<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 [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[ ] Preliminary Proxy Statement [ ] Confidential, for Use of the
Commission Only (as permitted by
Rule 14a-6(e)(2))
[X] 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):
[X] 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):
- --------------------------------------------------------------------------------
(4) Proposed maximum aggregate value of transaction:
- --------------------------------------------------------------------------------
(5) Total fee paid:
- --------------------------------------------------------------------------------
[ ] 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:
- --------------------------------------------------------------------------------
(2) Form, Schedule or Registration Statement No.:
- --------------------------------------------------------------------------------
(3) Filing Party:
- --------------------------------------------------------------------------------
(4) Date Filed:
- --------------------------------------------------------------------------------
<PAGE> 2
SMITH INTERNATIONAL, INC. LOGO
---------------------
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
APRIL 28, 1999
---------------------
To Our Stockholders:
The Annual Meeting of Stockholders of Smith International, Inc. (the
"Company") will be held on WEDNESDAY, APRIL 28, 1999, at 9:00 a.m., at 1209
Orange Street, Wilmington, Delaware, to consider and take action on the
following:
1. Re-election of three directors: G. Clyde Buck, Loren K. Carroll and
Wallace S. Wilson, each for a term of three years;
2. Ratification of Arthur Andersen LLP as auditors for 1999; and
3. Transacting any other business properly before the Annual Meeting.
YOUR BOARD OF DIRECTORS RECOMMENDS A VOTE "IN FAVOR OF" BOTH PROPOSALS.
The Board of Directors has fixed the close of business on March 3, 1999 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.
1998 Annual Report are being distributed on or about March 26, 1999.
This year we are offering two new ways to vote your shares. In addition to
the traditional paper proxy card, you may vote via the Internet or by telephone
by following the instructions included in this package. In either case, you will
need the Control Number that is imprinted on your personalized proxy card.
By Order of the Board of Directors
Neal S. Sutton Sig
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............................ 3
Stock Ownership of Directors and Executive Officers....... 5
Information about the Board and its Committees............ 6
Executive Compensation.................................... 6
Compensation and Benefits Committee Report on Executive
Compensation.......................................... 6
Comparison of Five-Year Cumulative Total Return........ 10
Executive Compensation Tables.......................... 11
I. Summary Compensation Table........................ 11
II. Stock Option/SAR Grants Table -- 1998 Grants...... 12
III. Aggregated Stock Option/SAR Exercises in 1998 and
Option/SAR Values as of Year-End 1998............. 12
Retirement Benefits and Employment Contracts........... 13
Additional Information about our Directors and Executive
Officers............................................... 14
Stock Ownership of Certain Beneficial Owners.............. 15
PROPOSAL 2: APPROVAL OF AUDITORS............................ 15
OTHER BUSINESS.............................................. 15
STOCKHOLDER PROPOSALS FOR THE 2000 ANNUAL MEETING........... 15
ANNUAL REPORT AND FINANCIAL INFORMATION..................... 16
</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 1999 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 26, 1999. IT IS IMPORTANT THAT YOUR SHARES BE
REPRESENTED AT THIS MEETING. EVEN IF YOU PLAN TO ATTEND THE MEETING, PLEASE VOTE
(1) BY COMPLETING, SIGNING, DATING AND MAILING THE PROXY CARD IN THE ENCLOSED
POSTAGE PRE-PAID ENVELOPE, OR (2) BY CALLING THE TOLL-FREE TELEPHONE NUMBER
LISTED ON THE PROXY CARD, OR (3) VIA THE INTERNET AS INDICATED ON THE PROXY
CARD.
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 March 3, 1999. At the close of business on March 3, 1999,
a total of 48,809,056 shares of common stock ("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, or if you vote by internet or
by telephone before the Annual Meeting, we will vote your shares as you direct.
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 both 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" PROPOSAL 2.
HOW YOU MAY REVOKE YOUR PROXY INSTRUCTIONS.
You can revoke your proxy at any time before it is exercised in any of four
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 submitting another proxy via the internet or by telephone on a
date after the date of your last proxy; or
(4) by voting in person at the meeting.
NUMBER OF VOTES REQUIRED.
Directors must be elected by a plurality of the votes cast at the meeting.
This means that the three nominees receiving the greatest number of votes will
be elected. A majority of the shares represented at the
1
<PAGE> 5
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 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. If any other matter is
presented at the meeting on which a vote may properly be taken, your signed
proxy card gives authority to Doug 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 1999 Annual Meeting, stockholders will elect three persons as Class
I directors to hold office until the 2002 Annual Meeting or until they are
succeeded by other qualified directors who have been elected. The nominees are
G. Clyde Buck, Loren K. Carroll and Wallace S. Wilson.
Directors must be elected by a plurality of the votes cast at the meeting.
This means that the three 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 your proxy card. If you properly
execute and return your proxy card (in paper form, electronically via the
internet or by telephone), 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.
2
<PAGE> 6
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 I for term expiring in 2002:
<TABLE>
<S> <C> <C>
G. CLYDE BUCK [PICTURE]
Age: 61
Director Since: 1992
Recent Business Experience: Mr. Buck has had extensive experience in
energy-related matters. 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 Harris, Webb & Garrison, Inc., a
position he has held since April 1998. From
1983 to April 1998, Mr. Buck was a Managing
Director in the Houston corporate finance
office of Dain Rauscher Incorporated.
Committee Membership: Compensation and Benefits Committee.
LOREN K. CARROLL PICTURE
Age: 55
Director Since: 1987
Recent Business Experience: Mr. Carroll 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 rejoined the Company
in 1992 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
subsidiary of the Company.
Committee Membership: Executive Committee.
WALLACE S. WILSON PICTURE
Age: 69
Director Since: 1998
Recent Business Experience: Mr. Wilson was President of Wilson
Industries, Inc. from 1964 to 1980, at which
time he assumed the additional position of
Chairman of the Board and Chief Executive
Officer. He served as Chairman of the Board,
President and Chief Executive Officer of
Wilson Industries, Inc. until April 30, 1998
when Wilson Industries was purchased by the
Company. Mr. Wilson became a director of the
Company on May 15, 1998.
</TABLE>
3
<PAGE> 7
DIRECTORS CONTINUING IN OFFICE
Directors of Class II to continue in office until 2000:
<TABLE>
<S> <C> <C>
BENJAMIN F. BAILAR [PICTURE]
Age: 64
Director Since: 1993
Recent Business Experience: Mr. Bailar is the Dean and H. Joe Nelson,
III Professor of Administration Emeritus of
Jesse H. Jones Graduate School of
Administration of Rice University, where he
held that position from September 1, 1987
through June 1997.
Committee Membership: Chairman, Audit Committee.
Other Directorships: Dana Corporation; U.S. Can Corporation;
Trico Marine Services, Inc.
DOUG ROCK [PICTURE]
Age: 52
Director Since: 1987
Recent Business Experience: Mr. Rock 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.
</TABLE>
Directors of Class III to continue in office until 2001:
<TABLE>
<S> <C> <C>
JAMES R. GIBBS [PICTURE]
Age: 54
Director Since: 1990
Recent Business Experience: Mr. Gibbs was President and Chief Operating
Officer of Frontier Oil Corporation
(formerly 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 Frontier
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: Frontier Oil Corporation; Veritas DGC Inc.;
advisory director of Frost Bank-Houston.
</TABLE>
4
<PAGE> 8
<TABLE>
<S> <C> <C>
JERRY W. NEELY [PICTURE]
Age: 62
Director Since: 1977
Recent Business Experience: Mr. Neely 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>
STOCK OWNERSHIP OF DIRECTORS AND EXECUTIVE OFFICERS
The following table shows the number of shares of Common Stock beneficially
owned as of March 3, 1999 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 6.6%
of the outstanding Common Stock.
SECURITY OWNERSHIP OF DIRECTORS AND EXECUTIVE OFFICERS
<TABLE>
<CAPTION>
COMMON STOCK
BENEFICIALLY OWNED
--------------------
NO. OF PERCENT
NAME OF INDIVIDUAL SHARES OF CLASS
- ------------------ --------- --------
<S> <C> <C>
Benjamin F. Bailar(1)............................ 3,600 *
G. Clyde Buck(1)................................. 10,600 *
Loren K. Carroll(2).............................. 160,125 *
James R. Gibbs(1)................................ 3,500 *
D. Barry Heppenstall(2).......................... 54,100 *
John J. Kennedy(2)............................... 31,525 *
Jerry W. Neely(1)................................ 267,302 *
Doug Rock(2)(3).................................. 248,632 *
Neal S. Sutton(2)................................ 63,850 *
Wallace S. Wilson(1)............................. 2,269,001 4.6
All Directors and executive officers as a group
(17 persons)(1)(2)(3).......................... 3,239,876 6.6
</TABLE>
- ---------------
* Less than 1%
(1) The amounts reported by Messrs. Buck, Bailar, Gibbs, Neely and Wilson
include 200 shares to be issued to each outside director on or about April
28, 1999 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 2, 1999 through the exercise of stock options as follows:
Mr. Rock: 229,938; Mr. Carroll: 132,425; Mr. Sutton: 63,850; Mr.
Heppenstall: 54,100; and Mr. Kennedy: 31,525; and all executive officers as
a group: 624,427.
(3) The amounts reported include Common Stock allocated to accounts under a
Section 40l(k) plan as follows: Mr. Rock: 18,694; all directors and
executive officers as a group: 33,746.
5
<PAGE> 9
INFORMATION ABOUT THE BOARD OF DIRECTORS AND ITS COMMITTEES
THE BOARD. During 1998, the Board of Directors held nine 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 Company has an Audit Committee and its members are Messrs. Bailar,
Gibbs and Neely. 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 1998, 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 1998, this committee held
two meetings. The Executive Compensation Subcommittee of this committee,
comprised of Messrs. Gibbs and Buck, held two meetings during 1998.
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 1998.
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 terminated its Directors'
Retirement Plan in 1998. The Company has issued each of the non-employee
directors restricted stock grants to fund the actuarial value of their accrued
benefits under the retirement plan. These grants will "cliff-vest" upon
retirement after ten years of service as a director. This means the grants will
all vest at once upon retirement after ten years of service.
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, PricewaterhouseCoopers, 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
6
<PAGE> 10
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.
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 consists of two members of the
Committee, Messrs. Gibbs and Buck, who are independent directors as defined in
the Internal Revenue Code and its regulations. 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.
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
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 1998, seven
executive officers received merit increases.
7
<PAGE> 11
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, their goals are
based on financial performance measures supporting that business unit's
performance. 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 1998 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 1998 under the Annual Incentive Plan for
fiscal year 1997 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 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
1997 meeting of the Committee and increased to $650,000. In setting Mr. Rock's
base salary for fiscal year 1998, the Committee reviewed the recommendations by
the independent consultant, PricewaterhouseCoopers, market comparisons as well
as the Company's positive financial performance during fiscal year 1997 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 1997 financial performance. For fiscal year 1997, Mr. Rock earned an
annual bonus in the amount of $550,000 which was paid in 1998.
Stock Options -- Non-qualified stock options to purchase 140,000 shares
were granted to Mr. Rock on December 1, 1998 at the recommendation of the
Committee. The award of stock options to Mr. Rock was approximately 16% of the
total stock options granted to all employees of the Company in 1998. 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.
8
<PAGE> 12
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
9
<PAGE> 13
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, 1993 and ending December 31, 1998. Our Peer Group consists of the following
companies in the same general line of business as the Company: Baker Hughes,
Inc., BJ Services Company, Daniel Industries, Inc., Dresser Industries, Inc.
(acquired by Halliburton Company in September 1998), Weatherford International
Inc., Halliburton Company and Tuboscope, Inc.
The results are based on an assumed $100 investment on December 31, 1993
and reinvestment of dividends. For each index, total return is based on market
capitalization of its components.
[GRAPH]
<TABLE>
<CAPTION>
Measurement Period
(Fiscal Year Covered) Smith S&P 500 Peer Group
<S> <C> <C> <C>
Dec. 1993 100 100 100
Dec. 1994 141.43 101.32 98.53
Dec. 1995 268.57 139.40 140.65
Dec. 1996 512.86 171.40 189.81
Dec. 1997 701.43 228.59 283.76
Dec. 1998 287.86 293.91 143.08
</TABLE>
10
<PAGE> 14
EXECUTIVE COMPENSATION TABLES
The following table shows compensation for services to Smith of the persons
who during 1998 were the chief executive officer and the other four most highly
compensated executive officers (the "Named Officers"):
<TABLE>
<CAPTION>
LONG TERM COMPENSATION
-------------------------------------
PAYOUTS
AWARDS -----------
ANNUAL ----------------------- LONG
COMPENSATION OTHER RESTRICTED SECURITIES TERM ALL
----------------- ANNUAL STOCK UNDERLYING INCENTIVE OTHER
NAME OF INDIVIDUAL AND SALARY BONUS COMPENSATION AWARDS OPTIONS PLAN COMPENSATION
PRINCIPAL POSITION YEAR $(1) $ $ $ (#) PAYOUTS ($) $(2)
- ---------------------- ---- ------- ------- ------------ ---------- ---------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Doug Rock........................ 1998 671,923 550,000 -- -- 140,000 -- 148,812
President and Chief Executive 1997 548,658 500,000 -- -- 60,000 -- 127,938
Officer 1996 499,237 310,960 -- -- 50,000 -- 145,308
Loren K. Carroll................. 1998 424,251 288,000 -- -- 64,000 -- 87,650
Executive Vice President, 1997 359,054 260,000 -- -- 28,000 -- 76,386
President and Chief Executive 1996 324,616 164,944 -- -- 25,000 -- 77,355
Officer of M-I L.L.C.
Neal S. Sutton................... 1998 264,046 161,000 -- -- 38,000 -- 52,687
Senior Vice President -- 1997 229,592 150,500 -- -- 12,400 -- 47,232
Administration, General 1996 214,802 97,006 -- -- 11,000 -- 49,887
Counsel and Secretary
D. Barry Heppenstall(3).......... 1998 258,862 157,500 -- -- -- -- 51,646
President -- Smith Tool 1997 224,735 150,500 -- -- 12,400 -- 46,648
business unit 1996 214,898 99,372 -- -- 11,000 -- 50,212
John J. Kennedy.................. 1998 258,862 157,500 -- -- 38,000 -- 51,646
Senior Vice President, 1997 210,591 150,500 -- -- 12,400 -- 44,950
Chief Financial Officer and 1996 163,577 67,194 -- -- 11,000 -- 35,359
Treasurer
</TABLE>
- ---------------
(1) The amounts in this column include compensation deferred by the Named
Officers in 1996, 1997 and 1998 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 1996, 1997 and 1998, 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 1998, SERP
contributions to the Named Officers' account are as follows: Mr. Rock:
$140,012; Mr. Carroll: $78,850; Mr. Sutton: $43,887; Mr. Heppenstall:
$43,407; and Mr. Kennedy: $44,446. In addition, this column also reflects
the Company's contributions to the Smith International, Inc. 401(k)
Retirement Plan. The 1998 contributions to the Named Officers' 401(k)
account are as follows: Mr. Rock: $8,800; Mr. Carroll: $8,800; Mr. Sutton:
$8,800; Mr. Heppenstall: $8,239; and Mr. Kennedy: $7,200.
(3) Mr. Heppenstall retired from the Company on December 31, 1998.
11
<PAGE> 15
OPTION/SAR GRANTS IN 1998
The following table shows all grants of options to the Named Officers in
1998. No stock appreciation rights were granted in 1998.
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
-------------------------------------------------------------------------------
NUMBER OF
SECURITIES % OF TOTAL
UNDERLYING OPTIONS GRANTED EXERCISE OR
OPTION TO EMPLOYEES BASE PRICE EXPIRATION GRANT DATE
NAME GRANTS(#)(1) IN 1998 ($/SHARE) DATE PRESENT VALUE($)(2)
- ---- ------------ --------------- ----------- ---------- -------------------
<S> <C> <C> <C> <C> <C>
Doug Rock....................... 140,000 16.0 23.56 12-01-08 1,521,800
Loren K. Carroll................ 64,000 7.3 23.56 12-01-08 695,680
Neal S. Sutton.................. 38,000 4.3 23.56 12-01-08 413,060
D. Barry Heppenstall............ 0 0 -- -- 0
John J. Kennedy................. 38,000 4.3 23.56 12-01-08 413,060
</TABLE>
- ---------------
(1) Options were granted to the Named Officers on December 1, 1998 at an
exercise price of $23.56. The exercise price per share is equal to the
closing price of the Common Stock on the New York Stock Exchange Composite
Tape on the date of grant. Options granted vest at a rate of 25% per year
and will not begin to become exercisable until December 1, 1999. If a change
of control occurs, all outstanding options would become exercisable
immediately.
(2) Present value was calculated using the Black-Scholes option pricing model.
Use of this model should not be viewed in any way as a forecast of the
future performance of the Company's Common Stock, which will be determined
by future events and unknown factors. The estimated values under the
Black-Scholes model are based upon certain assumptions as to variables such
as interest rate and stock price volatility.
AGGREGATED OPTION EXERCISES IN 1998 AND DECEMBER 31, 1998 OPTION VALUES
The following table provides information on options exercised by the Named
Officers during 1998 and the value of options held by such officers at December
31, 1998.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED OPTIONS AT IN-THE-MONEY OPTIONS AT
SHARES DECEMBER 31, 1998 DECEMBER 31, 1998($)(1)
ACQUIRED ON VALUE ------------------------------- -------------------------
NAME EXERCISE(#) REALIZED($) EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
- ---- ----------- ----------- ------------------------------- -------------------------
<S> <C> <C> <C> <C>
Doug Rock..................... 0 0 229,938/218,750 2,308,535/ 63,941
Loren K. Carroll.............. 0 0 132,425/102,250 1,441,349/138,871
Neal S. Sutton................ 0 0 63,850/ 55,050 713,304/ 78,287
D. Barry Heppenstall.......... 3,500 $175,000 54,100/ 17,050 502,554/ 16,442
John J. Kennedy............... 0 0 31,525/ 54,200 286,140/ 72,076
</TABLE>
- ---------------
(1) Value based on the closing price on the New York Stock Exchange Composite
Tape for the Common Stock on December 31, 1998 ($25.19).
12
<PAGE> 16
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.
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 25 30
- ------------ -------- -------- --------
<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 governing 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
13
<PAGE> 17
("AWCP") ranging from 2 to 6%. The difference between a participant's (i) "Total
401(k) Compensation" and his or her (ii) "Net 401(k) Compensation" is multiplied
by the AWCP to compute the age-weighted contribution for the year. "Total 401(k)
Compensation" generally means the total of all cash amounts paid by the Company
to a participant, including deferred amounts. "Net 401(k) Compensation"
generally means Total 401(k) Compensation less participant contributions to the
SERP, but not to exceed $160,000 for any year. Effective January 1, 1995, the
SERP was amended to fix the AWCP for the executive officers at 6%.
Matching Contributions. The SERP contains matching provisions which mirror
the matching formulas in effect for the 401(k) Plan for a given plan year, but
without regard to certain Code limits applicable to the 401(k) Plan. Matching
contributions for a plan year in both the SERP and 401(k) combined cannot exceed
6% of a participant's Total 401(k) Compensation net of any incentive bonus.
Effective January 1, 1995, the SERP was amended so that executive officers will
receive combined matching contributions up to 6% of their Total 401(k)
Compensation.
Discretionary Profit Sharing Contributions. The Compensation Committee of
the Board 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 three senior officers, including
Messrs. Rock and Sutton. The agreements with Messrs. Rock, Sutton and one senior
officer have an initial term of three years and are automatically extended for
an additional year at each anniversary date. 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 401(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 1998 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 1998, neither Mr. Buck, Mr. Gibbs nor Mr. Neely were
officers or employees of the Company or any
14
<PAGE> 18
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.
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 March 3, 1999. 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.................................................... 7,187,900 14.7%
82 Devonshire Street
Boston, Massachusetts 02109
T. Rowe Price Associates, Inc............................... 3,731,300 7.6%
100 East Pratt Street
Baltimore, Maryland 20212
</TABLE>
PROPOSAL 2: 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, 1999. 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.
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, 1999.
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, 1999.
15
<PAGE> 19
ANNUAL REPORT AND FINANCIAL INFORMATION
A COPY OF THE COMPANY'S 1998 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, 1998, TO ANY
PERSON REQUESTING A COPY IN WRITING AND STATING THAT HE WAS A BENEFICIAL HOLDER
OF THE COMPANY'S COMMON STOCK ON MARCH 3, 1999. THE COMPANY WILL ALSO FURNISH
COPIES OF 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 1998 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
16
<PAGE> 20
PROXY
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS OF
SMITH INTERNATIONAL, INC.
The undersigned hereby appoints Doug Rock and Neal S. Sutton, and each of
them, as his or her Proxy with full power of substitution in each, to represent
the undersigned at the Annual Meeting of Shareholders of SMITH INTERNATIONAL,
INC. to be held at 1209 Orange Street, Wilmington, Delaware on April 28, 1999
at 9:00 a.m., and at any adjournments thereof, on all matters that may properly
come before the meeting.
YOUR SHARES WILL BE VOTED AS DIRECTED ON THIS CARD. IF SIGNED AND NO
DIRECTION IS GIVEN FOR ANY ITEM, IT WILL BE VOTED IN FAVOR OF ITEMS 1 AND 2.
To vote by telephone or internet, please see the reverse of this card. To
vote by mail, please sign and date this card on the reverse, tear off at the
perforation, and mail promptly in the enclosed postage-paid envelope.
Comments/Address Change:
--------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
YOUR VOTE IS VERY IMPORTANT. THANK YOU FOR VOTING.
*If you are voting by mail, detach Proxy Card here, sign, date and mail in
postage-paid envelope provided*
[SMITH LOGO]
LOG ONTO OUR WEB SITE AT http://www.smith.com
FOR MORE COMPREHENSIVE INFORMATION
To view your shareholder account on the Internet, please call First Chicago
Trust Company toll free at 1-877-THE-WEB7 (1-877-843-9327) and they will mail
you a password that provides you secure account access. If you are calling from
outside North America, please call 201-536-8071.
<PAGE> 21
[ X ] PLEASE MARK YOUR
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 and 2 and in the discretion of the proxies on all
other matters.
The Board of Directors recommends a vote FOR Proposals 1 and 2
<TABLE>
<CAPTION>
FOR WITHHELD NOMINEES: FOR AGAINST ABSTAIN
<S> <C> <C> <C> <C> <C> <C> <C>
1. ELECTION OF [ ] [ ] 01. G. Clyde Buck 2. Approval of Arthur Andersen LLP [ ] [ ] [ ]
DIRECTORS: as independent auditors of the
02. Loren K. Carroll Company.
03. Wallace S. Wilson 3. In the discretion of the proxies on any other matters that
may properly come before the meeting or any adjournment thereof.
For, except vote withheld from the following nominee(s):
SPECIAL ACTION
Comments or change of
address on reverse side
</TABLE>
SIGNATURE(S) DATE
-------------------------------------------- --------------------
NOTE: Signature(s) should agree with name(s) as printed on this proxy. When
signing in a fiduciary capacity, please give title as such. Co-fiduciaries and
joint owners should each sign.
- --------------------------------------------------------------------------------
Please carefully detach here and return this proxy in reply envelope
SMITH INTERNATIONAL, INC. encourages you to take advantage of new and
convenient ways by which you can vote your shares. You can vote your shares
electronically over the Internet or by telephone. This eliminates the need to
return the proxy card.
TO VOTE YOUR SHARES BY TELEPHONE OR VIA THE INTERNET, YOU MUST HAVE YOUR PROXY
CARD AND SOCIAL SECURITY NUMBER AVAILABLE. THE SERIES OF NUMBERS THAT APPEAR ON
THE TOP OF YOUR PROXY CARD MUST BE USED TO ACCESS THE SYSTEM.
1. To vote by telephone: On a touch-tone telephone, call 1-800-652-8683 toll
free from the U.S. and Canada.
2. To vote via the Internet Access the World Wide Web site
http://www.vote-by-net.com.
Voting by telephone and via the Internet is available 24 hours a day, 7 days a
week.
Your vote by telephone or via the Internet authorizes the named proxies in the
same manner as if you completed, signed, dated and mailed the proxy card.
If you choose to vote your shares by telephone or via the Internet, there is no
need for you to mail back your proxy card.
YOUR VOTE IS IMPORTANT. THANK YOU FOR VOTING.
