<PAGE> 1
SCHEDULE 14A
(RULE 14a-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE SECURITIES
EXCHANGE ACT OF 1934 (AMENDMENT NO. )
Filed by the Registrant [ ]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[X] Preliminary Proxy Statement [ ] Confidential, for Use of the
Commission Only (as permitted by
Rule 14a-6(e)(2))
[ ] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to sec. 240.14a-11(c) or sec. 240.14a-12
SMITH INTERNATIONAL, INC.
- --------------------------------------------------------------------------------
(Name of Registrant as Specified in its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[ ] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(l) and
0-11.
(1) Title of each class of securities to which transaction applies:
- --------------------------------------------------------------------------------
(2) Aggregate number of securities to which transaction applies:
- --------------------------------------------------------------------------------
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the filing fee
is calculated and state how it was determined):
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[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number, or
the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
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(4) Date Filed:
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<PAGE> 2
[SMITH INTERNATIONAL, INC. LOGO]
---------------------
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
APRIL 22, 1998
---------------------
To Our Stockholders::
The Annual Meeting of Stockholders of Smith International, Inc. (the
"Company") will be held on Wednesday, April 22, 1998, at 10:00 a.m., at the
Wyndham Hotel Greenspoint, 12400 Greenspoint Drive, Houston, Texas, to consider
and take action on the following:
1. Re-election of two directors: James R. Gibbs and Jerry W. Neely,
each for a term of three years;
2. Approval of an amendment to the Smith International, Inc. 1989
Long-Term Incentive Compensation Plan;
3. Approval of an amendment to the Smith International, Inc. Stock
Plan for Outside Directors;
4. Ratification of Arthur Andersen LLP as auditors for 1998; and
5. Transacting any other business properly before the Annual Meeting.
YOUR BOARD OF DIRECTORS RECOMMENDS A VOTE "IN FAVOR OF" ALL FOUR PROPOSALS.
The Board of Directors has fixed the close of business on February 25, 1998
as the record date for determining stockholders who are entitled to notice of
and to vote at the meeting.
This Proxy Statement, voting instruction card and Smith International, Inc.
1997 Annual Report are being distributed on or about March 20, 1998.
By Order of the Board of Directors
/s/ NEAL S. SUTTON
Neal S. Sutton
Secretary
<PAGE> 3
PROXY STATEMENT
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-------
<S> <C>
GENERAL INFORMATION ABOUT VOTING............................ 1
PROPOSAL 1: ELECTION OF DIRECTORS........................... 2
Information about the Nominees............................ 2
Stock Ownership of Directors and Executive Officers....... 5
Information about the Board and its Committees............ 5
Executive Compensation.................................... 6
Compensation and Benefits Committee Report on Executive
Compensation.......................................... 6
Comparison of Five-Year Cumulative Total Return........ 9
Executive Compensation Tables.......................... 10
I. Summary Compensation Table........................ 10
II. Stock Option/SAR Grants Table - 1997 Grants....... 11
III. Aggregated Stock Option/SAR Exercises in 1997
And Option/SAR Values as of Year-End 1997......... 11
Retirement Benefits and Employment Contracts........... 11
Additional Information about our Directors and Executive
Officers............................................... 13
Stock Ownership of Certain Beneficial Owners.............. 14
PROPOSAL 2: APPROVAL OF AMENDMENT TO THE COMPANY'S 1989
LONG-TERM INCENTIVE COMPENSATION PLAN..................... 14
PROPOSAL 3: APPROVAL OF AMENDMENT TO THE COMPANY'S STOCK
PLAN FOR OUTSIDE DIRECTORS................................ 15
PROPOSAL 4: APPROVAL OF AUDITORS............................ 16
OTHER BUSINESS.............................................. 16
STOCKHOLDER PROPOSALS FOR THE 1999 ANNUAL MEETING........... 16
ANNUAL REPORT AND FINANCIAL INFORMATION..................... 17
</TABLE>
<PAGE> 4
[SMITH INTERNATIONAL, INC. LOGO]
P.O. BOX 60068
HOUSTON, TX 77205-0068
---------------------
PROXY STATEMENT
---------------------
YOUR VOTE IS VERY IMPORTANT. For this reason, the Board of Directors is
soliciting Proxies to be used at the 1998 Annual Meeting. This Proxy Statement
is being sent to you in connection with this request and has been prepared for
the Board by our management. "We", "our", "Smith" and the "Company" each refers
to Smith International, Inc. This Proxy Statement is first being sent to our
stockholders on or about March 20, 1998. PLEASE SIGN, DATE AND RETURN YOUR PROXY
CARD WHETHER OR NOT YOU PLAN TO ATTEND THE STOCKHOLDERS' MEETING.
---------------------
GENERAL INFORMATION ABOUT VOTING
WHO CAN VOTE.
You are entitled to vote your Common Stock if our records show that you
held your shares as of February 25, 1998. At the close of business on February
25, 1998, a total of 40,326,421 shares of Common Stock were outstanding and
entitled to vote. Each share of Common Stock has one vote. The enclosed Proxy
Card shows the number of shares which you are entitled to vote.
HOW YOU CAN VOTE.
If you return your signed Proxy Card to us before the Annual Meeting, we
will vote your shares as you direct. A postage paid envelope is provided for
your convenience. You can specify on your proxy whether your shares should be
voted for all, some, or none of the nominees for director. You can also specify
whether you approve, disapprove, or abstain from each of the four proposals. If
your Common Stock is held by a broker, bank or other nominee, you will receive
instructions from them which you must follow in order to have your shares voted.
If the meeting is adjourned, your Common Stock may be voted by the Proxies on
the new meeting date as well, unless you have revoked your proxy instructions.
IF YOU DO NOT SPECIFY ON YOUR PROXY CARD HOW YOU WANT TO VOTE YOUR SHARES,
WE WILL VOTE THEM "FOR" THE ELECTION OF ALL NOMINEES FOR DIRECTORS AS SET FORTH
UNDER "ELECTION OF DIRECTORS" BELOW; AND "FOR" PROPOSALS 2, 3 AND 4.
HOW YOU MAY REVOKE YOUR PROXY INSTRUCTIONS.
You can revoke your proxy at any time before it is exercised in any of
three ways:
(1) by submitting written notice of revocation to the Secretary;
(2) by submitting another proxy that is properly signed and later dated; or
(3) by voting in person at the meeting.
REQUIRED VOTES.
Directors must be elected by a plurality of the votes cast at the meeting.
This means that the nominees receiving the greatest number of votes will be
elected. A majority of the shares represented at the meeting are required to
approve each proposal. The Annual Meeting will be held if a majority of the
outstanding Common Stock entitled to vote is represented at the meeting. If you
have returned valid proxy instructions or attend the meeting in person, your
Common Stock will be counted for the purpose of determining whether there is
<PAGE> 5
a quorum, even if you wish to abstain from voting on some or all matters
introduced to the meeting. "Broker non-votes" also count for quorum purposes. If
you hold your Common Stock through a broker, bank or other nominee, generally
the nominee may only vote the Common Stock which it holds for you in accordance
with your instructions. However, if it has not received your instructions within
ten days of the meeting, the nominee may vote on matters which the New York
Stock Exchange determines to be routine. If a nominee cannot vote on a
particular matter because it is not routine, there is a "broker non-vote" on
that matter. We do not count broker non-votes as votes for or against any
proposal; however, abstentions are voted against a proposal.
OTHER MATTERS TO BE ACTED UPON AT THE MEETING.
We do not know of any other matters to be presented or acted upon at the
meeting, other than those mentioned in this document. To present other matters,
a shareholder must provide notice to Smith on or before March 30, 1998. If any
other matter is presented at the meeting on which a vote may properly be taken,
your signed Proxy Card gives authority to Douglas L. Rock and Neal S. Sutton to
vote on such matters.
COST OF THIS PROXY SOLICITATION.
We will pay the cost of this proxy solicitation. In addition to soliciting
proxies by mail, some of our employees may solicit stockholders for the same
type of proxy, personally and by telephone. None of these employees will receive
any additional or special compensation for doing this. We have retained Morrow &
Co. to assist in the solicitation of proxies for a fee of $6,500, plus
reasonable out-of-pocket costs and expenses. We will, upon request, reimburse
brokers, banks and other nominees for their expenses in sending proxy material
to their principals and obtaining their proxies.
PROPOSAL 1: ELECTION OF DIRECTORS
At the 1998 Annual Meeting, stockholders will elect two persons as Class
III directors to hold office until the 2001 Annual Meeting or until they are
succeeded by other qualified directors who have been elected. The nominees are
James R. Gibbs and Jerry W. Neely.
Directors must be elected by a plurality of the votes cast at the meeting.
This means that the nominees receiving the greatest number of votes will be
elected. Votes withheld for any Director will not be counted.
We will vote your shares as you specify on the enclosed Proxy Card. If you
sign, date and return the Proxy Card but don't specify how you want your shares
voted, we will vote them for the election of all the nominees listed below. If
unforeseen circumstances (such as death or disability) make it necessary for the
Board of Directors to substitute another person for any of the nominees, and you
have either voted for the substituted nominee or not specified your vote, we
will vote your shares for that other person.
Each of the nominees is now a member of the Board of Directors. A brief
biography of all directors is presented below:
NOMINEES
Directors to be elected to Class III for term expiring in 2001:
<TABLE>
<S> <C>
- --------------------- JAMES R. GIBBS, Age: 53. Director Since: 1990. Recent Business Experience: Mr. Gibbs
PHOTO was President and Chief Operating Officer of Wainoco Oil Corporation from January 1,
1987 to April 1, 1992, at which time he assumed the additional position of Chief
- --------------------- Executive Officer. He joined Wainoco Oil Corporation in February 1982 as Vice President
of Finance and Administration, and was appointed Executive Vice President in September
1985. Committee Membership: Audit Committee; Executive Committee; Chairman,
Compensation and Benefits Committee. Other Directorships: Wainoco Oil Corporation;
Veritas DGC Inc.; advisory director of Frost Bank.
</TABLE>
2
<PAGE> 6
<TABLE>
<S> <C>
- --------------------- JERRY W. NEELY, Age: 61. Director Since: 1977. Recent Business Experience: Mr. Neely
PHOTO has held a number of positions with the Company from 1965 to 1987. He was elected
Chairman of the Board in 1977 and served in that capacity until December 1987. Since
- --------------------- that time, Mr. Neely has been a private investor. Committee Membership: Compensation
and Benefits Committee; Audit Committee; Chairman, Executive Committee. Other
Directorships: Elamex; member of the Board of Trustees of the University of Southern
California.
</TABLE>
DIRECTORS CONTINUING IN OFFICE
Directors of Class I to continue in office until 1999:
<TABLE>
<S> <C>
- --------------------- G. CLYDE BUCK, Age: 60. Director Since: 1992. Recent Business Experience: Mr. Buck has
PHOTO had extensive experience in energy-related matters. Experience: He received a B.A. in
economics from Williams College and a M.B.A. from Harvard and is currently a Managing
- --------------------- Director in the Houston corporate finance office of the investment banking firm of Dain
Rauscher Incorporated (formerly Rauscher Pierce Refsnes, Inc.), a position he has held
since 1983. Committee Membership: Compensation and Benefits Committee.
- --------------------- LOREN K. CARROLL, Age: 54. Director Since: 1987. Recent Business Experience: Mr Carroll
PHOTO joined the Company in December 1984 as Vice President and Chief Financial Officer. In
January 1988, he was appointed Executive Vice President and Chief Financial Officer and
- --------------------- served in that capacity until March 1989. Mr. Carroll was President of Geneva Business
Services and a Director of the Geneva Companies, an investment banking firm, from March
1989 until October 1992 when he rejoined the Company as Executive Vice President and
Chief Financial Officer; Mr. Carroll continues to hold the office of Executive Vice
President of the Company. On March 16, 1994, Mr. Carroll was named the President and
Chief Executive Officer of M-I L.L.C., a company in which the Company holds a 64%
interest. Committee Membership: Executive Committee.
</TABLE>
Directors of Class II to continue in office until 2000:
<TABLE>
<S> <C>
- --------------------- BENJAMIN F. BAILAR, Age: 63. Director Since: 1993. Recent Business Experience: Mr
PHOTO Bailar was the Dean and H. Joe Nelson, III Professor of Administration Emeritus of
Jesse H. Jones Graduate School of Administration of Rice University and held this
- --------------------- position from September 1, 1987 through June 1997. Committee Membership: Chairman,
Audit Committee. Other Directorships: Dana Corporation; U.S. Can Company; Trico Marine.
</TABLE>
3
<PAGE> 7
<TABLE>
<S> <C>
- --------------------- DOUGLAS L. ROCK, Age: 51. Director Since: 1987. Recent Business Experience: Mr. Rock
PHOTO was elected Chairman of the Board of Directors on February 26, 1991. Mr. Rock has been
with the Company since 1974 and has been Chief Executive Officer, President and Chief
- --------------------- Operating Officer since March 31, 1989. Committee Membership: Executive Committee.
Other Directorships: VIAD CORP.
- --------------------- H. MOAK ROLLINS, Age: 76. Director Since: 1987. Recent Business Experience: Mr. Rollins
PHOTO served as Chief Executive Officer and Chairman of the Board of the Company from
December 1987 until April 1988. Mr. Rollins was Commissioner of the Public Utility
- --------------------- Commission of Texas ("PUC") from 1979 to March 1983 and was Chairman of the PUC from
February 1982 to March 1983. From September 1983 to December 1987, Mr. Rollins was
President and a Director of FINANCO, Inc., a financial consulting firm. He rejoined
FINANCO, Inc. from July 1, 1988 to December 31, 1991 as a Vice President and Director.
Since that time, Mr. Rollins has been an independent consultant in financial analysis.
Committee Membership: Audit Committee.
</TABLE>
4
<PAGE> 8
STOCK OWNERSHIP OF DIRECTORS AND EXECUTIVE OFFICERS
The following table shows the number of shares of Common Stock beneficially
owned as of February 25, 1998 by each nominee for Director, the executive
officers named in the Summary Compensation Table and all Directors and officers
as a group. Except as otherwise indicated, the persons listed below have sole
voting power and investment power relating to the shares shown. The number of
shares shown as beneficially owned by all Directors and executive officers
totals 2.1% of the outstanding Common Stock.
STOCK OWNERSHIP OF DIRECTORS AND EXECUTIVE OFFICERS
<TABLE>
<CAPTION>
AMOUNT AND NATURE OF
NAME OF INDIVIDUAL BENEFICIAL OWNERSHIP
------------------ --------------------
<S> <C>
Benjamin F. Bailar........................................ 3,400 (1)
G. Clyde Buck............................................. 4,400 (1)
Loren K. Carroll.......................................... 126,250 (2)
James R. Gibbs............................................ 3,100 (1)
D. Barry Heppenstall...................................... 42,000 (2)
John J. Kennedy........................................... 20,400 (2)
Jerry W. Neely............................................ 267,102 (1)
Douglas L. Rock........................................... 164,438 (2)
H. Moak Rollins........................................... 94,100 (1)
Neal S. Sutton............................................ 48,250 (2)
All Directors and executive officers as a group (17
persons)................................................ 864,773 (3)
</TABLE>
- ---------------
(1) The amounts reported by Messrs. Buck, Bailar, Rollins, Gibbs and Neely
include 200 shares to be issued to each outside director on or about April
22, 1998 under the Smith International, Inc. Stock Plan for Outside
Directors.
(2) The amounts reported include shares of Common Stock which could be acquired
on or before May 19, 1998 through the exercise of stock options as follows:
Mr. Rock: 164,438; Mr. Carroll: 98,550; Mr. Sutton: 48,250; Mr. Heppenstall:
42,000; and Mr. Kennedy: 20,400; and all executive officers as a group:
451,296.
(3) The amounts reported include Common Stock allocated to accounts under a
Section 40l(k) plan as follows: Named Executive Officers: -0-; all directors
and executive officers as a group: 13,675.
INFORMATION ABOUT THE BOARD OF DIRECTORS AND ITS COMMITTEES
THE BOARD. During 1997, the Board of Directors held six meetings. All
directors attended at least 75% of the meetings of the Board of Directors and of
all committees on which they served.
COMMITTEES OF THE BOARD.
The Board has an Audit Committee and its members are Messrs. Bailar, Gibbs,
Neely and Rollins. The Audit Committee reviews Smith's auditing, accounting,
financial reporting and internal control functions. This committee also
recommends the firm that Smith should retain as its independent accountant. All
members are non-employee directors. During 1997, the Audit Committee held two
meetings.
The Company has a Compensation and Benefits Committee, and its members are
Messrs. Gibbs, Buck and Neely. The Compensation and Benefits Committee reviews
Smith's executive compensation and employee benefit plans and programs,
including their establishment, modification and administration. It also
administers the Company's stock option plan. During 1997, this committee held
two meetings. The Executive Compensation Subcommittee of this committee,
comprised of Messrs. Gibbs and Buck, held one meeting during 1997.
5
<PAGE> 9
The Company has an Executive Committee and its members are Messrs. Neely,
Carroll, Gibbs and Rock. The Executive Committee has limited power to act on
behalf of the Board whenever the Board is not in session. This Committee meets
only as needed and did not meet in 1997.
The Board of Directors does not have a Nominating Committee.
DIRECTORS' COMPENSATION. Employee Directors receive no additional
compensation other than their normal salary for serving on the Board or its
Committees. Non-employee Directors receive $20,000 annually and $1,500 for each
meeting attended. In addition, they are paid $3,000 for chairing a committee and
paid $1,250 for each committee meeting attended. Non-employee Directors also
receive an annual grant of 200 shares of Common Stock.
NON-EMPLOYEE DIRECTOR PROGRAMS. The Company has a Directors' Retirement
Plan which provides for an annual retirement benefit of $20,000 for life. Each
director who has at least ten years of service as a non-employee director and
who retires at age 70 or thereafter is eligible. After the director's death his
surviving spouse will receive an annual benefit of $10,000 for life under
certain conditions. The plan is funded from the general assets of the Company.
EXECUTIVE COMPENSATION
COMPENSATION AND BENEFITS COMMITTEE REPORT ON EXECUTIVE COMPENSATION
COMPENSATION POLICIES
Smith's executive compensation program is designed to help the Company
attract, motivate and retain the executive resources that the Company needs in
order to maximize its return to stockholders. The objective of the Company's
compensation program for key management positions is to provide compensation
packages that are consistent with competitive market norms for companies similar
in size, activity and complexity to the Company.
The Compensation and Benefits Committee (the "Committee"), which consists
solely of non-employee Directors, administers the executive compensation
programs of the Company and determines the compensation of senior management. An
independent compensation consultant, KPMG Peat Marwick, advises the Committee on
all compensation matters.
The Company's executive compensation program is structured and implemented
to provide competitive compensation opportunities and various incentive award
payments based on Company and individual performance, as well as to link
compensation to financial targets which affect short and long term share price
performance. The Committee administers all of the Company's executive
compensation programs, including the design of the programs and the measurement
of their effectiveness. The Committee also reviews and approves all salary
arrangements and other payments to executives, evaluates their performance and
considers other related matters.
TYPES OF COMPENSATION
There are two main types of compensation:
(1) Annual Compensation. This includes base salary and annual incentives
(bonuses). Smith awards bonuses only when a year's financial performance
meet a certain level required under the annual incentive plan.
(2) Long-Term Compensation. This includes stock options and other long-term
incentive awards based on Common Stock. The value of these awards depends
upon Company performance and future stock value.
FACTORS CONSIDERED IN DETERMINING COMPENSATION
The Committee wants the compensation of Smith executives to be competitive
in the worldwide energy industry. The Committee estimates an executive's
competitive level of total compensation based on information from a variety of
sources, including proxy statements, special surveys and its compensation
6
<PAGE> 10
consultant. The companies that are part of the Peer Group described in the
performance graph are some of the companies used by the Committee in
establishing both base salary and performance-based targeted incentive
compensation. The sources used by the Committee are larger than the Peer Group,
but are all in the energy industry. The Committee then compares the industry
information with the Peer Group and with the Company's compensation levels to
determine both base salary and incentive compensation.
Annual Compensation.
Annual compensation for Smith executives includes salary and bonus. This is
similar to the compensation programs of most leading companies.
The Committee annually reviews each executive's base salary. The Committee
aims to pay salaries at the median of the range of compensation paid by similar
companies. The Committee also looks at the specific job duties, the person's
achievements and other criteria. Increases in base salary are primarily the
result of individual performance, which includes meeting specific goals
established by the Committee. The criteria used in evaluating individual
performance varies depending on the executive's function, but generally include
leadership inside and outside the Company; advancing the Company's interest with
customers, vendors and in other business relationships; product quality and
development; and advancement in skills and responsibility. In 1997, seven
executive officers received merit increases.
Annual Incentive Compensation.
The annual incentive plan promotes the Company's pay-for-performance
philosophy by providing executives with direct financial incentives in the form
of cash awards that are paid based on the achievement of performance objectives
established for the fiscal year. Each year the Committee sets corporate goals
based upon financial objectives deemed appropriate by the Committee. These
objectives may include earnings per share, profit after tax, return on assets,
return on net capital employed, or other financial objectives for the year.
Where executives have strategic business unit responsibilities, a portion of the
goal is based on financial performance measures supporting that business unit's
performance. This portion varies with the position of each individual. No bonus
is paid unless certain threshold Company performance levels set by the Committee
are reached.
Each year the Committee sets targets for each executive relating to annual
incentive compensation. The target incentive awards for 1997 for eligible
Company executives were based on various company, business unit and individual
performance measures. The Committee does not use a specific formula for weighing
individual performance. Instead, individuals are assessed based upon how they
contributed to the Company's business success in his or her area of
responsibility. Awards were made in 1997 under the Annual Incentive Plan for
fiscal year 1996 to eligible executives.
Stock Option Program.
The Committee strongly believes that the grant of significant annual equity
awards further links the interests of senior management and Smith's
stockholders. Each year, the Committee determines the total amount of options to
be made available to the Company's executives. These amounts vary each year and
are based upon what the Committee believes is appropriate. The Committee
considers an executive's total compensation package, including the amount of
stock options previously awarded. Other important factors are the desire to
create stockholder value, encourage equity ownership, provide an appropriate
link to stockholder interests and provide long-term incentive award
opportunities in the same range as similar companies in the Company's industry.
Chief Executive Officer Compensation.
As described above, the Committee determines pay levels for all executives,
including the Chief Executive Officer, considering both a pay-for-performance
philosophy and market rates of compensation for
7
<PAGE> 11
similar positions. A significant portion of compensation for the Executive
Officer is based upon the Company's performance. Specific actions taken by the
Committee regarding Mr. Rock's compensation are summarized below.
Base Salary - The base salary for Mr. Rock was reviewed at the December
1996 meeting of the Committee and increased to $550,000. In setting Mr. Rock's
base salary for fiscal year 1997, the Committee reviewed the recommendations by
the independent consultant, KPMG Peat Marwick, market comparisons as well as the
Company's positive financial performance during fiscal year 1996 with respect to
revenue growth, expense control, net income and earnings per share.
Annual Incentive - Predetermined bonus objectives set by the Committee were
achieved by each of the named executive officers based on the Company's fiscal
year 1996 financial performance. For fiscal year 1996, Mr. Rock earned an annual
bonus in the amount of $500,000 which was paid in 1997.
Stock Options - Non-qualified stock options to purchase 60,000 shares were
granted to Mr. Rock on December 3, 1997 at the recommendation of the Committee.
The award of stock options to Mr. Rock was approximately 21.1% of the total
stock options granted to all employees of the Company in 1997. The options were
granted at 100% of fair market value on the date of grant. The performance
sensitivity of the grant is built into the option concept, since the options
produce no gain unless the Company's share price rises over the initial grant
price.
TAX CONSIDERATIONS
The Internal Revenue Code limits the allowable tax deduction that may be
taken by the Company for compensation paid to the Chief Executive Officer and
the four other highest paid executive officers named in the Summary Compensation
Table. The limit is $1 million per executive per year, but compensation payable
solely upon the attainment of performance goals is excluded from the limitation.
The Committee has established an Executive Compensation Subcommittee to review
and establish compensation for any executive officer whose compensation might
exceed $1 million in any year. The Subcommittee and Committee will continue to
analyze its executive compensation practices and plans on an ongoing basis with
respect to Section 162(m) of the Internal Revenue Code. Where it deems
advisable, the Committee will take appropriate action to maintain the tax
deductibility of its executive compensation.
SUMMARY
The Committee believes that the compensation program for the executives of
the Company is comparable with compensation programs provided by companies
within the energy industry and serves the best interests of Smith's
stockholders. The Committee also believes that annual performance pay is
appropriately linked to individual performance, annual financial performance of
the Company and stockholder value.
Compensation and Benefits Committee
James R. Gibbs, Chairman
G. Clyde Buck
Jerry W. Neely
8
<PAGE> 12
COMPARISON OF FIVE-YEAR CUMULATIVE TOTAL RETURN
Below is a line graph comparing the cumulative total stockholder return of
Smith's Common Stock against the cumulative total return of the S&P 500 Index
and our Peer Group for each of the five years in the period starting December
31, 1992 and ending December 31, 1997. Our Peer Group consists of the following
companies in the same general line of business as the Company: Baker Hughes,
Inc., BJ Services, Co., Daniel Industries, Dresser Industries, Inc., Weatherford
International Incorporated, Halliburton Company and Tuboscope VETCO
International Corporation.
The results are based on an assumed $100 invested on December 31, 1992 and
reinvestment of dividends. For each index, total return is based on market
capitalization of its components.
<TABLE>
<CAPTION>
Measurement Period
(Fiscal Year Covered) Smith S&P 500 Peer Group
<S> <C> <C> <C>
Dec. 1992 100.00 100.00 100.00
Dec. 1993 102.94 110.08 112.13
Dec. 1994 145.59 111.53 110.48
Dec. 1995 276.47 153.45 157.71
Dec. 1996 527.94 188.68 212.83
Dec. 1997 722.06 251.63 318.19
</TABLE>
9
<PAGE> 13
EXECUTIVE COMPENSATION TABLES
The following table shows compensation for services to Smith of the persons
who during 1997 were the chief executive officer and the other four most highly
compensated executive officers (the "Named Officers"):
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM COMPENSATION
-----------------------------------
AWARDS PAYOUTS
----------------------- ---------
ANNUAL LONG TERM
COMPENSATION RESTRICTED SECURITIES INCENTIVE
---------------- OTHER ANNUAL STOCK UNDERLYING PLAN ALL OTHER
NAME OF INDIVIDUAL AND SALARY BONUS COMPENSATION AWARDS OPTIONS PAYOUTS COMPENSATION
PRINCIPAL POSITION YEAR $(1) $ $ $ (#) ($) $(2)
---------------------- ---- ------- ------- ------------ ---------- ---------- --------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Douglas L. Rock............. 1997 548,658 500,000 -- -- 60,000 -- 127,938
President and Chief 1996 499,237 310,960 -- -- 50,000 -- 145,308
Executive Officer 1995 458,402 418,000 -- -- 35,000 -- 50,825
Loren K. Carroll............ 1997 359,054 260,000 -- -- 28,000 -- 76,386
Executive Vice President, 1996 324,616 164,944 -- -- 25,000 -- 77,355
President and Chief 1995 304,429 200,000 -- -- 19,000 -- 36,148
Executive Officer of
M-I L.L.C.
Neal S. Sutton.............. 1997 229,592 150,500 -- -- 12,400 -- 47,232
Senior Vice President- 1996 214,802 97,006 -- -- 11,000 -- 49,887
Administration, General/ 1995 204,346 112,800 -- -- 9,000 -- 18,772
Counsel and Secretary
David B. Heppenstall........ 1997 224,735 150,500 -- -- 12,400 -- 46,648
President - 1996 214,898 99,372 -- -- 11,000 -- 50,212
Smith Tool division 1995 209,617 112,800 -- -- 9,000 -- 18,772
John J. Kennedy............. 1997 210,591 150,500 -- -- 12,400 -- 44,950
Senior Vice President, 1996 163,577 67,194 -- -- 11,000 -- 35,359
Chief Financial Officer 1995 141,731 69,435 -- -- 5,600 -- 10,234
and Treasurer
</TABLE>
- ---------------
(1) The amounts in this column include compensation deferred by the Named
Officers in 1995, 1996 and 1997 pursuant to the Smith International, Inc.
Supplemental Executive Retirement Plan ("SERP").
(2) The amounts in this column include the Company's contribution to the Named
Officers' account in the SERP in 1995, 1996 and 1997, excluding interest (at
120% of the applicable Federal long-term rate). The 1996 SERP contributions
include an adjustment with respect to the 1995 plan year pursuant to a 1996
amendment which was retroactive to January 1, 1995. In 1997, SERP
contributions to the Named Officers' account are as follows: Mr. Rock:
$115,008; Mr. Carroll: $63,148; Mr. Sutton: $42,126; Mr. Heppenstall:
$33,410; and Mr. Kennedy: $33,943. In addition, this column also reflects
the Company's contributions to the Smith International, Inc. 401(k)
Retirement Plan. The 1997 contributions to the Named Officers' 401(k)
account are as follows: Mr. Rock: $12,930; Mr. Carroll: $13,238; Mr. Sutton:
$5,106; Mr. Heppenstall: $13,238; and Mr. Kennedy: $11,007.
10
<PAGE> 14
OPTION/SAR GRANTS IN 1997
The following table shows all grants of options to the Named Officers in
1997. No stock appreciation rights were granted in 1997.
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
------------------------------------------------------------------------------------
NUMBER OF
SECURITIES
UNDERLYING % OF TOTAL
OPTION OPTIONS GRANTED EXERCISE OR GRANT DATE
GRANTS TO EMPLOYEES BASE PRICE PRESENT VALUE
NAME (#)(1) IN 1996 ($/SHARE) EXPIRATION DATE ($)(2)
---- ---------- --------------- ----------- --------------- -------------
<S> <C> <C> <C> <C> <C>
Douglas L. Rock............. 60,000 21.1 69.06 12-02-07 $1,120,800
Loren K. Carroll............ 28,000 9.8 69.06 12-02-07 $ 523,040
Neal S. Sutton.............. 12,400 4.4 69.06 12-02-07 $ 231,632
David B. Heppenstall........ 12,400 4.4 69.06 12-02-07 $ 231,632
John J. Kennedy............. 12,400 4.4 69.06 12-02-07 $ 231,632
</TABLE>
- ---------------
(1) Options were granted to the Named Officers on December 3, 1997 at an
exercise price of $69.06. The exercise price per share is equal to the
closing price of the Common Stock on the New York Stock Exchange Composite
Tape on the date of grant. Options granted vest at a rate of 25% per year
and will not begin to become exercisable until December 3, 1998. If a change
of control occurs, all outstanding options would become exercisable
immediately.
(2) Present value was calculated using the Black-Scholes option pricing model.
Use of this model should not be viewed in any way as a forecast of the
future performance of the Company's Common Stock, which will be determined
by future events and unknown factors. The estimated values under the
Black-Scholes model are based upon certain assumptions as to variables such
as interest rate and stock price volatility.
AGGREGATED OPTION EXERCISES IN 1997 AND DECEMBER 31, 1997 OPTION VALUES
The following table provides information on options exercised by the Named
Officers during 1997 and the value of options held by such officers at December
31, 1997.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT IN-THE-MONEY OPTIONS AT
SHARES DECEMBER 31, 1996 DECEMBER 31, 1996
ACQUIRED ON VALUE (#) ($)(1)
EXERCISE REALIZED --------------------------- ---------------------------
NAME (#) ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Douglas L. Rock.......... 15,000 592,425 164,438/ 144,250 $7,643,231/ $2,470,416
Loren K. Carroll......... -0- -0- 98,550/ 72,125 4,681,863/ 1,343,506
Neal S. Sutton........... -0- -0- 48,250/ 32,650 2,308,636/ 629,292
David B. Heppenstall..... 33,750 1,362,579 42,000/ 32,650 1,930,540/ 629,292
John J. Kennedy.......... -0- -0- 20,400/ 27,325 923,570/ 380,463
</TABLE>
- ---------------
(1) Value based on the closing price on the New York Stock Exchange Composite
Tape for the Common Stock on December 31, 1997 ($61.38).
RETIREMENT BENEFITS AND EMPLOYMENT CONTRACTS
PENSION PLAN
Smith International, Inc. Restated Pension Plan. The Company has a defined
benefit pension plan (the "Restated Pension Plan") which is currently frozen.
The benefit accruals were frozen effective March 1, 1987, and the amount of the
pension benefit was fixed for all eligible employees based only upon benefit
accruals from September 1, 1985 to March 1, 1987. Any benefits under the
Restated Pension Plan are offset by benefits paid under a previous pension plan
of the Company.
11
<PAGE> 15
The following table illustrates the estimated annual retirement benefit
payable as a life annuity under the Restated Pension Plan and the Supplemental
Pension Plan (which is discussed below) to any employee retiring at normal
retirement age in various compensation levels and certain years-of-service
classifications.
PENSION PLAN TABLE
<TABLE>
<CAPTION>
ESTIMATED ANNUAL PENSION FOR
YEARS OF SERVICE
--------------------------------
COMPENSATION 20 YEARS 25 YEARS 30 YEARS
- ------------ -------- -------- --------
<S> <C> <C> <C>
$ 125,000........................ $ 3,280 $ 3,280 $ 3,280
200,000........................ 5,250 5,250 5,250
300,000........................ 7,875 7,875 7,875
400,000........................ 10,500 10,500 10,500
500,000........................ 13,125 13,125 13,125
700,000........................ 18,375 18,375 18,375
800,000........................ 21,000 21,000 21,000
900,000........................ 23,625 23,625 23,625
1,000,000........................ 26,250 26,250 26,250
</TABLE>
Since benefit accruals under the Company's Restated Pension Plan have been
frozen since March 1, 1987, the years of service for the Named Officers is only
the period from September 1, 1985 to March 1, 1987. The annual pension benefit
that would be payable at age 65 under the Restated Pension Plan to the Named
Officers are as follows: Mr. Rock: $8,150; Mr. Carroll: $4,282; Mr. Sutton:
$-0-; Mr. Heppenstall: $1,631; and Mr. Kennedy: -0-.
Smith International, Inc. Supplemental Pension Plan. Supplemental
retirement benefits are provided to all of the executive officers and certain
other participants under the Smith International, Inc. Supplemental Pension Plan
(the "Supplemental Pension Plan"). This plan allows participants to retire at
age 60. The participants receive an unfunded annual benefit at retirement equal
to that which they would have been paid had the participant remained employed
until age 65. Participants who reach age 55 while actively employed by the
Company and who accrue five years of service with the Company are vested in
their benefit. If a participant dies after reaching age 55, his or her spouse is
entitled to a survivor's benefit.
SMITH INTERNATIONAL, INC. SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN ("SERP")
The Company adopted the SERP effective October 1, 1993. It is a
non-qualified, deferred compensation plan covering all of the executive officers
and certain other participants. The primary purpose of the SERP is to provide
executives who are affected by the Internal Revenue Code (the "Code")
limitations under the Company's 40l(k) Retirement Plan (the "40l(k) Plan") with
the opportunity to defer a portion of their current compensation. Distributions
may generally be made following a participant's termination of employment. A
participant in the SERP may defer up to 50% of his or her salary for a plan year
ending December 31. A participant may also defer up to 100% of any Annual
Incentive bonus awarded during the plan year. The Company may also make
contributions to the SERP on behalf of its participants.
Age-Weighted Contributions. Effective as of the last day of each quarter
during the year, a contribution may be allocated under the SERP based on the
participant's age-weighted contribution percentage ("AWCP") ranging from 2 to
6%. The difference between a participant's (i) "Total 40l(k) Compensation" and
his or her (ii) "Net 40l(k) Compensation" is multiplied by the AWCP to compute
the age-weighted contribution for the year. "Total 40l(k) Compensation"
generally means the total of all cash amounts paid by the Company to a
participant, including deferred amounts. "Net 40l(k) Compensation" generally
means Total 40l(k) Compensation less participant contributions to the SERP, but
not to exceed $150,000 for any year. Effective January 1, 1995, the SERP was
amended to fix the AWCP for the executive officers at 6% of their Total 40l(k)
Compensation.
12
<PAGE> 16
Matching Contributions. To the extent that a SERP participant's account
under the 40l(k) Plan cannot receive any matching contribution as the result of
limits imposed by the Code, then this participant is eligible to receive
matching contributions under the SERP. The matching contribution is based on a
formula in the SERP that is intended to provide the participant with the full
amount of matching contributions that he or she could have received under the
Company's 40l(k) Plan if there were no limits in the Code. Matching
contributions for a plan year in both the SERP and 40l(k) cannot exceed 6% of a
participant's Total 40l(k) Compensation net of any incentive bonus. Effective
January 1, 1995, the SERP was amended so that executive officers may receive
matching contributions up to 6% of their Total 40l(k) Compensation.
Discretionary Profit Sharing Contributions. The Committee administering the
SERP may, in its discretion, determine the amount of any Company profit sharing
contribution for a plan year and how such amount is to be allocated among the
SERP participants.
EMPLOYMENT AGREEMENTS
The Company has employment agreements with four senior officers, including
Messrs. Rock, Heppenstall and Sutton. The agreements with Messrs. Rock,
Heppenstall and Sutton have an initial term of three years and are automatically
extended for an additional year at each anniversary date. The agreement with the
remaining senior officer was executed in 1995 for a three year term only. The
employment agreements contain the employee's salary and other conditions of
employment and entitle the employee to participate in the Company's bonus
program and other benefit programs.
The employment agreements were amended to become operative upon a "change
of control" of Smith (as defined in the amendment) and to provide for the
continuation of salary and benefits. If the employee is terminated by the
Company (other than for cause), or if the employee elects to terminate his
employment, the employee is entitled to receive a lump sum payment in cash equal
to the sum of (a) three times the employee's base salary; (b) the employee's
target incentive level for an award under the Company's stock option plan; (c)
the Company contributions made to the employee's account under the 40l(k) Plan
during the year immediately before the change in control; and (d) the amount
provided for in the Company's executive perquisite program in effect on the
employee's date of termination. The employee would also receive continued
coverage under applicable welfare benefit plans for 12 months and the employee's
stock options would become fully vested and a cash payment would be made to the
employee for the Fair Market Value (as defined in the amendment). The employment
agreements provide for a comparison between (a) the tax effect of receiving the
sum of $1.00 less than three times the employee's base salary; and (b) the
benefit payable using the calculation in the employment agreement. This
comparison would be independently calculated by Arthur Andersen LLP and the
employee would be entitled to the greater amount on an after-tax basis.
ADDITIONAL INFORMATION ABOUT OUR
DIRECTORS AND EXECUTIVE OFFICERS
COMPLIANCE WITH SECTION 16(A) REPORTING
The rules of the Securities and Exchange Commission ("SEC") require that
the Company disclose late filings of reports of stock ownership (and changes in
stock ownership) by its directors and executive officers. Based on Company
records and representations by its directors and executive officers, the Company
believes that during 1997 all filings were made in compliance with SEC
requirements.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Messrs. Buck, Gibbs and Neely are members of the Company's Compensation and
Benefits Committee. During 1997, neither Mr. Buck, Mr. Gibbs nor Mr. Neely were
officers or employees of the Company or any of its subsidiaries, nor did any of
them have any relationship with the Company which requires disclosure under SEC
requirements. From 1977 to December 1987, Mr. Neely was Chief Executive Officer
and Chairman of the Board of Directors of the Company.
13
<PAGE> 17
STOCK OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
The following table shows certain information about stock ownership of all
persons known to the Company to own of record or beneficially more than 5% of
the outstanding Common Stock of the Company as of February 25, 1998. This
information is based upon information furnished to the Company by these persons
and statements filed with the SEC:
<TABLE>
<CAPTION>
NAME AND ADDRESS AMOUNT AND NATURE OF PERCENT OF
OF BENEFICIAL OWNER BENEFICIAL OWNERSHIP CLASS
------------------- -------------------- ----------
<S> <C> <C>
FMR Corp.................................................... 5,234,400 12.98%
82 Devonshire Street Boston,
Massachusetts 02109
Janus Capital Corporation................................... 4,111,625 10.19%
100 Fillmore Street
Denver, Colorado 80206-4923
</TABLE>
PROPOSAL 2: APPROVAL OF AN AMENDMENT TO THE SMITH INTERNATIONAL, INC.
1989 LONG-TERM INCENTIVE COMPENSATION PLAN
At the meeting, you will be asked to approve an amendment to the Smith
International, Inc. 1989 Long-Term Incentive Compensation Plan (the "1989 Plan")
to increase by 2,500,000 the number of shares reserved for the 1989 Plan. Upon
your approval, the term of the 1989 Plan would be extended to April 22, 2008.
The 1989 Plan was originally approved by the stockholders at the May 9,
1989 annual meeting and a total of 1,000,000 common shares were reserved. At the
April 27, 1994 annual meeting, the stockholders reserved an additional 1,500,000
shares for the 1989 Plan which were awarded to participants over a 5-year
period. A total of 2,500,000 shares has been reserved by the stockholders;
however, as of February 25, 1998 there were only 179,229 shares available for
the grant of new options. Approximately 100 employees of the Company hold
options under the 1989 Plan.
As of February 25, 1998, 1,358,495 stock options were outstanding under the
1989 Plan, including stock options for 284,500 shares which were issued on
December 3, 1997. The outstanding options have a ten-year term, are exercisable
at various dates through December 2007 and are conditioned upon continued
employment.
The Board of Directors has found that stock options granted to employees
have been highly effective in recruiting and retaining competent personnel. The
Board of Directors believes that the growth of the Company is dependent upon its
ability to attract, employ and retain executives and employees of outstanding
ability who will dedicate their maximum productive efforts toward the
advancement of the Company. The growing competition among companies for capable
managers makes it necessary for the Company to maintain a strong and competitive
incentive program. The proposed increase in the number of shares reserved and in
the life of the 1989 Plan are intended to assure the continued availability of
options for this purpose. The Company has grown dramatically in the past few
years and the number of participants in the 1989 Plan has more than doubled.
The following is a summary of the 1989 Plan and is qualified in its
entirety by the full text of the 1989 Plan. Any shareholder may obtain a copy of
the 1989 Plan by writing to Smith International, Inc., 16740 Hardy Street,
Houston, Texas 77032, Attention: Corporate Secretary. Requests may also be made
by fax to (281) 233-5996 or to the Company's website at (www.smith-intl.com).
The 1989 Plan is administered by the Committee. All full-time salaried
employees of the Company who are performing management, supervisory, sales,
scientific or engineering services or who the Committee decides are key
employees are eligible to receive awards under the 1989 Plan.
14
<PAGE> 18
The Committee determines awards based upon an employee's ability to
influence the Company's performance. Future awards are based on future
performance and cannot, therefore, be determined. Nonqualified stock options
have been granted to all Named Officers, seven Executive Group employees and 89
Non-Executive Officer employees, for a total of 101 current employees. No
directors of the Company have been granted awards under the 1989 Plan. Please
see "Executive Compensation" above for more information about stock options
granted.
The 1989 Plan provides for the following types of awards: (a) nonstatutory
stock option; (b) stock appreciation right related to an option; (c) stock
appreciation right not related to an option; (d) stock award; (e) restricted
stock; (f) cash award; and (g) any combination of the foregoing.
Exercise and Termination of Awards. The purchase price for a nonstatutory
stock option is payable in cash or in shares of Common Stock and may be
exercised only by the employee. If an employee voluntarily resigns or is
terminated for cause, all of the awards immediately terminate. If an employee
retires, the award expires three years after unless it expires sooner by its
terms. If an employee is terminated by the Company for any other reason, then
the award expires one year after unless it expires sooner by its terms. An award
may not be exercised after ten years from the date the award is granted.
Adjustment of Awards. If any change occurs in the capitalization of the
Company, such as a stock dividend or stock split, or if a merger takes place in
which the Company is the surviving corporation, the Committee can decide to
adjust the outstanding awards and the number of shares reserved under the 1989
Plan. In the event of a takeover bid or tender offer for 25% or more of the
outstanding securities of the Company, the restrictions on any restricted stock
would lapse immediately, all outstanding options and stock appreciation rights
become exercisable immediately, and all performance objectives are deemed to be
met and payment made immediately.
Amendment of the 1989 Plan. The Board of Directors may terminate, modify or
amend the 1989 Plan at any time without shareholder approval, except for
amendments that (a) change the class of persons eligible to receive awards; (b)
materially increase benefits; (c) transfer the administration of the 1989 Plan
to anyone who is not a "disinterested person" under the federal securities law;
or (d) increase the number of shares subject to the 1989 Plan.
The affirmative vote of a majority of the votes represented at the annual
meeting will be sufficient to approve the 1989 Plan.
THE BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE FOR APPROVAL OF THE
AMENDMENT TO THE 1989 PLAN.
PROPOSAL 3: APPROVAL OF AN AMENDMENT TO THE SMITH
INTERNATIONAL, INC. STOCK PLAN FOR OUTSIDE DIRECTORS
At the meeting, you will be asked to approve an amendment to the Smith
International, Inc. Stock Plan for Outside Directors (the "Stock Plan") to
increase by 20,000 the number of shares reserved for the Stock Plan. Upon your
approval, the term of the Stock Plan would be extended to April 22, 2008.
The Stock Plan was adopted and approved by the stockholders on April 28,
1992, and a total of 20,000 shares were reserved. The Stock Plan provides that
nonemployee directors can receive 200 shares of Common Stock per year, to be
issued as of the annual meeting date. As of February 25, 1998, there are 13,000
shares available for issuance.
The Company intends to terminate the Directors' Retirement Plan (discussed
at page 6 above) and to use shares in the Stock Plan to fund the benefits under
the retirement plan. The actuarial value of accrued benefits in the retirement
plan for the five outside directors will be calculated and the corresponding
value in Smith shares as of the termination date will be issued to the directors
as non-qualified stock options. The options would "cliff-vest" after ten years
of service as a director. This means the options would all vest at once after
ten years of service. Benefits under the current Directors' Retirement Plan
fully accrue after ten years of
15
<PAGE> 19
service. The Company anticipates that approximately 15,000 to 17,000 shares will
be needed in order to fund the retirement benefits.
It is important for the Company to attract outstanding directors and to
retain their services. The additional shares which are being requested for the
Stock Plan will be used as additional incentive for securing and retaining
qualified non-employee persons to serve on the Board of Directors of the
Company.
The following is a summary of the Stock Plan and is qualified in its
entirety by the full text of the Stock Plan. Any shareholder may obtain a copy
of the Stock Plan by writing to Smith International, Inc., 16740 Hardy Street,
Houston, Texas 77032, Attention: Corporate Secretary. Requests may also be made
by fax to (281) 233-5996 or to the Company's website at (www.smith-intl.com).
The Board of Directors may modify, revise or terminate the Stock Plan at
any time. If any amendment to the Stock Plan requires the approval of our
stockholders in order to assure that it complies with the rules of the
Securities and Exchange Commission rules, then an amendment would only be made
after obtaining the required shareholder vote.
The affirmative vote of a majority of the votes represented at the annual
meeting will be sufficient to approve the Stock Plan.
THE BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE FOR APPROVAL OF THE
AMENDMENT TO THE STOCK PLAN.
PROPOSAL 4: APPROVAL OF ARTHUR ANDERSEN LLP AS AUDITORS
The Board of Directors has selected Arthur Andersen LLP to audit the books
and records of the Company for its fiscal year ending December 31, 1997. The
Company has been advised by Arthur Andersen LLP that the firm has no
relationship with the Company or its subsidiaries other than that arising from
the firm's engagement as auditors, tax advisors and consultants.
Arthur Andersen LLP has been the Company's independent public accounting
firm since 1952. The firm has offices in or convenient to most of the locations
in the world where the Company and its subsidiaries operate. Representatives of
Arthur Andersen LLP will attend the annual meeting to answer questions and make
a statement if they desire.
THE BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE FOR THE CONTINUED
ENGAGEMENT OF ARTHUR ANDERSEN LLP TO AUDIT THE BOOKS AND RECORDS OF THE COMPANY
FOR THE FISCAL YEAR ENDING DECEMBER 31, 1998.
OTHER BUSINESS
The Board of Directors does not intend to present any other business for
action at the meeting and the Company has not been advised of any other business
intended to be presented by others.
STOCKHOLDERS' PROPOSALS
In order to be considered for inclusion in next year's proxy statement,
stockholder proposals must be submitted to the Company in writing by no later
than November 20, 1998.
ANNUAL REPORT AND FINANCIAL INFORMATION
A COPY OF THE COMPANY'S 1997 ANNUAL REPORT TO STOCKHOLDERS ACCOMPANIES THIS
PROXY STATEMENT. WE WOULD BE HAPPY TO PROVIDE WITHOUT CHARGE THE COMPANY'S
ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997, TO ANY
PERSON REQUESTING A COPY IN WRITING AND STATING THAT HE WAS A BENEFICIAL HOLDER
OF THE COMPANY'S COMMON STOCK ON FEBRUARY 25, 1998. THE COMPANY WILL ALSO
FURNISH COPIES OF
16
<PAGE> 20
ANY EXHIBITS TO THE FORM 10-K AT $0.50 PER PAGE, PAID IN ADVANCE. REQUESTS AND
INQUIRIES SHOULD BE ADDRESSED TO:
INVESTOR RELATIONS
SMITH INTERNATIONAL, INC.
P. O. BOX 60068
HOUSTON TX 77205-0068
The Company's 1997 Annual Report to Stockholders should not be regarded as
proxy soliciting material or as a communication for which a solicitation of
proxies is to be made.
By Order of the Board of Directors
/s/ NEAL S. SUTTON
Neal S. Sutton
Secretary
17
<PAGE> 21
VOTING INSTRUCTIONS
SMITH INTERNATIONAL, INC.
P ANNUAL MEETING OF SHAREHOLDERS APRIL 22, 1998
R TO: All Smith and M-I Employees participating in the Smith Stock Fund:
O We have been requested to forward to you the enclosed proxy material for
securities held by Vanguard in your 401(k) account but not registered in
X your name. These securities can be voted only by Vanguard's nominee as
the holder of record. We urge you to send in your instructions so that
Y your securities may be voted in accordance with your wishes.
The Annual Meeting of Shareholders of SMITH INTERNATIONAL, INC. will be
held at the Wyndham Hotel Greenspoint, 12400 Greenspoint Drive, Houston,
Texas on April 22, 1998 at 10:00 A.M.
The election of three directors to serve until they are succeeded by
other qualified directors who have been elected.
Nominees: James R. Gibbs
Jerry W. Neely
YOU ARE ENCOURAGED TO SPECIFY YOUR CHOICES BY MARKING THE APPROPRIATE
BOXES (SEE REVERSE SIDE), BUT YOU NEED NOT MARK ANY BOXES IF YOU WISH TO
VOTE AS THE BOARD OF DIRECTORS RECOMMENDS. YOUR SHARES CANNOT BE VOTED
UNLESS YOU SIGN AND RETURN THIS CARD. PLEASE DATE, SIGN AND RETURN THIS
CARD PROMPTLY IN THE RETURN ENVELOPE PROVIDED.
-----------
SEE REVERSE
SIDE
-----------
<PAGE> 22
- --- PLEASE MARK YOUR
X VOTES AS IN THIS
- --- EXAMPLE.
THIS PROXY WILL BE VOTED AS DIRECTED BELOW, OR WHERE NO DIRECTION IS
GIVEN, WILL BE VOTED "FOR" ITEMS 1, 2, 3 AND 4 AND IN THE DISCRETION OF THE
PROXIES ON ALL OTHER MATTERS.
FOR WITHHELD
1. Election of
Directors / / / /
(see reverse
side)
For, except vote withheld from the following nominee(s):
FOR AGAINST ABSTAIN
2. Approval of amendment to
Long-Term Incentive / / / / / /
Compensation Plan
3. Approval of amendment to
Stock Plan for Outside / / / / / /
Directors
4. Approval of Arthur
Andersen & Co. as / / / / / /
independent auditors
of the Company
5. In the discretion of the proxies on any other matters that
may properly come before the meeting or any adjournment
thereof
SIGNATURE(S) ______________________________________________________ DATE _____
NOTE: Signature(s) should agree with name(s) as printed on this proxy.
_______________________________________________________________________________
