<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:
[ ] 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):
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(4) Proposed maximum aggregate value of transaction:
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(5) Total fee paid:
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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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(2) Form, Schedule or Registration Statement No.:
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(3) Filing Party:
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(4) Date Filed:
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<PAGE> 2
[SMITH INTERNATIONAL, INC. LOGO]
---------------------
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
APRIL 25, 2000
---------------------
To Our Stockholders:
The Annual Meeting of Stockholders of Smith International, Inc. (the
"Company") will be held on TUESDAY, APRIL 25, 2000, at 9:00 a.m., at 1209 Orange
Street, Wilmington, Delaware, to consider and take action on the following:
1. Re-election of two directors: Benjamin F. Bailar and Doug Rock,
both for a term of three years;
2. Ratification of Arthur Andersen LLP as auditors for 2000; 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 1, 2000 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.
1999 Annual Report are being distributed on or about March 24, 2000.
This year we are again offering three 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
/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
Nominees.................................................. 3
Directors Continuing in Office............................ 4
Stock Ownership of Directors and Executive Officers....... 6
Information about the Board and its Committees............ 6
Executive Compensation.................................... 7
Compensation and Benefits Committee Report on Executive
Compensation.......................................... 7
Comparison of Five-Year Cumulative Total Return........ 11
Executive Compensation Tables.......................... 12
I. Summary Compensation Table........................ 12
II. Stock Option/SAR Grants in 1999................... 13
III. Aggregated Stock Option/SAR Exercises in 1999 and
December 31, 1999 Option Values................... 13
Retirement Benefits and Employment Contracts........... 13
Additional Information about our Directors and Executive
Officers............................................... 15
Stock Ownership of Certain Beneficial Owners.............. 16
PROPOSAL 2: APPROVAL OF ARTHUR ANDERSEN LLP AS AUDITORS..... 16
OTHER BUSINESS.............................................. 16
STOCKHOLDERS' PROPOSALS..................................... 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 2000 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 24, 2000. 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 1, 2000. At the close of business on March 1, 2000,
a total of 49,874,930 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 that you are entitled to vote.
HOW YOU CAN VOTE.
If you return your signed proxy card to us, or if you vote by the 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
that 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;
(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 two 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 that 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. Abstentions and
broker non-votes have no effect on the outcome of the election of directors.
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 Loren K. Carroll 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 2000 Annual Meeting, stockholders will elect two persons as Class II
directors to hold office until the 2003 Annual Meeting, or until they are
succeeded by other qualified directors who have been elected. The nominees are
Benjamin F. Bailar and Doug Rock.
Directors must be elected by a plurality of the votes cast at the meeting.
This means that the two 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.
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<PAGE> 6
Both of the nominees are now members of the Board of Directors. A brief
biography of all directors is presented below:
NOMINEES
Directors to be elected to Class II for term expiring in 2003:
<TABLE>
<S> <C> <C>
BENJAMIN F. BAILAR [PICTURE]
Age: 65
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.; Trustee of the
Philatelic Foundation.
</TABLE>
<TABLE>
<S> <C> <C>
DOUG ROCK [PICTURE]
Age: 53
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>
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<PAGE> 7
DIRECTORS CONTINUING IN OFFICE
Directors of Class III to continue in office until 2001:
<TABLE>
<S> <C> <C>
JAMES R. GIBBS [PICTURE]
Age: 55
Director Since: 1990
Recent Business Experience: Mr. Gibbs is the Chairman of the Board,
President & Chief Executive Officer of
Frontier Oil Corporation (formerly Wainoco
Oil Corporation). He was President and Chief
Operating Officer of Frontier from January
1, 1987 to April 1, 1992, at which time he
assumed the additional position of Chief
Executive Officer. He was elected Chairman
of the Board of Frontier in April 1999. 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.;
Talon International, Inc.; advisory director
of Frost Bank-Houston.
</TABLE>
<TABLE>
<S> <C> <C>
JERRY W. NEELY [PICTURE]
Age: 63
Director Since: 1977
Recent Business Experience: Mr. Neely 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>
4
<PAGE> 8
Directors of Class I to continue in office until 2002:
<TABLE>
<S> <C> <C>
G. CLYDE BUCK [PICTURE]
Age: 62
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 Senior
Vice President and Managing Director
Corporate Finance of the investment banking
firm of Sanders Morris Harris (which
recently merged with Harris, Webb &
Garrison, Inc.), a position he has held
since April 1998. From 1983 to 1998, Mr.
Buck was a Managing Director in the Houston
corporate finance office of Dain Rauscher
Incorporated.
Committee Membership: Compensation and Benefits Committee.
</TABLE>
<TABLE>
<S> <C> <C>
LOREN K. CARROLL [PICTURE]
Age: 56
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
company in which the Company holds a 60%
interest.
Committee Membership: Executive Committee.
Other Directorships: Fleetwood Enterprises, Inc.
</TABLE>
<TABLE>
<S> <C> <C>
WALLACE S. WILSON [PICTURE]
Age: 70
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.
Committee Membership: Compensation and Benefits Committee.
</TABLE>
5
<PAGE> 9
STOCK OWNERSHIP OF DIRECTORS AND EXECUTIVE OFFICERS
The following table shows the number of shares of Common Stock beneficially
owned as of March 1, 2000 by each Director or nominee for Director, the
executive officers named in the Summary Compensation Table included later in
this proxy statement 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. All Directors and executive
officers beneficially own 5.7% 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)............................ 3,800 *
Roger A. Brown................................... 59,700 *
G. Clyde Buck(1)................................. 10,800 *
Loren K. Carroll................................. 136,450 *
James R. Gibbs(1)................................ 3,700 *
Jerry W. Neely(1)................................ 247,502 *
Doug Rock........................................ 137,500 *
Neal S. Sutton................................... 32,950 *
Richard A. Werner................................ 44,200 *
Wallace S. Wilson(1)............................. 2,093,850 4.2
All Directors and executive officers as a group
(16 persons)(1)(2)(3).......................... 2,835,623 5.7
</TABLE>
- ---------------
* Less than 1%
(1) The amounts reported by Messrs. Bailar, Buck, Gibbs, Neely and Wilson
include 200 shares to be issued to each outside director on or about April
25, 2000 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 1, 2000 through the exercise of stock options as follows:
Mr. Rock: 137,500; Mr. Carroll: 108,750; Mr. Sutton: 32,950; Mr. Werner:
44,200; and Mr. Brown: 59,700; and all executive officers as a group:
444,750.
(3) The amounts reported include Common Stock allocated to accounts under a
Section 401(k) plan as follows: Mr. Werner: 409 shares; all directors and
executive officers as a group: 3,521.
INFORMATION ABOUT THE BOARD OF DIRECTORS AND ITS COMMITTEES
THE BOARD. During 1999, 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 1999, the Audit Committee held two
meetings.
The Company has a Compensation and Benefits Committee, and its members are
Messrs. Gibbs, Buck, Neely and Wilson. 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 1999, this committee held
two meetings. The Executive
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<PAGE> 10
Compensation Subcommittee of this committee, comprised of Messrs. Gibbs and
Buck, held two meetings during 1999.
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 1999.
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 $28,000 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.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Messrs. Buck, Gibbs, Neely and Wilson are members of the Company's
Compensation and Benefits Committee. During 1999, neither Mr. Buck, Mr. Gibbs,
Mr. Neely nor Mr. Wilson 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.
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 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.
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TAX CONSIDERATIONS
Section 162(m) of 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 or slightly above 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 1999, 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
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<PAGE> 12
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 to
corporate executives unless certain threshold Company performance levels set by
the Committee are reached. Business unit executives must meet certain threshold
performance levels in their business unit's annual incentive plan in order to
receive a bonus.
Each year the Committee sets targets for each executive relating to annual
incentive compensation. The target incentive awards for 1999 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. No awards were made to corporate executives in 1999 under the
Annual Incentive Plan for fiscal year 1998. Awards were made to executives in
several of the Company's business units based upon the unit reaching performance
goals under its annual incentive plan for 1998.
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.
The Executive Compensation Subcommittee (the "Subcommittee") determines the
pay level for 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 Chief Executive Officer
is based upon the Company's performance. Specific actions taken by the
Subcommittee regarding Mr. Rock's compensation are summarized below.
Base Salary -- The base salary for Mr. Rock was reviewed at the December
1998 meeting of the Subcommittee and increased to $715,000. In setting Mr.
Rock's base salary for fiscal year 1999, the Subcommittee reviewed the
recommendations by the independent consultant, PricewaterhouseCoopers and market
comparisons as well as the Company's acquisition activities and expense control
during fiscal year 1998.
Annual Incentive -- No annual incentive bonus was paid to Mr. Rock in 1999
due to the Company's performance in 1998, which resulted from a severe downturn
in the industry.
Stock Options -- Non-qualified stock options to purchase 99,400 shares were
granted to Mr. Rock on December 7, 1999 at the recommendation of the
Subcommittee. The award of stock options to Mr. Rock was approximately 18% of
the total stock options granted to all employees of the Company in 1999. 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.
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<PAGE> 13
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
Wallace S. Wilson
10
<PAGE> 14
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, 1994 and ending December 31, 1999. Our Peer Group consists of the following
companies in the same general line of business as the Company: Baker Hughes,
Inc., BJ Services Company, Weatherford International Inc., Halliburton Company
and Tuboscope, Inc.
The results are based on an assumed $100 investment on December 31, 1994
and reinvestment of dividends (if applicable). For each index, total return is
based on market capitalization of its components.
[PERFORMANCE GRAPH]
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
Dec. 1994 Dec. 1995 Dec. 1996 Dec. 1997 Dec. 1998 Dec. 1999
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Smith $100.00 $189.90 $362.63 $495.96 $203.54 $401.52
S&P 500 $100.00 $137.58 $169.17 $225.60 $290.08 $351.12
Peer Group $100.00 $142.75 $192.65 $288.01 $145.23 $204.93
</TABLE>
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<PAGE> 15
EXECUTIVE COMPENSATION TABLES
The following table shows compensation for services to Smith of the persons
who during 1999 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
-------------------------------------
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>
Douglas L. Rock.................. 1999 715,000 0 -- -- 99,400 -- 84,130
President and Chief Executive 1998 671,923 550,000 -- -- 140,000 -- 148,812
Officer 1997 548,658 500,000 -- -- 60,000 -- 127,938
Loren K. Carroll................. 1999 450,008 0 -- -- 40,500 -- 52,319
Executive Vice President, 1998 424,251 288,000 -- -- 64,000 -- 87,650
President and Chief Executive 1997 359,054 260,000 -- -- 28,000 -- 76,386
Officer of M-I L.L.C.
Neal S. Sutton................... 1999 315,016 0 -- -- 20,200 -- 35,650
Senior Vice 1998 264,046 161,000 -- -- 38,000 -- 52,687
President -- Administration, 1997 229,592 150,500 -- -- 12,400 -- 47,232
General Counsel and Secretary
Richard A. Werner................ 1999 260,000 153,540 -- -- 20,200 -- 47,461
President -- Smith Services 1998 232,889 140,000 -- -- 38,000 -- 44,707
business unit 1997 199,677 131,600 -- -- 12,400 -- 36,936
Roger A. Brown................... 1999 260,000 99,440 -- -- 20,200 -- 40,957
President -- Smith Bits business 1998 241,118 128,800 -- -- 38,000 -- 46,071
unit 1997 199,677 131,600 -- -- 12,400 -- 36,961
</TABLE>
- ---------------
(1) The amounts in this column include compensation deferred by the Named
Officers in 1997, 1998 and 1999 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 1997, 1998 and 1999, excluding interest (at
120% of the applicable Federal long-term rate). In 1999, SERP contributions
to the Named Officers' account are as follows: Mr. Rock: $75,330; Mr.
Carroll: $41,919; Mr. Sutton: $26,850; Mr. Werner: $37,061; and Mr. Brown:
$32,157. In addition, this column also reflects the Company's contributions
to the Smith International, Inc. 401(k) Retirement Plan. The 1999
contributions to the Named Officers' 401(k) account are as follows: Mr.
Rock: $8,800; Mr. Carroll: $10,400; Mr. Sutton: $8,800; Mr. Werner: $10,400;
and Mr. Brown: $8,800.
12
<PAGE> 16
OPTION/SAR GRANTS IN 1999
The following table shows all grants of options to the Named Officers in
1999. No stock appreciation rights were granted in 1999.
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
-------------------------------------------------------------------------------
NUMBER OF
SECURITIES % OF TOTAL
UNDERLYING OPTIONS GRANTED EXERCISE OR
OPTION TO EMPLOYEES BASE PRICE EXPIRATION GRANT DATE
NAME GRANTS(#)(1) IN 1999 ($/SHARE) DATE PRESENT VALUE($)(2)
- ---- ------------ --------------- ----------- ---------- -------------------
<S> <C> <C> <C> <C> <C>
Douglas L. Rock................. 99,400 18.2% 39.19 12-07-09 1,818,225
Loren K. Carroll................ 40,500 7.4% 39.19 12-07-09 740,826
Neal S. Sutton.................. 20,200 3.7% 39.19 12-07-09 369,498
Richard A. Werner............... 20,200 3.7% 39.19 12-07-09 369,498
Roger A. Brown.................. 20,200 3.7% 39.19 12-07-09 369,498
</TABLE>
- ---------------
(1) Options were granted to the Named Officers on December 7, 1999 at an
exercise price of $39.19. The exercise price per share is equal to the
closing price of the Common Stock on the New York Stock Exchange Composite
Tape on the date of grant. Options granted vest at a rate of 25% per year
and will not begin to become exercisable until December 7, 2000. If a change
of control occurs, all outstanding options would become exercisable
immediately.
(2) Present value was calculated using the Black-Scholes option pricing model.
Use of this model should not be viewed in any way as a forecast of the
future performance of the Company's Common Stock, which will be determined
by future events and unknown factors. The estimated values under the
Black-Scholes model are based upon certain assumptions as to variables such
as interest rate and stock price volatility. The ultimate value of the
options will depend on the future market price of the Company's Common
Stock.
AGGREGATED OPTION EXERCISES IN 1999 AND DECEMBER 31, 1999 OPTION VALUES
The following table provides information on options exercised by the Named
Officers during 1999 and the value of options held by such officers at December
31, 1999.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED OPTIONS AT IN-THE-MONEY OPTIONS AT
SHARES DECEMBER 31, 1999 DECEMBER 31, 1999($)(1)
ACQUIRED ON VALUE ------------------------------- -------------------------
NAME EXERCISE(#) REALIZED($) EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
- ---- ----------- ----------- ------------------------------- -------------------------
<S> <C> <C> <C> <C>
Douglas L. Rock............ 30,000 $ 859,875 271,188/246,900 7,299,175/3,893,808
Loren K. Carroll........... 25,000 $1,035,812 141,425/108,750 3,924,541/1,732,753
Neal S. Sutton............. 11,500 $ 469,945 69,950/ 57,650 1,990,956/ 980,216
Richard A. Werner.......... 31,650 $1,177,041 44,200/ 57,650 1,048,413/ 980,216
Roger A. Brown............. 8,250 $ 262,928 59,700/ 57,650 1,592,219/ 980,216
</TABLE>
- ---------------
(1) Value based on the closing price on the New York Stock Exchange Composite
Tape for the Common Stock on December 31, 1999 ($49.6875).
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.
13
<PAGE> 17
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. Werner: $-0-; and Mr. Brown: $-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 in service
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 limitations under the
Company's 401(k) Retirement Plan (the "401(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 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 $170,000 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, 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
14
<PAGE> 18
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
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 Messrs. Rock, Sutton and Werner.
These agreements have an initial term of three years and are automatically
extended for an additional year at each anniversary date. The employment
agreements with Messrs. Rock, Sutton and Werner 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.
On January 4, 2000, the Company entered into Change-of-Control Employment
Agreements ("Agreement") with seven executive officers, including Messrs. Rock,
Carroll, Sutton, Werner and Brown. In the event of a "change of control" of the
Company, as defined in the Agreement, the Change-of-Control Agreements provide
for the continued employment of the seven executive officers for a period of
three years and provide for the continuation of salary and benefits. If the
executive is terminated by the Company (other than for cause, death or
disability), or if the executive elects to terminate his employment for "Good
Reason", as defined in the Agreement, the executive is entitled to receive a
lump sum payment in cash equal to the aggregate of the following amounts: (i)
current annual base salary and pro rata bonus through the date of termination;
(ii) any compensation previously deferred by the executive and any accrued
vacation pay; (iii) three times the executive's annual base salary and Highest
Annual Bonus, as defined in the Agreement; and (iv) any actuarial difference in
the SERP benefit the executive would have received had the executive's
employment continued for three years after the date of the executive's
termination.
The executive would also receive continued coverage under applicable
welfare and benefit plans for three years. The Change of Control Agreements also
provide for an additional payment to the executive of an amount equal to any
Excise Tax, as defined in the Agreement, imposed on the aggregate cash payment
described above and any income taxes imposed on such additional payment, so that
the executive receives the amount that would have been received had any Excise
Tax not been imposed. The determination of whether and when the additional
payment is required and the amount of such payment will be made by Arthur
Andersen LLP.
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 1999 all filings were made in compliance with SEC
requirements.
15
<PAGE> 19
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 1, 2000. 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.................................................... 7,244,186 14.5%
82 Devonshire Street
Boston, Massachusetts 02109
Morgan Stanley Dean Witter & Co............................. 3,759,632 7.5%
1585 Broadway
New York, New York 10036
T. Rowe Price Associates, Inc............................... 2,948,200 5.9%
100 East Pratt Street
Baltimore, Maryland 20212
AMVESCAP PLC................................................ 2,895,850 5.8%
1315 Peachtree Street, N.E.
Atlanta, Georgia 30309
</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, 2000. 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, 2000.
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 27, 2000. In addition, in order for a stockholder to bring any
business before a stockholder meeting, timely notice must be received by the
Company in writing by no later than November 27, 2000.
16
<PAGE> 20
ANNUAL REPORT AND FINANCIAL INFORMATION
A COPY OF THE COMPANY'S 1999 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, 1999, TO ANY
PERSON REQUESTING A COPY IN WRITING AND STATING THAT HE WAS A BENEFICIAL HOLDER
OF THE COMPANY'S COMMON STOCK ON MARCH 1, 2000. 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 1999 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
[X] Please mark your 7551
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.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR PROPOSALS 1 AND 2
- --------------------------------------------------------------------------------------------------------------------------
FOR WITHHELD NOMINEES: FOR AGAINST ABSTAIN
<S> <C> <C>
1. Election of [ ] [ ] 01. Benjamin F. Bailar 2. Approval of Arthur Andersen LLP [ ] [ ] [ ]
Directors. 02. Doug Rock as independent
auditors of the Company.
For, except vote withheld from
the following nominee(s):
3. In the discretion of the proxies on any other matters that
- ------------------------------ may properly come before the meeting or any adjournment thereof.
--------------------------------------
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.
<PAGE> 22
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS OF
SMITH INTERNATIONAL, INC.
P The undersigned hereby appoints Loren K. Carroll and Neal S. Sutton, and
R each of them, as his or her Proxy with full power of substitution in each, to
O represent the undersigned at the Annual Meeting of Shareholders of SMITH
X INTERNATIONAL, INC. to be held at 1209 Orange Street, Wilmington, Delaware on
Y April 25, 2000 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.
Please sign and date this card on the reverse and mail promptly in the
enclosed postage-paid envelope.
Comments/Address Change:
--------------------------------------------------------
- --------------------------------------------------------------------------------
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- --------------------------------------------------------------------------------
YOUR VOTE IS VERY IMPORTANT. THANK YOU FOR VOTING.
