Document:

exv10w3

 

Exhibit 10.3

EMPLOYMENT AGREEMENT

by and between

BAKER HUGHES INCORPORATED

and

CHAD C. DEATON

 

 

EMPLOYMENT AGREEMENT

     THIS EMPLOYMENT AGREEMENT dated as of October 25, 2005 (this “Agreement”),
by and between Chad C. Deaton (the “Executive”) and Baker Hughes Incorporated,
a Delaware corporation (the “Company”).

     WHEREAS, the Board of Directors of the Company (the “Board”) desires to
retain the Executive as the Chief Executive Officer of the Company and to
encourage the attention and dedication to the Company of the Executive as a
member of the Company’s management, in the best interests of the Company and
its shareholders;

     WHEREAS, the Executive is willing to commit himself to serve the Company,
on the terms and conditions herein provided; and

     WHEREAS, the Company and the Executive desire to set forth in this
Agreement the terms and conditions of the Executive’s employment; and

     WHEREAS, the Company and the Executive have simultaneously herewith
executed a Change in Control Agreement effective as of October 25, 2005 (the
“Change in Control Agreement”);

     NOW, THEREFORE, in consideration of the premises and the respective
covenants and agreements of the parties herein contained, and intending to be
legally bound hereby, the parties hereto agree as follows:

     1. Employment and Term. The Company hereby agrees to employ the
Executive, and the Executive hereby accepts such employment, on the terms and
conditions hereinafter set forth. The period of employment of the Executive by
the Company hereunder (the “Employment Period”) shall commence on October 25,
2004 (the “Effective Date”) and shall end on the Executive’s Date of
Termination (as defined in Section 7(b) hereof). The term of this Agreement
(the “Term”) shall begin on the Effective Date and shall end on the second
anniversary thereof; provided, that, on October 25, 2005, and each anniversary
of October 25 thereafter, the Term shall be extended for one additional year
unless, prior to September 25, 2005 with respect to the extension on October
25, 2005, and each anniversary of September 25, thereafter with respect to each
subsequent annual extension, the Company or the Executive shall have given
notice not to extend the Term or the Executive shall have incurred a
termination of employment with the Company.

     2. Position and Duties.

     (a) As of the Effective Date, the Executive shall serve as Chief Executive
Officer of the Company, in which capacity the Executive shall perform the usual
and customary duties of such office, which shall be those normally inherent in
such capacity in U.S. publicly held corporations of similar size and character.
The Executive agrees and acknowledges that, in connection with his employment
relationship with the Company, the Executive owes fiduciary duties to the
Company and will act accordingly.

 

 

     (b) During the Employment Period, the Executive agrees to devote
substantially his full time, attention and energies to the Company’s business
and agrees to faithfully and diligently endeavor to the best of his ability to
further the best interests of the Company. The Executive shall not engage in
any other business activity, whether or not such business activity is pursued
for gain, profit or other pecuniary advantage. Subject to the covenants of
Section 9 herein, this shall not be construed as preventing the Executive from
investing his own assets in such form or manner as will not require his
services in the daily operations of the affairs of the companies in which such
investments are made. Further, subject to Section 9 herein, the Executive may
serve as a director of other companies, if such service is approved by the
Compensation Committee of the Board (the “Compensation Committee”), so long as
such service is not detrimental to the Company, does not interfere with the
Executive’s service to the Company and does not present the Executive with a
conflict of interest.

     (c) In keeping with the Executive’s fiduciary duties to the Company, the
Executive agrees that he shall not, directly or indirectly, become involved in
any conflict of interest, or upon discovery thereof, allow such a conflict to
continue. Moreover, the Executive agrees that he shall promptly disclose to
the Board any facts which might involve any reasonable possibility of a
conflict of interest, or be perceived as such.

     (d) Circumstances in which a conflict of interest on the part of the
Executive would or might arise, and which should be reported immediately by the
Executive to the Board, include the following: (i) ownership of a material
interest in, acting in any capacity for, or accepting directly or indirectly
any payments, services or loans from a supplier, contractor, subcontractor,
customer or other entity with which the Company does business; (ii) misuse of
information or facilities to which the Executive has access in a manner which
will be detrimental to the Company’s interest; (iii) disclosure or other misuse
of Confidential Information (as defined in Section 9); (iv) acquiring or
trading in, directly or indirectly, other properties or interests connected
with the design, manufacture or marketing of products designed, manufactured or
marketed by the Company; (v) the appropriation to the Executive or the
diversion to others, directly or indirectly, of any opportunity in which it is
known or could reasonably be anticipated that the Company would be interested;
and (vi) the ownership, directly or indirectly, of a material interest in an
enterprise in competition with the Company or its dealers and distributors or
acting as a director, officer, partner, consultant, employee or agent of any
enterprise which is in competition with the Company or its dealers or
distributors.

     (e) Further, the Executive covenants, warrants and represents that he
shall:

     (i) devote his full and best efforts to the fulfillment of his
employment obligations;

     (ii) exercise the highest degree of fiduciary loyalty and care and
the highest standards and conduct in the performance of his duties; and

     (iii) endeavor to prevent any harm, in any way, to the business or
reputation of the Company.

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     (f) As Chief Executive Officer of the Company, the Executive is required
to own common stock in the Company equal to five times Base Salary within five
years from the Effective Date.

     3. Place of Performance. In connection with the Executive’s employment by
the Company, the Executive’s principal business address shall be at the
Company’s current principal executive offices in Houston, Texas (the “Principal
Place of Employment”) or in such other place as the Executive and the Company
may agree.

     4. Compensation and Related Matters.

     (a) Base Salary. During the Employment Period, the Company shall pay the
Executive an annual base salary (“Base Salary”) in an amount that shall be
established from time to time by the Compensation Committee, payable in
approximately equal installments in accordance with the Company’s customary
payroll practices. The Base Salary shall be set initially at $825,000. The
Compensation Committee shall review the Executive’s Base Salary during the
Spring of 2005 and at least annually thereafter during the Employment Period.
The Executive’s Base Salary may be increased but not decreased during the
Employment Period.

     (b) Bonuses. During the Employment Period, the Executive shall be eligible
to participate in the Baker Hughes Incorporated 1995 Employee Annual Incentive
Compensation Plan or any successor plan thereto (the “Annual Incentive Plan”).
The bonus opportunity afforded the Executive pursuant to this Section 4(b) may
vary from year to year and any bonus earned thereunder (the “Annual Bonus”)
shall be paid at a time and in a manner consistent with the Company’s customary
practices. For the year 2004, the Executive’s bonus is guaranteed to be equal
to $600,000. The expected value bonus level for the Executive for the year
2005 will be 100 percent of the Executive’s Base Salary. In 2005 and
subsequent years, the Executive’s bonus levels will be contingent upon the
Company achieving predetermined performance goals and approval by the
Compensation Committee.

     (c) Equity-Based Compensation and Performance Awards. During the
Employment Period, the Executive shall be entitled to receive equity-based
compensation awards and performance awards on substantially similar terms and
conditions no less favorable than awards made to the other senior executive
officers of the Company.

     Upon employment the Executive will receive an award of 80,000 shares of
restricted stock, under the Baker Hughes Incorporated 2002 Director & Officer
Long-Term Incentive Plan Company’s Long Term Incentive Plan or successor plan
thereto (the “Long Term Incentive Plan”), one-quarter of which will vest on
October 25 of each of 2006, 2007, 2008 and 2009, in each case subject to the
Executive’s continued employment with the Company. The Executive shall have a
fully nonforfeitable interest in 40,000 of these restricted shares in the event
of (i) the termination of the Executive’s employment by the Company without
Cause (as defined in Section 6(c)), or (ii) the termination of the Executive’s
employment by the Executive for Good Reason (as defined in Section 6(d)), in
both cases, prior to October 25, 2006. The Executive shall have a fully
nonforfeitable interest in 80,000 of these restricted shares in the event of
(i) the death of the Executive while in the employ of the Company or (ii) the
termination of the Executive’s employment with the Company due to Disability
(as defined in Section 6(b)).

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     The Executive will also be eligible to receive a one-time grant of a
nonqualified stock option to purchase 75,000 shares of the Company’s common
stock under the Long-Term Incentive Plan. One-third of the shares subject to
this option will become exercisable on October 25 of each of 2005, 2006 and
2007, in each case subject to the terms and conditions of the Company’s Long
Term Incentive Plan. This option shall be fully exercisable in the event of
(i) the death of the Executive while in the employ of the Company or (ii) the
termination of the Executive’s employment due to Disability (as defined in
Section 6(b)), in both cases, prior to October 25, 2014. In accordance with
the Long Term Incentive Plan, the per share exercise price under this option
will be the last per share sale price of the Company’s common stock on the day
preceding the date of grant as reported by The Wall Street Journal in the
composite transactions report section for the New York Stock Exchange.

     During the Employment Period the Executive will participate on a pro-rated
basis in the executive performance program established under the Long Term
Incentive Plan for the performance period commencing on January 1, 2004 and
ending on December 31, 2006. The Executive will be eligible to earn 17,000
shares of the Company’s common stock under this performance program if the
“100%” target level of performance is achieved. The Executive will be granted
a performance award agreement evidencing his participation in this performance
program.

     During the Employment Period the Executive will participate in the
executive performance program established under the Long Term Incentive Plan
for the performance period commencing on January 1, 2005 and ending on December
31, 2007.

     The Executive will be eligible to receive a grant of a stock option in
2005, as determined by the Compensation Committee, at the same time the
Compensation Committee considers similar awards for other senior executive
officers of the Company.

     Each award agreement evidencing an award of restricted stock granted to
the Executive under the Long Term Incentive Plan or any other Company program
or arrangement shall specify that the Executive shall have a fully
nonforfeitable interest in the shares of restricted stock in the event of (i)
the death of the Executive while in the employ of the Company or (ii) the
termination of the Executive’s employment due to Disability (as defined in
Section 6(b)). Each award agreement evidencing an award of a stock option to
the Executive under the Long Term Incentive Plan or any other Company program
or arrangement shall specify that the option shall be fully exercisable in the
event of (i) the death of the Executive while in the employ of the Company or
(ii) the termination of the Executive’s employment due to Disability (as
defined in Section 6(b)), in both cases, prior to the expiration of the term of
the stock option.

     (d) Expenses. The Company shall promptly reimburse the Executive for all
reasonable legal expenses that the Executive has incurred in connection with
entering into the employ of the Company and all reasonable business expenses
incurred during the Employment Period by the Executive in performing services
hereunder, including all expenses of travel and living expenses while away from
home on business or at the request of and in the service of the Company;
provided, in each case, that such expenses are incurred and accounted for in
accordance with the policies and procedures established by the Company.

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     (e) Other Benefits. During the Employment Period, the Executive shall be
entitled to participate in all of the employee benefit plans and arrangements
made available by the Company to its other senior executive officers, subject
to and on a basis consistent with the terms, conditions and overall
administration of such plans and arrangements, and shall be entitled to
perquisites, including executive life insurance, club memberships, financial
planning (including tax return preparation), an annual physical examination,
security monitoring at the Executive’s residences, phone/internet access at the
Executive’s residences and other perquisites that may be added with the
approval of the Compensation Committee, each within the limitations of the
Company’s Executive Perquisite Program. The pool of perquisite dollars that
will be available to the Executive under the Company’s Executive Perquisite
Program for years during the Employment Period other than 2004 is $25,000. For
2004, the pool of perquisite dollars that will be available to the Executive is
$5,000. Notwithstanding the foregoing, the Company shall have the right to
change, amend or discontinue any benefit plan, program, or perquisite, so long
as such changes are similarly applicable to senior executive officers of the
Company generally.

     (f) Vacation. During the Employment Period, the Executive shall be
entitled to 25 days of vacation per year other than for 2004. For 2004, the
Executive shall be entitled to ten days of vacation.

     (g) Services Furnished. During the Employment Period, the Executive shall
at all times be provided with office space, stenographic assistance and such
other facilities and services as are suitable to his position and no less
favorable than those being provided to the Executive by the Company as of the
date hereof.

     5. Offices. Subject to Sections 2, 3 and 4 hereof, the Executive agrees
to serve without additional compensation, if elected or appointed thereto, as a
director of any of the Company’s subsidiaries and as a member of any committees
of the board of directors of any such corporations, and in one or more
executive positions of any of the Company’s subsidiaries; provided, that the
Executive is indemnified for serving in any and all such capacities on a basis
no less favorable than is currently or may be provided to any other director of
the Company, any of its subsidiaries, or in connection with any such executive
position, as the case may be. This indemnity is in addition to and not in
replacement of the Company’s obligations to provide indemnity pursuant to
Section 10 hereof.

     6. Termination. The Employment Period shall end in the event of a
termination of the Executive’s employment in accordance with any of the
provisions of Section 6 or 7, and the Term shall expire in the event of a
termination of Executive’s employment by the Company for Cause or by the
Executive without Good Reason, in each case, on the Executive’s Date of
Termination. Otherwise the Term shall expire as set forth in Section 1.

     (a) Death. The Executive’s employment hereunder shall terminate upon his
death.

     (b) Disability. If, as a result of the Executive’s incapacity due to
physical or mental illness, the Executive shall have been absent from the
full-time performance of his duties hereunder for the entire period of ninety
(90) days in the aggregate during any period of twelve (12) consecutive months
or it is reasonably expected that such disability will exist for more than such
period of time, and within thirty (30) days after written Notice of Termination
(as defined in

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Section 7) is given (which notice may be given during such ninety (90) day
period) shall not have returned to the performance of his duties hereunder on a
full-time basis, the Company may terminate the Executive’s employment hereunder
for “Disability.”

     During any period that the Executive fails to perform his duties hereunder
as a result of incapacity due to physical or mental illness (“Disability
Period”), the Executive shall continue to receive his Base Salary at the rate
in effect at the beginning of such period as well as all other payments and
benefits set forth in Section 4 hereof, reduced by any payments made to the
Executive during the Disability Period under the disability benefit plans of
the Company then in effect or under the Social Security disability insurance
program.

     (c) Cause. The Company may terminate the Executive’s employment hereunder
for Cause. For purposes of this Agreement, the Company shall have “Cause” to
terminate the Executive’s employment hereunder upon the occurrence of any of
the following events:

     (i) the Executive is convicted of an act of fraud, embezzlement,
theft or other criminal act constituting a felony;

     (ii) a material breach by the Executive of any provision of this
Agreement;

     (iii) the failure by the Executive to perform any and all covenants
contained in Sections 2(c), 2(d), 2(e) and 9 of this Agreement for any
reason other than the Executive’s death, Disability or following the
Executive’s delivery of a Notice of Termination for Good Reason; or

     (iv) a material breach by the Executive of the Company’s Standards
of Ethical Conduct;

provided, that, the Executive shall have thirty (30) business days from the
date on which the Executive receives the Company’s Notice of Termination for
Cause under clause (ii), (iii) or (iv) above to remedy any such occurrence
otherwise constituting Cause under such clause (ii), (iii) or (iv).

Cause shall not exist unless and until the Company has delivered to the
Executive a copy of a resolution duly adopted by the affirmative vote of not
less than two-thirds (2/3) of the entire membership of the Board at a meeting
of the Board called and held for such purpose (after reasonable notice to the
Executive and an opportunity for the Executive, together with his counsel, to
be heard before the Board), finding that in the good faith opinion of the
Board, the Executive was guilty of the conduct set forth in this Section 6(c)
and specifying the particulars thereof in detail.

     (d) Good Reason. The Executive may terminate his employment hereunder for
“Good Reason”. Good Reason for the Executive’s termination of employment shall
mean the occurrence, without the Executive’s prior written consent, of any one
or more of the following:

     (i) the assignment to the Executive of any duties inconsistent with
the Executive’s position (including status, office, title and reporting
requirements),

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     authorities, duties or other responsibilities as contemplated by
Section 2 of this Agreement;

     (ii) the relocation of the Principal Place of Employment to a
location more than fifty (50) miles from the Principal Place of
Employment; or

     (iii) a material breach by the Company of any provision of this
Agreement;

provided, in any case, that the Company shall have thirty (30) business days
from the date on which the Company receives the Executive’s Notice of
Termination for Good Reason to remedy any such occurrence otherwise
constituting Good Reason.

     (e) Termination of Agreement. Either party hereto may terminate this
Agreement at any time by giving the Board or the Executive, as the case may be,
no more than thirty (30) days’ prior written notice, in accordance with Section
7 hereof, of such party’s intent to so terminate this Agreement.

     7. Termination Procedure.

     (a) Notice of Termination. Any termination of the Executive’s employment
by the Company or by the Executive (other than termination pursuant to Section
6(a) hereof) shall be communicated by written Notice of Termination to the
other party hereto in accordance with Section 12 hereof. For purposes of this
Agreement, a “Notice of Termination” shall mean a notice that shall indicate
the specific termination provision in this Agreement relied upon and shall set
forth in reasonable detail the facts and circumstances claimed to provide a
basis for termination of the Executive’s employment under the provision so
indicated.

     (b) Date of Termination. “Date of Termination” shall mean (i) if the
Executive’s employment is terminated pursuant to Section 6(a) above, the date
of the Executive’s death, (ii) if the Executive’s employment is terminated
pursuant to Section 6(b) above, thirty (30) days after Notice of Termination is
given (provided that the Executive shall not have returned to the performance
of his duties on a full-time basis during such thirty (30) day period), (iii)
if the Executive’s employment is terminated pursuant to Section 6(c) above, the
date specified in the Notice of Termination, which date may be no earlier than
the date the Executive is given notice in accordance with Section 12 hereof,
(iv) if the Executive’s employment is terminated pursuant to Section 6(d)
above, the date on which a Notice of Termination is given or any later date
(within thirty (30) days of the date of such Notice of Termination) set forth
in such Notice of Termination and (v) if the Executive’s employment is
terminated for any other reason, the date specified in the Notice of
Termination, which date shall be not later than thirty (30) days following the
date on which Notice of Termination is given; provided, that, if within ten
(10) days after any Notice of Termination is given the party receiving such
Notice of Termination notifies the other party that a dispute exists concerning
such termination, the Date of Termination shall be the date on which the
dispute is finally determined, either by mutual written agreement of the
parties or by a binding and final arbitration award.

     (c) Compensation During Dispute. If a purported termination occurs during
the Term, and such termination is disputed in accordance with subsection (b) of
this Section 7, the Company shall continue to pay the Executive the full
compensation in effect when the notice

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giving rise to the dispute was given (including, but not limited to, Base
Salary) and continue the Executive as a participant in all compensation,
benefit and insurance plans in which the Executive was participating when the
notice giving rise to the dispute was given, until the Date of Termination,
determined in accordance with subsection (b) of this Section 7. Amounts paid
under this Section 7(c) are in addition to all other amounts due under this
Agreement and shall not be offset against or reduce any other amounts due under
this Agreement.

     8. Compensation upon Termination or During Disability.

     (a) Accrued Obligation Defined. For purposes of this Agreement, payment
of the “Accrued Obligation” shall mean payment by the Company to the Executive
(or his designated beneficiary or legal representative, as applicable), when
due, of all vested benefits to which the Executive is entitled under the terms
of the employee benefit plans in which the Executive is a participant as of the
Date of Termination and a lump sum amount in cash equal to the sum of (i) the
Executive’s Base Salary through the Date of Termination, (ii) any compensation
previously deferred by the Executive (together with any accrued interest or
earnings thereon) and any accrued vacation pay and (iii) any other amounts due
the Executive as of the Date of Termination, in each case to the extent
not theretofore paid.

     (b) Disability; Death. Following the termination of the Executive’s
employment pursuant to Sections 6(a) or (b) hereof, the Company shall pay to
the Executive (or his designated beneficiary or legal representative, if
applicable):

     (i) the Accrued Obligation,

     (ii) a lump sum in cash equal to one-half of the Executive’s Base
Salary as in effect on the Date of Termination (for each year and
prorated for any partial years) for the remainder of the Term, and

     (iii) a lump sum in cash equal to the Executive’s expected value of
the Executive’s bonus opportunity under the Annual Incentive Plan for the
fiscal year of the Company in which the Date of Termination occurs. Such
payment is an accelerated payment of the full year expected value bonus
for the fiscal year in which the Date of Termination occurs and is in
lieu of all other bonus payments that would have otherwise been due to
the Executive under the Annual Incentive Plan after the completion of the
fiscal year.

The Company shall pay the Executive the amounts required pursuant to this
Section 8(b) no later than 60 days after the termination of the Executive’s
employment pursuant to Sections 6(a) or (b) hereof.

     (c) By the Company for Cause. If during the Term the Executive’s
employment is terminated by the Company pursuant to Section 6(c) hereof, the
Company shall pay to the Executive the Accrued Obligation within thirty (30)
days following the Date of Termination. Following such payment, the Company
shall have no further obligations to the Executive other than as may be
required by law or the terms of an employee benefit plan of the Company.

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     (d) By the Executive Without Good Reason. If during the Term the
Executive terminates his employment for any reason other than Good Reason, the
Company shall pay to the Executive the Accrued Obligation within thirty (30)
days following the Date of Termination. Following such payment, the Company
shall have no further obligations to the Executive other than as may be
required by law or the terms of an employee benefit plan of the Company. The
Executive shall not have breached this Agreement if he terminates his
employment for any reason.

     (e) By the Company Without Cause or by the Executive for Good Reason. If
during the Term the Executive’s employment is terminated by the Company other
than for Cause, death or Disability or if the Executive terminates his
employment for Good Reason, then :

     (i) Within thirty (30) days after the Date of Termination the
Company shall pay the Executive the Accrued Obligation.

     (ii) Within sixty (60) days after the Date of Termination the
Company shall also pay to the Executive a lump sum cash severance payment
in an amount equal to two times his Base Salary (at the rate in effect as
of the Date of Termination).

     (iii) Within sixty (60) days after the Date of Termination the
Company shall also pay to the Executive a lump sum in cash equal to the
expected value of the Executive’s bonus opportunity under the Annual
Incentive Plan for the fiscal year of the Company in which the Date of
Termination occurs prorated to the Date of Termination. Such payment is
an accelerated payment of the bonus for the fiscal year in which the Date
of Termination occurs and is in lieu of all other bonus payments that
would have otherwise been due to the Executive under the Annual Incentive
Plan after the completion of the fiscal year.

     (iv) Subject to clause (viii), for the remainder of the Term the
Company shall arrange to provide the Executive and his dependents medical
insurance benefits substantially similar to those provided to the
Executive and his dependents immediately prior to the Date of Termination
(at no greater cost to the Executive than such cost to the Executive in
effect immediately prior to the Date of Termination, or, if greater, the
cost to similarly situated active employees of the Company under the
applicable group health plan of the Company).

     (v) No later than 60 days after the Date of Termination the Company
shall pay the Executive an amount equivalent to the product of (1) the
monthly basic life insurance premium applicable to the Executive’s basic
life insurance coverage immediately prior to the Date of Termination and
(2) the number of full and fractional months remaining in the Term. The
Executive may, at his option, convert his basic life insurance coverage
to an individual policy after the Date of Termination by completing the
forms required by the Company for this purpose.

     (vi) In addition to the benefits to which the Executive is entitled
under the Baker Hughes Incorporated Supplemental Retirement Plan (the
“Supplemental Retirement Plan”), the Company shall, as soon as
practicable after each December 31 for

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the remainder of the Term pay the Executive an amount equal to the
employer contributions the Company would have credited to the Executive’s
Supplemental Retirement Plan account had he continued to remain employed
by the Company for the remainder of the Term, assuming for this purpose
that (1) the Executive’s earned compensation for a year is the sum of the
amount of the expected value of his bonus under the Annual Incentive Plan
for the fiscal year of the Company in which the Date of Termination
occurs and the amount of Executive’s annualized Base Salary for the
calendar year in which the Date of Termination occurs, and (2) the
applicable legal limitations and the contribution, deferral, credit and
accrual percentages under the Supplemental Retirement Plan by and on
behalf of the Executive under the Supplemental Retirement Plan for the
remainder of the Term, are the same percentages and limitations in effect
immediately prior to the Date of Termination.

     (vii) For the remainder of the Term the Company shall continue to
provide the Executive perquisites, other than executive life insurance,
in the manner specified in Section 4(e).

     (viii) Subject to the Executive’s group health plan coverage
continuation rights under the Consolidated Omnibus Budget Reconciliation
Act of 1985, as amended, the benefits and perquisites listed in clauses
(iv), (vi) and (vii) of this Section 8(e) shall be reduced to the extent
benefits and perquisites of the same type are received by or made
available to the Executive during such period, and provided, further,
that the Executive shall have the obligation to notify the Company that
he is entitled to or receiving such benefits and perquisites. The
Company agrees that, if the Executive’s employment with the Company
terminates for any reason during the Term, the Executive is not required
to seek other employment or to attempt in any way to reduce any amounts
payable to the Executive by the Company pursuant to this Section 8.
Further, except with respect to the benefits provided pursuant to clause
(iv), (vi) and (vii) above, the amount of any payment or benefit provided
for in this Agreement shall not be reduced by any compensation earned by
the Executive as the result of employment by another employer, by
retirement benefits, or by offset against any amount claimed to be owed
by the Executive to the Company. Payments to the Executive under this
Section 8 (other than Accrued Obligations) are contingent upon the
Executive’s execution of a release substantially in the form of Exhibit A
hereto.

     9. Confidential Information; Non-Competition; Non-Solicitation.

     (a) Confidential Information. The Executive shall hold in a fiduciary
capacity for the benefit of the Company all trade secrets, confidential
information, and knowledge or data relating to the Company and its businesses,
which shall have been obtained by the Executive during the Executive’s
employment by the Company and which shall not have been or hereafter become
public knowledge (other than by acts by the Executive or representatives of the
Executive in violation of this Agreement) (hereinafter being collectively
referred to as “Confidential Information”). For the avoidance of doubt,
Confidential Information shall not include information that:

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     (i) is already in Executive’s possession; provided that the
information is not known by the Executive to be subject to another
confidentiality agreement with, or other obligation of secrecy to, the
Company or any of its subsidiaries,

     (ii) becomes generally available to the public other than as a
result of a disclosure by the Executive, or

     (iii) becomes available to the Executive on a non-confidential basis
from a source other than the Company or any of its subsidiaries or any of
their respective directors, officers, employees, agents or advisors;
provided, that such source is not known by the Executive to be bound by a
confidentiality agreement with or other obligation of secrecy to the
Company or any of its subsidiaries.

The Executive shall not, without the prior written consent of the Company or as
may otherwise be required by law or legal process, communicate or divulge any
such trade secrets, information, knowledge or data to anyone other than the
Company and those designated by the Company. Any termination of the
Executive’s employment or of this Agreement shall have no effect on the
continuing operation of this Section 9(a). The Executive agrees to return all
Confidential Information, including all photocopies, extracts and summaries
thereof, and any such information stored electronically on tapes, computer
disks or in any other manner to the Company at any time upon request by the
Company and upon the termination of his employment hereunder for any reason.

     (b) Non-Competition. During the Employment Period and for a period of two
(2) years following the Date of Termination (such period following the
Employment Period, the “Restricted Period”), the Executive shall not engage in
Competition, as defined below, with the Company; provided, that it shall not be
a violation of this Section 9(b) for the Executive to become the registered or
beneficial owner of up to five percent (5%) of any class of the capital stock
of a corporation registered under the Securities Exchange Act of 1934, as
amended, provided that the Executive does not actively participate in the
business of such corporation until such time as this covenant expires.

     For purposes of this Agreement, “Competition” by the Executive means the
Executive’s engaging in, or otherwise directly or indirectly being employed by
or acting as a consultant or lender to, or being a director, officer, employee,
principal, agent, stockholder, member, owner or partner of, or permitting his
name to be used in connection with the activities of any other business or
organization which competes, directly or indirectly, with the business of the
Company as the same shall be constituted at any time during the Term.

     (c) Non-Solicitation. During the Restricted Period, the Executive agrees
that he will not, directly or indirectly, for his benefit or for the benefit of
any other person, firm or entity, do any of the following:

     (i) solicit from any customer doing business with the Company as of
the Date of Termination that is known to Executive, business of the same
or of a similar nature to the business of the Company with such customer;

-11-

 

     (ii) solicit from any potential customer of the Company that is
known to the Executive business of the same or of a similar nature to
that which has been the subject of a known written or oral bid, offer or
proposal by the Company, or of substantial preparation with a view to
making such a bid, proposal or offer, within six (6) months prior to such
Date of Termination;

     (iii) solicit the employment or services of any person who was known
to be employed by or was a known consultant to the Company upon the Date
of Termination, or within six (6) months prior thereto; or

     (iv) otherwise knowingly interfere with the business or accounts of
the Company.

     The Executive and the Company agree and acknowledge that the Company has a
substantial and legitimate interest in protecting the Company’s Confidential
Information and goodwill. The Executive and the Company further agree and
acknowledge that the provisions of this Section 9 are reasonably necessary to
protect the Company’s legitimate business interests and are designed to protect
the Company’s Confidential Information and goodwill.

     The Executive agrees that the scope of the restrictions as to time,
geographic area, and scope of activity in this Section 9 are reasonably
necessary for the protection of the Company’s legitimate business interests and
are not oppressive or injurious to the public interest. The Executive agrees
that in the event of a breach or threatened breach of any of the provisions of
this Section 9 the Company shall be entitled to injunctive relief against the
Executive’s activities to the extent allowed by law, and the Executive waives
any requirement for the posting of any bond by the Company in connection with
such action. The Executive further agrees that any breach or threatened breach
of any of the provisions of Section 9(a) would cause injury to the Company for
which monetary damages alone would not be a sufficient remedy.

     (d) Publicity. The Executive agrees that the Company may use, and hereby
grants the Company the nonexclusive and worldwide right to use, the Executive’s
name, picture, likeness, photograph, signature or any other attribute of the
Executive’s persona (all of such attributes are hereafter collectively referred
to as “Persona”) in any media for any advertising, publicity or other purpose
at any time, either during or subsequent to his employment by the Company. The
Executive agrees that such use of his Persona will not result in any invasion
or violation of any privacy or property rights the Executive may have; and the
Executive agrees that he will receive no additional compensation for the use of
his Persona. The Executive further agrees that any negatives, prints or other
material for printing or reproduction purposes prepared in connection with the
use of his Persona by the Company shall be and are the sole property of the
Company.

     10. Indemnification; Insurance. The Company shall indemnify the Executive
to the fullest extent permitted by the laws of the Company’s state of
incorporation in effect at that time, or certificate of incorporation and
by-laws of the Company, whichever affords the greater protection to the
Executive. The Executive will be entitled to any insurance policies the
Company may elect to maintain generally for the benefit of its officers and
directors against all costs, charges and expenses incurred in connection with
any action, suit or proceeding to which he may be made a party by reason of
being a director or officer of the Company.

-12-

 

     11. Successors; Binding Agreement.

     (a) Company’s Successors. The Company will require any successor (whether
direct or indirect, by purchase, merger, consolidation or otherwise) to all or
substantially all of the business and/or assets of the Company to expressly
assume and agree to perform this Agreement in the same manner and to the same
extent that the Company would be required to perform it if no such succession
had taken place. Failure of the Company to obtain such assumption and
agreement prior to the effectiveness of any such succession shall be a breach
of this Agreement and shall entitle the Executive to compensation from the
Company in the same amount and on the same terms as he would be entitled to
hereunder if he terminated his employment for Good Reason, except that for
purposes of implementing the foregoing, the date on which any such succession
becomes effective shall be deemed the Date of Termination. As used in this
Agreement, “Company” shall mean the Company as hereinbefore defined and any
successor to its business and/or assets as aforesaid which executes and
delivers the agreement provided for in this Section 11 or which otherwise
becomes bound by all the terms and provisions of this Agreement by operation of
law.

     (b) Executive’s Successors. This Agreement and all rights of the
Executive hereunder shall inure to the benefit of and be enforceable by the
Executive’s personal or legal representatives, executors, administrators,
successors, heirs, distributees, devisees and legatees. If the Executive should
die while any amounts would still be payable to him hereunder if he had
continued to live, all such amounts unless otherwise provided herein shall be
paid in accordance with the terms of this Agreement to the Executive’s devisee,
legatee or other designee or, if there is no such designee, to the Executive’s
estate.

     12. Notice. For the purposes of this Agreement, notices, demands and all
other communications provided for in this Agreement shall be in writing and
shall be deemed to have been duly given when delivered or (unless otherwise
specified) mailed by United States certified or registered mail, return receipt
requested, postage prepaid, addressed as follows:

If to the Executive:

Mr. Chad C. Deaton

13914 I. O. Court

Willis, Texas 77318

If to the Company:

Baker Hughes Incorporated

3900 Essex Lane, Suite 1200

Houston, Texas 70027

Attention: General Counsel

or to such other address as either party may have furnished to the other in
writing in accordance herewith, except that notices of change of address shall
be effective only upon receipt.

-13-

 

     13. Amendment or Modification; Waiver. No provisions of this Agreement
may be modified, waived or discharged unless such waiver, modification or
discharge is agreed to in writing signed by the Executive and such officer of
the Company as may be specifically designated by the Board or its Compensation
Committee. No waiver by either party hereto at any time of any breach by the
other party hereto of, or compliance with, any condition or provision of this
Agreement to be performed by such other party shall be deemed a waiver of
similar or dissimilar provisions or conditions at the same or at any prior or
subsequent time. No agreements or representations, oral or otherwise, express
or implied, with respect to the subject matter hereof have been made by either
party which are not set forth expressly in Agreement.

     14. Dispute Resolution. Any dispute or controversy arising under or in
connection with this Agreement, the Executive’s employment by the Company or
the Executive’s compensation or benefits (a “Dispute”) shall be settled in
accordance with the procedures described in this Section 14.

     (a) First, the parties shall attempt in good faith to resolve any Dispute
promptly by negotiations between the Executive and executives or directors of
the Company who have authority to settle the Dispute. Either party may give
the other disputing party written notice of any Dispute not resolved in the
normal course of business. Within five days after the effective date of that
notice, the Executive and such executives or directors of the Company shall
agree upon a mutually acceptable time and place to meet and shall meet at that
time and place, and thereafter as often as they reasonably deem necessary, to
exchange relevant information and to attempt to resolve the Dispute. The first
of those meetings shall take place within 30 days of the effective date of the
disputing party’s notice. If the Dispute has not been resolved within 60 days
of the disputing party’s notice, or if the parties fail to agree on a time and
place for an initial meeting within five days of that notice, either party may
initiate mediation and arbitration of the Dispute as provided hereinafter. If
a negotiator intends to be accompanied at a meeting by an attorney, the other
negotiators shall be given at least three business days’ notice of that
intention and may also be accompanied by an attorney. All negotiations
pursuant to this Section 14 shall be treated as compromise and settlement
negotiations for the purposes of applicable rules of evidence and procedure.

     (b) Second, if the Dispute is not resolved through negotiation as provided
in Section 14(a), either disputing party may require the other to submit to
non-binding mediation with the assistance of a neutral, unaffiliated mediator.
If the parties encounter difficulty in agreeing upon a neutral, they shall seek
the assistance of the American Arbitration Association in the selection
process.

     (c) Any Dispute that has not been resolved by the non-binding procedures
provided in Sections 14(a) and 14(b) within 90 days of the initiation of the
first of the procedures shall be finally settled by arbitration conducted
expeditiously in accordance with the Commercial Arbitration Rules of the
American Arbitration Association or of such similar organization as the parties
hereto may mutually agree; provided, that if one party has requested the other
to participate in a non-binding procedure and the other has failed to
participate within 30 days of the written request, the requesting party may
initiate arbitration before the expiration of the period. The arbitration
shall be conducted by three independent and impartial arbitrators. Executive
shall appoint one arbitrator, the Company shall appoint a second arbitrator,
and a third

-14-

 

arbitrator not appointed by the parties shall be appointed by the first
two arbitrators selected. The arbitration shall be held in Houston, Harris
County, Texas. Judgment may be entered on the arbitrator’s award in any court
having jurisdiction. The arbitrators shall award the prevailing party in the
arbitration its costs and expenses, including reasonable attorney’s fees,
incurred in connection with the Dispute. The arbitrators shall not award any
amount to either the Executive or the Company in excess of the compensation,
employee benefits and indemnification amounts that the Company paid or should
have paid to the Executive pursuant to this Agreement.

     (d) Notwithstanding the Dispute resolution provisions of this Section 14,
either party may bring an action in a court of competent jurisdiction in an
effort to enforce the provisions of this Section 14 and to seek injunctive
relief to protect the party’s rights pending resolution of a Dispute pursuant
to this Section 14, including, without limitation, the Company’s rights
pursuant to Section 9 of this Agreement.

     15. Governing Law. The validity, interpretation, construction and
performance of this Agreement shall be governed by the laws of the State of
Texas without regard to its conflicts of law principles.

     16. Miscellaneous. All references to sections of any statute shall be
deemed also to refer to any successor provisions to such sections. The
obligations of the parties under Sections 8, 9, 10 and 14 hereof shall survive
the expiration of the Term. The compensation and benefits payable to the
Executive or his beneficiary under Section 8 of this Agreement shall be in lieu
of any other severance benefits to which the Executive may otherwise be
entitled upon his termination of employment under any severance plan, program,
policy or arrangement of the Company other than the Change in Control
Agreement, and the Executive shall not be entitled to receive any benefits
under Section 8 hereof if he has become eligible to receive benefits under the
Change in Control Agreement.

     17. Severability. The invalidity or unenforceability of any provision or
provisions of this Agreement shall not affect the validity or enforceability of
any other provision of this Agreement, which shall remain in full force and
effect throughout the Term. Should any one or more of the provisions of this
Agreement be held to be excessive or unreasonable as to duration, geographical
scope or activity, then that provision shall be construed by limiting and
reducing it so as to be reasonable and enforceable to the extent compatible
with the applicable law.

     18. Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed to be an original but all of which
together will constitute one and the same instrument.

     19. Release. In consideration of the benefits and compensation which may
be awarded to the Executive pursuant to Section 8 of this Agreement, the
Executive hereby agrees to execute and be bound by, as a condition precedent to
receiving said benefits and compensation, the Release attached hereto as
Exhibit A, such Release being incorporated herein by reference.

     20. Entire Agreement. This Agreement sets forth the entire agreement of
the parties hereto in respect of the subject matter contained herein and, as of
the Effective Date, supersedes

-15-

 

all prior agreements, promises, covenants, arrangements, communications,
representations or warranties, whether oral or written, by any officer,
employee or representative of any party hereto; provided, that the Change in
Control Agreement shall not be superseded hereby.

     21. Effectiveness. This Agreement shall become effective upon approval of
the Board of Directors. The Company shall provide a certified copy of the
resolution evidencing such approval as soon as practical after such approval.

     IN WITNESS WHEREOF, the parties have executed this Agreement on the date
first above written.

	 	 	 	 	 
	 	BAKER HUGHES INCORPORATED

 	 
	 	By:  	                                            /s/H. John Riley, Jr.
 	 
	 	 	H. John Riley, Jr. 	 
	 	 	Lead Director and Chairman of

the Compensation Committee 	 
	 

	 	 	 	 	 
	 	CHAD C. DEATON

 	 
	 	/s/Chad C. Deaton
 	 
	 	 	 
	 	 	 

-16-

 

	 	 	 	 	 

EXHIBIT A

RELEASE

     The Executive hereby irrevocably and unconditionally releases, acquits and
forever discharges the Company (as defined in the Executive’s Employment
Agreement) and its affiliated companies and their directors, officers,
employees and representatives, (collectively “Releasees”), from any and all
claims, liabilities, obligations, damages, causes of action, demands, costs,
losses and/or expenses (including attorneys’ fees) of any nature whatsoever,
whether known or unknown, including, but not limited to, rights arising out of
alleged violations of any contracts, express or implied, any covenant of good
faith and fair dealing, express or implied, or any tort, or any legal
restrictions on the Company’s right to terminate employees, or any federal,
state or other governmental statute, regulation, or ordinance, including,
without limitation, Title VII of the Civil Rights Act of 1964, as amended and
the Age Discrimination in Employment Act of 1967, as amended, which the
Executive claims to have against any of the Releasees (in each case, except as
to indemnification provided by (a) the Executive’s Employment Agreement with
the Company (as amended or superceded from time to time) and/or (b) by the
Company’s bylaws and any indemnification agreement or arrangement permitted by
Section 145 of the Delaware General Corporation Law and by directors, officers
and other liability insurance coverages to the extent you would have enjoyed
such coverages had you remained a director or officer of the Company). In
addition, the Executive waives all rights and benefits afforded by any state
laws which provide in substance that a general release does not extend to
claims which a person does not know or suspect to exist in his favor at the
time of executing the release which, if known by him, must have materially
affected the Executive’s settlement with the other person. The only exception
to the foregoing are claims and rights that may arise after the date of
execution of this Release, claims and rights arising under any employee benefit
plan (including, but not limited to the Long Term Incentive Plan and the Annual
Incentive Plan) and claims and rights arising under Section 8 of the
Executive’s Employment Agreement.

The Executive understands and agrees that:

	A.	 	He has a period of 21 days within which to consider whether
he desires to execute this Agreement, that no one hurried him into
executing this Agreement during that 21-day period, and that no one
coerced him into executing this Agreement.
	 
	B.	 	He has carefully read and fully understands all of the
provisions of this Agreement, and declares that the Agreement is
written in a manner that he fully understands.
	 
	C.	 	He is, through this Agreement, releasing the Releasees from
any and all claims he may have against the Releasees, and that this
Agreement constitutes a release and discharge of claims arising
under the Age Discrimination in Employment Act of 1967, as amended,
29 U.S.C. §§ 621-634, including the Older Workers’ Benefit
Protection Act, 29 U.S.C. § 626(f).

 

 

	D.	 	He declares that his agreement to all of the terms set forth
in this Release is knowing and is voluntary.
	 
	E.	 	He knowingly and voluntarily intends to be legally bound by
the terms of this Release.
	 
	F.	 	He was advised and hereby is advised in writing to consult
with an attorney of his choice concerning the legal effect of this
Release prior to executing this Release.
	 
	G.	 	He understands that rights or claims that may arise after the
date this Agreement is executed are not waived.
	 
	H.	 	He understands that, in connection with the release of any
claim of age discrimination, he has a period of seven days to revoke
his acceptance of this Release, and that he may deliver notification
of revocation by letter or facsimile addressed to the Vice President
& General Counsel of the Company, at 3900 Essex Lane, Suite 1200,
Houston, TX 77027, or (713) 439.8718. Executive understands that
this Agreement will not become effective and binding with respect to
a claim of age discrimination until after the expiration of the
revocation period. The revocation period commences when Executive
executes this Agreement and ends at 11:59 p.m. on the seventh
calendar day after execution, not counting the date on which
Executive executes this Agreement. Executive understands that if he
does not deliver a notice of revocation before the end of the
seven-day period described above, that this Agreement will become a
final, binding and enforceable release of any claim of age
discrimination. This right of revocation shall not affect the
release of any claim other than a claim of age discrimination
arising under federal law.
	 
	I.	 	He understands that nothing in this Agreement shall be
construed to prohibit Executive from filing a charge or complaint,
including a challenge to the validity of this Agreement, with the
Equal Employment Opportunity Commission or participating in any
investigation or proceeding conducted by the Equal Employment
Opportunity Commission.

     AGREED AND ACCEPTED, on this                   day of                                       ,                   .

	 	 	 
	 

	 	CHAD C. DEATON
	

	 	                                                         

-2-exv10w5

 

EXHIBIT 10.5

Stock Option Agreement

THIS STOCK OPTION AGREEMENT (this “Agreement”) is made as of the Option Grant
Date set forth on the initial Notice of Grant attached hereto by and between
(i) WEBMETHODS, INC., a Delaware corporation (the “Corporation”), and (ii)
Participant, an employee of the Corporation or any Subsidiary or Parent, named
on each Notice of Grant attached hereto.

The Corporation has adopted an Amended and Restated Stock Option Plan (with all
amendments thereto, the “Plan”), a copy of which has been provided or made
available to Participant.

In consideration of the foregoing, of the mutual promises set forth in this
Agreement and of other good and valuable consideration, the receipt and
sufficiency of which are acknowledged, the parties, intending to be legally
bound, agree as follows:

1. Grant of Option. Subject to the terms and conditions set forth in
this Agreement and each respective Notice of Grant, the Corporation hereby
grants to Participant the right to purchase, during the period specified in
Section 2, the number of shares of Incentive Stock (those shares of Incentive
Stock are referred to as the “Shares”) set forth on the respective Notice of
Grant at an exercise price of per Share set forth on that Notice of Grant, in
accordance with the terms of this Agreement, that Notice of Grant and the Plan
(that right is referred to as the “Option”).

2. Duration of Option. The Option shall be effective during the period
commencing as of the Option Grant Date and ending on the earliest to occur of:
(a) failure of Participant to return a signed copy of the Notice of Grant (and,
if the initial Notice of Grant, a signed copy of this Agreement) to the
Corporation by the Return Date indicated in such Notice of Grant; (b) the date
all of the Shares are purchased pursuant to the terms of this Agreement or are
surrendered to the Corporation; (c) ninety (90) days after the date Participant
ceases to be employed by the Corporation or any Subsidiary or Parent (except
for termination due to the death of Participant); (d) the expiration of the one
(1)-year period prescribed under Section 3.B; and (e) at 5:00 P.M. local time
at the headquarters of the Corporation on the day immediately preceding the
tenth (10th) anniversary of the Option Grant Date. Upon the expiration of the
Option, the Option shall have no further force or effect, and Participant shall
have no further rights in or under the Option or to the Shares that shall not
have been purchased by that time pursuant to the Option.

3. Exercise of Option.

A. Subject to the provisions of Section 2 regarding the duration of the Option,
and except as provided below, the Option shall vest in periodic increments
commencing on the Vesting Start Date as provided in the respective Notice of
Grant. Notwithstanding the foregoing, vesting of the Option shall terminate
immediately upon the Participant ceasing to be employed with the Corporation or
a Subsidiary or Parent. The Option may be exercised only to the extent the
Option is vested.

The Option may be exercised only if Participant is in compliance with all
covenants in, and provisions of, this Agreement and if compliance with all
applicable securities laws can be effected and only by (i) Participant’s
completion, execution and delivery (by written or electronic means) to the
Corporation of a Notice and Request of Exercise in the form specified by the
Corporation, (ii) the payment to the Corporation, as provided in Section 3.C,
of an amount equal to the amount obtained by multiplying the Exercise Price by
the number of Shares being purchased pursuant to such exercise, as shall be
specified by Participant in such notice of exercise and (iii) if tax
withholding applies to such exercise, the payment to the Corporation, as
provided in Section 3.C, of an amount calculated by the Corporation to be
sufficient to satisfy applicable Federal, state, foreign or local tax
withholding requirements. Except in the event of the death of a Participant,
in which event Participant’s estate, executors or administrators, or personal
or legal representatives may exercise the Option in accordance with the terms
of Section 3.B, the Option or any of the rights thereunder may be exercised by
Participant only, and may not, on an absolute or contingent basis, be
transferred or assigned, in whole or in part, whether voluntarily,
involuntarily or by operation of law (including, without limitation, the laws
of bankruptcy, intestacy, descent and distribution and succession).

B. In the event of the death of Participant at such time that Participant shall
possess an Option pursuant to the terms of this Agreement, Participant’s
estate, executors or administrators, or personal or legal representatives shall
be entitled, for a period of one (1) year following the date of Participant’s
death, to exercise the Option, but only to the extent that Participant was
entitled to exercise the Option on the date of such death. Any person so
desiring to exercise Participant’s Option shall be required, as a condition to
the exercise of the Option, to furnish to the Corporation such documentation as
the Corporation shall deem satisfactory to evidence the

 

 

 exclusive authority of
such person to exercise the Option on behalf of Participant. In the event of
the exercise of the Option by Participant’s estate, executors or
administrators, or personal or legal representatives, all references herein to
Participant shall, to the extent applicable, be deemed to refer to and include
such estate, executors or administrators, or personal or legal representatives,
as the case may be.

C. Payment of the amount determined pursuant to Section 3.A shall be made (i)
by cash, (ii) by good check, (iii) by delivery of shares of Common Stock owned
by Participant valued at their fair market value as determined by the Board of
Directors in good faith (which shares of Common Stock shall have been owned by
Participant at least six (6) months prior to such delivery), (iv) by the
assignment of the proceeds of a sale or loan with respect to some or all of the
Shares being acquired upon exercise of the Option (including without
limitation, through an exercise complying with Regulation T or rules
promulgated by the Board of Governors of the Federal Reserve System) in
accordance with such rules and procedures as the Corporation shall determine or
(v) in such other manner as shall then be acceptable to, and permitted by, the
Board of Directors. In addition, the Participant may satisfy applicable tax
withholding requirements by electing to have the Corporation withhold from the
Shares issuable upon exercise of an Option a number of whole shares having a
fair market value (determined on the date that the amount of tax to be withheld
is fixed) not in excess of the aggregate minimum withholding amount required by
statute.

D. Upon the exercise of the Option by Participant, or as soon thereafter as is
practicable, the Corporation shall issue and deliver to Participant a
certificate or certificates evidencing such number of Shares as Participant has
so elected to receive. Such certificate or certificates shall be registered in
the name of Participant and, if applicable, shall bear an appropriate
investment warranty legend, any legends required by any applicable securities
law, rule or regulation, any legend referring to the restrictions provided
hereunder and under the Plan and any legend required by the law of the
jurisdiction of incorporation of the Corporation. Upon the exercise of the
Option and the issuance and delivery of such certificate or certificates,
Participant shall have all the rights of a stockholder with respect to such
Shares and to receive all dividends or other distributions paid or made with
respect thereto; provided, however, that such Shares shall be subject to the
restrictions hereunder and in the Plan (if any).

E. The Board of Directors of the Corporation may, upon such terms and
conditions as it deems appropriate, accept the surrender by Participant of
Participant’s right to exercise the Option, in whole or in part, and authorize
a payment in consideration therefor of an amount equal to the difference
obtained by subtracting the sum of (i) the Exercise Price of the Shares which
are the subject of such surrendered Option and (ii) an amount calculated by the
Corporation to be sufficient to satisfy applicable Federal, state, foreign or
local tax withholding requirements from the fair market value of the Shares
which are the subject of such surrendered Option on the date of such surrender
(such amount not to be less than zero), such payment to be in cash.

F. Notwithstanding any other provision of this Agreement, any unvested portion
of the Option shall thereupon vest and the entire Option shall thereupon become
immediately exercisable if, within one (1) year after a Change of Control of
the Corporation, there is (i) a termination of Participant’s employment by the
Corporation or a Subsidiary or Parent other than for Cause (as defined below)
or (ii) a voluntary termination by Participant of Participant’s employment with
the Corporation or a Subsidiary or Parent within ninety (90) days after Good
Reason (as defined below) shall first exist. For purposes of this Agreement,
“Cause” shall mean (i) embezzlement, theft, fraud, or any other act of
dishonesty involving the Corporation or a Subsidiary or Parent or any of their
customers, suppliers or business partners, (ii) Participant’s conviction of a
felony, or any other crime involving moral turpitude, or (iii) a violation of a
written agreement between Participant and the Corporation or a Subsidiary or
Parent, including but not limited to Sections 6, 7, 8, 9, or 10 of this
Agreement, that certain Proprietary Information and Assignment of Inventions
Agreement or that certain letter agreement providing for nondisclosure of
“Protected Information” and assignment of inventions. For purposes of this
Agreement, “Good Reason” shall mean (i) a material reduction in Participant’s
base salary, (ii) a material reduction in Participant’s duties without
Participant’s consent, or (iii) a relocation of Participant’s regular place of
work to any location outside a thirty (30) mile radius of the location from
which Participant served the Corporation or a Subsidiary or Parent thirty (30)
days prior to the date of such Change of Control of the Corporation without
Participant’s consent. For purposes of this Agreement, a “Change of Control”
of the Corporation shall be deemed to have occurred if (i) any person or group
acquires, directly or indirectly (including, without limitation, by way of a
tender offer or an exchange offer or a two-step

- 2 -

 

transaction involving a tender
offer followed with reasonable promptness by a merger involving the
Corporation), ownership of not less than a majority of the then outstanding
voting securities of the Corporation, (ii) the stockholders of the Corporation
approve a merger or consolidation involving the Corporation and resulting in a
change of ownership of a majority of the then outstanding shares of voting
securities of the Corporation, or (iii) the stockholders of the Corporation
approve a plan of liquidation or dissolution of the Corporation or the sale or
disposition by the Corporation of all or substantially all of the Corporation’s
assets.

4. Changes in Capital Structure of the Corporation. Subject to any
required action by the stockholders of the Corporation and the provisions of
the applicable law of the jurisdiction of incorporation of the Corporation, the
number of Shares subject to this Agreement as well as the Exercise Price of any
Shares not yet purchased by Participant shall be proportionately adjusted for
(a) a division or combination of the shares of capital stock of the
Corporation, (b) a dividend payable in shares of capital stock of the
Corporation or (c) a reclassification of any shares of capital stock of the
Corporation.

5. Rights Prior to Exercise. Participant shall have no equity interest
in the Corporation or any voting, dividend, liquidation or dissolution rights
with respect to any capital stock of the Corporation solely by reason of having
an Option or having executed this Agreement or any Notice of Grant hereto.
Furthermore, prior to the exercise of all or a portion of the Option, as set
forth in Section 3.A, and the issuance and delivery of a certificate or
certificates evidencing the Shares purchased pursuant to the exercise of all or
a portion of such Option, Participant shall have no interest in, or any voting,
dividend, liquidation or dissolution rights with respect to, the Shares.

6. Treatment of Information.

A. Participant covenants and agrees that Participant shall not, except with the
prior written consent of the Corporation, or except if Participant is acting as
an employee of the Corporation solely for the benefit of the Corporation in
connection with the Corporation’s business and in accordance with the
Corporation’s business practices and employee policies, at any time during or
within ten (10) years following termination of Participant’s employment by the
Corporation, directly or indirectly, disclose, divulge, reveal, report,
publish, transfer or use, for any purpose whatsoever, any Confidential
Information in any form or format which has been obtained by or disclosed to
Participant as a result of Participant’s employment with the Corporation.
“Confidential Information” shall include, without limitation: the terms and
conditions of this Agreement; trade secrets; systems; technology; computer
programs, related object and source code or documentation; databases and data
residing therein or derived therefrom; procedures; manuals or confidential
reports or analysis; the agreements with or terms of any relationship or
agreement with any distributor, reseller, customer, systems integrator,
business partner or strategic partner; financial, marketing or sales
information and strategy; pricing or accounting data or methods; licenses,
business arrangements or related documentation; the identity of and lists
and/or electronic mail addresses relating to customers, prospective customers,
systems integrators, business partners or strategic partners; personal
information and electronic mail addresses or telephone numbers for employees of
or contractors to the Corporation or any subsidiary; information, concepts,
discoveries or ideas relating to the Corporation’s past, present and future
technology, software, services and techniques; information concerning
competitive analysis or strategy; inventions, improvements, techniques, designs
or other technical data; or other information, data or materials concerning any
of the Corporation’s business methods, personnel, practices or strategies.
Participant acknowledges that Participant’s obligations not to use or disclose
the Corporation’s trade secrets after the term of Participant’s employment by
the Corporation continue indefinitely and are not subject to the ten (10)-year
limitation upon use or disclosure of Confidential Information. Participant
further acknowledges that any information and materials received by the
Corporation from third parties in confidence (or subject to nondisclosure or
similar covenants) shall be deemed to be and shall be Confidential Information
within the meaning of this Section 6. The absence of any marking or statement
that particular information is confidential, proprietary or Confidential
Information shall not affect its status as Confidential Information.

B. Disclosure of any Confidential Information shall not be prohibited if such
disclosure is required by a valid and existing order of a court or other
governmental body or agency within the United States; provided, however, that
(i) Participant shall first have given prompt notice to the Corporation of any
possible or prospective order (or proceeding pursuant to which any such order
may result) and (ii)

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the Corporation shall have been afforded a reasonable
opportunity to prevent or limit any such disclosure. It shall not be a
violation of this Agreement for Participant to disclose to Participant’s legal
counsel the provisions of this Agreement, provided that the purpose of such
disclosure is to aid in Participant’s compliance with those provisions, and
that Participant’s legal counsel agrees in writing to maintain the provisions
of this Agreement in strictest confidence. Also, it shall not be a violation
of this Agreement for Participant to disclose the provisions of this Agreement
to Participant’s tax advisors, provided that such tax advisors agree in writing
to maintain the provisions of this Agreement in strictest confidence.

C. For purposes of this Agreement, Participant may disclose Confidential
Information which (i) has been provided to Participant by a third party that is
not obligated to maintain confidentiality or to whom the Corporation owes no
duty of confidentiality, (ii) is or becomes publicly available without breach
of any other agreement or instrument to which the Corporation is a party or a
beneficiary or (iii) is or becomes publicly available without breach of any
duty owed to the Corporation by Participant or any third party. Participant
acknowledges and agrees that, if Participant shall seek to disclose, divulge,
reveal, report, publish, transfer or use, for any purpose whatsoever, any
Confidential Information within the scope of this Section 6.C, Participant
shall bear the burden of proving that any such Confidential Information shall
have become publicly available without a breach of an agreement or instrument
to which the Corporation is a party or beneficiary or the breach of a duty to
the Corporation.

7. Covenant Not to Compete. Participant covenants and agrees that during
the Restricted Period (as defined below) and in the Restricted Area (as defined
below), Participant shall not directly, indirectly or in concert with any other
person or entity, provide services that are the same as, or substantially
similar to, the services Participant performed for the Corporation at any time
during Participant’s employment by the Corporation (the “Restricted Services”),
to or on behalf of a Competing Entity (as defined below).

A. “Competing Entity” shall mean any person (including Participant acting on
his/her own behalf) or entity engaged in actual competition for customers with
the Corporation, in the business of designing, developing, producing,
marketing, distributing, licensing, selling, implementing, modifying,
deploying, servicing or supporting any software or technology being designed,
developed, produced, marketed, demonstrated, distributed, licensed, sold,
implemented, modified, deployed, serviced or supported by the Corporation (the
“Competing Products”) (i) during the period the Restricted Services were
performed for the Corporation or (ii) as of the date of termination of
Participant’s employment with the Corporation.

B. The “Restricted Period” shall mean the period commencing with the Option
Grant Date set forth on the initial Notice of Grant and ending on the later of
(i) nine (9) months after Participant’s employment with the Corporation ends
for any reason whatsoever, including, but not limited to, involuntary
termination by the Corporation, voluntary termination by Participant, a mutual
decision by the Corporation and Participant, or any other reason; or (ii) nine
(9) months after a court of competent jurisdiction enters an order enforcing
the terms of this Section 7.

C. The “Restricted Area” shall mean any state, province or similar political
subdivision where the Corporation has employees and/or has designed, developed,
produced, marketed, demonstrated, distributed, licensed, sold, implemented,
modified, deployed, serviced or supported software, technology or services or
has a written proposal pending to do the same. In addition to the foregoing,
given the ability of Participant to work remotely for a Competing Entity via
the internet or other technology, the Restricted Area shall include any other
state, province or similar political subdivision where Participant is
physically located while performing Restricted Services for a Competing Entity
that directly or indirectly uses Participant’s services to design, develop,
demonstrate, produce, market, demonstrate, distribute, license, sell,
implement, modify, deploy, service or support any Competing Product within the
Restricted Area or has a written proposal pending to do the same.

D. Notwithstanding the foregoing, Participant shall not be in violation of this
Section 7 if Participant is acting as an employee of the Corporation solely for
the benefit of the Corporation in connection with the Corporation’s business
and in accordance with the Corporation’s business practices and employee
policies. Also, Participant shall not be in violation of this Section 7 if,
after the termination of Participant’s employment with the Corporation,
Participant provides services to a Competing Entity in a line of business which
the Corporation has abandoned.

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8. Customer Nonsolicitation Covenant. Participant covenants and agrees
that for the Nonsolicitation Period (as defined below), Participant will not,
directly, indirectly, or in concert with any other person or entity, solicit
any Customer (as defined below) where the products or services at issue are the
same as, substantially similar to or substantially derived from those then
available from the Corporation.

A. “Customer” shall mean any person or entity that had purchased or utilized
products or services from the Corporation during the twelve (12) month period
immediately preceding the earlier of (i) the prohibited solicitation; or (ii)
the date of termination of Participant’s employment with the Corporation.
“Customer” shall also include any person or entity who Participant is, or
reasonably should be, aware that the Corporation was actively soliciting (other
than by means of a general advertising campaign) to purchase the Corporation’s
products or services during the twelve (12) month period immediately preceding
the earlier of (i) the prohibited solicitation; or (ii) the date of termination
of Participant’s employment by the Corporation.

B. The “Nonsolicitation Period” shall mean the period commencing with the
Option Grant Date set forth on the initial Notice of Grant and ending on the
later of (i) nine (9) months after Participant’s employment with the
Corporation ends for any reason whatsoever, including, but not limited to,
involuntary termination by the Corporation, voluntary termination by
Participant, a mutual decision by the Corporation and Participant, or any other
reason; or (ii) nine (9) months after a court of competent jurisdiction enters
an order enforcing the terms of this Section 8.

C. Notwithstanding the foregoing, Participant shall not be in violation of this
Section 8 if Participant is acting as an employee of the Corporation solely for
the benefit of the Corporation in connection with the Corporation’s business
and in accordance with the Corporation’s business practices and employee
policies.

9. Employee/Consultant Nonsolicitation Covenant. Participant covenants
and agrees that for the period commencing with the Option Grant Date set forth
on the initial Notice of Grant and ending on the later of (a) two (2) years
after Participant’s employment with the Corporation ends for any reason
whatsoever, including, but not limited to, involuntary termination by the
Corporation, voluntary termination by Participant, a mutual decision by Corporation and
Participant, or any other reason whatsoever, or (b) two (2) years after a court
of competent jurisdiction enters an order enforcing the terms of this Section
8, Participant shall not, directly or indirectly, Solicit (as defined below)
any person or entity who was an employee, independent contractor or consultant
of the Corporation during the one (1)-year period prior to the date of
termination of Participant’s employment by the Corporation (any such person or
entity is a “Covered Person”), in any manner that causes any Covered Person to
terminate or otherwise diminish any Covered Person’s relationship with the
Corporation.

A. “Solicit” shall mean the direct or indirect solicitation for hire or
engagement by Participant of a Covered Person, whether for or on behalf of
Participant or for any entity in which Participant shall have a direct or
indirect interest (or any subsidiary or affiliate of any such entity), whether
as a proprietor, partner, co-venturer, financier, investor or stockholder
(other than de minimis stock holdings), director, officer, employer, employee,
servant, agent, representative or otherwise. “Solicit” shall also mean
Participant’s direct or indirect hiring or engagement of a Covered Individual,
whether for or on behalf of Participant or for any entity in which Participant
shall have a direct or indirect interest (or any subsidiary or affiliate of any
such entity), whether as a proprietor, partner, co-venturer, financier,
investor or stockholder, director, officer, employer, employee, servant, agent,
representative or otherwise.

10. Materials. All notes, data, tapes, reference items, sketches,
drawings, memoranda, records and other materials in any way relating to the
Corporation’s business shall belong exclusively to the Corporation and
Participant agrees to turn over to the Corporation all copies of such materials
in Participant’s possession or under Participant’s control at the request of
the Corporation or, in the absence of such a request, upon the termination of
Participant’s employment with the Corporation.

11. Reasonableness of Restrictions. PARTICIPANT HAS CAREFULLY READ AND
CONSIDERED THE PROVISIONS OF SECTIONS 6 THROUGH 10 HEREOF INCLUSIVE AND SECTION
15 HEREOF AND, HAVING DONE SO, AGREES THAT THE RESTRICTIONS SET FORTH IN SUCH
SECTIONS ARE FAIR AND REASONABLE AND ARE REASONABLY REQUIRED TO PROTECT THE
INTERESTS OF THE CORPORATION, AND ITS OFFICERS, DIRECTORS,

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STOCKHOLDERS AND
EMPLOYEES, INCLUDING BUT NOT LIMITED TO, THE GOODWILL THE CORPORATION HAS
DEVELOPED WITH ITS CUSTOMERS AND THE PROTECTION OF THE CORPORATION’S
CONFIDENTIAL INFORMATION AND TRADE SECRETS.

12. Employment of Participant. Nothing in this Agreement shall be
construed as constituting a commitment, guarantee, agreement or understanding
of any kind or nature that the Corporation shall continue to employ
Participant, nor shall this Agreement affect in any way the right of the
Corporation to terminate the employment of Participant, at any time and for any
reason if Participant is employed in the United States. By Participant’s
execution of this Agreement, Participant acknowledges and agrees that
Participant’s employment, if that employment is within the United States, is
“at will.” No change of Participant’s duties as an employee of the Corporation
shall result in, or be deemed to be, a modification of any of the terms of this
Agreement.

13. No Prior Agreements. Participant represents that Participant’s
performance of all the terms of this Agreement and any services to be rendered
as an employee of the Corporation do not and shall not breach any fiduciary or
other duty or any covenant, agreement or understanding (including, without
limitation, any agreement relating to any proprietary information, knowledge or
data acquired by Participant in confidence, trust or otherwise prior to
Participant’s employment by the Corporation) to which Participant is a party or
by the terms of which Participant may be bound.

14. Burden and Benefit; Corporation. This Agreement shall be binding
upon, and shall inure to the benefit of, the Corporation and Participant, and
their respective heirs, personal and legal representatives, successors and
assigns. As used in Sections 6 through 13 inclusive, this Section 14 and
Sections 15 and 21, the term the “Corporation” shall also include any
corporation or other entity which is the parent or a subsidiary of the
Corporation or any corporation or entity which is an affiliate of the
Corporation by virtue of common (although not identical) ownership, and for
which Participant is providing services in any form during Participant’s
employment with the Corporation or any such other corporation or entity.
Participant hereby consents to the enforcement of any and all of the provisions
of this Agreement by or for the benefit of the Corporation and any such other
corporation or entity.

15. Accounting for Profits; Indemnification. Participant covenants and
agrees that, if Participant shall violate any of Participant’s covenants or
agreements contained in this Agreement, the Corporation shall be entitled to an
accounting and repayment of all profits, gains, compensation, royalties,
commissions, remunerations or benefits which Participant directly or indirectly
shall have realized or may realize relating to, growing out of or in connection
with (i) any such violation; and (ii) any grant of Options under this
Agreement; such remedy shall be in addition to and not in limitation of any
injunctive relief or other rights or remedies to which the Corporation is or
may be entitled at law or in equity or otherwise under this Agreement.
Participant agrees that the Corporation may obtain injunctive or equitable
relief without posting a bond. Participant hereby agrees to defend, indemnify
and hold harmless the Corporation against and in respect of: (i) any and all
losses and damages resulting from, relating or incident to, or arising out of
any misrepresentation or breach by Participant of any warranty, covenant or
agreement made or contained in this Agreement; and (ii) any and all actions,
suits, proceedings, claims, demands, judgments, costs and expenses (including
reasonable attorneys’ fees) incident to the foregoing.

16. Forum Choice. Participant consents to the personal and subject
matter jurisdiction and venue of the Circuit Court for Fairfax County,
Virginia, USA and the U.S. District Court for the Eastern District of Virginia,
USA, with respect to any and all causes of action pertaining to this Agreement,
and agrees to accept service of process made in accordance with the statutes of
Virginia and the United States. Participant and the Corporation agree that the
exclusive forum for any and all causes of action pertaining to this Agreement
shall be the Circuit Court for Fairfax County, Virginia, USA and the U.S.
District Court for the Eastern District of Virginia, USA.

17. Genders. The use of any gender herein shall be deemed to be or
include the other genders and the use of the singular herein shall be deemed to
be or include the plural (and vice versa), wherever appropriate.

18. Headings. The headings and other captions contained in this
Agreement are for convenience of reference only and shall not be used in
interpreting,

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construing or enforcing any of the provisions of this Agreement.

19. Entire Agreement. This Agreement, the Notice(s) of Grant, and the
Plan set forth all of the promises, agreements, conditions, understandings,
warranties and representations between the parties hereto with respect to the
subject matter of this Agreement, and there are no promises, agreements,
conditions, understandings, warranties or representations, oral or written,
express or implied, between them with respect to the Option or the Shares other
than as set forth herein. This Agreement, the Notice of Grant, and the Plan
are, and are intended by the parties to be, an integration of any and all prior
agreements or understandings, oral or written, with respect to the Option and
the Shares. The terms and conditions of this Agreement shall apply to any
future grants of Incentive Stock to Participant pursuant to the Plan and the
term “Option Grant Date” shall refer to such subsequent grant date as
appropriate. Any such future grants and acceptance thereof shall be evidenced
by the completion, execution and attachment to this Agreement of an additional
Notice of Grant, in the form of the initial Notice of Grant attached hereto, or
as otherwise provided by the Corporation, which shall be incorporated herein by
reference.

20. Notices. Any and all notices provided for herein shall be
sufficient if in writing, and sent by hand delivery or by certified or
registered mail (return receipt requested and first- class postage prepaid), in
the case of the Corporation, to its principal office and to the attention of
its General Counsel, and, in the case of Participant, to Participant’s address
as shown on the Corporation’s records.

21. Invalid or Unenforceable Provisions. The provisions of this
Agreement shall be deemed severable, and the invalidity or unenforceability of
any one or more of the provisions hereof shall not affect the validity and
enforceability of the other provisions hereof. Participant agrees that the
breach or alleged breach by the Corporation of (a) any covenant contained in
another agreement (if any) between the Corporation and Participant or (b) any
obligation owed to Participant by the Corporation, shall not affect the
validity or enforceability of the covenants and agreements of Participant set
forth herein.

22. Governing Law. This Agreement shall be construed and enforced in
accordance with the substantive laws of the jurisdiction of incorporation of
the Corporation excluding conflicts-of-law principles.

23. Modifications. No change or modification of this Agreement shall be
valid unless the same is in writing and signed by the parties hereto; provided,
however, that Participant hereby covenants and agrees to execute any amendment
to this Agreement which shall be required or desirable (in the opinion of the
Corporation or its counsel) in order to comply with any applicable securities
law or rule or any rule or regulation promulgated or proposed under the Code by
the Internal Revenue Service.

24. Terms and Conditions of Plan. The terms and conditions included in
the Plan are incorporated by reference herein, and to the extent that any
conflict may exist between any term or provision of this Agreement and any term
or provision of the Plan, such term or provision of the Plan shall control.

IN WITNESS WHEREOF, the Corporation and Participant have executed this
Agreement as of the Option Grant Date.

CORPORATION:

WEBMETHODS, INC., a Delaware corporation

	 	 	 
	By:
	 	 
	

	 	

	

	 	     Authorized Person

PARTICIPANT:

	 	 	 
	

	Print name:

	 	

	 
	 	 
	Address:

	 	

	

	 	

	

	 	

- 7 -

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