holder's Notes or any portion of the principal amount thereof that
is equal to $1,000 or an integral multiple of $1,000 on the day that is 35 days
after the date of the Company Notice of the occurrence of the Fundamental Change
(subject to extension to comply with applicable law) for a Fundamental Change
Purchase Price equal to 100% of the principal amount of Notes purchased plus
accrued and unpaid interest (including Additional Amounts, if any) to the
Fundamental Change Purchase Date, which Fundamental Change Purchase Price shall
be paid by the Company in cash, as set forth in the Indenture.
(c) Holders have the right to withdraw any Purchase Notice or Fundamental
Change Purchase Notice, as the case may be, by delivery to the Paying Agent of a
written notice of withdrawal in accordance with the provisions of the Indenture.
(d) If cash sufficient to pay a Fundamental Change Purchase Price or
Purchase Price, as the case may be, of all Notes or portions thereof to be
purchased as of the Purchase Date or the Fundamental Change Purchase Date, as
the case may be, is deposited with the Paying Agent on the Business Day
following the Purchase Date or the Fundamental Change Purchase Date, as the case
may be, interest (including Additional Amounts, if any) shall cease to accrue on
such Notes (or portions thereof) on and after such date, and the Holder thereof
shall have no other rights as such (other than the right to receive the Purchase
Price or Fundamental Change Purchase Price, as the case may be, upon surrender
of such Note).
8. Ranking
The Notes shall be unsecured and shall rank equally in right of payment
with all of the Company's other existing and future unsecured and unsubordinated
Indebtedness.
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9. Conversion
Subject to the procedures set forth in the Indenture, a Holder may convert
Notes into Common Stock on or before the close of business on July 15, 2023
during the periods and upon satisfaction of at least one of the conditions set
forth below:
(a) in any calendar quarter (and only during such calendar quarter) if the
Last Reported Sale Price for Common Stock for at least 20 Trading Days during
the period of 30 consecutive Trading Days ending on the last Trading Day of the
previous calendar quarter is greater than or equal to 120% of the Conversion
Price per share of Common Stock on such last Trading Day;
(b) during any period in which both (A) the credit rating assigned to the
Notes by Moody's Investors Service, Inc. is lower than Ba1 and (B) the credit
rating assigned to the Notes by Standard & Poors Rating Services is lower than
BB+;
(c) during any period in which the Notes no longer are assigned credit
ratings by at least one of Moody's Investors Services, Inc. and Standard &
Poor's Ratings Services or their successors;
(d) in the event that the Company calls the Notes for redemption, at any
time prior to the close of business on the second Business Day immediately
preceding the Redemption Date; or
(e) the Company becomes a party to a consolidation, merger or binding share
exchange pursuant to which the Common Stock would be converted into cash or
property (other than securities), in which case a Holder may surrender Notes for
conversion at any time from and after the date which is 15 days prior to the
anticipated effective date for the transaction until 15 days after the actual
effective date of such transaction; or
(f) the Company elects to (i) distribute to all holders of Common Stock
assets, debt securities or rights to purchase securities of the Company, which
distribution has a per share value as determined by the Board of Directors
exceeding 15% of the Last Reported Sale Price of a share of Common Stock on the
Trading Day immediately preceding the declaration date for such distribution, or
(ii) distribute to all holders of Common Stock rights entitling them to
purchase, for a period expiring within 60 days after the date of such
distribution, shares of Common Stock at less than the Last Reported Sale Price
of Common Stock on the Trading Day immediately preceding the declaration date of
the distribution. In the case of the foregoing clauses (i) and (ii), the Company
must notify the Holders at least 20 Business Days immediately prior to the
ex-dividend date for such distribution. Once the Company has given such notice,
Holders may surrender their Notes for conversion at any time thereafter until
the earlier of the close of business on the Business Day immediately prior to
the ex-dividend date or the Company's announcement that such distribution will
not take place; provided, however, that a Holder may not exercise this right to
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convert if the Holder may participate in the distribution without conversion. As
used herein, the term "ex-dividend date," when used with respect to any issuance
or distribution, shall mean the first date on which a sale of the Common Stock
does not automatically transfer the right to receive the relevant dividend from
the seller of the Common Stock to its buyer.
Notes in respect of which a Holder has delivered a notice of exercise of
the option to require the Company to purchase such Notes pursuant to Article VI
or VII may be converted only if the notice of exercise is withdrawn in
accordance with the terms of the Indenture.
The initial Conversion Rate is 26.5583 shares of Common Stock per $1,000
principal amount, subject to adjustment in certain events described in the
Indenture. The Company shall deliver, at its option, shares of Common Stock,
cash or a combination of cash and shares of Common Stock. The Company shall
deliver cash or a check in lieu of any fractional share of Common Stock.
Holders of Notes at the close of business on a regular record date will
receive payment of interest, payable on the corresponding Interest Payment Date
notwithstanding the conversion of such Notes at any time after the close of
business on such regular record date. Notes surrendered for conversion by a
Holder during the period from the close of business on any regular record date
to the opening of business on the immediately following Interest Payment Date
must be accompanied by payment of an amount equal to the interest that the
Holder is to receive on the Notes; provided, however, that no such payment need
be made if (1) the Company has specified a Redemption Date that is after a
regular record date and on or prior to the immediately following Interest
Payment Date, (2) the Company has specified a Purchase Date following a
Fundamental Change that is during such period, or (3) any overdue interest
exists at the time of conversion with respect to such Notes to the extent of
such overdue interest. The Holders of the Notes and any Common Stock issuable
upon conversion thereof will continue to be entitled to receive Additional
Amounts in accordance with the Registration Rights Agreement.
To convert the Notes a Holder must (1) complete and manually sign the
irrevocable conversion notice on the back of the Notes (or complete and manually
sign a facsimile of such notice) and deliver such notice to the Conversion Agent
at the office maintained by the Conversion Agent for such purpose, (2) surrender
the Notes to the Conversion Agent, (3) furnish appropriate endorsements and
transfer documents if required by the Conversion Agent, the Company or the
Trustee and (4) pay any transfer or similar tax, if required.
A Holder may convert a portion of the Notes only if the principal amount of
such portion is $1,000 or a multiple of $1,000. No payment or adjustment shall
be made for dividends on the Common Stock except as provided in the Indenture.
On conversion of the Notes, that portion of accrued and unpaid interest
attributable to the period from the Issue Date to the Conversion Date with
respect to the converted portion of the Notes shall not be canceled,
extinguished or forfeited, but rather shall be deemed to be paid in full to the
Holder thereof through the delivery of the Common Stock (together with any cash
payment in lieu of fractional shares) in exchange for the portion of the Notes
being converted pursuant to the terms hereof; and the Fair Market Value of such
shares of Common Stock, cash or a combination thereof, at the Company's election
(together with any such cash payment in lieu of fractional shares, if any) shall
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be treated as issued, to the extent thereof, first in exchange for interest
accrued and unpaid through the Conversion Date, and the balance, if any, of such
Fair Market Value of such Common Stock (and any such cash payment) shall be
treated as issued in exchange for the principal amount of the Notes being
converted pursuant to the provisions hereof. Notwithstanding the conversion of
any Notes, the Holders of the Notes and any Common Stock issuable upon
conversion thereof will continue to be entitled to receive Additional Amounts in
accordance with the Registration Rights Agreement.
10. Denominations; Transfer; Exchange
The Notes are in registered form, without coupons, in denominations of
principal amount of $1,000 and whole multiples of $1,000. A Holder may transfer
or exchange Notes in accordance with the Indenture. The Registrar may require a
Holder, among other things, to furnish appropriate endorsements or transfer
documents and to pay any taxes and fees required by law or permitted by the
Indenture. The Registrar need not register the transfer of or exchange any Notes
for a period beginning 15 days before an Interest Payment Date and ending on
such Interest Payment Date. In the event of any redemption or purchase in part,
the Registrar need not register the transfer of or exchange any Notes selected
for redemption (except, in the case of a Note to be redeemed in part, the
portion of the Note not to be redeemed) or any Notes in respect of which a
Purchase Notice or Fundamental Change Purchase Notice has been given and not
withdrawn (except, in the case of a Note to be purchased in part, the portion of
the Note not to be purchased) for a period of 15 days before the mailing of a
Redemption Notice, Purchase Notice or Fundamental Change Purchase Notice.
11. Persons Deemed Owners
The registered Holder of this Note may be treated as the owner of this Note
for all purposes.
12. Unclaimed Money
If money for the payment of the principal of or interest on the Notes
remains unclaimed for two years, the Trustee or Paying Agent shall pay the money
back to the Company at its written request unless an abandoned property law
designates another person. After any such payment, Holders entitled to the money
must look only to the Company and not to the Trustee for payment.
13. Defeasance
Subject to certain conditions set forth in the Indenture, the Company at
any time may terminate some or all of its obligations under the Notes and the
Indenture if the Company deposits with the Trustee money or U.S. Government
Obligations for the payment of principal and interest on the Notes to maturity.
14. Amendment, Waiver
Subject to certain exceptions set forth in the Indenture, (i) the Indenture
and the Notes may be amended with the written consent of the Holders of at least
A-11
a majority in principal amount of the then outstanding Notes (including, without
limitation, consents obtained in connection with a purchase of, or tender offer
or exchange offer for, Notes) and (ii) any past default (other than with respect
to nonpayment) or noncompliance with any provision may be waived with the
written consent of the Holders of a majority in principal amount of the then
outstanding Notes (including, without limitation, consents obtained in
connection with a purchase of, or tender offer or exchange offer for, Notes).
Subject to certain exceptions set forth in the Indenture, without the consent of
any Holder, the Company and the Trustee may amend the Indenture or the Notes.
15. Defaulted Interest
Except as otherwise specified with respect to the Notes, any Defaulted
Interest on any Note shall forthwith cease to be payable to the registered
Holder thereof on the relevant regular record date or accrual date, as the case
may be, by virtue of having been such Holder, and such Defaulted Interest may be
paid by the Company as provided for in Section 2.13.
16. Defaults and Remedies
If an Event of Default occurs and is continuing, the Trustee, or the
Holders of at least 25% in aggregate principal amount of the Notes at the time
outstanding, may declare the principal amount and any accrued and unpaid
interest (including Additional Amounts, if any), of all the Notes to be due and
payable immediately. Certain events of bankruptcy or insolvency are Events of
Default, which shall result in the Notes being declared due and payable
immediately upon the occurrence of such Events of Default.
Events of Default in respect of the Notes are set forth in Section 10.1.
Holders may not enforce the Indenture or the Notes except as provided in the
Indenture. The Trustee may refuse to enforce the Indenture or the Notes unless
it receives reasonable indemnity or security. Subject to certain limitations,
conditions and exceptions, Holders of a majority in aggregate principal amount
of the Notes at the time outstanding may direct the Trustee in its exercise of
any trust or power, including the annulment of a declaration of acceleration.
17. Consolidation, Merger and Sale of Assets
In the event of a consolidation, merger, or sale of assets to convey,
transfer or lease of all or substantially all of Company's property or assets as
described in Article IV, the successor corporation to the Company shall succeed
to and be substituted for the Company, and may exercise the Company's rights and
powers under this Indenture, and thereafter, except in the case of a lease, the
Company shall be relieved of all obligations and covenants under the Indenture
and the Notes.
18. Trustee Dealings with the Company
Subject to certain limitations set forth in the Indenture, each of the
Trustee, Paying Agent, Conversion Agent and Registrar under the Indenture, in
its individual or any other capacity, may become the owner or pledgee of Notes
and may otherwise deal with and collect obligations owed to it by the Company or
A-12
its Affiliates and may otherwise deal with the Company or its Affiliates with
the same rights it would have if it were not Trustee, Paying Agent, Conversion
Agent or Registrar.
19. No Recourse Against Others
A director, officer, employee or stockholder, as such, of the Company shall
not have any liability for any obligations of the Company under the Notes or the
Indenture or for any claim based on, in respect of or by reason of such
obligations or their creation. By accepting a Note, each Holder waives and
releases all such liability. The waiver and release are part of the
consideration for the issue of the Notes.
20. Authentication
This Note shall not be valid until an authorized signatory of the Trustee
(or an authenticating agent acting on its behalf) manually signs the certificate
of authentication on the other side of this Note.
21. Abbreviations
Customary abbreviations may be used in the name of a Holder or an assignee,
such as TEN COM (=tenants in common), TEN ENT (=tenants by the entirety), JT TEN
(=joint tenants with rights of survivorship and not as tenants in common), CUST
(=custodian) and U/G/M/A (=Uniform Gift to Minors Act).
22. CUSIP Numbers
Pursuant to a recommendation promulgated by the Committee on Uniform Note
Identification Procedures the Company has caused CUSIP numbers to be printed on
the Notes. No representation is made as to the accuracy of such numbers as
printed on the Notes and reliance may be placed only on the other identification
numbers placed thereon.
23. Governing Law
This Note shall be governed by, and construed in accordance with, the laws
of the State of New York.
The Company will furnish to any Holder upon written request and without
charge to the Holder a copy of the Indenture which has in it the text of this
Note in larger type. Requests may be made to:
Halliburton Company
1401 McKinney, Suite 2400
Houston, Texas 77010
Attention: Chief Financial Officer
Facsimile No.: (713) 759-2603
A-13
ASSIGNMENT FORM
To assign this Note, fill in the form below:
I or we assign and transfer this Note to
---------------------------------------------------
(Print or type assignee's name, address and zip code)
----------------------------------------
(Insert assignee's soc. sec. or tax I.D. No.)
and irrevocably appoint agent to transfer this Note on the books of
------------
the Company. The agent may substitute another to act for him.
- --------------------------------------------------------------------------------
Date: Your Signature:
------------------------------ --------------------------
Signature Guarantee:
------------------------------------------------
(Signature must be guaranteed)
- --------------------------------------------------------------------------------
Sign exactly as your name appears on the other side of this Note.
The signature(s) should be guaranteed by an eligible guarantor institution
(banks, stockbrokers, savings and loan associations and credit unions with
membership in an approved signature guarantee medallion program), pursuant to
S.E.C. Rule 17Ad-15.
In connection with any transfer or exchange of any of the Notes evidenced
by this certificate occurring prior to the date that is two years after the
later of the date of original issuance of such Notes and the last date, if any,
on which such Notes were owned by the Company or any Affiliate of the Company,
the undersigned confirms that such Notes are being:
CHECK ONE BOX BELOW:
1 acquired for the undersigned's own account, without transfer; or
------
2 transferred to the Company; or
------
3 transferred pursuant to and in compliance with Rule 144A under the
Securities Act of 1933, as amended (the "Securities Act"); or
------
4 transferred pursuant to an effective registration statement under
the Securities Act; or
------
5 transferred pursuant to and in compliance with Regulation S under
the Securities Act; or
------
A-14
6 transferred to an institutional accredited investor (as defined in
Rule 501(a)(1), (2), (3) or (7) under the Securities Act), that
has furnished to the Trustee a signed letter containing certain
representations and agreements (the form of which letter appears
as Section 2.7 of the Indenture); or
------
7 transferred pursuant to another available exemption from the
registration requirements of the Securities Act of 1933.
------
Unless one of the boxes is checked, the Trustee will refuse to register any of
the Notes evidenced by this certificate in the name of any person other than the
registered Holder thereof; provided, however, that if box (5), (6) or (7) is
checked, the Trustee or the Company may require, prior to registering any such
transfer of the Notes, in their sole discretion, such legal opinions,
certifications and other information as the Trustee or the Company may
reasonably request to confirm that such transfer is being made pursuant to an
exemption from, or in a transaction not subject to, the registration
requirements of the Securities Act, such as the exemption provided by Rule 144
under such Act.
------------------------------
Signature
Signature Guarantee:
- ------------------------- ------------------------------
(Signature must be guaranteed) Signature
- --------------------------------------------------------------------------------
The signature(s) should be guaranteed by an eligible guarantor institution
(banks, stockbrokers, savings and loan associations and credit unions with
membership in an approved signature guarantee medallion program), pursuant to
S.E.C. Rule 17Ad-15.
TO BE COMPLETED BY PURCHASER IF (1) OR (3) ABOVE IS CHECKED.
The undersigned represents and warrants that it is purchasing this Note for
its own account or an account with respect to which it exercises sole investment
discretion and that it and any such account is a qualified institutional buyer
within the meaning of Rule 144A under the Securities Act, as amended, and is
aware that the sale to it is being made in reliance on Rule 144A and
acknowledges that it has received such information regarding the Company as the
undersigned has requested pursuant to Rule 144A or has determined not to request
such information and that it is aware that the transferor is relying upon the
undersigned's foregoing representations in order to claim the exemption from
registration provided by Rule 144A.
Dated: NOTICE: To be executed by an executive officer
A-15
SCHEDULE OF INCREASES OR DECREASES IN GLOBAL SECURITY
The following increases or decreases in this Global Note have been made:
Principal Amount of Signature of
Amount of decrease in Amount of increase in this Global Note authorized signatory
Date of Principal Amount of Principal Amount of following such of Trustee or Notes
Exchange this Global Note this Global Note decrease or increase Custodian
- ---------------- ------------------------ ------------------------ ------------------------ ------------------------
A-16
OPTION OF HOLDER TO ELECT PURCHASE
If you want to elect to have this Note purchased by the Company pursuant to
Section 7.1 of the Indenture, check the box:
---------
If you want to elect to have only part of this Note purchased by the
Company pursuant to Section 7.1 of the Indenture, state the amount in principal
amount (must be integral multiple of $1,000): $ .
Date: Your Signature:
---------------------- -------------------------------------
(Sign exactly as your name appears on the other side
of the Note)
Signature Guarantee:
-----------------------------------------
(Signature must be guaranteed)
The signature(s) should be guaranteed by an eligible guarantor institution
(banks, stockbrokers, savings and loan associations and credit unions with
membership in an approved signature guarantee medallion program), pursuant to
S.E.C. Rule 17Ad-15.
A-17
FORM OF CERTIFICATE TO BE DELIVERED UPON EXCHANGE
OR REGISTRATION OF TRANSFER OF SECURITIES
Re: 3?% Convertible Senior Notes due July 15, 2023 of Halliburton Company
(the "Company").
This Certificate relates to $ principal amount of
----------------------
Notes held in * book-entry or * definitive form by
-------- --------
(the "Transferor").
- -------------------
The Transferor has requested the Trustee by written order to exchange or
register the transfer of a Note or Notes.
In connection with such request and in respect of each such Note, the
Transferor does hereby certify that the Transferor is familiar with the
Indenture, dated as of June 30, 2003 (as amended or supplemented to date, the
"Indenture"), between the Company and JPMorgan Chase Bank, as trustee (the
"Trustee"), relating to the above-captioned Notes and that the transfer of this
Note does not require registration under the Securities Act (as defined below)
because:*
Such Note is being acquired for the Transferor's own account without
------
transfer.
Such Note is being transferred (i) to a " qualified institutional
------
buyer" (as defined in Rule 144A under the Securities Act of 1933, as amended
(the "Securities Act")), in accordance with Rule 144A under the Securities Act
or (ii) pursuant to an exemption from registration in accordance with Rule 904
of Regulation S under the Securities Act (and in the case of clause (ii), based
upon an opinion of counsel if the Company or the Trustee so requests, together
with a certification in substantially the form of the Form of Certificate to be
Delivered in Connection with Transfers Pursuant to Regulation S attached to this
Note).
Such Note is being transferred (i) pursuant to an exemption from
------
registration in accordance with Rule 144 under the Securities Act (and based
upon an opinion of counsel if the Company or the Trustee so requests) or (ii)
pursuant to an effective registration statement under the Securities Act.
Such Note is being transferred in reliance on and in compliance
------
with another exemption from the registration requirements of the Securities Act
(and based upon an opinion of counsel if the Company or the Trustee so
requests).
- ----------------------------------
* Fill in blank or check appropriate box, as applicable.
A-18
You are entitled to rely upon this certificate and you are irrevocably
authorized to produce this certificate or a copy hereof to any interested party
in any administrative or legal proceeding or official inquiry
with respect to the matters covered hereby.
[INSERT NAME OF TRANSFEROR]
By:
------------------------------------------
Name:
Title:
Address:
Date:
----------------------------------------
A-19
FORM OF CERTIFICATE TO BE DELIVERED IN CONNECTION
WITH TRANSFERS PURSUANT TO REGULATION S
-------------, ----
JPMorgan Chase Bank, as Registrar
600 Travis, Suite 1150
Houston, Texas 77002
Attention: Institutional Trust Services
Ladies and Gentlemen:
In connection with our proposed sale of certain 3?% Convertible Senior
Notes due July 15, 2023 (the "Notes"), of Halliburton Company (the "Company"),
we represent that:
(i) the offer or sale of the Notes was made in an "offshore transaction";
(ii) at the time the buy order was originated, the transferee was outside
the United States or we and any person acting on our behalf reasonably believed
that the transferee was outside the United States;
(iii) no directed selling efforts have been made by us in the United States
in contravention of the requirements of Rule 903(a) or Rule 904(a) of Regulation
S under the U.S. Securities Act of 1933, as applicable;
(iv) if this transfer of the Note is being made prior to the expiration of
the one-year Distribution Compliance Period, such interest that is being
transferred is held immediately thereafter through The Euroclear System or
Clearstream Banking, societe anonyme; and
(v) the transaction is not part of a plan or scheme to evade the
registration requirements of the U.S. Securities Act of 1933.
A-20
You and the Company are entitled to rely upon this letter and you are
irrevocably authorized to produce this letter or a copy hereof to any interested
party in any administrative or legal proceedings or official inquiry with
respect to the matters covered hereby. Terms used in this certificate have the
meanings set forth in Regulation S under the U.S. Securities Act of 1933.
Very truly yours,
Name of Transferor:
By:
-------------------------------------
Name:
Title:
Address:
A-21
FORM OF CONVERSION NOTICE
To: Halliburton Company
The undersigned registered holder of this Note hereby exercises the option
to convert this Note, or portion hereof (which is $1,000 principal amount or an
integral multiple thereof) designated below, for shares of Common Stock of
Halliburton Company in accordance with the terms of the Indenture referred to in
this Note, and directs that the shares, if any, issuable and deliverable upon
such conversion, together with any check for cash deliverable upon such
conversion, and any Notes representing any unconverted principal amount hereof,
be issued and delivered to the registered holder hereof unless a different name
has been indicated below. If shares or any portion of this Note not converted
are to be issued in the name of a Person other than the undersigned, the
undersigned shall pay all transfer taxes payable with respect thereto.
This notice shall be deemed to be an irrevocable exercise of the option to
convert this Note.
Dated: -----------------------------------------
-----------------------------------------
Signature(s)
Signature(s) must be guaranteed by
a commercial bank or trust company
or a member firm of a major stock
exchange if shares of Common Stock
are to be issued, or Notes to be
delivered, other than to or in the
name of the registered holder.
-----------------------------------------
Signature Guarantee
A-22
Fill in for registration of shares if
to be delivered, and Notes, if to be
issued, other than to and in the name
of registered holder:
Principal Amount to be purchased (if
- -------------------------------------- less than all):
(Name)
- -------------------------------------- $ ,000
(Street Address) ---------
- -------------------------------------- Social Security or Other Taxpayer
(City, state and zip code) Number
Please print name and address
A-23
FORM OF FUNDAMENTAL CHANGE PURCHASE NOTICE
To: Halliburton Company
The undersigned registered holder of this Note hereby acknowledges receipt
of a notice from Halliburton Company (the "Company") as to the occurrence of a
Fundamental Change with respect to the Company and requests and instructs the
Company to repurchase this Note, or the portion hereof (which is $1,000
principal amount or a integral multiple thereof) designated below, in accordance
with the terms of the Indenture referred to in this Note and directs that the
check of the Company, in payment for this Note or the portion thereof and any
Notes representing any unrepurchased principal amount hereof, be issued and
delivered to the registered holder hereof unless a different name has been
indicated below. If any portion of this Note not repurchased is to be issued in
the name of a Person other than the undersigned, the undersigned shall pay all
transfer taxes payable with respect thereto.
Dated: ----------------------------------
Signature(s)
Signature(s) must be guaranteed by
a commercial bank or trust company
or a member firm of a major stock
exchange if Notes are to be
delivered, other than to or in the
name of the registered holder.
----------------------------------
Signature Guarantee
Fill in for registration of Notes if to be issued other than to and in the name
of registered holder:
- -----------------------------------
(Name)
- -----------------------------------
(Street Address)
- -----------------------------------
(City, state and zip code)
Please print name and address
Principal Amount to be purchased (if less
than all): $ , 000
------
Social Security or Other Taxpayer Number
B-1
EXHIBIT B
FORM OF TRANSFER CERTIFICATE FOR TRANSFER
OF RESTRICTED COMMON STOCK
[NAME AND ADDRESS OF COMMON STOCK TRANSFER AGENT]
Re: Halliburton Company 3?% Convertible Senior Notes Due 2023 (the "Notes")
Reference is hereby made to the Indenture dated as of June 30, 2003 between
the Company and the Trustee (collectively, the "Indenture"). Capitalized terms
used but not defined herein shall have the meanings given them in the Indenture.
This letter relates to _________ shares of Common Stock represented by the
accompanying certificate(s) that were issued upon conversion of Notes and which
are held in the name of [name of transferor] (the "Transferor") to effect the
transfer of such Common Stock.
In connection with the transfer of such shares of Common Stock, the
undersigned confirms that such shares of Common Stock are being transferred:
CHECK ONE BOX BELOW
(1) to the Company; or
------
(2) to a "qualified institutional buyer" (as defined in Rule 144A
------ under the Securities Act of 1933) in accordance with Rule 144A
under the Securities Act of 1933;
(3) pursuant to and in compliance with Regulation S under the
------ Securities Act of 1933 in off-shore transactions to non-U.S.
Persons; or
(4) pursuant to an exemption from registration under the
------ Securities Act of 1933 provided by Rule 144 thereunder.
Unless one of the boxes is checked, the transfer agent will refuse to
register any of the Common Stock evidenced by this certificate in the name of
any person other than the registered holder thereof; provided, however, that if
box (2) or (3) is checked, the transfer agent may require, prior to registering
any such transfer of the Common Stock such certifications and other information,
and if box (3) is checked such legal opinions, as the Company has reasonably
requested in writing, by delivery to the transfer agent of a standing letter of
B-2
instruction, to confirm that such transfer is being made pursuant to an
exemption from, or in a transaction not subject to, the registration
requirements of the Securities Act of 1933.
[Name of Transferor],
By
Name:
Title:
Dated:
B-3
HALLIBURTON COMPANY
1993 STOCK AND INCENTIVE PLAN
As Amended and Restated February 12, 2003
I. PURPOSE
The purpose of the Halliburton Company 1993 Stock and Incentive Plan (the
"Plan") is to provide a means whereby Halliburton Company, a Delaware
corporation (the "Company"), and its Subsidiaries may attract, motivate and
retain highly competent employees and to provide a means whereby selected
employees can acquire and maintain stock ownership and receive cash awards,
thereby strengthening their concern for the long-term welfare of the Company.
The Plan is also intended to provide employees with additional incentive and
reward opportunities designed to enhance the profitable growth of the Company
over the long term. A further purpose of the Plan is to allow awards under the
Plan to Non-employee Directors in order to enhance the Company's ability to
attract and retain highly qualified Directors. Accordingly, the Plan provides
for granting Incentive Stock Options, Options which do not constitute Incentive
Stock Options, Stock Appreciation Rights, Restricted Stock Awards, Performance
Awards, Stock Value Equivalent Awards, or any combination of the foregoing, as
is best suited to the circumstances of the particular employee or Non-employee
Director as provided herein. The Plan was established February 18, 1993, has
been amended from time to time thereafter, and effective as of February 12,
2003, is amended and restated to remove the expiration date of the Plan, to
rename the Plan and to make certain other changes.
II. DEFINITIONS
The following definitions shall be applicable throughout the Plan unless
specifically modified by any paragraph:
(a) "Award" means, individually or collectively, any Option, Stock
Appreciation Right, Restricted Stock Award, Performance Award
or Stock Value Equivalent Award.
(b) "Award Document" means the relevant award agreement or other
document containing the terms and conditions of an Award.
(c) "Beneficial Owners" shall have the meaning set forth in Rule
13d-3 promulgated under the Exchange Act.
(d) "Board" means the Board of Directors of Halliburton Company.
(e) "Change of Control Value" means, for the purposes of Paragraph
(f) of Article XII, the amount determined in Clause (i), (ii)
or (iii), whichever is applicable, as follows: (i) the per
share price offered to stockholders of the Company in any
merger, consolidation, sale of assets or dissolution
transaction, (ii) the per share price offered to stockholders
of the Company in any tender offer or exchange offer whereby a
Corporate Change takes place or (iii) if a Corporate Change
occurs other than as described in Clause (i) or Clause (ii),
the fair market value per share determined by the Committee as
of the date determined by the Committee to be the date of
cancellation and surrender of an Option or Stock Appreciation
Right. If the consideration offered to stockholders of the
Company in any transaction described in this Paragraph (e)
consists of anything other than cash, the Committee shall
determine the fair cash equivalent of the portion of the
consideration offered which is other than cash.
(f) "Code" means the Internal Revenue Code of 1986, as amended.
Reference in the Plan to any section of the Code shall be
deemed to include any amendments or successor provisions to
such section and any regulations under such section.
1
(g) "Committee" means the committee selected by the Board to
administer the Plan in accordance with Paragraph (a) of
Article IV of the Plan.
(h) "Common Stock" means the Common Stock, par value $2.50 per
share, of the Company.
(i) "Company" means Halliburton Company, a Delaware corporation.
(j) "Corporate Change" shall conclusively be deemed to have
occurred on a Corporate Change Effective Date if an event set
forth in any one of the following paragraphs shall have
occurred:
(i) any Person is or becomes the Beneficial Owner,
directly or indirectly, of securities of the
Company (not including in the securities
beneficially owned by such Person any securities
acquired directly from the Company or its
affiliates) representing 20% or more of the
combined voting power of the Company's then
outstanding securities; or
(ii) the following individuals cease for any reason to
constitute a majority of the number of directors
then serving: individuals who, on the date hereof,
constitute the Board and any new Director (other
than a Director whose initial assumption of office
is in connection with an actual or threatened
election contest relating to the election of
Directors of the Company) whose appointment or
election by the Board or nomination for election
by the Company's stockholders was approved or
recommended by a vote of at least two-thirds (2/3)
of the Directors then still in office who either
were Directors on the date hereof or whose
appointment, election or nomination for election
was previously so approved or recommended; or
(iii) there is consummated a merger or consolidation of
the Company or any direct or indirect Subsidiary
of the Company with any other corporation, other
than (A) a merger or consolidation which would
result in the voting securities of the Company
outstanding immediately prior to such merger or
consolidation continuing to represent (either by
remaining outstanding or by being converted into
voting securities of the surviving entity or any
parent thereof), in combination with the ownership
of any trustee or other fiduciary holding
securities under an employee benefit plan of the
Company or any Subsidiary of the Company, at least
50% of the combined voting power of the securities
of the Company or such surviving entity or any
parent thereof outstanding immediately after such
merger or consolidation, or (B) a merger or
consolidation effected to implement a
recapitalization of the Company (or similar
transaction) in which no Person is or becomes the
Beneficial Owner, directly or indirectly, of
securities of the Company (not including in the
securities Beneficially Owned by such Person any
securities acquired directly from the Company or
any of its affiliates other than in connection
with the acquisition by the Company or any of its
affiliates of a business) representing 20% or more
of the combined voting power of the Company's then
outstanding securities; or
2
(iv) the stockholders of the Company approve a plan of
complete liquidation or dissolution of the Company
or there is consummated an agreement for the sale,
disposition, lease or exchange by the Company of
all or substantially all of the Company's assets,
other than a sale, disposition, lease or exchange
by the Company of all or substantially all of the
Company's assets to an entity, at least 50% of the
combined voting power of the voting securities of
which are owned by stockholders of the Company in
substantially the same proportions as their
ownership of the Company immediately prior to such
sale.
Notwithstanding the foregoing, a "Corporate Change" shall not be deemed to have
occurred by virtue of the consummation of any transaction or series of
integrated transactions immediately following which the record holders of the
Common Stock of the Company immediately prior to such transaction or series of
transactions continue to have substantially the same proportionate ownership in
an entity which owns all or substantially all of the assets of the Company
immediately following such transaction or series of transactions.
(k) "Corporate Change Effective Date" shall mean:
(i) the first date that the direct or indirect
ownership of 20% or more combined voting power of
the Company's outstanding securities results in a
Corporate Change as described in clause (i) of
such definition above; or
(ii) the date of the election of Directors that results
in a Corporate Change as described in clause (ii)
of such definition; or
(iii) the date of the merger or consideration that
results in a Corporate Change as described in
clause (iii) of such definition; or
(iv) the date of stockholder approval that results in a
Corporate Change as described in clause (iv) of
such definition.
(l) "Exchange Act" means the Securities Exchange Act of 1934,
as amended.
(m) "Fair Market Value" means, as of any specified date, the
closing price of the Common Stock on the New York Stock
Exchange (or, if the Common Stock is not then listed on such
exchange, such other national securities exchange on
which the Common Stock is then listed) on that date, or if no
prices are reported on that date, on the last preceding date
on which such prices of the Common Stock are so reported or,
in the sole discretion of the Committee for purposes of
determining the Fair Market Value of the Common Stock at the
time of exercise of an Option or a Stock Appreciation Right,
such Fair Market Value shall be the prevailing price of the
Common Stock as of the time of exercise. If the Common Stock
is not then listed or quoted on any national securities
exchange but is traded over the counter at the time a
determination of its Fair Market Value is required to be made
hereunder, its Fair Market Value shall be deemed to be equal
to the average between the reported high and low sales prices
of Common Stock on the most recent date on which Common Stock
was publicly traded. If the Common Stock is not publicly
traded at the time a determination of its value is required to
be made hereunder, the determination of its Fair Market Value
shall be made by the Committee in such manner as it deems
appropriate.
(n) "Holder" means an employee or Non-employee Director of the
Company who has been granted an Award.
3
(o) "Immediate Family" means, with respect to a particular Holder,
the Holder's spouse, parent, brother, sister, children and
grandchildren (including adopted and step children and
grandchildren).
(p) "Incentive Stock Option" means an Option within the meaning of
Section 422 of the Code.
(q) "Minimum Criteria" shall have the meaning given such term in
Paragraph (a) of Article IX.
(r) "Non-employee Director" means a member of the Board who is not
an employee or former employee of the Company or its
Subsidiaries.
(s) "Option" means an Award granted under Article VII of the Plan
and includes both Incentive Stock Options to purchase Common
Stock and Options which do not constitute Incentive Stock
Options to purchase Common Stock.
(t) "Option Agreement" means a written agreement between the
Company and a Holder with respect to an Option.
(u) "Optionee" means a Holder who has been granted an Option.
(v) "Parent Corporation" shall have the meaning set forth in
Section 424(e) of the Code.
(w) "Performance Award" means an Award granted under Article X of
the Plan.
(x) "Person" shall have the meaning given in Section 3(a)(9) of
the Exchange Act, as modified and used in Sections 13(d) and
14(d) thereof, except that such term shall not include (i) the
Company or any of its Subsidiaries, (ii) a trustee or other
fiduciary holding securities under an employee benefit plan of
the Company or any of its affiliates, (iii) an underwriter
temporarily holding securities pursuant to an offering of such
securities, or (iv) a corporation owned, directly or
indirectly, by the stockholders of the Company in
substantially the same proportions as their ownership of stock
of the Company.
(y) "Plan" means the Halliburton Company 1993 Stock and Incentive
Plan.
(z) "Restricted Stock Award" means an Award granted under Article
IX of the Plan.
(aa) "Restricted Stock Award Agreement" means a written agreement
between the Company and a Holder with respect to a Restricted
Stock Award.
(bb) "Restriction Period" shall have the meaning given such term in
Paragraph (a) of Article IX.
(cc) "Spread" means, in the case of a Stock Appreciation Right, an
amount equal to the excess, if any, of the Fair Market Value
of a share of Common Stock on the date such right is exercised
over the exercise price of such Stock Appreciation Right.
(dd) "Stock Appreciation Right" means an Award granted under
Article VIII of the Plan.
(ee) "Stock Appreciation Rights Agreement" means a written
agreement between the Company and a Holder with respect to an
Award of Stock Appreciation Rights.
(ff) "Stock Value Equivalent Award" means an Award granted under
Article XI of the Plan.
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(gg) "Subsidiary" means a company (whether a corporation,
partnership, joint venture or other form of entity) in which
the Company or a corporation in which the Company owns a
majority of the shares of capital stock, directly or
indirectly, owns a greater than 20% equity interest, except
that with respect to the issuance of Incentive Stock Options
the term "Subsidiary" shall have the same meaning as the term
"subsidiary corporation" as defined in Section 424(f) of the
Code.
(hh) "Successor Holder" shall have the meaning given such term in
Paragraph (f) of Article XIV.
III. EFFECTIVE DATE AND DURATION OF THE PLAN
The Plan as amended and restated herein shall be effective February 12, 2003,
the date of its adoption by the Board, provided the Plan is approved by the
stockholders of the Company within twelve (12) months thereafter and on or prior
to the date of the first annual meeting of stockholders of the Company held
thereafter. Notwithstanding any provision of the Plan or in any Option Agreement
or Stock Appreciation Rights Agreement, no Option or Stock Appreciation Right
granted on or after February 12, 2003, shall be exercisable prior to such
stockholder approval. Subject to the provisions of Article XIII, the Plan shall
remain in effect until all Options and Stock Appreciation Rights granted under
the Plan have been exercised or expired by reason of lapse of time, all
restrictions imposed upon Restricted Stock Awards have lapsed and all
Performance Awards and Stock Value Equivalent Awards have been satisfied.
IV. ADMINISTRATION
(a) Composition of Committee. The Plan shall be administered by a Committee
of Directors of the Company which shall be appointed by the Board.
(b) Powers. The Committee shall have authority, in its discretion, to
determine which eligible individuals shall receive an Award, the time
or times when such Award shall be made, whether an Incentive Stock
Option, nonqualified Option or Stock Appreciation Right shall be
granted, the number of shares of Common Stock which may be issued under
each Option, Stock Appreciation Right and Restricted Stock Award, and
the value of each Performance Award and Stock Value Equivalent Award.
The Committee shall have the authority, in its discretion, to establish
the terms and conditions applicable to any Award, subject to any
specific limitations or provisions of the Plan. In making such
determinations the Committee may take into account the nature of the
services rendered by the respective individuals, their responsibility
level, their present and potential contribution to the Company's
success and such other factors as the Committee in its discretion shall
deem relevant.
(c) Additional Powers. The Committee shall have such additional powers as
are delegated to it by the other provisions of the Plan. Subject to the
express provisions of the Plan, the Committee is authorized to construe
the Plan and the respective Award Documents executed thereunder, to
prescribe such rules and regulations relating to the Plan as it may
deem advisable to carry out the Plan, and to determine the terms,
restrictions and provisions of each Award, including such terms,
restrictions and provisions as shall be requisite in the judgment
of the Committee to cause designated Options to qualify as Incentive
Stock Options, and to make all other determinations necessary or
advisable for administering the Plan. The Committee may correct any
defect or supply any omission or reconcile any inconsistency in any
Award Document relating to an Award in the manner and to the extent the
Committee shall deem expedient to carry the Award into effect. The
determinations of the Committee on the matters referred to in this
Article IV shall be conclusive.
5
(d) Delegation of Authority. The Committee may delegate some or all of its
power to the Chief Executive Officer of the Company as the Committee
deems appropriate; provided, however, that (i) the Committee may not
delegate its power with regard to the grant of an Award to any person
who is a "covered employee" within the meaning of Section 162(m) of the
Code or who, in the Committee's judgment, is likely to be a covered
employee at any time during the period an Award to such employee would
be outstanding; (ii) the Committee may not delegate its power with
regard to the selection for participation in the Plan of an officer or
other person subject to Section 16 of the Exchange Act or decisions
concerning the timing, pricing or amount of an Award to such an officer
or other person and (iii) any delegation of the power to grant Awards
shall be permitted by applicable law.
V. GRANT OF OPTIONS, STOCK APPRECIATION RIGHTS, RESTRICTED STOCK
AWARDS, PERFORMANCE AWARDS AND STOCK VALUE EQUIVALENT
AWARDS; SHARES SUBJECT TO THE PLAN
(a) Award Limits. The Committee may from time to time grant Awards to one
or more individuals determined by it to be eligible for participation
in the Plan in accordance with the provisions of Article VI. The
aggregate number of shares of Common Stock that may be issued under the
Plan shall not exceed 49,000,000 shares, of which no more than
16,000,000 may be issued in the form of Restricted Stock Awards or
pursuant to Performance Awards. Notwithstanding anything contained
herein to the contrary, the number of Option shares or Stock
Appreciation Rights, singly or in combination, together with shares or
share equivalents under Performance Awards granted to any Holder in any
one calendar year, shall not in the aggregate exceed 500,000. The cash
value determined as of the date of grant of any Performance Award not
denominated in Common Stock granted to any Holder for any one calendar
year shall not exceed $5,000,000. Any shares which remain unissued and
which are not subject to outstanding Options or Awards at the
termination of the Plan shall cease to be subject to the Plan, but,
until termination of the Plan, the Company shall at all times reserve a
sufficient number of shares to meet the requirements of the Plan.
Shares shall be deemed to have been issued under the Plan only to the
extent actually issued and delivered pursuant to an Award. To the
extent that an Award lapses or the rights of its Holder terminate or
the Award is paid in cash, any shares of Common Stock subject to such
Award shall again be available for the grant of an Award. The
aggregate number of shares which may be issued under the Plan shall be
subject to adjustment in the same manner as provided in Article XII
with respect to shares of Common Stock subject to Options then
outstanding. The 500,000-share limit on Stock Options and Stock
Appreciation Rights Awards to a Holder in any calendar year shall be
subject to adjustment in the same manner as provided in Article XII.
Separate stock certificates shall be issued by the Company for those
shares acquired pursuant to the exercise of an Incentive Stock Option
and for those shares acquired pursuant to the exercise of any Option
which does not constitute an Incentive Stock Option. The Committee may
from time to time adopt and observe such procedures concerning the
counting of shares against the Plan maximum as it may deem appropriate.
(b) Stock Offered. The stock to be offered pursuant to the grant of an
Award may be authorized but unissued Common Stock or Common Stock
previously issued and reacquired by the Company.
VI. ELIGIBILITY
Awards made pursuant to the Plan may be granted to individuals who, at the time
of grant, are employees of the Company or any Parent Corporation or Subsidiary
of the Company or are Non-employee Directors. An Award may also be granted to a
person who has agreed to become an employee of the Company or any Parent
6
Corporation or Subsidiary of the Company within the subsequent three (3)
months. An Award made pursuant to the Plan may be granted on more than one
occasion to the same person, and such Award may include an Incentive Stock
Option, an Option which is not an Incentive Stock Option, an Award of Stock
Appreciation Rights, a Restricted Stock Award, a Performance Award, a Stock
Value Equivalent Award or any combination thereof. Each Award shall be evidenced
in such manner and form as may be prescribed by the Committee.
VII. STOCK OPTIONS
(a) Stock Option Agreement. Each Option shall be evidenced by an Option
Agreement between the Company and the Optionee which shall contain such
terms and conditions as may be approved by the Committee. The terms and
conditions of the respective Option Agreements need not be identical.
Specifically, an Option Agreement may provide for the payment of the
option price, in whole or in part, by the delivery of a number of
shares of Common Stock (plus cash if necessary) having a Fair Market
Value equal to such option price.
(b) Option Period. The term of each Option shall be as specified by the
Committee at the date of grant; provided that, in no case, shall the
term of an Option exceed ten (10) years.
(c) Limitations on Exercise of Option. An Option shall be exercisable in
whole or in such installments and at such times as determined by the
Committee.
(d) Option Price. The purchase price of Common Stock issued under each
Option shall be determined by the Committee, but such purchase price
shall not be less than the Fair Market Value of Common Stock subject to
the Option on the date the Option is granted.
(e) Options and Rights in Substitution for Stock Options Granted by Other
Corporations. Options and Stock Appreciation Rights may be granted
under the Plan from time to time in substitution for stock options held
by employees of corporations who become, or who became prior to the
effective date of the Plan, employees of the Company or of any
Subsidiary as a result of a merger or consolidation of the employing
corporation with the Company or such Subsidiary, or the acquisition by
the Company or a Subsidiary of all or a portion of the assets of the
employing corporation, or the acquisition by the Company or a
Subsidiary of stock of the employing corporation with the result that
such employing corporation becomes a Subsidiary.
(f) Repricing Prohibited. Except for adjustments pursuant to Article XII,
the purchase price of Common Stock for any outstanding Option granted
under the Plan may not be decreased after the date of grant nor may an
outstanding Option granted under the Plan be surrendered to the Company
as consideration for the grant of a new Option with a lower purchase
price. Any other action that is deemed to be a repricing under any
applicable rule of the New York Stock Exchange shall be prohibited.
VIII. STOCK APPRECIATION RIGHTS
(a) Stock Appreciation Rights. A Stock Appreciation Right is the right to
receive an amount equal to the Spread with respect to a share of Common
Stock upon the exercise of such Stock Appreciation Right. Stock
Appreciation Rights may be granted in connection with the grant of an
Option, in which case the Option Agreement will provide that exercise
of Stock Appreciation Rights will result in the surrender of the right
to purchase the shares under the Option as to which the Stock
Appreciation Rights were exercised. Alternatively, Stock Appreciation
Rights may be granted independently of Options in which case each Award
of Stock Appreciation Rights shall be evidenced by a Stock Appreciation
Rights Agreement between the Company and the Holder which shall contain
such terms and conditions as may be approved by the Committee. The
7
terms and conditions of the respective Stock Appreciation Rights
Agreements need not be identical. The Spread with respect to a Stock
Appreciation Right may be payable either in cash, shares of Common
Stock with a Fair Market Value equal to the Spread or in a combination
of cash and shares of Common Stock. Upon the exercise of any Stock
Appreciation Rights granted hereunder, the number of shares reserved
for issuance under the Plan shall be reduced only to the extent that
shares of Common Stock are actually issued in connection with the
exercise of such Right.
(b) Exercise Price. The exercise price of each Stock Appreciation Right
shall be determined by the Committee, but such exercise price shall not
be less than the Fair Market Value of a share of Common Stock on the
date the Stock Appreciation Right is granted.
(c) Exercise Period. The term of each Stock Appreciation Right shall be as
specified by the Committee at the date of grant; provided that, in no
case, shall the term of a Stock Appreciation Right exceed ten (10)
years.
(d) Limitations on Exercise of Stock Appreciation Right. A Stock
Appreciation Right shall be exercisable in whole or in such
installments and at such times as determined by the Committee.
(e) Repricing Prohibited. Except for adjustments pursuant to Article XII,
the exercise price of a Stock Appreciation Right may not be decreased
after the date of grant nor may an outstanding Stock Appreciation Right
granted under the Plan be surrendered to the Company as consideration
for the grant of a new Stock Appreciation Right with a lower exercise
price. Any other action that is deemed to be a repricing under any
applicable rule of the New York Stock Exchange shall be prohibited.
IX. RESTRICTED STOCK AWARDS
(a) Restricted Period To Be Established by the Committee. At the time a
Restricted Stock Award is made, the Committee shall establish a period
of time (the "Restriction Period") applicable to such Award; provided,
however, that, except as set forth below and as permitted by Paragraph
(b) of this Article IX, such Restriction Period shall not be less than
three (3) years from the date of grant (the "Minimum Criteria"). An
award which provides for the lapse of restrictions on shares applicable
to such Award in equal annual installments over a period of at least
three (3) years from the date of grant shall be deemed to meet the
Minimum Criteria. The foregoing notwithstanding, with respect to
Restricted Stock Awards of up to an aggregate 550,000 shares (subject
to adjustment as set forth in Article XII), the Minimum Criteria shall
not apply and the Committee may establish such lesser Restriction
Periods applicable to such Awards as it shall determine in its
discretion. Subject to the foregoing, each Restricted Stock Award may
have a different Restriction Period, in the discretion of the
Committee. The Restriction Period applicable to a particular Restricted
Stock Award shall not be changed except as permitted by Paragraph (b)
of this Article or by Article XII.
(b) Other Terms and Conditions. Common Stock awarded pursuant to a
Restricted Stock Award shall be represented by a stock certificate
registered in the name of the Holder of such Restricted Stock Award or,
at the option of the Company, in the name of a nominee of the Company.
The Holder shall have the right to receive dividends during the
Restriction Period, to vote the Common Stock subject thereto and to
enjoy all other stockholder rights, except that (i) the Holder shall
not be entitled to possession of the stock certificate until the
Restriction Period shall have expired, (ii) the Company shall retain
custody of the stock during the Restriction Period, (iii) the Holder
may not sell, transfer, pledge, exchange, hypothecate or otherwise
dispose of the stock during the Restriction Period, and (iv) a breach
of the terms and conditions established by the Committee pursuant to
the Restricted Stock Award shall cause a forfeiture of the Restricted
Stock Award. At the time of such Award, the Committee may, in its sole
8
discretion, prescribe additional terms, conditions or restrictions
relating to Restricted Stock Awards, including, but not limited
to, rules pertaining to the termination of a Holder's service (by
retirement, disability, death or otherwise) prior to expiration of the
Restriction Period as shall be set forth in a Restricted Stock Award
Agreement.
(c) Payment for Restricted Stock. A Holder shall not be required to make
any payment for Common Stock received pursuant to a Restricted Stock
Award, except to the extent otherwise required by law and except that
the Committee may, in its discretion, charge the Holder an amount in
cash not in excess of the par value of the shares of Common Stock
issued under the Plan to the Holder.
(d) Miscellaneous. Nothing in this Article shall prohibit the exchange of
shares issued under the Plan (whether or not then subject to a
Restricted Stock Award) pursuant to a plan of reorganization for stock
or securities in the Company or another corporation a party to the
reorganization, but the stock or securities so received for shares then
subject to the restrictions of a Restricted Stock Award shall become
subject to the restrictions of such Restricted Stock Award. Any shares
of stock received as a result of a stock split or stock dividend with
respect to shares then subject to a Restricted Stock Award shall also
become subject to the restrictions of the Restricted Stock Award.
X. PERFORMANCE AWARDS
(a) Performance Period. The Committee shall establish, with respect to and
at the time of each Performance Award, a performance period over which
the performance applicable to the Performance Award of the Holder shall
be measured.
(b) Performance Awards. Each Performance Award may have a maximum value
established by the Committee at the time of such Award.
(c) Performance Measures. A Performance Award granted under the Plan that
is intended to qualify as qualified performance-based compensation
under Section 162(m) of the Code shall be awarded contingent upon the
achievement of one or more performance measures. The performance
criteria for Performance Awards shall consist of objective tests based
on the following: earnings, cash flow, cash value added performance,
stockholder return and/or value, revenues, operating profits (including
EBITDA), net profits, earnings per share, stock price, cost reduction
goals, debt to capital ratio, financial return ratios, profit return
and margins, market share, working capital and customer satisfaction.
The Committee may select one criterion or multiple criteria for
measuring performance. Performance criteria may be measured on
corporate, subsidiary or business unit performance, or on a combination
thereof. Further, the performance criteria may be based on comparative
performance with other companies or other external measure of the
selected performance criteria. A Performance Award that is not intended
to qualify as qualified performance-based compensation under Section
162(m) of the Code shall be based on achievement of such goals and be
subject to such terms, conditions and restrictions as the Committee or
its delegate shall determine.
(d) Payment. Following the end of the performance period, the Holder of a
Performance Award shall be entitled to receive payment of an amount,
not exceeding the maximum value of the Performance Award, if any, based
on the achievement of the performance measures for such performance
period, as determined by the Committee in its sole discretion. Payment
of a Performance Award (i) may be made in cash, Common Stock or a
combination thereof, as determined by the Committee in its sole
discretion, (ii) shall be made in a lump sum or in installments as
prescribed by the Committee in its sole discretion, and (iii) to the
extent applicable, shall be based on the Fair Market Value of the
9
Common Stock on the payment date. If a payment of cash or issuance of
Common Stock is to be made on a deferred basis, the Committee shall
establish whether interest or dividend equivalents shall be credited
on the deferred amounts and any other terms and conditions applicable
thereto.
(e) Termination of Service. The Committee shall determine the effect of
termination of service during the performance period on a Holder's
Performance Award.
XI. STOCK VALUE EQUIVALENT AWARDS
(a) Stock Value Equivalent Awards. Stock Value Equivalent Awards are rights
to receive an amount equal to the Fair Market Value of shares of Common
Stock or rights to receive an amount equal to any appreciation or
increase in the Fair Market Value of Common Stock over a specified
period of time, which vest over a period of time as established by the
Committee, without payment of any amounts by the Holder thereof (except
to the extent otherwise required by law) or satisfaction of any
performance criteria or objectives. Each Stock Value Equivalent Award
may have a maximum value established by the Committee at the time of
such Award.
(b) Award Period. The Committee shall establish, with respect to and at the
time of each Stock Value Equivalent Award, a period over which the
Award shall vest with respect to the Holder.
(c) Payment. Following the end of the determined period for a Stock Value
Equivalent Award, the Holder of a Stock Value Equivalent Award shall be
entitled to receive payment of an amount, not exceeding the maximum
value of the Stock Value Equivalent Award, if any, based on the then
vested value of the Award. Payment of a Stock Value Equivalent Award
(i) shall be made in cash, (ii) shall be made in a lump sum or in
installments as prescribed by the Committee in its sole discretion,
and (iii) shall be based on the Fair Market Value of the Common Stock
on the payment date. Cash dividend equivalents may be paid during, or
may be accumulated and paid at the end of, the determined period with
respect to a Stock Value Equivalent Award, as determined by the
Committee. If payment of cash is to be made on a deferred basis, the
Committee shall establish whether interest shall be credited, the rate
thereof and any other terms and conditions applicable thereto.
(d) Termination of Service. The Committee shall determine the effect of
termination of service during the applicable vesting period on a
Holder's Stock Value Equivalent Award.
XII. RECAPITALIZATION OR REORGANIZATION
(a) Except as hereinafter otherwise provided, in the event of any
recapitalization, reorganization, merger, consolidation, combination,
exchange, stock dividend, stock split, extraordinary dividend or
divestiture (including a spin-off) or any other change in the corporate
structure or shares of Common Stock occurring after the date of the
grant of an Award, the Committee shall, in its discretion, make such
adjustment as to the number and price of shares of Common Stock or
other consideration subject to such Awards as the Committee shall deem
appropriate in order to prevent dilution or enlargement of rights of
the Holders.
(b) The existence of the Plan and the Awards granted hereunder shall not
affect in any way the right or power of the Board or the stockholders
of the Company to make or authorize any adjustment, recapitalization,
reorganization or other change in the Company's capital structure or
its business, any merger or consolidation of the Company, any issue of
debt or equity securities having any priority or preference with
respect to or affecting Common Stock or the rights thereof, the
dissolution or liquidation of the Company or any sale, lease, exchange
or other disposition of all or any part of its assets or business or
any other corporate act or proceeding.
10
(c) The shares with respect to which Options or Stock Appreciation Rights
may be granted are shares of Common Stock as presently constituted, but
if, and whenever, prior to the expiration of an Option or Stock
Appreciation Rights, the Company shall effect a subdivision or
consolidation of shares of Common Stock or the payment of a stock
dividend on Common Stock without receipt of consideration by the
Company, the number of shares of Common Stock with respect to which
such Option or Stock Appreciation Rights may thereafter be exercised
(i) in the event of an increase in the number of outstanding shares
shall be proportionately increased, and the purchase price per share
shall be proportionately reduced, and (ii) in the event of a reduction
in the number of outstanding shares shall be proportionately reduced,
and the purchase price per share shall be proportionately increased.
(d) If the Company recapitalizes or otherwise changes its capital
structure, thereafter upon any exercise of an Option or Stock
Appreciation Rights theretofore granted, the Holder shall be entitled
to purchase or receive, as applicable, under such Option or Stock
Appreciation Rights, in lieu of the number of shares of Common Stock as
to which such Option or Stock Appreciation Rights shall then be
exercisable, the number and class of shares of stock and securities and
the cash and other property to which the Holder would have been
entitled pursuant to the terms of the recapitalization if, immediately
prior to such recapitalization, the Holder had been the holder of
record of the number of shares of Common Stock then covered by such
Option or Stock Appreciation Rights.
(e) In the event of a Corporate Change, unless an Award Document otherwise
provides, as of the Corporate Change Effective Date (i) any outstanding
Options and Stock Appreciation Rights shall become immediately vested
and fully exercisable, (ii) any restrictions on Restricted Stock Awards
shall immediately lapse, (iii) all performance measures upon which an
outstanding Performance Award is contingent shall be deemed achieved
and the Holder shall receive a payment equal to the maximum amount of
the Award he or she would have been entitled to receive, prorated to
the Corporate Change Effective Date, and (iv) any outstanding cash
Awards including, but not limited to, Stock Value Equivalent Awards
shall immediately vest and be paid based on the vested value of the
Award.
(f) In the relevant Award Document, the Committee may provide that, no
later than two (2) business days prior to any Corporate Change
referenced in Clause (ii), (iii) or (iv) of the definition thereof or
ten (10) business days after any Corporate Change referenced in Clause
(i) of the definition thereof, the Committee may, in its sole
discretion, (i) require the mandatory surrender to the Company by
selected Optionees of some or all of the outstanding Options held by
such Optionees (irrespective of whether such Options are then
exercisable under the provisions of the Plan) as of a date (before or
after a Corporate Change) specified by the Committee, in which event
the Committee shall thereupon cancel such Options and pay to each
Optionee an amount of cash per share equal to the excess, if any, of
the Change of Control Value of the shares subject to such Option over
the exercise price(s) under such Options for such shares, (ii) require
the mandatory surrender to the Company by selected Holders of Stock
Appreciation Rights of some or all of the outstanding Stock
Appreciation Rights held by such Holders (irrespective of whether such
Stock Appreciation Rights are then exercisable under the provisions of
the Plan) as of a date (before or after a Corporate Change) specified
by the Committee, in which event the Committee shall thereupon cancel
such Stock Appreciation Rights and pay to each Holder an amount of cash
equal to the Spread with respect to such Stock Appreciation Rights with
the Fair Market Value of the Common Stock at such time to be deemed to
be the Change of Control Value, or (iii) require the mandatory
surrender to the Company by selected Holders of Restricted Stock Awards
or Performance Awards of some or all of the outstanding Awards held by
such Holder (irrespective of whether such Awards are vested under the
provisions of the Plan) as of a date (before or after a Corporate
11
Change) specified by the Committee, in which event the Committee
shall thereupon cancel such Awards and pay to each Holder an amount of
cash equal to the Change of Control Value of the shares, if the Award
is denominated in Common Stock, or an amount of cash equal to the Fair
Market Value of the Common Stock at such time, if the Award is not
denominated in Common Stock.
(g) Except as hereinbefore expressly provided, the issuance by the Company
of shares of stock of any class or securities convertible into shares
of stock of any class, for cash, property, labor or services, upon
direct sale, upon the exercise of rights or warrants to subscribe
therefor, or upon conversion of shares or obligations of the Company
convertible into such shares or other securities, and in any case
whether or not for fair value, shall not affect, and no adjustment by
reason thereof shall be made with respect to, the number of shares of
Common Stock subject to Options or Stock Appreciation Rights
theretofore granted, the purchase price per share of Common Stock
subject to Options or the calculation of the Spread with respect to
Stock Appreciation Rights.
XIII. AMENDMENT OR TERMINATION OF THE PLAN
The Board in its discretion may terminate the Plan or alter or amend the Plan or
any part thereof from time to time; provided that no change in any Award
theretofore granted may be made which would impair the rights of the Holder
without the consent of the Holder, and provided, further, that the Board may
not, without approval of the stockholders, amend the Plan to effect a "material
revision" of the Plan, where a "material revision" includes, but is not limited
to, a revision that: (a) materially increases the benefits accruing to a Holder
under the Plan, (b) materially increases the aggregate number of securities that
may be issued under the Plan, (c) materially modifies the requirements as to
eligibility for participation in the Plan, (d) changes the types of awards
available under the Plan or, (e) amends or deletes the provisions that prevent
the Committee from amending the terms and conditions of an outstanding Option or
Stock Appreciation Rights to alter the exercise price.
XIV. OTHER
(a) No Right To An Award. Neither the adoption of the Plan nor any action
of the Board or of the Committee shall be deemed to give an employee or
a non-employee Director any right to be granted an Option, a Stock
Appreciation Right, a right to a Restricted Stock Award or a right to a
Performance Award or Stock Value Equivalent Award or any other rights
hereunder except as may be evidenced by an Award or by an Option or
Stock Appreciation Agreement duly executed on behalf of the Company,
and then only to the extent of and on the terms and conditions
expressly set forth therein. The Plan shall be unfunded. The Company
shall not be required to establish any special or separate fund or to
make any other segregation of funds or assets to assure the payment of
any Award.
(b) No Employment Rights Conferred. Nothing contained in the Plan or in
any Award made hereunder shall:
(i) confer upon any employee any right to continuation
of employment with the Company or any Subsidiary;
or
(ii) interfere in any way with the right of the Company
or any Subsidiary to terminate his or her
employment at any time.
(c) No Rights to Serve as a Director Conferred. Nothing contained in the
Plan or in any Award made hereunder shall confer upon any Director any
right to continue their position as a Director of the Company.
12
(d) Other Laws; Withholding. The Company shall not be obligated to issue
any Common Stock pursuant to any Award granted under the Plan at any
time when the offering of the shares covered by such Award has not been
registered under the Securities Act of 1933 and such other state and
federal laws, rules or regulations as the Company or the Committee
deems applicable and, in the opinion of legal counsel for the Company,
there is no exemption from the registration requirements of such laws,
rules or regulations available for the issuance and sale of such
shares. No fractional shares of Common Stock shall be delivered, nor
shall any cash in lieu of fractional shares be paid. The Company shall
have the right to deduct in connection with all Awards any taxes
required by law to be withheld and to require any payments necessary to
enable it to satisfy its withholding obligations. The Committee may
permit the Holder of an Award to elect to surrender, or authorize the
Company to withhold, shares of Common Stock (valued at their Fair
Market Value on the date of surrender or withholding of such shares) in
satisfaction of the Company's withholding obligation, subject to such
restrictions as the Committee deems appropriate.
(e) No Restriction on Corporate Action. Nothing contained in the Plan shall
be construed to prevent the Company or any Subsidiary from taking any
corporate action which is deemed by the Company or such Subsidiary to
be appropriate or in its best interest, whether or not such action
would have an adverse effect on the Plan or any Award made under the
Plan. No Holder, beneficiary or other person shall have any claim
against the Company or any Subsidiary as a result of any such action.
(f) Restrictions on Transfer. Except as otherwise provided herein, an Award
shall not be sold, transferred, pledged, assigned or otherwise
alienated or hypothecated by a Holder other than by will or the laws of
descent and distribution or pursuant to a "qualified domestic relations
order" as defined by the Code or Title I of the Employee Retirement
Income Security Act of 1974, as amended, and shall be exercisable
during the lifetime of the Holder only by such Holder, the Holder's
guardian or legal representative, a transferee under a qualified
domestic relations order or a transferee as described below. The
Committee may prescribe and include in the respective Award Documents
hereunder other restrictions on transfer. Any attempted assignment or
transfer in violation of this section shall be null and void. Upon a
Holder's death, the Holder's personal representative or other person
entitled to succeed to the rights of the Holder (the "Successor
Holder") may exercise such rights as are provided under the applicable
Award Document. A Successor Holder must furnish proof satisfactory to
the Company of his or her rights to exercise the Award under the
Holder's will or under the applicable laws of descent and distribution.
Notwithstanding the foregoing, the Committee shall have the authority,
in its discretion, to grant (or to sanction by way of amendment to an
existing grant) Awards (other than Incentive Stock Options) which may
be transferred by the Holder for no consideration to or for the benefit
of the Holder's Immediate Family, to a trust solely for the benefit of
the Holder and his Immediate Family, or to a partnership or limited
liability company in which the Holder and members of his Immediate
Family have at least 99% of the equity, profit and loss interest, in
which case the Award Document shall so state. A transfer of an Award
pursuant to this Paragraph (f) shall be subject to such rules and
procedures as the Committee may establish. In the event an Award is
transferred as contemplated in this Paragraph (f), such Award may not
be subsequently transferred by the transferee except by will or the
laws of descent and distribution, and such Award shall continue to be
governed by and subject to the terms and limitations of the Plan and
the relevant written instrument for the Award and the transferee shall
be entitled to the same rights as the Holder under Articles XII and
XIII hereof as if no transfer had taken place. No transfer shall be
effective unless and until written notice of such transfer is provided
to the Committee, in the form and manner prescribed by the Committee.
The consequences of termination of employment shall continue to be
applied with respect to the original Holder, following which the Awards
shall be exercised by the transferee only to the extent and for the
periods specified in the Plan and the related Award Document.
13
The Option Agreement, Stock Appreciation Rights Agreement, Restricted
Stock Agreement or other Award Document shall specify the effect of the
death of the Holder on the Award.
(g) Governing Law. This Plan shall be construed in accordance with the laws
of the State of Texas, except to the extent that it implicates matters
which are the subject of the General Corporation Law of the State of
Delaware which matters shall be governed by the latter law.
(h) Foreign Awardees. Without amending the Plan, the Committee may grant
Awards to eligible persons who are foreign nationals on such terms and
conditions different from those specified in the Plan as may, in the
judgment of the Committee, be necessary or desirable to foster and
promote achievement of the purposes of the Plan and, in furtherance of
such purposes, the Committee may make such modifications, amendments,
procedures, subplans and the like as may be necessary or advisable to
comply with the provisions of laws and regulations in other countries
or jurisdictions in which the Company or its Subsidiaries operate.
14
CERTIFICATION
I, David J. Lesar, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Halliburton
Company;
2. Based on my knowledge, this report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under
which such statements were made, not misleading with respect to the
period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows
of the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the
registrant and have:
(a) Designed such disclosure controls and procedures, or caused
such disclosure controls and procedures to be designed under
our supervision, to ensure that material information relating
to the registrant, including its consolidated subsidiaries, is
made known to us by others within those entities, particularly
during the period in which this report is being prepared;
(b) Evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls
and procedures, as of the end of the period covered by this
report based on such evaluation; and
(c) Disclosed in this report any change in the registrant's
internal control over financial reporting that occurred during
the registrant's most recent fiscal quarter (the registrant's
fourth fiscal quarter in the case of an annual report) that
has materially affected, or is reasonably likely to materially
affect, the registrant's internal control over financial
reporting; and
5. The registrant's other certifying officer(s) and I have disclosed,
based on our most recent evaluation of internal control over financial
reporting, to the registrant's auditors and the audit committee of the
registrant's board of directors (or persons performing the equivalent
functions):
(a) All significant deficiencies and material weaknesses in the
design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the
registrant's ability to record, process, summarize and report
financial information; and
(b) Any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal control over financial reporting.
Date: August 11, 2003
/s/ David J. Lesar
-----------------------------
David J. Lesar
Chief Executive Officer
CERTIFICATION
I, C. Christopher Gaut, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Halliburton
Company;
2. Based on my knowledge, this report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows
of the registrant as of, and for, the periods presented in this
report;
4. The registrant's other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the
registrant and have:
(a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made
known to us by others within those entities, particularly
during the period in which this report is being prepared;
(b) Evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls
and procedures, as of the end of the period covered by this
report based on such evaluation; and
(c) Disclosed in this report any change in the registrant's
internal control over financial reporting that occurred during
the registrant's most recent fiscal quarter (the registrant's
fourth fiscal quarter in the case of an annual report) that has
materially affected, or is reasonably likely to materially
affect, the registrant's internal control over financial
reporting; and
5. The registrant's other certifying officer(s) and I have disclosed,
based on our most recent evaluation of internal control over financial
reporting, to the registrant's auditors and the audit committee of the
registrant's board of directors (or persons performing the equivalent
functions):
(a) All significant deficiencies and material weaknesses in the
design or operation of internal control over financial reporting
which are reasonably likely to adversely affect the registrant's
ability to record, process, summarize and report financial
information; and
(b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal control over financial reporting.
Date: August 11, 2003
/s/ C. Christopher Gaut
-----------------------------
C. Christopher Gaut
Executive Vice President and
Chief Financial Officer
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Halliburton Company (the "Company")
on Form 10-Q for the period ending June 30, 2003 as filed with the Securities
and Exchange Commission on the date hereof (the "Report"), I, David J. Lesar,
Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. ss. 1350,
as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of section 13(a) or
15(d) of the Securities Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations
of the Company.
/s/ David J. Lesar
-----------------------
David J. Lesar
Chief Executive Officer
August 11, 2003
CERTIFICATION PURSUANT
TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Halliburton Company (the "Company")
on Form 10-Q for the period ending June 30, 2003 as filed with the Securities
and Exchange Commission on the date hereof (the "Report"), I, C. Christopher
Gaut, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. ss.
1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of section 13(a) or
15(d) of the Securities Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations
of the Company.
/s/ C. Christopher Gaut
-----------------------------
C. Christopher Gaut
Chief Financial Officer
August 11, 2003