<PAGE> 1
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1996
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
1-8514
SMITH INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
DELAWARE 95-3822631
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
16740 HARDY STREET 77032
HOUSTON, TEXAS (Zip Code)
(Address of principal executive offices)
</TABLE>
(713) 443-3370
(Registrant's telephone number, including area code)
NOT APPLICABLE
(Former name, former address and former fiscal year, if changed since last
report)
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 / /
The number of shares outstanding of the Registrant's common stock as of August
9, 1996 was 39,982,747.
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<PAGE> 2
INDEX
<TABLE>
<CAPTION>
PAGE NO.
--------
<S> <C>
PART I: FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
Consolidated Statements of Operations --
For the Three and Six Months Ended June 30, 1996 and 1995................... 3
Consolidated Balance Sheets --
As of June 30, 1996 and December 31, 1995................................... 4
Consolidated Statements of Cash Flows --
For the Six Months Ended June 30, 1996 and 1995............................. 5
Notes to Consolidated Financial Statements.................................... 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS............................................................ 10
PART II: OTHER INFORMATION
ITEMS 1-6........................................................................ 13
SIGNATURES......................................................................... 15
</TABLE>
2
<PAGE> 3
SMITH INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------- --------------------
1996 1995 1996 1995
-------- -------- -------- --------
<S> <C> <C> <C> <C>
REVENUES........................................... $270,272 $205,976 $509,092 405,579
COSTS AND EXPENSES:
Costs of Revenues................................ 179,949 137,179 337,860 271,246
Selling Expenses................................. 44,858 38,216 86,684 72,864
General and Administrative Expenses.............. 15,131 11,123 29,164 22,563
-------- -------- -------- --------
Total Costs and Expenses................. 239,938 186,518 453,708 366,673
-------- -------- -------- --------
EARNINGS BEFORE INTEREST AND TAXES................. 30,334 19,458 55,384 38,906
INTEREST EXPENSE, NET.............................. 3,764 3,076 6,803 5,970
-------- -------- -------- --------
INCOME BEFORE INCOME TAXES AND MINORITY
INTERESTS........................................ 26,570 16,382 48,581 32,936
INCOME TAX PROVISION............................... 5,779 2,690 10,794 5,249
-------- -------- -------- --------
INCOME BEFORE MINORITY INTERESTS................... 20,791 13,692 37,787 27,687
MINORITY INTERESTS................................. 5,810 3,568 9,858 6,758
-------- -------- -------- --------
NET INCOME......................................... $ 14,981 $ 10,124 $ 27,929 $ 20,929
======== ======== ======== ========
EARNINGS PER SHARE (Note 3 )....................... $ 0.38 $ 0.26 $ 0.70 $ 0.53
======== ======== ======== ========
AVERAGE COMMON AND COMMON EQUIVALENT SHARES
OUTSTANDING...................................... 39,851 39,414 39,814 39,224
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE> 4
SMITH INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PAR VALUE DATA)
(UNAUDITED)
ASSETS
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1996 1995
-------- ------------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents.......................................... $ 20,300 $ 14,845
Receivables, net................................................... 281,833 230,590
Inventories, net (Note 4).......................................... 267,076 221,952
Deferred tax assets, net........................................... 4,515 3,925
Prepaid expenses and other......................................... 29,631 13,979
-------- --------
Total current assets....................................... 603,355 485,291
-------- --------
PROPERTY, PLANT AND EQUIPMENT, NET (Note 5).......................... 163,637 132,499
GOODWILL, NET........................................................ 124,951 43,925
OTHER ASSETS......................................................... 41,338 41,129
-------- --------
TOTAL ASSETS......................................................... $933,281 $702,844
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable................................................... $ 88,426 $ 71,439
Short-term borrowings and current portion of long-term debt (Note
6).............................................................. 32,465 25,147
Accrued payroll costs.............................................. 33,074 30,922
Income taxes payable............................................... 17,164 11,977
Other.............................................................. 63,808 45,804
-------- --------
Total current liabilities.................................. 234,937 185,289
-------- --------
LONG-TERM DEBT (Note 6).............................................. 216,348 117,238
OTHER LONG-TERM LIABILITIES.......................................... 15,672 15,754
MINORITY INTERESTS................................................... 136,935 83,677
SHAREHOLDERS' EQUITY:
Common stock --
Authorized -- 60,000 shares, $1 par value; issued and
outstanding -- 39,971 and 39,807 in 1996 and 1995,
respectively................................................... 39,971 39,807
Common stock warrants --
Class C warrants: outstanding -- 451 in 1996 and 1995........... 7,278 7,278
Additional paid-in capital......................................... 277,184 275,432
Retained earnings (Accumulated deficit)............................ 25,969 (1,962)
Cumulative translation adjustment.................................. (7,099) (5,755)
Less -- treasury securities, at cost (629 common shares and 451
Class C warrants in 1996 and 1995).............................. (13,914) (13,914)
-------- --------
Total shareholders' equity................................. 329,389 300,886
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY........................... $933,281 $702,844
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE> 5
SMITH INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
-----------------------
1996 1995
-------- --------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income........................................................... $ 27,929 $ 20,929
Adjustments to reconcile net income to net cash provided by (used in)
operating activities excluding the net effects of acquisitions:
Depreciation and amortization...................................... 14,058 11,643
Minority interests................................................. 9,858 6,758
Provision for losses on receivables................................ 570 481
Gain on disposal of property, plant and equipment.................. (1,261) (2,578)
Foreign currency translation....................................... 54 331
Changes in operating assets and liabilities:
Receivables........................................................ (28,684) (6,403)
Inventories, net................................................... (28,317) (15,971)
Accounts payable................................................... 6,458 (3,866)
Other current assets and liabilities............................... (2,383) (4,387)
Other non-current assets and liabilities........................... 2,788 (5,188)
--------- --------
Net cash provided by operating activities............................ 1,070 1,749
--------- --------
INVESTING ACTIVITIES:
Acquisition of Baker Hughes Treatment Services, net of cash
acquired........................................................... -- (5,131)
Acquisition of Fremont Chemical Company, net of cash acquired........ -- (2,650)
Acquisition of Anchor Drilling Fluids A.S., net of cash acquired..... (68,351) --
Purchases of property, plant and equipment........................... (31,149) (16,796)
Proceeds from disposal of property, plant and equipment.............. 6,698 5,125
--------- --------
Net cash used in investing activities................................ (92,802) (19,452)
--------- --------
FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt............................. 107,790 14,859
Proceeds from exercise of stock options and warrants................. 1,916 2,875
Net increase (decrease) in short-term borrowing...................... (2,433) 10,410
Principal payments of term loan debt................................. (10,000) (10,000)
Distributions to minority interests, net............................. -- (1,800)
--------- --------
Net cash provided by financing activities............................ 97,273 16,344
--------- --------
Effect of exchange rate changes on cash.............................. (86) 94
--------- --------
Net increase (decrease) in cash and cash equivalents................. 5,455 (1,265)
Cash and cash equivalents at beginning of period..................... 14,845 8,145
--------- --------
Cash and cash equivalents at end of period........................... $ 20,300 $ 6,880
========= ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
<PAGE> 6
SMITH INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1) BASIS OF PRESENTATION OF INTERIM FINANCIAL STATEMENTS
The accompanying unaudited consolidated financial statements of Smith
International, Inc. and subsidiaries (the "Company") have been prepared pursuant
to the rules and regulations of the Securities and Exchange Commission.
Accordingly, certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted. These financial statements should be
read in conjunction with the audited financial statements and accompanying notes
included in the Company's 1995 Annual Report on Form 10-K.
The unaudited consolidated financial statements reflect all adjustments
(consisting only of normal recurring adjustments) which the Company considers
necessary for a fair presentation of the interim periods. All significant
intercompany balances and transactions have been eliminated in the accompanying
financial statements. Results for the interim periods are not necessarily
indicative of results for the year.
Certain prior year amounts have been reclassified to conform to the current
year presentation.
2) ACQUISITION
On June 11, 1996, M-I Drilling Fluids L.L.C. ("M-I Drilling Fluids")
acquired the assets of Anchor Drilling Fluids, A.S. ("Anchor") in exchange for
cash and the assumption of certain liabilities totaling $114.7 million. M-I
Drilling Fluids also incurred accounting, legal and other acquisition-related
costs of $7.9 million in connection with the transaction.
The Anchor acquisition was recorded using the purchase method of accounting
and, accordingly, the acquired operations have been included in the results of
operations since the acquisition date. The purchase price was allocated to the
net assets acquired based upon their estimated fair market values. The excess of
the purchase price over the estimated fair value of the net assets acquired
amounted to approximately $81.5 million, which has been recorded as goodwill and
is being amortized over 40 years using the straight line method for book
purposes. This allocation was based on preliminary estimates and may be revised
when final valuations of the assets acquired and the liabilities assumed are
obtained.
The Company financed their portion of the purchase price by utilizing
approximately $73.4 million of borrowings under new loan agreements. The
minority partner contributed the remaining $41.3 million of consideration, which
is included in Minority Interests in the accompanying Consolidated Balance
Sheet.
In connection with finalizing the transaction, M-I Drilling Fluids reached
an agreement with the U.S. Department of Justice to modify a 1994 judgment
issued by the U.S. District Court for the District of Columbia. M-I Drilling
Fluids agreed to hold the acquired assets of Anchor Drilling Fluids USA, Inc.
("Anchor USA") separate until a sale of those assets can be made to an
acceptable purchaser. On July 31, 1996, M-I Drilling Fluids entered into a
definitive agreement for the sale of the Anchor USA assets. The transaction is
expected to be finalized during the Company's third quarter; however, there are
no assurances as to whether this transaction will ultimately be consummated.
The Anchor USA assets, which had a fair value of approximately $11.0
million at the acquisition date, have been recorded in accordance with the
Financial Accounting Standards Board's Emerging Issues Task Force ("EITF") Issue
No. 87-11 "Allocation of Purchase Price to Assets to be Sold". The fair value of
these operations are included in Prepaid and Other Current Assets on the
accompanying Consolidated Balance Sheet. Additionally, approximately $3.9
million of the acquisition-related costs discussed above, consisting primarily
of the estimated gain or loss on sale of the Anchor USA operations, the
estimated earnings or losses during the holding period and interest expense on
the borrowings used to finance the Anchor USA purchase, are included in Other
Current Liabilities in the accompanying Consolidated Balance Sheet.
6
<PAGE> 7
SMITH INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The summarized unaudited pro forma results from continuing operations
(excluding the results of the Anchor USA operations) for the three and six
months periods ended June 30, 1996 and 1995, assuming the acquisition had been
made on January 1, 1996 and 1995, respectively, are as follows (dollars in
thousands, except per share amounts):
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
--------------------- ---------------------
1996 1995 1996 1995
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Unaudited pro forma revenues............... $ 288,888 $ 235,280 $ 558,973 $ 456,127
======== ======== ======== ========
Unaudited pro forma income from continuing
operations............................... $ 15,219 $ 10,531 $ 27,832 $ 20,829
======== ======== ======== ========
Unaudited pro forma income from continuing
operations per share..................... $ 0.38 $ 0.27 $ 0.70 $ 0.53
======== ======== ======== ========
</TABLE>
These pro forma results have been prepared for comparative purposes only
and include certain adjustments such as additional depreciation expense as a
result of a step-up in the basis of property, plant and equipment, additional
amortization expense as a result of goodwill and other intangible assets and
increased interest expense on the acquisition-related debt. The pro forma
results do not include estimated consolidation savings; therefore, they do not
purport to be indicative of the results of operations which actually would have
resulted had the combination been in effect on January 1, 1996 or 1995 or of
future results of operations for the consolidated entities.
3) EARNINGS PER SHARE
Earnings per share is computed using the weighted average number of shares
of common stock and common stock equivalents outstanding during the period.
Common stock equivalents include the number of shares issuable upon exercise of
stock options, less the number of shares that could have been repurchased with
the exercise proceeds using the treasury stock method.
The number of shares used in the computation was determined as follows (in
thousands):
<TABLE>
<CAPTION>
THREE MONTHS
ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
----------------- -----------------
1996 1995 1996 1995
------- ------- ------- -------
<S> <C> <C> <C> <C>
Weighted average number of shares outstanding...... 39,329 39,023 39,313 38,940
Common stock equivalents........................... 522 391 501 284
------ ------ ------ ------
39,851 39,414 39,814 39,224
====== ====== ====== ======
</TABLE>
7
<PAGE> 8
SMITH INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
4) INVENTORIES
Inventories are stated at the lower of cost or market. Cost is determined
by the last-in, first-out ("LIFO") method for substantially all of the domestic
inventories and by the first-in, first-out ("FIFO") method for all other
inventories. Inventories consist of the following (in thousands):
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1996 1995
-------- ------------
<S> <C> <C>
Raw Materials................................................ $ 30,408 $ 31,052
Work in Process.............................................. 47,812 40,718
Finished Goods............................................... 202,320 163,597
-------- --------
280,540 235,367
Reserves to state certain domestic inventories ($107,496 and
$99,113 in 1996 and 1995, respectively) on a LIFO basis.... (13,464) (13,415)
-------- --------
Inventories, net............................................. $267,076 $221,952
======== ========
</TABLE>
5) PROPERTY, PLANT AND EQUIPMENT, NET
Property, Plant and Equipment consists of the following (in thousands):
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1996 1995
-------- ------------
<S> <C> <C>
Land......................................................... $ 17,352 $ 16,997
Buildings and improvements................................... 35,454 31,199
Machinery and equipment...................................... 272,538 250,221
-------- --------
325,344 298,417
Less -- accumulated depreciation............................. (161,707) (165,918)
-------- --------
Net property, plant and equipment............................ $163,637 $132,499
======== ========
</TABLE>
6) DEBT
Debt consists of the following (in thousands):
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1996 1995
-------- ------------
<S> <C> <C>
Current:
Short-term bank borrowings................................. $ 21,858 $ 14,438
Current portion of long-term debt.......................... 10,607 10,709
-------- --------
32,465 25,147
-------- --------
Long-term:
Notes payable.............................................. 106,220 46,000
Bank revolver.............................................. 58,971 50,400
Term loan.................................................. 49,056 30,000
Other...................................................... 12,708 1,547
-------- --------
226,955 127,947
Less current portion of long-term debt..................... (10,607) (10,709)
-------- --------
Long-term debt............................................. $216,348 $117,238
======== ========
</TABLE>
8
<PAGE> 9
SMITH INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
On April 4, 1996, the Company and M-I Drilling Fluids entered into new
unsecured revolving line of credit agreements which increased the available
facilities under the Company's domestic line of credit from $65.0 million to
$80.0 million and under the M-I Drilling Fluids line of credit from $20.0
million to $40.0 million. The new credit agreements provide for interest at
rates ranging from LIBOR + 3/8 to LIBOR + 5/8, based upon certain financial
ratios of the Company, and expire in March 2001.
On May 26, 1996, the Company entered into a new $50.0 million unsecured
note agreement with insurance company lenders. Of the total amount, $30.0
million bears interest at a rate of 7.24 percent and matures on April 2, 2001.
The remaining portion bears interest at 7.63 percent and is payable in six equal
installments from April 1, 2001 through April 2, 2006.
Principal payments of long-term debt from January 1 to December 31 are as
follows:
<TABLE>
<S> <C>
1997.............................................. $ 25,926
1998.............................................. 30,533
1999.............................................. 20,222
2000.............................................. 20,222
Thereafter........................................ 119,445
--------
$216,348
========
</TABLE>
7) CASH FLOW INFORMATION
Net cash provided by operating activities reflects cash payments for
interest and income taxes as follows (in thousands):
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
-----------------
1996 1995
------ ------
<S> <C> <C>
Income taxes....................................................... $4,419 $1,013
Interest........................................................... $7,212 $7,005
</TABLE>
The following schedule summarizes investing activities related to the
current year acquisition of Anchor (in thousands):
<TABLE>
<S> <C>
Fair value of assets, net of cash acquired of $5,041...................... $ 75,105
Goodwill recorded......................................................... 81,476
Less: Total liabilities assumed........................................... (46,947)
Less: Minority interest partner's contribution............................ (41,283)
--------
Cash paid for acquisition of Anchor, net of cash acquired................. $ 68,351
========
</TABLE>
9
<PAGE> 10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
Management's Discussion and Analysis of Financial Condition and Results of
Operations is the Company's discussion of its financial performance and of
significant trends which may impact the future performance of the Company. It
should be read in conjunction with the financial statements of the Company and
the related notes thereto.
The Company manufactures and supplies a wide range of products and services
to the worldwide oil and gas drilling and production and mining industries. The
Company's revenues are derived from sales of drilling and completion fluid
systems, solids control equipment, drill bits, downhole drilling tools and
tubular drill string components in addition to providing drilling and completion
services to the oil and gas industry.
The Company operates in the global oil and gas services market and can be
significantly impacted by fluctuations in exploration and drilling activity in
the major energy producing areas. While exploration and drilling activity is
primarily influenced by oil and natural gas prices. It may be affected by
political actions and uncertainties, environmental concerns, capital expenditure
plans of customers and the overall level of global economic growth and activity.
RESULTS OF OPERATIONS
REVENUES
The Company operates through four business units which market the products
manufactured and provide services throughout the world. The following table sets
forth the amounts and percentages of revenues by business unit and by area, as
well as average rig count data (in thousands, except rig count information):
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED FOR THE SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------------------------- ----------------------------------
1996 1995 1996 1995
--------------- --------------- --------------- ---------------
AMOUNT % AMOUNT % AMOUNT % AMOUNT %
-------- ---- -------- ---- -------- ---- -------- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Breakdown by Business Unit:
M-I Drilling Fluids........................... $176,224 65 $132,424 64 $326,947 64 $254,791 63
Smith Tool.................................... 46,494 17 38,568 19 91,721 18 81,231 20
Smith Drilling & Completions.................. 33,799 13 27,208 13 64,574 13 53,379 13
Smith Diamond Technology...................... 13,755 5 7,776 4 25,850 5 16,178 4
-------- ---- -------- ---- -------- ---- -------- ----
Total................................... $270,272 100 $205,976 100 $509,092 100 $405,579 100
======== === ======== === ======== === ======== ===
Breakdown by Area:
U.S........................................... $116,760 43 $ 84,562 41 $212,142 42 $166,873 41
Export........................................ 17,451 7 13,635 7 30,572 6 24,921 6
Non-U.S....................................... 136,061 50 107,779 52 266,378 52 213,785 53
-------- ---- -------- ---- -------- ---- -------- ----
Total................................... $270,272 100 $205,976 100 $509,092 100 $405,579 100
======== === ======== === ======== === ======== ===
Average Active Rig Count:
U.S........................................... 760 677 734 693
Canada........................................ 150 146 243 236
Non-North America............................. 794 758 787 754
-------- -------- -------- --------
Total................................... 1,704 1,581 1,764 1,683
======== ======== ======== ========
</TABLE>
REVENUES BY BUSINESS UNITS
M-I Drilling Fluids
The M-I Drilling Fluids operation provides drilling fluids systems, solids
control equipment, products and technical services to end users engaged in
drilling oil, natural gas and geothermal wells worldwide. M-I Drilling Fluids
revenues increased $43.8 million, or 33 percent, over the second quarter of 1995
and $72.2 million, or 28 percent, from the first six months of 1995. Increased
revenues relate primarily to the increased level of deep water drilling activity
in the U.S. Gulf Coast area and the incremental revenues associated with the
Anchor acquisition. For the six month period, M-I Drilling Fluids continued to
experience strong revenue growth in the U.S. and international markets,
primarily Latin America and Europe/Africa, resulting from the higher drilling
activity.
10
<PAGE> 11
Smith Tool
The Smith Tool business unit manufactures and sells three-cone drill bits
used in the oil and gas drilling industry and in mining applications. Smith Tool
revenues increased $7.9 million and $10.5 million, or 21 percent and 13 percent,
from the second quarter of 1995 and first six months of 1995, respectively.
Increased sales of the business unit's premium drill bits and heightened
drilling activity in the U.S. and in international markets, primarily the
Europe/Africa geographic area, contributed to the increase.
Smith Drilling & Completions
The Smith Drilling & Completions business unit manufactures and markets
downhole drilling tools and tubular drill string components and provides related
drilling and completion services for drilling oil and gas wells. Drilling &
Completions revenues increased $6.6 million, or 24 percent, from the second
quarter of 1995 and $11.2 million, or 21 percent, from the first six months of
1995. The increase is primarily attributable to higher levels of re-entry
drilling activity in the U.S. Gulf Coast and increased demand for products and
services in international markets, particularly Latin America.
Smith Diamond Technology
The Smith Diamond Technology business unit manufactures and markets shear
bits featuring cutters made of polycrystalline diamond (PDC) or natural diamonds
at its Geodiamond division. Smith Diamond Technology also manufactures PDC's and
cubic boron nitride at its Megadiamond and Supradiamant subsidiaries. These
ultrahard materials are used in the business unit's diamond drill bits and in
other specialized cutting tools. Smith Diamond Technology revenues increased
$6.0 million and $9.7 million, or 77 percent and 60 percent, from the second
quarter 1995 and first six months of 1995, respectively. The increase results
primarily from higher unit sales of Smith Diamond's drill bits, which increased
over 50 percent from the second quarter in 1995. Increases in worldwide drilling
activity, particularly Latin America and the U.S., also impacted the results for
the periods presented.
For the periods indicated, the following table summarizes the operating
results of the Company and presents results as a percentage of total revenues:
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED FOR THE SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------------------- --------------------------------
1996 1995 1996 1995
-------------- -------------- -------------- --------------
AMOUNT % AMOUNT % AMOUNT % AMOUNT %
-------- --- -------- --- -------- --- -------- ---
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues....................... $270,272 100 $205,976 100 $509,092 100 $405,579 100
-------- -------- -------- --------
Gross profit................... 90,323 33 68,797 33 171,232 34 134,333 33
Operating expenses............. 59,989 22 49,339 24 115,848 23 95,427 24
-------- --- -------- --- -------- --- -------- ---
Earnings before interest and
taxes........................ 30,334 11 19,458 9 55,384 11 38,906 9
Interest expense, net.......... 3,764 1 3,076 1 6,803 2 5,970 1
-------- --- -------- --- -------- --- -------- ---
Income before income taxes and
minority interests........... 26,570 10 16,382 8 48,581 9 32,936 8
Income tax provision........... 5,779 2 2,690 1 10,794 2 5,249 1
-------- --- -------- --- -------- --- -------- ---
Income before minority
interests.................... 20,791 8 13,692 7 37,787 7 27,687 7
Minority interests............. 5,810 2 3,568 2 9,858 2 6,758 2
-------- --- -------- --- -------- --- -------- ---
Net income..................... $ 14,981 6 $ 10,124 5 $ 27,929 5 $ 20,929 5
======== === ======== === ======== === ======== ===
</TABLE>
Total revenues for the second quarter of 1996 increased approximately $64.3
million, or 31 percent, over the same quarter in the prior year. Revenues for
the first six months of 1996 were up $103.5 million from the comparable period
in 1995. The significant revenue growth for the quarter relates primarily to
increased level of drilling activity in the U.S. which has resulted in domestic
revenues increasing from 41 percent of total revenues in the second quarter of
1995 to 43 percent in the same quarter of 1996. Increased worldwide drilling
activity, particularly Latin America and Europe/Africa, continued expansion into
developing international
11
<PAGE> 12
markets and the addition of the Anchor operations also contributed to the
revenue growth. For the six month period, increased drilling activity in the
U.S. as well as international markets, primarily Latin America and
Europe/Africa, contributed to the favorable revenue results reported by the
Company. Management believes the addition of Anchor operations, which provided
approximately $5.4 million of the reported revenues for the 1996 periods
presented, will have a significant impact on the Company's future revenues.
Gross profit increased by $21.5 million, or 31 percent, from the second
quarter of 1995 and $36.9 million, or 27 percent, from the first six months of
1995. As a percentage of revenues, margins were comparable to the second quarter
of 1995 and increased from 33 percent for the first six months of 1995 to 34
percent for the same period in 1996. The gross profit increase over the prior
year's results is primarily attributable to the significant revenue growth.
Operating expenses, increased $10.7 million and $20.4 million from the
second quarter and first six months of 1995, respectively; however, as a
percentage of revenues, operating expenses decreased from both the second
quarter and first six months of 1995 -- with a quarter-to-quarter decrease of 24
to 22 percent as compared to the second quarter of 1995. The increase in
absolute dollars primarily relates to increased selling costs associated with
the higher revenues and higher general and administrative costs related to the
expansion of various foreign operations. Additional operating costs associated
with the Anchor operations for which no amounts were included the prior year,
also contributed to the increase.
Net interest expense increased $0.7 million and $0.8 million over the
second quarter and first six months of 1995, respectively. The increase is due
primarily to the higher level of borrowings required to meet working capital
needs which has resulted from the significant growth experienced by the Company.
The remaining portion of the increase related to the interest expense associated
with the incremental borrowings used to finance the Anchor acquisition.
The Company's effective tax rate for both the second quarter and first six
months of 1996 approximated 22 percent, which is higher than the rate for the
comparable periods in the prior year and lower than the U.S. statutory rate. The
effective rate increase from the prior year relates primarily to full
utilization of U.S. alternative minimum tax net operating loss carryforwards
during 1995. The effective rate was lower than the statutory rate, due primarily
to the utilization of U.S. regular net operating loss carryforwards during the
current year.
Minority interests represent the share of M-I Drilling Fluids profits
associated with the minority interest partner in the M-I Drilling Fluids
operation as well as minority interests in investments in other joint ventures
held by M-I Drilling Fluids. Minority interests increased by $2.2 million and
$3.1 million from the second quarter and first six months of 1995, respectively.
The increase is due primarily to the higher level of M-I Drilling Fluids
earnings.
LIQUIDITY AND CAPITAL RESOURCES
The Company's financial condition remained strong at June 30, 1996. Working
capital at June 30, 1996 increased $68.4 million, or 23 percent, from December
31, 1995. During the six months ended June 30, 1996, cash generated internally
exceeded the cash required to support the Company's operations by approximately
$1.1 million.
The Company's primary internal source of liquidity is cash flow generated
from operations. External sources of liquidity include debt and, if needed,
equity financing. The Company has domestic and international borrowing
facilities for operating and financing needs. The Company had a $80.0 million
revolving line of credit facility with a bank group and approximately $22.0
million of international borrowing facilities with various foreign banks. The
Company had approximately $46.3 million of funds available for borrowings under
these facilities. Additionally, the M-I Drilling Fluids revolving line of credit
facility of $40.0 million had approximately $10.9 million of funds available for
borrowing. The Company expects to be able to meet its ongoing working capital
and capital expenditure requirements from existing cash on hand, operating cash
flows and existing credit facilities.
Management regularly evaluates opportunities to acquire products or
businesses complementary to the Company's operations. These acquisitions, if
they arise, may involve the use of cash or, depending on the size and terms of
the transaction, may require debt or equity financing.
12
<PAGE> 13
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 2. CHANGES IN SECURITIES
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Annual Meeting of Shareholders on April 24, 1996, shareholders of
the Company elected directors and ratified the appointment of auditors by the
votes shown below.
<TABLE>
<CAPTION>
FOR WITHHELD ABSTAIN
---------- -------- -------
<S> <C> <C> <C>
Agenda Item
Election of directors:
G. Clyde Buck....................................... 35,487,898 3,967 90,282
Loren K. Carroll.................................... 34,585,079 906,786 993,101
Agenda Item
Ratify auditors....................................... 35,550,506 10,533 17,141
</TABLE>
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
(2) Plan of Acquisition, Reorganization, Arrangement or Succession.
<TABLE>
<CAPTION>
SEQUENTIALLY INCORPORATED BY REFERENCE FROM
EXHIBIT NUMBER NUMBERED --------------------------------------
AND DESCRIPTION PAGE FORM DATE FILE NO. EXHIBIT
------------------------------- ------------ ---- ------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
2.1 --Purchase and Sale Agreement N/A 8-K 6/11/96 1-8514 2.1
By and Between M-I Drilling
Fluids L.L.C. and Anchor
Drilling Fluids A.S.
</TABLE>
13
<PAGE> 14
(10) Material Contracts.
<TABLE>
<CAPTION>
SEQUENTIALLY INCORPORATED BY REFERENCE FROM
EXHIBIT NUMBER NUMBERED --------------------------------------
AND DESCRIPTION PAGE FORM DATE FILE NO. EXHIBIT
------------------------------- ------------ ---- ------- -------- -------
<C> <S> <C> <C> <C> <C> <C>
10.1 --Loan Agreement N/A N/A N/A N/A
$80 Million Revolving Loan
Facility and 320,000,000
Norwegian Krone Term Loan
Facility dated as of April
4, 1996 among Smith
International, Inc., as
Borrower; Texas Commerce
Bank National Association,
as Agent and as a Bank, and
ABN Amro Bank N.V., Houston
Agency and Den Norske Bank
AS, as Co-Agent and as
Banks, and the other banks
now or hereafter parties
hereto.
10.2 --Loan Agreement N/A N/A N/A N/A
$40 Million Revolving Loan
Facility dated as of April
4, 1996 among M-I Drilling
Fluids, L.L.C. as Borrower;
Texas Commerce Bank National
Association, an Agent and as
a Bank, and ABN Amro Bank
N.V., Houston Agency and Den
Norske Bank AS, as Co-Agents
and as Banks, and the other
banks new or hereafter
parties hereto.
10.3 --Smith International, Inc. N/A N/A N/A N/A
Note Agreement dated May 21,
1996.
</TABLE>
(27) Financial Data Schedule.
(b) Reports on Form 8-K
The Registrant filed a Form 8-K dated June 11, 1996 reporting under "Item
2. Acquisition or Disposition of Assets" the acquisition of Anchor Drilling
Fluids, A.S.
14
<PAGE> 15
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SMITH INTERNATIONAL, INC.
Registrant
<TABLE>
<S> <C>
Date: August 13, 1996 By: /s/ DOUGLAS L. ROCK
------------------------------------
Douglas L. Rock
Chairman of the Board, Chief
Executive Officer, President and
Chief Operating Officer
Date: August 13, 1996 By: /s/ LOREN K. CARROLL
------------------------------------
Loren K. Carroll
Executive Vice President and Chief
Financial Officer (Principal
Accounting Officer)
</TABLE>
15
<PAGE> 16
EXHIBIT INDEX
<TABLE>
<CAPTION>
SEQUENTIALLY INCORPORATED BY REFERENCE FROM
EXHIBIT NUMBER NUMBERED --------------------------------------
AND DESCRIPTION PAGE FORM DATE FILE NO. EXHIBIT
------------------------------- ------------ ---- ------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
2.1 -- Purchase and Sale Agreement N/A 8-K 6/11/96 1-8514 2.1
By and Between M-I Drilling
Fluids L.L.C. and Anchor
Drilling Fluids A.S.
10.1 -- Loan Agreement N/A N/A N/A N/A
$80 Million Revolving Loan
Facility and 320,000,000
Norwegian Krone Term Loan
Facility dated as of April
4, 1996 among Smith
International, Inc., as
Borrower; Texas Commerce
Bank National Association,
as Agent and as a Bank, and
ABN Amro Bank N.V., Houston
Agency and Den Norske Bank
AS, as Co-Agent and as
Banks, and the other banks
now or hereafter parties
hereto.
10.2 -- Loan Agreement N/A N/A N/A N/A
$40 Million Revolving Loan
Facility dated as of April
4, 1996 among M-I Drilling
Fluids, L.L.C. as Borrower;
Texas Commerce Bank National
Association, an Agent and as
a Bank, and ABN Amro Bank
N.V., Houston Agency and Den
Norske Bank AS, as Co-Agents
and as Banks, and the other
banks new or hereafter
parties hereto.
10.3 -- Smith International, Inc. N/A N/A N/A N/A
Note Agreement dated May 21,
1996.
</TABLE>
<PAGE> 1
EXHIBIT 10.1
LOAN AGREEMENT
$80,000,000 REVOLVING LOAN FACILITY
AND
320,000,000 NORWEGIAN KRONE TERM LOAN FACILITY
DATED AS OF APRIL 4, 1996
AMONG
SMITH INTERNATIONAL, INC.,
AS BORROWER;
TEXAS COMMERCE BANK NATIONAL ASSOCIATION,
AS AGENT AND AS A BANK,
AND
ABN AMRO BANK N.V., HOUSTON AGENCY AND DEN NORSKE BANK AS,
AS CO-AGENTS AND AS BANKS,
AND
THE OTHER BANKS NOW OR HEREAFTER
PARTIES HERETO
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
1. Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
-----------
1.1 Certain Defined Terms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
---------------------
1.2 Miscellaneous . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
-------------
2. Commitments and Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
---------------------
2.1 Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
-----
2.2 Letters of Credit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
-----------------
2.3 Terminations or Reductions of Revolving Loan Commitments . . . . . . . . . . . . . . . . . . . . . 19
--------------------------------------------------------
2.4 Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
----
2.5 Several Obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
-------------------
2.6 Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
-----
2.7 Use of Proceeds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
---------------
3. Borrowings, Payments and Prepayments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
------------------------------------
3.1 Borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
----------
3.2 Payments and Prepayments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
------------------------
4. Payments; Pro Rata Treatment; Computations, Etc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
------------------------------------------------
4.1 Payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
--------
4.2 Pro Rata Treatment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
------------------
4.3 Certain Actions, Notices, Etc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
------------------------------
4.4 Non-Receipt of Funds by the Agent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
---------------------------------
4.5 Sharing of Payments, Etc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
-------------------------
4.6 Replacement of Banks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
--------------------
5. Conditions Precedent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
--------------------
5.1 Initial Loans and Letters of Credit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
-----------------------------------
5.2 All Loans and Letters of Credit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
-------------------------------
5.3 Term Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
----------
6. Representations and Warranties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
------------------------------
6.1 Organization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
------------
6.2 Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
--------------------
6.3 Enforceable Obligations; Authorization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
--------------------------------------
6.4 Other Debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
----------
6.5 Litigation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
----------
6.6 Title . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
-----
6.7 Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
-----
6.8 Regulations U and X . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
-------------------
6.9 Subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
------------
6.10 No Untrue or Misleading Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
----------------------------------
6.11 ERISA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
-----
</TABLE>
i
<PAGE> 3
<TABLE>
<S> <C> <C>
6.12 Investment Company Act . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
----------------------
6.13 Public Utility Holding Company Act . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
----------------------------------
6.14 Solvency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
--------
6.15 Fiscal Year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
-----------
6.16 Compliance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
----------
6.17 Environmental Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
---------------------
7. Affirmative Covenants. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
---------------------
7.1 Taxes, Existence, Regulations, Property, Etc. . . . . . . . . . . . . . . . . . . . . . . . . . . 32
---------------------------------------------
7.2 Financial Statements and Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
------------------------------------
7.3 Financial Tests . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
---------------
7.4 Inspection . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
----------
7.5 Further Assurances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
------------------
7.6 Books and Records . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
-----------------
7.7 Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
---------
7.8 Notice of Certain Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
-------------------------
7.9 Capital Adequacy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
----------------
7.10 ERISA Information and Compliance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
--------------------------------
7.11 Additional Subsidiaries; Corporate Restructuring . . . . . . . . . . . . . . . . . . . . . . . . . 36
------------------------------------------------
8. Negative Covenants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
------------------
8.1 Indebtedness . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
------------
8.2 Liens . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
-----
8.3 Contingent Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
----------------------
8.4 Mergers, Consolidations and Dispositions of Assets . . . . . . . . . . . . . . . . . . . . . . . . 39
--------------------------------------------------
8.5 Nature of Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
------------------
8.6 Transactions with Related Parties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
---------------------------------
8.7 Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
-----------
8.8 Organizational Documents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
------------------------
8.9 Subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
------------
8.10 Notice of Asset Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
---------------------
8.11 No Restriction on Payment of Dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
--------------------------------------
8.12 Modifications to Note Agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
--------------------------------
9. Defaults . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
--------
9.1 Events of Default . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
-----------------
9.2 Right of Setoff . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
---------------
9.3 Collateral Account . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
------------------
9.4 Preservation of Security for Unmatured Reimbursement Obligations . . . . . . . . . . . . . . . . . 44
----------------------------------------------------------------
9.5 Remedies Cumulative . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
-------------------
10. The Agent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
---------
10.1 Appointment, Powers and Immunities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
----------------------------------
10.2 Reliance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46
--------
10.3 Defaults . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46
--------
10.4 Rights as a Bank . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46
----------------
</TABLE>
ii
<PAGE> 4
<TABLE>
<S> <C> <C>
10.5 Indemnification . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
---------------
10.6 Non-Reliance on Agent and Other Banks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
-------------------------------------
10.7 Failure to Act . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
--------------
10.8 Resignation or Removal of Agent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
-------------------------------
10.9 No Partnership . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
--------------
11. Miscellaneous . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
-------------
11.1 Waiver . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
------
11.2 Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49
-------
11.3 Expenses, Etc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49
--------------
11.4 Indemnification . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50
---------------
11.5 Amendments, Etc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50
----------------
11.6 Successors and Assigns . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51
----------------------
11.7 Limitation of Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53
----------------------
11.8 Survival . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54
--------
11.9 Captions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54
--------
11.10 Counterparts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54
------------
11.11 Governing Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54
-------------
11.12 Severability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55
------------
11.13 Tax Forms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55
---------
11.14 Venue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55
-----
11.15 Confidential Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55
------------------------
11.16 Amendment and Restatement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56
-------------------------
</TABLE>
SCHEDULES
1 -- Interest Rate and Foreign Currency Agreement
EXHIBITS
A -- Request for Extension of Credit
B -- Revolving Note
C -- Term Note
D -- Assignment and Acceptance
E -- Compliance Certificate
F -- Subsidiaries
G -- Litigation
H -- Borrowed Money Indebtedness
I -- Liens
iii
<PAGE> 5
LOAN AGREEMENT
THIS LOAN AGREEMENT is made and entered into as of April 4, 1996 (the
"Effective Date"), by and among SMITH INTERNATIONAL, INC., a Delaware
corporation (the "Borrower"); each of the banks which is or may from time to
time become a party hereto in accordance with Section 11.6 hereof
(individually, a "Bank" and, collectively, the "Banks"), ABN AMRO BANK N.V.,
HOUSTON AGENCY and DEN NORSKE BANK AS, as Co-Agents, and TEXAS COMMERCE BANK
NATIONAL ASSOCIATION ("TCB"), a national banking association, as agent for the
Banks (in such capacity, together with its successors in such capacity, the
"Agent").
2 Commitments and Loans.
2.1 Loans.
(a) Revolving Loans. From time to time on or after the Effective
Date and during the Revolving Loan Availability Period, each Bank severally
agrees, subject to all of the terms and conditions of this Agreement
(including, without limitation, Sections 5.1 and 5.2 hereof), to make loans
under this Section 2.1(a) to the Borrower in an aggregate principal amount at
any one time outstanding (including its Revolving Loan Commitment Percentage of
all Letter of Credit Liabilities at such time) up to but not exceeding such
Bank's Revolving Loan Commitment. Subject to the conditions in this Agreement,
any such Revolving Loan repaid prior to the Termination Date may be reborrowed
pursuant to the terms of this Agreement; provided, that any and all such
Revolving Loans shall be due and payable in full at the end of the Revolving
Loan Availability Period. The Borrower, the Agent and the Banks agree that
Chapter 15 of the Texas Credit Code shall not apply to this Agreement, the
Notes or any Obligation. The aggregate of all Revolving Loans to be made by
the Banks in connection with a particular borrowing shall be equal to $500,000
or a multiple of $100,000 in excess of $500,000.
(b) Term Loans. On or before June 30, 1996, each Bank severally
agrees, subject to all of the terms and conditions of this Agreement
(including, without limitation, Sections 5.1, 5.2 and 5.3 hereof), to make
loans under this Section 2.1(b) to the Borrower in a single advance and in a
principal amount equal to such Bank's Term Loan Commitment. Repayments of such
Term Loans may not be reborrowed.
2.3 Terminations or Reductions of Revolving Loan Commitments.
(a) Mandatory. On the Termination Date, all Revolving Loan
Commitments shall be terminated in their entirety.
<PAGE> 6
(b) Optional. The Borrower shall have the right to terminate or
reduce the unused portion of the Revolving Loan Commitments at any time or from
time to time, provided that (i) the Borrower shall give notice of each such
termination or reduction to the Agent as provided in Section 4.3 hereof and
(ii) each such partial reduction shall be in an aggregate amount of at least
$5,000,000 and the aggregate of all the Revolving Loan Commitments may not be
reduced below $20,000,000 unless terminated entirely.
(c) No Reinstatement. Any termination of the Revolving Loan
Commitments may not be reinstated without the written approval of the Agent and
the Banks.
2.4 Fees.
(a) The Borrower shall pay to the Agent for the account
of each Bank commitment fees for the period from the Effective Date to
and including the Termination Date at a rate per annum equal to the
then current Commitment Fee Percentage. Such commitment fees shall be
computed (on the basis of the actual number of days elapsed in a year
composed of 360 days) on each day and shall be based on the excess of
(x) the aggregate amount of each Bank's Revolving Loan Commitment for
such day over (y) the sum of (i) the aggregate unpaid principal
balance of such Bank's Revolving Loans on such day plus (ii) the
aggregate Letter of Credit Liabilities as to such Bank for such day.
Accrued commitment fees under this provision through each Quarterly
Date prior to the Termination Date shall be payable on the third (3rd)
Business Day after such Quarterly Date. Any accrued and unpaid
commitment fees shall be due and payable on the Termination Date.
(b) The Borrower shall pay to the Agent for the account
of each Bank commitment fees for the period from the Effective Date to
and including June 30, 1996 or the funding of the Term Loans,
whichever comes first, at 0.175% per annum. Such commitment fees
shall be computed (on the basis of the actual number of days elapsed
in a year composed of 360 days) on each day and shall be based on the
excess of (x) the aggregate amount of each Bank's Term Loan Commitment
for such day over the aggregate unpaid principal balance of such
Bank's Term Loans on such day. Accrued commitment fees under this
provision through June 30, 1996 or the funding of the Term Loans,
whichever comes first, shall be payable on the third (3rd) Business
Day after such date.
(c) The Borrower shall pay to the Agent fees as set forth
in that certain Letter Agreement dated February 13, 1996 executed by
and between the Agent and the Borrower.
(d) All past due fees payable under this Section shall
bear interest at the Past Due Rate.
<PAGE> 7
2. Borrowings, Payments and Prepayments.
3.2 Payments and Prepayments.
(a) Optional Prepayments. Except as provided in the Interest Rate
and Foreign Currency Agreement, the Borrower shall have the right to prepay, on
any Business Day, in whole or in part, without the payment of any penalty or
fee, Loans at any time or from time to time, provided that the Borrower shall
give the Agent notice of each such prepayment as provided in Section 4.3
hereof. Each optional prepayment on a Revolving Loan shall be in an amount at
least equal to $250,000 and each optional prepayment on a Term Loan shall be in
an amount at least equal to 32,000,000 Krone.
(b) Mandatory Prepayments and Cover.
(1) Insurance Proceeds and Condemnation Awards. Promptly
following the receipt thereof by the Borrower or any of its
Subsidiaries, the Borrower shall deposit or cause to be deposited with
the Agent in an interest bearing account (but without any obligation
to maximize such interest) all of the net cash proceeds of any payment
or award in excess of $1,000,000 (in the aggregate in any given year)
made to the Borrower or any of its Subsidiaries under any policy of
property insurance or pursuant to any condemnation award which relates
to or derives from assets of--or acquired from--Anchor Drilling Fluids
(or its Subsidiaries) provided such amounts have not theretofore been
reasonably expended for the restoration or replacement of the asset in
respect of which such payment or award was made. Such amounts shall
be collaterally assigned to the Agent as security for the Obligations
in a manner reasonably acceptable to the Agent. Upon delivery to the
Agent of written certification by the Borrower that the Borrower or
any of its Subsidiaries has reasonably expended amounts or committed
in writing to expend amounts for the restoration or replacement of the
asset in respect of which such payment or award was made, specifying
the amount expended or committed, so long as no Default or Event of
Default shall have occurred and be continuing any such amount
deposited with the Agent shall be released by the Agent to the
Borrower; provided, however, that, in the event that within 180 days
of receipt of such payment or award by the Borrower, to the extent the
Borrower shall not have certified to the Agent its intention to expend
an equivalent amount for the restoration or replacement of the asset
in respect of which such payment or award was made, the Borrower shall
make a prepayment on the Term Loans (using any funds deposited with
the Agent pursuant to this Section 3.2(b)(2) or other funds) in the
amount of the excess of the amount of such payment or award over the
amount of such expenditures and/or commitment on such 180th day.
(2) Asset Sales. 100% of the net sales proceeds in
excess of $5,000,000 (in the aggregate in any given year) realized by
the Borrower or any of its Subsidiaries from the sale, transfer or
other disposition of any Property which relates to or derives from
assets of--or acquired from--Anchor Drilling Fluids (or its
Subsidiaries) (other than
<PAGE> 8
Inventory and other Property where the sale, transfer or other
disposition occurred in the ordinary course of business of the owner
thereof) shall be applied to prepayment of the Term Loans.
(c) Application of Prepayments on Term Loans. Any prepayments
made on the Term Loans will be applied pro rata to each of the remaining
scheduled principal installments on the Term Loans.
(d) Term Loan Amortization. The principal of each Note evidencing
Term Loans shall be due and payable in semiannual installments due on each six
month anniversary of the making of the Term Loans equal to the applicable Term
Loan Lender's pro rata share of the Term Loans times 32,000,000 Krone. On the
Maturity Date, the entire unpaid principal balance of each Note evidencing Term
Loans and all accrued and unpaid interest on the unpaid principal balance of
each such Note shall be finally due and payable.
(e) Interest Payments. Accrued and unpaid interest on the unpaid
principal balance of the Notes shall be due and payable on the Interest Payment
Dates.
(f) Payments; Interest Rate and Foreign Currency Agreement. The
Borrower shall pay all amounts required to be paid under the Interest Rate and
Foreign Currency Agreement, the Notes and the other Loan Documents as and when
due.
(g) Payments and Interest on Reimbursement Obligations. The
Borrower will pay to the Agent for the account of each Bank the amount of each
Reimbursement Obligation promptly upon its incurrence. The amount of any
Reimbursement Obligation may, if the applicable conditions precedent specified
in Sections 5.1 and 5.2 hereof have been satisfied, be paid with the proceeds
of Revolving Loans. Subject to Section 11.7 hereof, the Borrower will pay to
the Agent for the account of each Bank interest at the applicable Past Due Rate
on any Reimbursement Obligation and on any other amount payable by the Borrower
hereunder to or for the account of such Bank (but, if such amount is interest,
only to the extent legally allowed), which shall not be paid in full when due
(whether at stated maturity, by acceleration or otherwise), for the period
commencing on the due date thereof until the same is paid in full.
7 Affirmative Covenants.
The Borrower covenants and agrees with the Agent and the Banks that
prior to the termination of this Agreement it will do, and cause each of its
Subsidiaries and the Guarantor to do, and if necessary cause to be done, each
and all of the following:
7.3 Financial Tests. The Borrower (on a consolidated basis) will
have and maintain:
(a) Debt to Total Capitalization Ratio - a Debt to Total
Capitalization Ratio of not greater than (1) 40% for the period
commencing on the Effective Date through and including March 31, 1998
and (2) 35% at all times thereafter.
<PAGE> 9
(b) Interest Coverage Ratio - an Interest Coverage Ratio
of not less than 2.00 to 1.00 at all times.
(c) Tangible Net Worth - Tangible Net Worth of not less
than (1) for the period commencing on the Effective Date through and
including March 31, 1996, $240,000,000 and (2) for each fiscal quarter
thereafter the minimum Tangible Net Worth required during the
immediately preceding fiscal quarter plus 50% of the Net Income (if
positive) of the Borrower for the immediately preceding fiscal quarter
plus 100% of any increase in Tangible Net Worth during such fiscal
quarter resulting from any merger, sale or issuance of equity.
8 Negative Covenants.
The Borrower covenants and agrees with the Agent and the Banks that
prior to the termination of this Agreement it will not, and will not suffer or
permit any of its Subsidiaries or the Guarantor to, do any of the following:
8.1 Indebtedness. Create, incur, suffer or permit to exist, or
assume or guarantee, directly or indirectly, or become or remain liable with
respect to any Indebtedness which constitutes Borrowed Money Indebtedness,
whether direct, indirect, absolute, contingent or otherwise, except (subject to
Section 7.3 hereof) the following:
(a) Borrowed Money Indebtedness of the Borrower and its
Subsidiaries outstanding on the Effective Date and described on
Exhibit H hereto or disclosed to the Agent in the financial statements
delivered on or prior to the Effective Date pursuant to Section 7.2
hereof;
(b) Borrowed Money Indebtedness evidenced by the Notes
(including contingent liabilities under the Guaranty);
(c) Borrowed Money Indebtedness evidenced by the M-I
Drilling Facility (including contingent liabilities of the Borrower
with respect thereto);
(d) Borrowed Money Indebtedness of any Subsidiary owing
to the Borrower or another wholly-owned Subsidiary and Borrowed Money
Indebtedness of Borrower owing to any Subsidiary, provided such
Borrowed Money Indebtedness is expressly subordinated, in a manner
reasonably acceptable to the Agent, to the payment in full of all
Obligations of Borrower under the Loan Documents;
(e) contingent liabilities incurred by M-I by with
respect to performance letters of credit and bid and performance bonds
required by M-I in support of contracts entered into by M-I in the
ordinary course of its business (or guaranties of such contingent
liabilities by the Borrower);
<PAGE> 10
(f) other Borrowed Money Indebtedness of the Borrower or
any of its Subsidiaries in an aggregate principal amount at any one
time outstanding up to but not exceeding $20,000,000, provided that
the aggregate principal amount of Borrowed Money Indebtedness of the
Subsidiaries of the Borrower (exclusive of Borrowed Money Indebtedness
permitted under clauses (a) through (d) above) shall not exceed
$10,000,000 in the aggregate at any one time outstanding and provided
further that all Borrowed Money Indebtedness incurred by the Borrower
or by any U.S. Subsidiary of Borrower shall take the form of purchase
money indebtedness or Capital Lease Obligations;
(g) Borrowed Money Indebtedness evidenced by the 1996
Note Purchase Agreements in an aggregate principal amount not to
exceed $50,000,000 (including contingent liability of the Guarantor
with respect thereto) provided that the 1996 Note Purchase Agreements
shall be in form and substance reasonably satisfactory to the Agent
and the Banks, and
(h) obligations under any interest rate swap agreement,
interest rate cap agreement or similar arrangement entered into
between the Borrower and any Bank for the purpose of reducing
Borrower's exposure to interest rate risk and not for speculative
purposes.
8.2 Liens. Create or suffer to exist any Lien upon any of its
Property now owned or hereafter acquired, or acquire any Property upon any
conditional sale or other title retention device or arrangement or any purchase
money security agreement; or in any manner directly or indirectly sell, assign,
pledge or otherwise transfer any of its Accounts or General Intangibles;
provided, however, that the Borrower, any of its Subsidiaries or the Guarantor
may create or suffer to exist: (a) artisans' or mechanics' Liens arising in the
ordinary course of business, and Liens for taxes, but only to the extent that
payment thereof shall not at the time be due or if due, the payment thereof is
being diligently contested in good faith and adequate reserves, if required by
GAAP, have been set aside therefor; (b) Liens in effect on the Effective Date
and described on Exhibit I hereto or disclosed to the Agent in the financial
statements delivered on or prior to the Effective Date pursuant to Section 7.2
hereof, provided that neither the Indebtedness secured thereby nor the Property
covered thereby shall increase after the Effective Date without the prior
written consent of the Majority Banks; (c) normal encumbrances and restrictions
on title which do not secure Borrowed Money Indebtedness and which do not have
a Material Adverse Effect; (d) Liens in favor of the Agent or any Bank under
the Loan Documents; (e) Liens incurred or deposits made in the ordinary course
of business (i) in connection with workmen's compensation, unemployment
insurance, social security and other like laws, or (ii) to secure insurance in
the ordinary course of business, the performance of bids, tenders, contracts,
leases, licenses, statutory obligations, surety, appeal and performance bonds
and other similar obligations incurred in the ordinary course of business, not,
in any of the cases specified in this clause (ii), incurred in connection with
the borrowing of money, the obtaining of advances or the payment of the
deferred purchase price of Property; (f) attachments, judgments and other
similar Liens arising in connection with the court proceedings, provided that
the execution and enforcement of such Liens are effectively stayed and the
claims secured thereby are being actively contested in good faith with adequate
reserves made therefor in accordance with GAAP; (g) Liens imposed by law, such
as carriers', warehousemen's, mechanics', materialmen's and vendors' liens,
incurred in good faith in the ordinary course of business and securing
obligations which are not yet due or which are being contested
<PAGE> 11
in good faith by appropriate proceedings if adequate reserves with respect
thereto are maintained in accordance with GAAP; (h) zoning restrictions,
easements, licenses, reservations, provisions, covenants, conditions, waivers,
and restrictions on the use of Property, and which do not in any case singly or
in the aggregate materially impair the present use or value of the Property
subject to any such restriction or materially interfere with the ordinary
conduct of the business of the Borrower, any of its Subsidiaries or the
Guarantor; (i) Liens securing the Indebtedness incurred by non-U.S.
Subsidiaries of the Borrower permitted under Section 8.1(f) covering Property
owned by the applicable non- U.S. Subsidiaries of the Borrower, and (j)
extensions, renewals and replacements of Liens referred to in paragraphs (a)
through (i) of this Section; provided that any such extension, renewal or
replacement Lien shall be limited to the Property or assets covered by the Lien
extended, renewed or replaced and that the Indebtedness secured by any such
extension, renewal or replacement Lien shall be in an amount not greater than
the amount of the Indebtedness secured by the Lien extended, renewed or
replaced.
<PAGE> 1
EXHIBIT 10.2
LOAN AGREEMENT
($40,000,000 REVOLVING LOAN FACILITY)
DATED AS OF APRIL 4, 1996
AMONG
M-I DRILLING FLUIDS, L.L.C.,
AS BORROWER;
TEXAS COMMERCE BANK NATIONAL ASSOCIATION,
AS AGENT AND AS A BANK,
AND
ABN AMRO BANK N.V., HOUSTON AGENCY AND DEN NORSKE BANK AS,
AS CO-AGENTS AND AS BANKS,
AND
THE OTHER BANKS NOW OR HEREAFTER
PARTIES HERETO
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
1. Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
-----------
1.1 Certain Defined Terms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
---------------------
1.2 Miscellaneous . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
-------------
2. Commitments and Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
---------------------
2.1 Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
-----
2.2 Terminations or Reductions of Loan Commitments . . . . . . . . . . . . . . . . . . . . . . . . . . 12
----------------------------------------------
2.3 Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
----
2.4 Several Obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
-------------------
2.5 Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
-----
2.6 Use of Proceeds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
---------------
3. Borrowings, Payments and Prepayments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
------------------------------------
3.1 Borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
----------
3.2 Prepayments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
-----------
4. Payments; Pro Rata Treatment; Computations, Etc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
------------------------------------------------
4.1 Payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
--------
4.2 Pro Rata Treatment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
------------------
4.3 Certain Actions, Notices, Etc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
------------------------------
4.4 Non-Receipt of Funds by the Agent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
---------------------------------
4.5 Sharing of Payments, Etc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
-------------------------
4.6 Replacement of Banks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
--------------------
5. Conditions Precedent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
--------------------
5.1 Initial Loan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
------------
5.2 All Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
---------
6. Representations and Warranties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
------------------------------
6.1 Organization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
------------
6.2 Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
--------------------
6.3 Enforceable Obligations; Authorization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
--------------------------------------
6.4 Other Debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
----------
6.5 Litigation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
----------
6.6 Title . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
-----
6.7 Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
-----
6.8 Regulations U and X . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
-------------------
6.9 Subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
------------
6.10 ERISA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
-----
</TABLE>
i
<PAGE> 3
<TABLE>
<S> <C> <C>
6.11 Investment Company Act . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
----------------------
6.12 Public Utility Holding Company Act . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
----------------------------------
6.13 Solvency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
--------
6.14 Fiscal Year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
-----------
6.15 Compliance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
----------
6.16 Environmental Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
---------------------
7. Affirmative Covenants. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
---------------------
7.1 Taxes, Existence, Regulations, Property, Etc. . . . . . . . . . . . . . . . . . . . . . . . . . . 22
---------------------------------------------
7.2 Financial Statements and Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
------------------------------------
7.3 Financial Tests . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
---------------
7.4 Inspection . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
----------
7.5 Further Assurances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
------------------
7.6 Books and Records . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
-----------------
7.7 Notice of Certain Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
-------------------------
7.8 Capital Adequacy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
----------------
7.9 ERISA Information and Compliance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
--------------------------------
8. Negative Covenants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
------------------
8.1 Indebtedness . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
------------
8.2 Liens . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
-----
8.3 Contingent Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
----------------------
8.4 Mergers, Consolidations and Dispositions of Assets . . . . . . . . . . . . . . . . . . . . . . . . 27
--------------------------------------------------
8.5 Nature of Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
------------------
8.6 Transactions with Related Parties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
---------------------------------
8.7 Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
-----------
8.8 Organizational Documents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
------------------------
8.9 No Restriction on Payment of Dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
--------------------------------------
9. Defaults . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
--------
9.1 Events of Default . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
-----------------
9.2 Right of Setoff . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
---------------
9.3 Remedies Cumulative . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
-------------------
10. The Agent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
---------
10.1 Appointment, Powers and Immunities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
----------------------------------
10.2 Reliance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
--------
10.3 Defaults . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
--------
10.4 Rights as a Bank . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
----------------
10.5 Indemnification . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
---------------
10.6 Non-Reliance on Agent and Other Banks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
-------------------------------------
10.7 Failure to Act . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
--------------
10.8 Resignation or Removal of Agent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
-------------------------------
</TABLE>
ii
<PAGE> 4
<TABLE>
<S> <C> <C>
10.9 No Partnership . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
--------------
11. Miscellaneous . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
-------------
11.1 Waiver . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
------
11.2 Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
-------
11.3 Expenses, Etc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
--------------
11.4 Indemnification . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
---------------
11.5 Amendments, Etc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
----------------
11.6 Successors and Assigns . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
----------------------
11.7 Limitation of Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
----------------------
11.8 Survival . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
--------
11.9 Captions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
--------
11.10 Counterparts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
------------
11.11 Governing Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
-------------
11.12 Severability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
------------
11.13 Tax Forms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
---------
11.14 Venue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
-----
11.15 Confidential Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
------------------------
11.16 Amendment and Restatement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
-------------------------
</TABLE>
SCHEDULES
1 -- Interest Rate Agreement
EXHIBITS
A -- Request for Extension of Credit
B -- Note
C -- Assignment and Acceptance
D -- Compliance Certificate
E -- Subsidiaries
F -- Litigation
G -- Borrowed Money Indebtedness
H -- Liens
iii
<PAGE> 5
LOAN AGREEMENT
THIS LOAN AGREEMENT is made and entered into as of April 4, 1996 (the
"Effective Date"), by and among M-I DRILLING FLUIDS, L.L.C., a Delaware limited
liability company (the "Borrower"); each of the banks which is or may from time
to time become a party hereto in accordance with Section 11.6 hereof
(individually, a "Bank" and, collectively, the "Banks"), ABN AMRO BANK N.V.,
HOUSTON AGENCY and DEN NORSKE BANK AS, as Co-Agents, and TEXAS COMMERCE BANK
NATIONAL ASSOCIATION ("TCB"), a national banking association, as agent for the
Banks (in such capacity, together with its successors in such capacity, the
"Agent").
2. Commitments and Loans.
2.1 Loans. From time to time on or after the Effective Date and
during the Loan Availability Period, each Bank severally agrees, subject to all
of the terms and conditions of this Agreement (including, without limitation,
Sections 5.1 and 5.2 hereof), to make loans under this Section 2.1 to the
Borrower in an aggregate principal amount at any one time outstanding up to but
not exceeding such Bank's Loan Commitment Percentage of $40,000,000. Subject
to the conditions in this Agreement, any such Loan repaid prior to the
Termination Date may be reborrowed pursuant to the terms of this Agreement;
provided, that any and all such Loans shall be due and payable in full at the
end of the Loan Availability Period. The Borrower, the Agent and the Banks
agree that Chapter 15 of the Texas Credit Code shall not apply to this
Agreement, the Notes or any Obligation. The aggregate of all Loans to be made
by the Banks in connection with a particular borrowing shall be equal to
$500,000 or a multiple of $100,000 in excess of $500,000.
2.2 Fees.
(a) The Borrower shall pay to the Agent for the account
of each Bank commitment fees for the period from the Effective Date to
and including the Termination Date at a rate per annum equal to
0.125%. Such commitment fees shall be computed (on the basis of the
actual number of days elapsed in a year composed of 360 days) on each
day and shall be based on the excess of (x) the aggregate amount of
each Bank's Loan Commitment for such day over (y) the aggregate unpaid
principal balance of such Bank's Note on such day. Accrued commitment
fees through each Quarterly Date prior to the Termination Date shall
be payable on the third (3rd) Business Day after such Quarterly Date.
Any accrued and unpaid commitment fees shall be due and payable on the
Termination Date.
2.3 Several Obligations. The failure of any Bank to make any Loan
to be made by it on the date specified therefor shall not relieve any other
Bank of its obligation to make its
<PAGE> 6
Loan on such date, but neither the Agent nor any Bank shall be responsible or
liable for the failure of any other Bank to make a Loan to be made by such
other Bank. Notwithstanding anything contained herein to the contrary, (a) no
Bank shall be required to make or maintain Loans at any time outstanding if as
a result the total Obligations to such Bank shall exceed the lesser of (1) such
Bank's Loan Commitment Percentage of all Obligations and (2) such Bank's Loan
Commitment Percentage of $40,000,000 and (b) if a Bank fails to make a Loan as
and when required hereunder, then upon each subsequent event which would
otherwise result in funds being paid to the defaulting Bank, the amount which
would have been paid to the defaulting Bank shall be divided among the
non-defaulting Banks ratably according to their respective Commitment
Percentages until the Obligations of each Bank (including the defaulting Bank)
are equal to such Bank's Commitment Percentage of the total Obligations.
2.4 Notes. The Loans made by each Bank shall be evidenced by a
single note of the Borrower (each, together with all renewals, extensions,
modifications and replacements thereof and substitutions therefor, a "Note,"
collectively, the "Notes") in substantially the form of Exhibit B hereto
payable to the order of such Bank in a principal amount equal to the Loan
Commitment of such Bank and otherwise duly completed. Each Bank is hereby
authorized by the Borrower to endorse on the schedule (or a continuation
thereof) that may be attached to each Note of such Bank, to the extent
applicable, the date, amount, type of and the applicable period of interest for
each Loan made by such Bank to the Borrower hereunder, and the amount of each
payment or prepayment of principal of such Loan received by such Bank,
provided, that any failure by such Bank to make any such endorsement shall not
affect the obligations of the Borrower under such Note or hereunder in respect
of such Loan.
2.5 Use of Proceeds. The proceeds of the Loans shall be used by
the Borrower for general corporate purposes.
3. Borrowings, Payments and Prepayments.
3.2 Prepayments.
(a) Optional Prepayments. Except as provided in the Interest Rate
Agreement, the Borrower shall have the right to prepay, on any Business Day, in
whole or in part, without the payment of any penalty or fee, Loans at any time
or from time to time, provided that the Borrower shall give the Agent notice of
each such prepayment as provided in Section 4.3 hereof. Each optional
prepayment on a Loan shall be in an amount at least equal to $250,000.
(b) Interest Payments. Accrued and unpaid interest on the unpaid
principal balance of the Notes shall be due and payable on the Interest Payment
Dates.
(c) Payments; Interest Rate Agreement. The Borrower shall pay all
amounts required to be paid under the Interest Rate Agreement, the Notes and
the other Loan Documents as and when due.
<PAGE> 7
7 Affirmative Covenants.
The Borrower covenants and agrees with the Agent and the Banks that
prior to the termination of this Agreement it will do, and cause each of its
Subsidiaries to do, and if necessary cause to be done, each and all of the
following:
7.3 Financial Tests. The Borrower will have and maintain (on a
consolidated basis):
(a) Debt to Total Capitalization Ratio - a Debt to Total
Capitalization Ratio of not greater than 30%.
(b) Tangible Net Worth - Tangible Net Worth of not less
than $180,000,000.
8 Negative Covenants.
The Borrower covenants and agrees with the Agent and the Banks that
prior to the termination of this Agreement it will not, and will not suffer or
permit any of its Subsidiaries to, do any of the following:
8.1 Indebtedness. Create, incur, suffer or permit to exist, or
assume or guarantee, directly or indirectly, or become or remain liable with
respect to any Indebtedness which constitutes Borrowed Money Indebtedness,
whether direct, indirect, absolute, contingent or otherwise, except (subject to
Section 7.3 hereof) the following:
(a) Borrowed Money Indebtedness of the Borrower and its
Subsidiaries outstanding on the Effective Date and described on
Exhibit G hereto or disclosed to the Agent in the financial statements
delivered on or prior to the Effective Date pursuant to Section 7.2
hereof;
(b) Borrowed Money Indebtedness evidenced by the Notes;
(c) Borrowed Money Indebtedness of any Subsidiary owing
to the Borrower or another wholly-owned Subsidiary;
(d) Borrowed Money Indebtedness of Borrower owing to any
Subsidiary, provided such Borrowed Money Indebtedness is expressly
subordinated, in a manner reasonably acceptable to the Agent, to the
payment in full of all Obligations of Borrower under the Loan
Documents;
(e) contingent liabilities incurred by the Borrower with
respect to performance letters of credit and bid and performance bonds
required by the Borrower in support of contracts entered into by
Borrower in the ordinary course of its business; and
<PAGE> 8
(f) other Borrowed Money Indebtedness of the Borrower or
any of its Subsidiaries that does not cause the Borrower to be in
default under the provisions of Section 7.3 hereof.
8.2 Liens. Create or suffer to exist any Lien upon any of its
Property now owned or hereafter acquired, or acquire any Property upon any
conditional sale or other title retention device or arrangement or any purchase
money security agreement; or in any manner directly or indirectly sell, assign,
pledge or otherwise transfer any of its Accounts or General Intangibles;
provided, however, that the Borrower or any of its Subsidiaries may create or
suffer to exist: (a) artisans' or mechanics' Liens arising in the ordinary
course of business, and Liens for taxes, but only to the extent that payment
thereof shall not at the time be due or if due, the payment thereof is being
diligently contested in good faith and adequate reserves, if required by GAAP,
have been set aside therefor; (b) Liens in effect on the Effective Date and
described on Exhibit H hereto or disclosed to the Agent in the financial
statements delivered on or prior to the Effective Date pursuant to Section 7.2
hereof, provided that neither the Indebtedness secured thereby nor the Property
covered thereby shall increase after the Effective Date without the prior
written consent of the Majority Banks; (c) normal encumbrances and restrictions
on title which do not secure Borrowed Money Indebtedness and which do not have
a Material Adverse Effect; (d) Liens in favor of the Agent or any Bank under
the Loan Documents; (e) Liens incurred or deposits made in the ordinary course
of business (i) in connection with workmen's compensation, unemployment
insurance, social security and other like laws, or (ii) to secure insurance in
the ordinary course of business, the performance of bids, tenders, contracts,
leases, licenses, statutory obligations, surety, appeal and performance bonds
and other similar obligations incurred in the ordinary course of business, not,
in any of the cases specified in this clause (ii), incurred in connection with
the borrowing of money, the obtaining of advances or the payment of the
deferred purchase price of Property; (f) attachments, judgments and other
similar Liens arising in connection with the court proceedings, provided that
the execution and enforcement of such Liens are effectively stayed and the
claims secured thereby are being actively contested in good faith with adequate
reserves made therefor in accordance with GAAP; (g) Liens imposed by law, such
as carriers', warehousemen's, mechanics', materialmen's and vendors' liens,
incurred in good faith in the ordinary course of business and securing
obligations which are not yet due or which are being contested in good faith by
appropriate proceedings if adequate reserves with respect thereto are
maintained in accordance with GAAP; (h) zoning restrictions, easements,
licenses, reservations, provisions, covenants, conditions, waivers, and
restrictions on the use of Property, and which do not in any case singly or in
the aggregate materially impair the present use or value of the Property
subject to any such restriction or materially interfere with the ordinary
conduct of the business of the Borrower or any of its Subsidiaries; (i) Liens
securing the Indebtedness permitted under Section 8.1(f) covering Property
owned by non-U.S. Subsidiaries of the Borrower obligated with respect to such
Indebtedness, and (j) extensions, renewals and replacements of Liens referred
to in paragraphs (a) through (i) of this Section; provided that any such
extension, renewal or replacement Lien shall be limited to the Property or
assets covered by the Lien extended, renewed or replaced and that the
Indebtedness secured
<PAGE> 9
by any such extension, renewal or replacement Lien shall be in an amount not
greater than the amount of the Indebtedness secured by the Lien extended,
renewed or replaced.
<PAGE> 1
EXHIBIT 10.3
================================================================================
SMITH INTERNATIONAL, INC.
NOTE AGREEMENT
DATED AS OF MAY 21, 1996
RE: $30,000,000 7.24% SENIOR GUARANTEED NOTES
DUE APRIL 2, 2001
AND
$20,000,000 7.63% SENIOR GUARANTEED NOTES
DUE APRIL 2, 2006
================================================================================
<PAGE> 2
TABLE OF CONTENTS
(Not a part of the Agreement)
<TABLE>
<CAPTION>
Section Heading Page
<S> <C>
SECTION 1. DESCRIPTION OF NOTES AND COMMITMENT . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Section 1.1. Description of Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
--------------------
Section 1.2. Commitment, Closing Date . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
------------------------
Section 1.3. Other Agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
----------------
Section 1.4. Security for the Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
----------------------
SECTION 2. PREPAYMENT OF NOTES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Section 2.1. Required Prepayments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
--------------------
Section 2.2. Optional Prepayment with Premium . . . . . . . . . . . . . . . . . . . . . . . 3
--------------------------------
Section 2.3. Prepayment on Change of Control . . . . . . . . . . . . . . . . . . . . . . . . 3
-------------------------------
Section 2.4. Prepayment upon Specified Asset Sale . . . . . . . . . . . . . . . . . . . . . 4
------------------------------------
Section 2.5. Notice of Optional Prepayments . . . . . . . . . . . . . . . . . . . . . . . . 8
------------------------------
Section 2.6. Application of Prepayments . . . . . . . . . . . . . . . . . . . . . . . . . . 9
--------------------------
Section 2.7. Direct Payment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
--------------
SECTION 3. REPRESENTATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Section 3.1. Representations of the Company . . . . . . . . . . . . . . . . . . . . . . . . 9
------------------------------
Section 3.2. Representations of the Purchaser . . . . . . . . . . . . . . . . . . . . . . . 9
--------------------------------
SECTION 4. CLOSING CONDITIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Section 4.1. Conditions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
----------
Section 4.2. Waiver of Conditions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
--------------------
SECTION 5. COMPANY COVENANTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Section 5.1. Corporate Existence, Etc . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
------------------------
Section 5.2. Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
---------
Section 5.3. Taxes, Claims for Labor and Materials; Compliance with Laws;
Environmental Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
------------------------------------------------------------
Section 5.4. Maintenance, Etc . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
----------------
Section 5.5. Nature of Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
------------------
Section 5.6. Current Ratio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
-------------
Section 5.7. Certain Ratios . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
--------------
Section 5.8. Consolidated Tangible Net Worth . . . . . . . . . . . . . . . . . . . . . . . . 15
-------------------------------
Section 5.9. Limitations on Funded Debt, and Current Debt . . . . . . . . . . . . . . . . . 15
--------------------------------------------
Section 5.10. Limitation on Liens . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
-------------------
Section 5.11. Dividends, Stock Purchases, Restricted Investments . . . . . . . . . . . . . . 18
--------------------------------------------------
Section 5.12. Mergers, Consolidations and Sales of Assets . . . . . . . . . . . . . . . . . . 19
-------------------------------------------
Section 5.13. Guaranties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
----------
</TABLE>
-1-
<PAGE> 3
<TABLE>
<S> <C>
Section 5.14. Repurchase of Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
-------------------
Section 5.15. Transactions with Affiliates . . . . . . . . . . . . . . . . . . . . . . . . . 24
----------------------------
Section 5.16. Termination of Pension Plans . . . . . . . . . . . . . . . . . . . . . . . . . 24
----------------------------
Section 5.17. Reports and Rights of Inspection . . . . . . . . . . . . . . . . . . . . . . . 25
--------------------------------
Section 5.18. Performance of Obligations . . . . . . . . . . . . . . . . . . . . . . . . . . 29
--------------------------
Section 5.19. Modifications to SI Loan Agreement . . . . . . . . . . . . . . . . . . . . . . 30
----------------------------------
Section 5.20. Additional Subsidiaries, Corporate Restructuring . . . . . . . . . . . . . . . 30
------------------------------------------------
Section 5.21. Ownership of ACQCO . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
------------------
SECTION 6. EVENTS OF DEFAULT AND REMEDIES THEREFOR . . . . . . . . . . . . . . . . . . . . . . . . 30
Section 6.1. Events of Default . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
-----------------
Section 6.2. Acceleration of Maturities . . . . . . . . . . . . . . . . . . . . . . . . . . 33
--------------------------
Section 6.3. Rescission of Acceleration . . . . . . . . . . . . . . . . . . . . . . . . . . 33
--------------------------
SECTION 7. AMENDMENTS, WAIVERS AND CONSENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
Section 7.1. Consent Required . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
----------------
Section 7.2. Solicitation of Holders . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
-----------------------
Section 7.3. Effect of Amendment or Waiver . . . . . . . . . . . . . . . . . . . . . . . . . 34
-----------------------------
SECTION 8. INTERPRETATION OF AGREEMENT; DEFINITIONS . . . . . . . . . . . . . . . . . . . . . . . . 34
Section 8.1. Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
-----------
Section 8.2. Accounting Principles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50
---------------------
Section 8.3. Directly or Indirectly . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50
----------------------
SECTION 9. MISCELLANEOUS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51
Section 9.1. Registered Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51
----------------
Section 9.2. Exchange of Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51
-----------------
Section 9.3. Loss, Theft, Etc. of Notes . . . . . . . . . . . . . . . . . . . . . . . . . . 51
--------------------------
Section 9.4. Expenses, Stamp Tax Indemnity . . . . . . . . . . . . . . . . . . . . . . . . . 51
-----------------------------
Section 9.5. Powers and Rights Not Waived; Remedies Cumulative . . . . . . . . . . . . . . . 52
-------------------------------------------------
Section 9.6. Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52
-------
Section 9.7. Environmental Indemnity and Covenant Not to Sue . . . . . . . . . . . . . . . . 53
-----------------------------------------------
Section 9.8. Submission to Jurisdiction . . . . . . . . . . . . . . . . . . . . . . . . . . 54
--------------------------
Section 9.9. Successors and Assigns . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55
----------------------
Section 9.10. Survival of Covenants and Representations . . . . . . . . . . . . . . . . . . . 55
-----------------------------------------
Section 9.11. Severability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55
------------
Section 9.12. Governing Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55
-------------
Section 9.13. Maximum Interest Payable . . . . . . . . . . . . . . . . . . . . . . . . . . . 55
------------------------
Section 9.14. Captions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56
--------
</TABLE>
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<PAGE> 4
ATTACHMENTS TO NOTE AGREEMENT:
<TABLE>
<S> <C> <C>
Schedule I -- Names and Addresses of Purchasers and Amounts of Commitments
Schedule II -- Description of Funded Debt, Liens, Restricted Investments, Idle Assets and
Subsidiaries as of March 31, 1996
Exhibit A -- Form of Class A 7.24% Senior Guaranteed Note due April 2, 2001
Exhibit A-1 -- Form of Class B 7.63% Senior Guaranteed Note due April 2, 2006
Exhibit B-1 -- Representations and Warranties of the Company
Exhibit B-2 -- Representations and Warranties of ACQCO
Exhibit C -- Description of Special Counsel's Closing Opinion
Exhibit D-1 -- Description of Closing Opinion of Counsel to the Company
Exhibit D-2 -- Description of Closing Opinion of General Counsel to the Company and its Subsidiaries
Exhibit E -- Form of Guaranty of Smith International Acquisition Corp.
</TABLE>
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<PAGE> 5
SMITH INTERNATIONAL, INC.
16740 HARDY STREET
HOUSTON, TEXAS 77032
NOTE AGREEMENT
RE: $30,000,000 7.24% SENIOR GUARANTEED NOTES
DUE APRIL 2, 2001
AND
$20,000,000 7.63% SENIOR GUARANTEED NOTES
DUE APRIL 2, 2006
Dated as of
May 21, 1996
To the Purchaser named in Schedule I hereto which is a signatory of this
Agreement
Ladies and Gentlemen:
The undersigned, Smith International, Inc., a Delaware corporation
(the "Company"), agrees with you as follows:
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<PAGE> 6
SECTION 1. DESCRIPTION OF NOTES AND COMMITMENT.
Section 1.1 Description of Notes.
(a) The Company will authorize the issue and sale of $30,000,000
aggregate principal amount of its Class A Senior Guaranteed Notes (the "Class A
Notes") to be dated the date of issue, to bear interest from such date at the
rate of 7.24% per annum, payable semi-annually on the second day of each April
and October in each year (commencing October 2, 1996) and at maturity and to
bear interest on overdue principal (including any overdue required or optional
prepayment of principal) and premium, if any, and (to the extent legally
enforceable) on any overdue installment of interest at the applicable Overdue
Rate after the date due, whether by acceleration or otherwise, until paid, to
be expressed to mature on April 2, 2001, and to be substantially in the form
attached hereto as Exhibit A-1.
(b) The Company will authorize the issue and sale of $20,000,000
aggregate principal amount of its Class B Senior Guaranteed Notes (the "Class B
Notes") to be dated the date of issue, to bear interest from such date at the
rate of 7.63% per annum, payable semi-annually on the second day of each April
and October in each year (commencing October 2, 1996) and at maturity and to
bear interest on overdue principal (including any overdue required or optional
prepayment of principal) and premium, if any, and (to the extent legally
enforceable) on any overdue installment of interest at the applicable Overdue
Rate after the date due, whether by acceleration or otherwise, until paid, to
be expressed to mature on April 2, 2006 (the "Class B Maturity Date"), and to
be substantially in the form attached hereto as Exhibit A-2.
(c) The term "Notes" as used herein shall include each Class A
Note or Class B Note (as applicable) delivered pursuant to this Agreement and
the separate agreements with the other purchasers named in Schedule I. You and
the other purchasers named in Schedule I are hereinafter sometimes referred to
as the "Purchasers". The terms which are capitalized herein shall have the
meanings set forth in Section 8.1 unless the context shall otherwise require.
(d) Interest on the Notes shall be computed on the basis of a
360-day year of twelve 30-day months. The Notes are not subject to prepayment
or redemption at the option of the Company prior to their expressed maturity
dates except on the terms and conditions and in the amounts and with the
premium, if any, set forth in Section 2 of this Agreement.
Section1.4 Security for the Notes. The Notes will be entitled
to the benefit of the following contract and agreement (together with any other
guaranty agreements executed and delivered pursuant to the requirements of
Section 5.20 hereof and any amendments, replacements or restatements of the
foregoing, individually, a "Subsidiary Guaranty" and collectively, the
"Subsidiary Guaranties"): the Guaranty of ACQCO in favor of the holders of the
Notes to be dated as of the Closing Date substantially in the form of Exhibit E
hereto (the "ACQCO Guaranty").
SECTION 2. PREPAYMENT OF NOTES.
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<PAGE> 7
Section 2.1 Required Prepayments. The Company covenants and
agrees with respect to the Class B Notes only, that on April 2, 2001 and on
April 2 of each year thereafter until and including the Class B Maturity Date
(or if any such date shall not be a Business Day, the immediately following
Business Day) (each a "Class B Mandatory Prepayment Date"), it will prepay an
amount equal to the lesser of $3,333,333.33 and the entire principal amount of
the Class B Notes outstanding, together with interest accrued thereon to such
Mandatory Prepayment Date, but without premium.
In the event that the Company shall prepay less than all of the Class
B Notes pursuant to Section 2.2 or Section 2.3 hereof, the amounts of the
prepayments thereafter required by this Section 2.1 shall be reduced by an
amount which is the same percentage of such required prepayment as the
percentage that the principal amount of Class B Notes prepaid pursuant to
Section 2.2 or Section 2.3 hereof, as the case may be, is of the aggregate
principal amount of outstanding Class B Notes immediately prior to such
prepayment.
SECTION 5. COMPANY COVENANTS.
From and after the Closing Date and continuing so long as any amount
remains unpaid on any Note:
Section 5.6 Current Ratio. The Company will at all times keep
and maintain the ratio of Consolidated Current Assets to Consolidated Current
Liabilities at not less than 2.00 to 1.00.
Section 5.7 Certain Ratios. (a) The Company will at all times
maintain the ratio of Consolidated Indebtedness to Consolidated Total
Capitalization at not more than:
<TABLE>
<CAPTION>
During the Period Ratio
----------------- -----
<S> <C>
Closing Date through April 30, 1998 0.40 to 1.00
May 1, 1998 and thereafter 0.35 to 1.00
</TABLE>
For purposes of determining compliance with this Section 5.7(A), the term
"Consolidated Indebtedness" shall not include Indebtedness of M-I Drilling
under the M-I Drilling Facility or other Indebtedness of M-I Drilling incurred
within the limitations of Section 5.9(A)(5) if and to the extent the repayment
of all of such Indebtedness is absolutely, irrevocably and unconditionally
guaranteed by Halliburton and not by the Company.
The Company will not at any time permit the ratio of
Consolidated EBIT for the immediately preceding four fiscal quarter period to
Consolidated Interest Expense for the
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<PAGE> 8
immediately preceding four fiscal quarter period to be less than 2.50 to 1.00.
Section 5.8 Consolidated Tangible Net Worth. The Company will at
all times keep and maintain Consolidated Tangible Net Worth at an amount not
less than the sum of (a) $150,000,000 plus (b) 50% of Consolidated Net Earnings
computed on a cumulative basis for each of the elapsed fiscal years ending
after January 1, 1994; provided that notwithstanding that Consolidated Net
Earnings for any of such elapsed fiscal years may be a deficit figure, no
reduction as a result thereof shall be made in the sum to be maintained
pursuant hereto.
Section 5.9 Limitations on Funded Debt, and Current Debt. (a)
The Company will not, and will not permit any Subsidiary to, create, assume,
guarantee or otherwise incur or in any manner be or become liable in respect of
any Funded Debt or Current Debt, except:
Funded Debt and Current Debt of the Company and its
Subsidiaries outstanding on and as of March 31, 1996, and described on
Schedule II hereto;
Funded Debt of the Company evidenced by the Notes;
additional Funded Debt and Current Debt of the
Company and its Subsidiaries (other than M-I Drilling and its
Subsidiaries, provision for which is contained in Section 5.9(A)(5)),
provided that: (y) immediately prior to the creation, issuance,
assumption, guarantee or incurrence thereof, no Default or Event of
Default exists and (z) immediately after giving effect thereto and to
the application of the proceeds thereof:
in the case of Funded Debt, as at the end of
the immediately preceding fiscal quarter of the Company and
its Subsidiaries, the ratio of Consolidated EBIT for the
immediately preceding four fiscal quarter period to Pro Forma
Consolidated Interest Expense for the immediately succeeding
four fiscal quarter period would not be less than 2.50 to
1.00; and
in the case of (y) any Funded Debt of any
Foreign Subsidiary (other than Foreign Subsidiaries of M-I
Drilling, provision for which is contained in Section
5.9(A)(5)) and (z) any Funded Debt or Current Debt of the
Company secured by Liens permitted by Section 5.10(I), the sum
of (A) Funded Debt of the Company secured by Liens permitted
by Section 5.10(I) plus (B) Indebtedness of M-I Drilling and
its Subsidiaries which may be incurred within the limitations
of clause (5) of this Section 5.9(A), whether or not the same
is outstanding, plus (C) Indebtedness of Foreign Subsidiaries
(other than Foreign Subsidiaries of M-I Drilling), would not
exceed 20% of Consolidated Tangible Net Worth;
in the case of Funded Debt and Current Debt
of any Domestic Subsidiary, such Funded Debt and Current Debt
shall have been created, issued, assumed, guaranteed or
incurred within the limitations of Section 5.10(G) hereof; and
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<PAGE> 9
no Default or Event of Default would exist;
Funded Debt or Current Debt of a Subsidiary to the
Company;
Funded Debt or Current Debt of M-I Drilling and its
Subsidiaries not exceeding the sum of (i) $40,000,000 in the aggregate
at any one time outstanding under the M-I Drilling Loan Facility or
any Qualified Replacement Facility (including Guaranties thereof by
the Company to the extent, and only to the extent, of its ownership
interest in M-I Drilling) plus (ii) $7,400,000 in the aggregate; and
Funded Debt or Current Debt of ACQCO evidenced by (i)
the ACQCO Guaranty, (ii) the Guaranty of ACQCO of Indebtedness
outstanding under the SI Loan Agreement, (iii) the Guaranty of ACQCO
relating to the Senior Guaranteed Notes -- 1992 and (iv) the Guaranty
of ACQCO relating to the Senior Guaranteed Notes - 1994, and any other
Guaranty of a Subsidiary under SECTION 5.20.
The renewal, extension or refunding of any Funded Debt or
Current Debt issued, incurred or outstanding pursuant to Section 5.9(A) shall
constitute the issuance of additional Funded Debt or Current Debt which is, in
turn, subject to the limitations of the applicable provisions of this Section
5.9.
No corporation which becomes a Subsidiary of the Company after
the date hereof may have outstanding any Funded Debt or Current Debt other than
Funded Debt or Current Debt which may be and is issued, incurred and
outstanding pursuant to Section 5.9(A). Without limiting the foregoing, the
Company shall be deemed for all purposes of this Section 5.9 to have created,
assumed or incurred all Funded Debt or Current Debt of any corporation
outstanding immediately prior to such time as such corporation is effectively
merged with or into the Company pursuant to the terms of Section 5.12(A)
hereof.
Section 5.10 Limitation on Liens. The Company will not, and will
not permit any Subsidiary to, create or incur, or suffer to be incurred or to
exist, any Lien on its or their property or assets, whether now owned or
hereafter acquired, or upon any income or profits therefrom, or transfer any
property for the purpose of subjecting the same to the payment of obligations
in priority to the payment of its or their general creditors, or acquire or
agree to acquire, or permit any Subsidiary to acquire, any property or assets
upon conditional sales agreements or other title retention devices, except:
Liens for taxes and assessments or governmental
charges or levies and Liens securing claims or demands of mechanics
and materialmen, provided that payment thereof is not at the time
required by Section 5.3 and for which adequate reserves in accordance
with GAAP are maintained;
Liens of or resulting from any judgment or award, the
time for the appeal or petition for rehearing of which shall not have
expired, or in respect of which the
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<PAGE> 10
Company or a Subsidiary shall at any time in good faith be prosecuting
an appeal or proceeding for a review and in respect of which a stay of
execution pending such appeal or proceeding for review shall have been
secured and for which adequate reserves in accordance with GAAP are
maintained;
Liens incidental to the conduct of business or the
ownership of properties and assets (including Liens in connection with
worker's compensation, unemployment insurance and other like laws,
warehousemen's and attorneys' liens and statutory landlords' liens)
and Liens to secure the performance of bids, tenders or trade
contracts, or to secure statutory obligations, surety or appeal bonds
or other Liens of like general nature incurred in the ordinary course
of business and not in connection with the borrowing of money,
provided in each case, the obligation secured is not overdue or, if
overdue, is being contested in good faith by appropriate actions or
proceedings and for which adequate reserves in accordance with GAAP
are maintained and which do not in any event materially impair the use
of such properties in the operation of the business of the Company and
its Subsidiaries taken as a whole or the value of such properties for
the purposes of such business;
minor survey exceptions or minor encumbrances,
easements or reservations, or rights of others for rights-of-way,
utilities and other similar purposes, or zoning or other restrictions
as to the use of real properties, which are necessary for the conduct
of the activities of the Company and its Subsidiaries or which
customarily exist on properties of corporations engaged in similar
activities and similarly situated and which do not in any event
materially impair their use in the operation of the business of the
Company and its Subsidiaries taken as a whole or the value of such
properties for the purposes of such business;
Liens securing Indebtedness of a Wholly-owned
Subsidiary to the Company or to another Wholly-owned Subsidiary;
Liens described on Schedule II hereto;
Liens created or incurred on or after the Closing
Date given to secure the payment of the purchase price incurred in
connection with the acquisition or improvement of property or assets
useful and intended to be used in carrying on the business of the
Company or a Subsidiary, including Liens existing on such property or
assets at the time of acquisition thereof or at the time of
acquisition by the Company or a Subsidiary of any business entity then
owning such property or assets, provided that (1) the Lien shall
attach solely to the property or assets acquired or improved, (2) such
Lien shall have been created or incurred within 120 days of the date
of acquisition or completion of improvements, (3) at the time of
acquisition or improvement of such property or assets, the aggregate
amount remaining unpaid on all Indebtedness secured by Liens on such
property or assets, whether or not assumed by the Company or a
Subsidiary, shall not exceed an amount equal to 100% of the lesser of
the total purchase price or fair market value at the time of
acquisition of, or completion of the improvements to, such property
II-5
<PAGE> 11
or assets (as determined in good faith by the Board of Directors of
the Company), and (4) the incurrence of such Indebtedness does not
violate the applicable limitations provided in Section 5.9;
Liens existing on property or assets of any
corporation at the time such corporation becomes a Foreign Subsidiary
(if such Liens were not incurred by such corporation in connection
with, or in the anticipation of, the acquisition, purchase, merger or
consolidation of such corporation by, with or into the Company or a
Foreign Subsidiary); provided that (1) the Lien shall attach solely to
property or assets to which it attached before such acquisition,
purchase, merger or consolidation, (2) at the time of acquisition of
such corporation, the aggregate amount remaining unpaid on all
Indebtedness secured by Liens on such property or assets, whether or
not assumed by the Company or a Foreign Subsidiary, shall not exceed
in aggregate an amount equal to 100% of the lesser of the total price
or fair market value at the time of acquisition of such corporation
(as determined in good faith by the Board of Directors of the
Company), and (3) the incurrence of such Indebtedness does not violate
the applicable limitations provided in Section 5.9;
Liens incurred on or after the Closing Date given to
secure Funded Debt or Current Debt of the Company or any of its
Foreign Subsidiaries in addition to the Liens permitted by the
preceding clauses (a) through (h) hereof; provided that all Funded
Debt and Current Debt of the Company and its Foreign Subsidiaries
secured by such Liens shall have been incurred within the limitations
provided in Sections 5.9(A)(3), and provided further that in the event
that (x) any property or assets of the Company or any of its Foreign
Subsidiaries is subjected to a Lien pursuant to this Section 5.10(H)
and (y) the Funded Debt or Current Debt secured by such Liens exceeds
in the aggregate $15,000,000 within the United States or outside the
United States or in the aggregate $5,000,000 with respect to Liens on
assets located in the United States, the Company will make or cause to
be made provision whereby the Notes will be secured equally and
ratably with all other obligations secured by any such Liens, and the
Notes shall have the benefit, to the full extent of the law, of an
equitable Lien on such property or assets securing the Notes, under
the terms and conditions satisfactory to the holders of the Notes and
the Company shall provide an opinion to the holders of the Notes to
the effect that the Liens and documentation related thereto granted to
the holders of the Notes are valid, binding and enforceable pursuant
to the terms of documents creating such Liens and properly perfected;
and
any extension, renewal or replacement of any Lien
permitted by the preceding clause (f) hereof in respect of the same
property theretofore subject to such Lien in connection with the
extension, renewal or refunding of the Indebtedness secured thereby;
provided that (1) such Lien shall attach solely to the same such
property and (2) such Indebtedness shall have been incurred within the
limitations provided in Sections 5.9.
Section 5.11 Dividends, Stock Purchases, Restricted Investments.
(a) The Company will not and the Company will not permit any Subsidiary to,
directly or indirectly, or through
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<PAGE> 12
any Affiliate, declare or make or incur any liability to declare or make any
Distribution and neither the Company nor any of its Subsidiaries will make or
authorize any Restricted Investment, unless, immediately after giving effect to
the proposed Distribution or Restricted Investment, the aggregate amount of
Distributions declared in the case of dividends or made in the case of other
Distributions plus the aggregate amount of Restricted Investments made by the
Company and its Subsidiaries (valued immediately after the making of such
Restricted Investment as provided in the definition thereof) during the period
from and after March 1, 1993 to and including the date of declaration in the
case of a dividend, the date of payment in the case of any other Distribution
and the date such Investment is committed to in the case of a Restricted
Investment would not exceed the sum of:
$5,000,000; plus
50% of Consolidated Net Earnings (or if such
Consolidated Net Earnings is a deficit figure, then minus 100% of such
deficit) for such period determined on a cumulative basis commencing
on March 1, 1993, to and including the date of such declaration,
payment or commitment; plus
an amount equal to the aggregate net cash proceeds
received by the Company from the sale on or after March 1, 1993 of
shares of any class of the common stock of the Company.
For the purposes of making computations under paragraph (a) of
this Section 5.11, the amount of any Distribution declared, paid or distributed
or Restricted Investment made in property or assets of the Company or a
Subsidiary shall be deemed to be the greater of the book value or fair market
value (as determined in good faith by the Company's Board of Directors), of
such property or assets as of the date of declaration in the case of a
dividend, the date of payment in the case of any other Distribution and the
date the Investment is committed to in the case of any Restricted Investment.
Any corporation which becomes a Subsidiary after the date of this
Agreement shall be deemed to have made, at the time it becomes a Subsidiary,
all Restricted Investments of such corporation existing immediately after it
becomes a Subsidiary. Any corporation, other than the Company, which is a
party to any transaction permitted pursuant to Section 5.12(A) shall be deemed
to have made, at the time any such transaction shall become effective, all
Restricted Investments of such corporation existing immediately prior to the
effective time of such transaction.
The Company will not authorize a Distribution on its capital
stock which is not payable within 60 days of authorization.
The Company will not authorize or make a Distribution on its
capital stock and neither the Company nor any Subsidiary will make any
Restricted Investment if after giving
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<PAGE> 13
effect to the proposed Distribution or Restricted Investment a Default or an
Event of Default would exist.
Section 5.12 Mergers, Consolidations and Sales of Assets. (a)
The Company will not, and will not permit any Subsidiary to, consolidate with
or be a party to a merger with any other corporation, or sell, lease or
otherwise dispose of all or substantially all of its assets; provided that:
any Subsidiary may merge or consolidate with or into
the Company or any Wholly-owned Subsidiary so long as in any merger or
consolidation involving the Company, the Company shall be the
surviving or continuing corporation;
the Company may consolidate or merge with any other
corporation (other than a corporation described in clause (1)
immediately above) if (i) the corporation which results from such
merger or consolidation (if other than the Company, the "surviving
corporation"), is organized under the laws of any State of the United
States or the District of Columbia, (ii) the due and punctual payment
of the principal of and premium, if any, and interest on all of the
Notes, according to their tenor, and the due and punctual performance
and observation of all of the covenants in the Notes and this
Agreement to be performed or observed by the Company are expressly
assumed in writing by the surviving corporation and the surviving
corporation shall furnish the holders of the Notes an opinion of
counsel satisfactory to such holders to the effect that the instrument
of assumption has been duly authorized, executed and delivered and
constitutes the legal, valid and binding contract and agreement of the
surviving corporation enforceable in accordance with its terms, except
as enforcement of such terms may be limited by bankruptcy, insolvency,
reorganization, moratorium, fraudulent conveyance or similar laws
affecting the enforcement of creditors' rights generally and by
general equitable principles, (iii) at the time of such consolidation
or merger and immediately after giving effect thereto, no Default or
Event of Default would exist and (iv) the Company shall have
theretofore complied in all respects with Section 2.3 hereof;
the Company may sell or otherwise dispose of all or
substantially all of its assets (other than stock and Indebtedness of
a Subsidiary, which may only be sold or otherwise disposed of pursuant
to Section 5.12(C)) to any Person for consideration which represents
the fair market value of such assets (as determined in good faith by
the Board of Directors of the Company, a copy of which determination
certified by the Secretary or an Assistant Secretary of the Company
shall have been furnished to the holders of the Notes) at the time of
such sale or other disposition if (i) the acquiring Person is a
corporation organized under the laws of any State of the United States
or District of Columbia, (ii) the due and punctual payment of the
principal of and premium, if any, and interest on all the Notes,
according to their tenor, and the due and punctual performance and
observance of all of the covenants in the Notes and in this Agreement
to be performed or observed by the Company are expressly assumed in
writing by the acquiring corporation and the acquiring corporation
shall furnish the holders of the Notes an opinion of counsel
satisfactory to such holders to the effect that the instrument of
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<PAGE> 14
assumption has been duly authorized, executed and delivered and
constitutes the legal, valid and binding contract and agreement of
such acquiring corporation enforceable in accordance with its terms,
except as enforcement of such terms may be limited by bankruptcy,
insolvency, reorganization, moratorium, fraudulent conveyance or
similar laws affecting the enforcement of creditors' rights generally
and by general equitable principles, (iii) at the time of such sale or
disposition and immediately after giving effect thereto, no Default or
Event of Default would exist and (iv) the Company shall have
theretofore complied in all respects with Section 2.3 hereof.
The Company will not, and will not permit any Subsidiary to,
sell, lease, transfer, abandon or otherwise dispose of, assets (other than
assets sold by the Company to customers or by the Company to a Wholly-owned
Subsidiary which then and thereupon sells such assets to customers, in any such
case in the ordinary course of business); provided that the foregoing
restrictions do not apply to:
the sale, lease, transfer or other disposition of
assets of a Subsidiary to the Company or a Wholly-owned Subsidiary; or
the sale of such assets for cash or other property to
a Person or Persons other than an Affiliate if all of the following
conditions are met:
such assets (valued at net book value) do
not, together with all other assets of the Company and its
Subsidiaries previously disposed of during the same fiscal
year (other than to customers in the ordinary course of
business), exceed 10% of Consolidated Net Tangible Assets, and
such assets (valued at net book value) do not, together with
all other assets of the Company and its Subsidiaries
previously disposed of during the period from the Closing Date
to and including the date of the sale of such assets (other
than to customers in the ordinary course of business) exceed
25% of Consolidated Net Tangible Assets, in each such case
determined as of the end of the immediately preceding fiscal
year;
such assets did not, together with all other
assets of the Company and its Subsidiaries previously disposed
of during the same fiscal year (other than to customers in the
ordinary course of business), contribute more than 10% of
Consolidated EBIT for the immediately preceding fiscal year of
the Company and such assets did not, together with all other
assets of the Company and its Subsidiaries previously disposed
of during the period from the Closing Date to and including
the date of the sale of such assets (other than to customers
in the ordinary course of business) contribute more than 25%
of Consolidated EBIT for the immediately preceding fiscal year
plus EBIT contributed by assets sold from the Closing Date to
the current fiscal year;
in the opinion of (A) the Company's Board of
Directors (in the
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<PAGE> 15
event the fair market value of such assets being disposed of equals or
exceeds $2,500,000) or (B) a Responsible Officer (in the event the
fair market value of such assets being disposed of is less than
$2,500,000), the sale is for fair value and is in the best interests
of the Company; and
immediately after the consummation of the
transaction and after giving effect thereto, no Default or
Event of Default would exist;
provided, however, that for purposes of the foregoing calculation,
there shall not be included (A) any of the Idle Assets disposed of, or
(B) any assets the proceeds from the sale of which were or are used
first, to prepay the Notes pursuant to Section 2.4 and second, within
twelve months of the date of sale of such assets to either (y) the
acquisition of property or assets useful and intended to be used and
actually used in the operations of the Company and its Subsidiaries
and having a fair market value (as determined in good faith by the
Board of Directors of the Company) at least equal to that of the
assets so disposed of, reduced by the principal amount of Notes
prepaid pursuant to Section 2.4 from any sale of assets described in
clause (B) above, or (z) the prepayment, at any applicable prepayment
premium, on a pro rata basis, of Funded Debt of the Company (other
than (i) Subordinated Indebtedness of the Company or any of its
Subsidiaries and (ii) Guaranties by the Company of Funded Debt of
others). It is understood and agreed by the Company that, after
giving effect to any prepayment of the Notes pursuant to Section 2.4,
any such proceeds paid and applied to the prepayment of the Notes as
provided in the foregoing clause (z) shall be prepaid as and to the
extent provided in Section 2.2 of this Agreement.
Computations pursuant to this Section 5.12(B)(2) shall include
dispositions made pursuant to Section 5.12(C)(4) and computations pursuant to
Section 5.12(C)(4) shall include dispositions made pursuant to this Section
5.12(B)(2).
The Company will not, and will not permit any Subsidiary to,
sell, pledge or otherwise dispose of any shares of the stock (including as
"stock" for the purposes of this Section any options or warrants to purchase
stock or other Securities exchangeable for or convertible into stock) of a
Subsidiary (said stock, options, warrants and other Securities herein called
"Subsidiary Stock") or any Indebtedness of any Subsidiary, nor will any
Subsidiary issue, sell, pledge or otherwise dispose of any shares of its own
Subsidiary Stock, provided that the foregoing restrictions do not apply to:
the issue of directors qualifying shares; or
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<PAGE> 16
the issue of Subsidiary Stock to the Company; or
the sale or other disposition of Subsidiary Stock to
the Company or any Wholly-owned Subsidiary; or
the sale or other disposition at one time to a Person
(other than directly or indirectly to an Affiliate) of the entire
Investment of the Company and its other Subsidiaries in any Subsidiary
if all of the following conditions are met:
the assets (valued at net book value) of the
Subsidiary do not, together with all other assets of the
Company and its Subsidiaries previously disposed of during the
same fiscal year (other than to customers in the ordinary
course of business), exceed 10% of Consolidated Net Tangible
Assets, and such assets (valued at net book value) of the
Subsidiary do not together with all other assets of the
Company and its Subsidiaries previously disposed of during the
period from the Closing Date to and including the date of the
sale of such assets (other than to customers in the ordinary
course of business) exceed 25% of Consolidated Net Tangible
Assets, in each such case determined as of the end of the
immediately preceding fiscal year;
the assets of the Subsidiary did not,
together with all other assets of the Company and its
Subsidiaries previously disposed of during the same fiscal
year (other than to customers in the ordinary course of
business), contribute more than 10% of Consolidated EBIT for
the immediately preceding fiscal year of the Company and such
assets did not, together with all other assets of the Company
and its Subsidiaries previously disposed of during the period
from the Closing Date to and including the date of the sale of
such assets (other than to customers in the ordinary course of
business) contribute more than 25% of Consolidated EBIT for
the immediately preceding fiscal year plus EBIT contributed by
assets sold from the Closing Date to the current fiscal year;
in the opinion of (A) the Company's Board of
Directors (in the event the fair market value of such assets
being disposed of equals or exceeds $2,500,000) or (B) a
Responsible Officer (in the event that the fair market value
of such assets being disposed of is less than $2,500,000), the
sale is for fair value and is in the best interests of the
Company;
immediately after the consummation of the
transaction and after giving effect thereto, such Subsidiary
shall have no Indebtedness of or continuing Investment in the
capital stock of the Company or of any Subsidiary and any such
Indebtedness or Investment shall have been discharged or
acquired, as the case may be, by the Company or a Subsidiary;
and
immediately after the consummation of the
transaction and after
II-11
<PAGE> 17
giving effect thereto, no Default or Event of Default would
exist;
provided, however, that for purposes of the foregoing calculation,
there shall not be included (A) any of the Idle Assets disposed of, or
(B) any assets the proceeds from the sale of which were or are used
first, to prepay the Notes pursuant to Section 2.4 and second, within
twelve months of the date of sale of such assets to either (y) the
acquisition of property or assets useful and intended to be used and
actually used in the operations of the Company and its Subsidiaries
and having a fair market value (as determined in good faith by the
Board of Directors of the Company) at least equal to that of the
assets so disposed of, reduced by the principal amount of Notes
prepaid pursuant to Section 2.4 from any sale of assets described in
(B) above, or (z) the prepayment, at any applicable prepayment
premium, on a pro rata basis, of Funded Debt of the Company (other
than (i) Subordinated Indebtedness of the Company or any of its
Subsidiaries and (ii) Guaranties by the Company of Funded Debt of
others). It is understood and agreed by the Company that, after
giving effect to any prepayment of the Notes pursuant to Section 2.4,
any such proceeds paid and applied to the prepayment of the Notes as
hereinabove provided shall be prepaid as and to the extent provided in
Section 2.2 of this Agreement.
Computations pursuant to this Section 5.12(C)(4) shall include
dispositions made pursuant to Section 5.12(B)(2) and computations pursuant to
Section 5.12(B)(2) shall include dispositions made pursuant to this Section
5.12(C)(4).
Reference is herein made to that certain Company Agreement entered
into as of January 20, 1995, by and among the Company, Sandvik AB, a company
duly organized and existing under the laws of Sweden ("Sandvik"), and
Megadiamond (the "Sandvik Agreement"), a true, correct and complete copy of
which has been provided to you. Notwithstanding anything in this Section 5.12
to the contrary, the Company shall be permitted to sell the "Shares" (as
defined in the Sandvik Agreement) to Sandvik pursuant to and in compliance with
the Sandvik Agreement.
SECTION 6. EVENTS OF DEFAULT AND REMEDIES THEREFOR.
Section 6.1 Events of Default. Any one or more of the following
shall constitute an "Event of Default" as such term is used herein:
Default shall occur in the payment of interest on any Note when the same
II-12
<PAGE> 18
shall have become due and such default shall continue for more than five
Business Days; or
Default shall occur in the making of any required
prepayment on any of the Notes as provided in Section 2.1; or
Default shall occur in the making of any other
payment of the principal of any Note or premium, if any, thereon at
the expressed or any accelerated maturity date or at any date fixed
for prepayment; or
Default shall occur in the observance or performance
of any covenant or agreement contained in Section 5.6 through Section
5.13; or
Default shall occur in the observance or performance
of any other provision of this Agreement which is not remedied within
30 days after the earlier of (1) the day on which a Responsible
Officer of the Company first obtains knowledge of such default, or (2)
the day on which written notice thereof is given to the Company by the
holder of any Note; or
A Plan shall fail to maintain the minimum funding
standard required by Section 412 of the Code for any plan year or a
waiver of such standard is sought or granted under Section 412(d) of
the Code, or a Plan is, shall have been or is likely to be, terminated
or the subject of termination proceedings under ERISA, or the Company
or an ERISA Affiliate has incurred or is likely to incur a liability
to or on account of a Plan under Section 515, 4062, 4063, 4064, 4201
or 4204 of ERISA, and there shall result from any such event or events
either a liability or a material risk of incurring a liability to the
PBGC or a Plan, which in the opinion of the Required Noteholders,
will have a Material Adverse Effect; or
Default shall be made in the payment when due
(whether by lapse or time, by declaration, by call for redemption or
otherwise) of the principal of or interest on any Indebtedness
outstanding under either the SI Loan Agreement or the M-I Drilling
Loan Facility or any other default shall occur under the SI Loan
Agreement or the M-I Drilling Loan Facility and in any such case such
default shall continue beyond the period of grace, if any, allowed
with respect thereto; or
Default shall be made in the payment when due
(whether by lapse of time, by declaration, by call for redemption or
otherwise) of the principal of or interest on any Indebtedness (other
than the Notes and other than Indebtedness outstanding under the SI
Loan Agreement or the M-I Drilling Loan Facility) of the Company and
its Subsidiaries in an aggregate outstanding amount of $2,500,000 or
more and such default shall continue beyond the period of grace, if
any, allowed with respect thereto; or
Default or the happening of any event shall occur under any indenture,
II-13
<PAGE> 19
agreement or other instrument under which any Indebtedness (other than
the Notes and other than Indebtedness outstanding under the SI Loan
Agreement or the M-I Drilling Loan Facility) of the Company and its
Subsidiaries may be issued in an aggregate outstanding amount of
$2,500,000 or more and such default or event shall continue for a
period of time sufficient to permit the acceleration of the maturity
of any Indebtedness of the Company or any Subsidiary outstanding
thereunder; or
Any representation or warranty made by the Company
herein, or made or deemed to have been made by the Company or any of
its Subsidiaries in any statement or certificate furnished by the
Company or such Subsidiary in connection with the consummation of the
issuance and delivery of the Notes or furnished by the Company or any
of its Subsidiaries pursuant hereto or pursuant to any of the
Subsidiary Guaranties, is untrue in any material respect as of the
date of the issuance or making thereof; or
Final judgment or judgments for the payment of money
aggregating in excess of $2,500,000 is or are outstanding against the
Company and its Subsidiaries or against any property or assets of
either and such judgments have remained unpaid, unvacated, unbonded or
unstayed by appeal or otherwise for a period of 45 days from the date
of its entry; or
Any Subsidiary Guaranty (including the Initial
Guaranties) shall cease to be in full force and effect for any reason
whatsoever, including, without limitation, a determination by any
governmental body or court that either such agreement is invalid, void
or unenforceable or any Subsidiary executing and delivering a
Subsidiary Guaranty or the Company shall contest or deny in writing
the validity or enforceability of any Subsidiary's obligations under
any Subsidiary Guaranty; or
A custodian, liquidator, trustee or receiver is
appointed for the Company or any of its Subsidiaries or for the major
part of the property of any such Person and is not discharged within
60 days after such appointment; or
The Company or any of its Subsidiaries becomes
insolvent or bankrupt, is generally not paying its debts as they
become due or makes an assignment for the benefit of creditors, or the
Company or any of its Subsidiaries applies for or consents to the
appointment of a custodian, liquidator, trustee or receiver for the
Company or any such Subsidiary or for the major part of the property
of any such Person; or
Bankruptcy, reorganization, arrangement or insolvency
proceedings, or other proceedings for relief under any bankruptcy or
similar law or laws for the relief of debtors, are instituted by or
against the Company or any of its Subsidiaries and, if instituted
against the Company or any of its Subsidiaries, are consented to or
are not dismissed within 60 days after such institution.
II-14
<PAGE> 20
SMITH INTERNATIONAL, INC.
7.24% CLASS A SENIOR GUARANTEED NOTE
DUE APRIL 2, 2001
PPN ___________
NO. MAY 21, 1996
$
SMITH INTERNATIONAL, INC., A DELAWARE CORPORATION (THE "COMPANY"), FOR
VALUE RECEIVED, HEREBY PROMISES TO PAY TO
or registered assigns
on the second day of April, 2001
the principal amount of
Dollars ($ )
and to pay interest (computed on the basis of a 360-day year of twelve 30-day
months) on the principal amount from time to time remaining unpaid hereon at
the rate of 7.24% per annum from the date hereof until maturity, payable semi-
annually on the second of each April and October in each year (commencing on
October 2, 1996) and at maturity. The Company agrees to pay interest on
overdue principal (including any overdue required or optional prepayment of
principal) and premium, if any, and (to the extent legally enforceable) on any
overdue installment of interest, at the Overdue Rate after the due date,
whether by acceleration or otherwise, until paid. "Overdue Rate" shall mean
the lesser of (a) the maximum interest rate permitted by law and (b) the
greater of (i) 9.24% per annum and (ii) 2% per annum over the rate which The
First National Bank of Chicago announces from time to time as its prime lending
rate, as in effect from time to time.
Both the principal hereof and interest hereon are payable as provided
in the Note Agreements (as defined below) in coin or currency of the United
States of America which at the time of payment shall be legal tender for the
payment of public and private debts. If any amount of principal, premium, if
any, or interest on or in respect of this Note becomes due and payable on any
date which is not a Business Day, such amount shall be payable on the
immediately preceding Business Day. "Business Day" means any day other than a
Saturday, Sunday or other day on which banks in New York, New York or Houston,
Texas are required by law to close or are customarily closed.
A-1-1
<PAGE> 21
This Note is one of the 7.24% Class A Senior Guaranteed Notes (the
"Class A Notes") of the Company in the aggregate principal amount of
$30,000,000 which, along with the 7.63% Class B Senior Guaranteed Notes of the
Company in the aggregate principal amount of $20,000,000 (the "Class B Notes"),
are to be issued under and pursuant to the terms and provisions of the separate
Note Agreements, each dated as of May __, 1996 (the "Note Agreements"), entered
into by the Company with the original Purchasers therein referred to and this
Note and the holder hereof are entitled to all the benefits provided for
thereby or referred to therein. Reference is hereby made to the Note
Agreements for a statement of such rights and benefits. The Class A Notes and
the Class B Notes are herein collectively called the "Notes".
The payment of all principal of, premium, if any, and interest on this
Note and the other Notes outstanding under the Note Agreements has been
unconditionally guaranteed by Smith International Acquisition Corp., a Delaware
corporation, pursuant to that certain Guaranty Agreement, dated as of May __,
1996, and may subsequently be guaranteed by other Subsidiaries pursuant to
Section 5.20 of the Note Agreements (collectively, the "Subsidiary
Guaranties"). Reference is hereby made thereto for a statement of the rights
and benefits accorded thereby.
This Note and the other Notes outstanding under the Note Agreements
may be declared due prior to their expressed maturity dates and certain
prepayments are required to be made thereon, all in the events, on the terms
and in the manner and amounts as provided in the Note Agreements.
The Notes are not subject to prepayment or redemption at the option of
the Company prior to their expressed maturity dates except on the terms and
conditions and in the amounts and with the premium, if any, set forth in the
Note Agreements.
This Note is registered on the books of the Company and is
transferable only by surrender thereof at the principal office of the Company
duly endorsed or accompanied by a written instrument of transfer duly executed
by the registered holder of this Note or its attorney duly authorized in
writing. Payment of or on account of principal, premium, if any, and interest
on this Note shall be made only to or upon the order in writing of the
registered holder.
The Company and the holder of this Note specifically intend and agree
to limit contractually the amount of interest payable under the Note
Agreements, the Subsidiary Guaranties, the Notes and all other instruments and
agreements related hereto and thereto to the maximum amount of the interest
lawfully permitted to be charged under applicable law. Therefore, none of the
terms of the Note Agreements, the Subsidiary Guaranties, the Notes or any
instrument pertaining to or relating to the Note Agreements, the Subsidiary
Guaranties, or the Notes shall ever be construed to create a contract to pay
interest at a rate in excess of the maximum rate permitted to be charged under
applicable law, and neither the Company, any guarantor nor any other party
liable or to become liable hereunder, under the Notes, any guaranty or under
any other instruments and agreements related hereto and thereto shall ever be
liable for interest in excess of the amount determined at such maximum rate,
and this provision
A-1-2
<PAGE> 22
shall control over all other provisions of the Note Agreements, the Subsidiary
Guaranties, any Notes, any other guaranty or instrument pertaining to or
relating to the transactions herein contemplated. If any amount of interest
taken or received by any holder of this Note shall be in excess of said maximum
amount of interest which, under applicable law, could lawfully have been
collected by such holder incident to such transactions, then such excess shall
be deemed to have been the result of a mathematical error by all parties hereto
and shall be refunded promptly by the Person receiving such amount to the party
paying such amount, or, at the option of the recipient, credited ratably
against the unpaid principal amount of this Note. All amounts paid or agreed
to be paid in connection with such transactions which would be construed under
applicable law as "interest" shall be, to the extent permitted by such
applicable law, amortized, prorated, allocated and spread throughout the stated
term of the Note Agreements and the Notes. If the Make-Whole Amount payable
following an Event of Default constitutes interest under applicable law, such
Make-Whole Amount, together with all other amounts that constitute interest
under applicable law, will not exceed the maximum amount of interest that may
be lawfully charged or received with respect to the transactions referred to
herein for the actual period of this Note as to which such Make-Whole Amount is
payable are outstanding. The term "maximum rate" as used in this provision
means, with respect to any indebtedness owed to any of the holders of this Note
or under the Subsidiary Guaranties, the maximum lawful, non-usurious rates of
interest (if any) that at any time or from time to time may be contracted for,
taken, reserved, charged or received by such holder with respect to such
indebtedness under applicable law.
THIS NOTE AND SAID NOTE AGREEMENTS ARE GOVERNED BY AND CONSTRUED IN
ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK, INCLUDING ALL MATTERS OF
CONSTRUCTION, VALIDITY AND PERFORMANCE.
SMITH INTERNATIONAL, INC.
BY
Its
BY
---------------------------
Its
-----------------------
A-1-3
<PAGE> 23
SMITH INTERNATIONAL, INC.
7.63% CLASS B SENIOR GUARANTEED NOTE
DUE APRIL 2, 2006
PPN ___________
NO. MAY 21, 1996
$
SMITH INTERNATIONAL, INC., A DELAWARE CORPORATION (THE "COMPANY"), FOR
VALUE RECEIVED, HEREBY PROMISES TO PAY TO
or registered assigns
on the second day of April, 2006
the principal amount of
Dollars ($ )
and to pay interest (computed on the basis of a 360-day year of twelve 30-day
months) on the principal amount from time to time remaining unpaid hereon at
the rate of 7.63% per annum from the date hereof until maturity, payable semi-
annually on the second of each April and October in each year (commencing on
October 2, 1996) and at maturity. The Company agrees to pay interest on
overdue principal (including any overdue required or optional prepayment of
principal) and premium, if any, and (to the extent legally enforceable) on any
overdue installment of interest, at the Overdue Rate after the due date,
whether by acceleration or otherwise, until paid. "Overdue Rate" shall mean
the lesser of (a) the maximum interest rate permitted by law and (b) the
greater of (i) 9.63% per annum and (ii) 2% per annum over the rate which The
First National Bank of Chicago announces from time to time as its prime lending
rate, as in effect from time to time.
Both the principal hereof and interest hereon are payable as provided
in the Note Agreements (as defined below) in coin or currency of the United
States of America which at the time of payment shall be legal tender for the
payment of public and private debts. If any amount of principal, premium, if
any, or interest on or in respect of this Note becomes due and payable on any
date which is not a Business Day, such amount shall be payable on the
immediately preceding Business Day. "Business Day" means any day other than a
Saturday, Sunday or other day on which banks in New York, New York or Houston,
Texas are required by law to close
A-2-1
<PAGE> 24
or are customarily closed.
This Note is one of the 7.63% Class B Senior Guaranteed Notes (the
"Class B Notes") of the Company in the aggregate principal amount of
$20,000,000 which, along with the 7.24% Class A Senior Guaranteed Notes of the
Company in the aggregate principal amount of $30,000,000 (the "Class A Notes"),
are to be issued under and pursuant to the terms and provisions of the separate
Note Agreements, each dated as of May __, 1996 (the "Note Agreements"), entered
into by the Company with the original Purchasers therein referred to and this
Note and the holder hereof are entitled to all the benefits provided for
thereby or referred to therein. Reference is hereby made to the Note
Agreements for a statement of such rights and benefits. The Class A Notes and
the Class B Notes are herein collectively called the "Notes".
The payment of all principal of, premium, if any, and interest on this
Note and the other Notes outstanding under the Note Agreements has been
unconditionally guaranteed by Smith International Acquisition Corp., a Delaware
corporation, pursuant to that certain Guaranty Agreement, dated as of May __,
1996, and may subsequently be guaranteed by other Subsidiaries pursuant to
Section 5.20 of the Note Agreements (collectively, the "Subsidiary
Guaranties"). Reference is hereby made thereto for a statement of the rights
and benefits accorded thereby.
This Note and the other Notes outstanding under the Note Agreements
may be declared due prior to their expressed maturity dates and certain
prepayments are required to be made thereon, all in the events, on the terms
and in the manner and amounts as provided in the Note Agreements.
The Notes are not subject to prepayment or redemption at the option of
the Company prior to their expressed maturity dates except on the terms and
conditions and in the amounts and with the premium, if any, set forth in the
Note Agreements.
This Note is registered on the books of the Company and is
transferable only by surrender thereof at the principal office of the Company
duly endorsed or accompanied by a written instrument of transfer duly executed
by the registered holder of this Note or its attorney duly authorized in
writing. Payment of or on account of principal, premium, if any, and interest
on this Note shall be made only to or upon the order in writing of the
registered holder.
The Company and the holder of this Note specifically intend and agree
to limit contractually the amount of interest payable under the Note
Agreements, the Subsidiary Guaranties, the Notes and all other instruments and
agreements related hereto and thereto to the maximum amount of the interest
lawfully permitted to be charged under applicable law. Therefore, none of the
terms of the Note Agreements, the Subsidiary Guaranties, the Notes or any
instrument pertaining to or relating to the Note Agreements, the Subsidiary
Guaranties, or the Notes shall ever be construed to create a contract to pay
interest at a rate in excess of the maximum rate permitted to be charged under
applicable law, and neither the Company, any guarantor nor any other party
liable or to become liable hereunder, under the Notes, any
A-2-2
<PAGE> 25
guaranty or under any other instruments and agreements related hereto and
thereto shall ever be liable for interest in excess of the amount determined at
such maximum rate, and this provision shall control over all other provisions
of the Note Agreements, the Subsidiary Guaranties, any Notes, any other
guaranty or instrument pertaining to or relating to the transactions herein
contemplated. If any amount of interest taken or received by any holder of
this Note shall be in excess of said maximum amount of interest which, under
applicable law, could lawfully have been collected by such holder incident to
such transactions, then such excess shall be deemed to have been the result of
a mathematical error by all parties hereto and shall be refunded promptly by
the Person receiving such amount to the party paying such amount, or, at the
option of the recipient, credited ratably against the unpaid principal amount
of this Note. All amounts paid or agreed to be paid in connection with such
transactions which would be construed under applicable law as "interest" shall
be, to the extent permitted by such applicable law, amortized, prorated,
allocated and spread throughout the stated term of the Note Agreements and the
Notes. If the Make-Whole Amount payable following an Event of Default
constitutes interest under applicable law, such Make-Whole Amount, together
with all other amounts that constitute interest under applicable law, will not
exceed the maximum amount of interest that may be lawfully charged or received
with respect to the transactions referred to herein for the actual period of
this Note as to which such Make-Whole Amount is payable are outstanding. The
term "maximum rate" as used in this provision means, with respect to any
indebtedness owed to any of the holders of this Note or under the Subsidiary
Guaranties, the maximum lawful, non-usurious rates of interest (if any) that at
any time or from time to time may be contracted for, taken, reserved, charged
or received by such holder with respect to such indebtedness under applicable
law.
THIS NOTE AND SAID NOTE AGREEMENTS ARE GOVERNED BY AND CONSTRUED IN
ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK, INCLUDING ALL MATTERS OF
CONSTRUCTION, VALIDITY AND PERFORMANCE.
SMITH INTERNATIONAL, INC.
BY
Its
BY
---------------------------
Its
-----------------------
A-2-3
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<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<CASH> 20,300
<SECURITIES> 0
<RECEIVABLES> 288,874
<ALLOWANCES> 7,041
<INVENTORY> 267,076
<CURRENT-ASSETS> 34,146
<PP&E> 325,344
<DEPRECIATION> 161,707
<TOTAL-ASSETS> 933,281
<CURRENT-LIABILITIES> 234,937
<BONDS> 216,348
<COMMON> 39,971
0
0
<OTHER-SE> 289,418
<TOTAL-LIABILITY-AND-EQUITY> 933,281
<SALES> 509,092
<TOTAL-REVENUES> 509,092
<CGS> 337,860
<TOTAL-COSTS> 337,860
<OTHER-EXPENSES> 115,848
<LOSS-PROVISION> 570
<INTEREST-EXPENSE> 6,803
<INCOME-PRETAX> 48,581
<INCOME-TAX> 10,794
<INCOME-CONTINUING> 27,929
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 27,929
<EPS-PRIMARY> .70
<EPS-DILUTED> .70
</TABLE>
