UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
SCHEDULE 14A
(RULE 14a-101)
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 under Rule 14a-2
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)(1) 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:
----------------------------------------------------------------------
SEC 1913 (04-04)
(SMITH INTERNATIONAL, INC. LOGO)
---------------------
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
APRIL 26, 2005
---------------------
To Our Stockholders:
The Annual Meeting of Stockholders (the "Annual Meeting") of Smith
International, Inc. (the "Company") will be held on TUESDAY, APRIL 26, 2005, at
9:00 a.m., at 700 King Street, Wilmington, Delaware, to consider and take action
on the following:
1. Election of three directors: G. Clyde Buck, Loren K. Carroll and
Dod A. Fraser, each for a term of three years;
2. Approval of an amendment to the Company's Restated Certificate of
Incorporation to increase the number of authorized shares of common
stock from 150,000,000 to 250,000,000.
3. Approval of the Smith International, Inc. 1989 Long-Term Incentive
Compensation Plan as amended and restated effective January 1,
2005;
4. Ratification of Deloitte & Touche LLP as independent auditors for
2005.
YOUR BOARD OF DIRECTORS RECOMMENDS A VOTE "IN FAVOR OF" PROPOSALS 1, 2, 3
AND 4.
The Board of Directors has fixed the close of business on March 1, 2005 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.
2004 Annual Report are being distributed on or about March 28, 2005.
Your vote is important. Please vote your proxy promptly so your shares can
be represented, even if you plan to attend the Annual Meeting. You can vote by
Internet, by telephone, or by using the proxy card that is enclosed. Please see
your proxy card for specific instructions on how to vote.
By Order of the Board of Directors
-s- Neal S. Sutton
Neal S. Sutton
Secretary
PROXY STATEMENT
TABLE OF CONTENTS
PAGE
----
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 of Directors and its
Committees............................................. 7
Corporate Governance...................................... 9
Audit Committee Report.................................... 10
Executive Compensation.................................... 12
Compensation and Benefits Committee Report on Executive
Compensation.......................................... 12
Comparison of Five-Year Cumulative Total Return........ 16
Executive Compensation Tables.......................... 17
I. Summary Compensation Table........................ 17
II. Option/SAR Grants in 2004......................... 18
III. Aggregated Option Exercises in 2004 and December
31, 2004 Option Values................................ 18
Retirement Benefits and Employment Contracts........... 19
Additional Information about Our Directors and Executive
Officers............................................... 22
Stock Ownership of Certain Beneficial Owners.............. 23
PROPOSAL 2: APPROVAL OF AN AMENDMENT TO THE RESTATED
CERTIFICATE OF INCORPORATION TO INCREASE THE NUMBER OF
AUTHORIZED SHARES OF COMMON STOCK FROM 150,000,000 TO
250,000,000............................................... 24
PROPOSAL 3: APPROVAL OF SMITH INTERNATIONAL, INC. 1989
LONG-TERM INCENTIVE COMPENSATION PLAN AS AMENDED AND
RESTATED EFFECTIVE JANUARY 1, 2005........................ 25
PROPOSAL 4: RATIFICATION OF DELOITTE & TOUCHE LLP AS
INDEPENDENT AUDITORS...................................... 28
OTHER BUSINESS.............................................. 29
STOCKHOLDERS' PROPOSALS..................................... 30
ANNUAL REPORT AND FINANCIAL INFORMATION..................... 30
Appendix A -- Smith International, Inc Long-Term Incentive
Plan as amended and restated effective January 1, 2005.... A-1
(SMITH INTERNATIONAL LOGO)
P. O. Box 60068
Houston TX 77205-0068
PROXY STATEMENT
The Board of Directors of Smith International, Inc. is soliciting your
proxy to vote your shares at the 2005 Annual Meeting. This Proxy Statement and
the accompanying proxy card are being mailed to you on or about March 28, 2005.
"We," "our," "Smith" and the "Company" each refers to Smith International, Inc.
We solicit proxies to give all stockholders of record an opportunity to vote on
matters that will be presented at the Annual Meeting. In this Proxy Statement,
you will find information to assist you in voting your shares. YOUR VOTE IS VERY
IMPORTANT.
GENERAL INFORMATION ABOUT VOTING
WHO CAN VOTE.
You are entitled to vote your shares of our common stock ("Common Stock")
if our records show that you held your shares as of March 1, 2005. At the close
of business on March 1, 2005, a total of 106,037,836 shares of Common Stock were
outstanding and entitled to vote. Each share of Common Stock has one vote. The
enclosed proxy card shows the number of shares that you are entitled to vote.
HOW YOU CAN VOTE.
You may vote your shares as follows:
(1) in person at the Annual Meeting;
(2) by telephone (see the enclosed proxy card for instructions);
(3) by Internet (see the enclosed proxy card for instructions); or
(4) by mail by signing, dating and mailing the enclosed proxy card.
If you vote by proxy, the individuals named on the proxy card (your
proxies) will vote your shares in the manner you indicate. You can specify on
your proxy card whether your shares should be voted for all of the nominees for
director or your vote may be withheld with respect to one or more of the
nominees. You can also specify whether you approve, disapprove or abstain from
the other 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 will
be voted as specified on your proxy card on the new meeting date, unless you
have revoked your proxy instructions.
IF YOU SIGN AND RETURN YOUR PROXY CARD WITHOUT INDICATING YOUR VOTING
INSTRUCTIONS, YOUR SHARES WILL BE VOTED "FOR" THE ELECTION OF ALL NOMINEES FOR
DIRECTOR AS SET FORTH UNDER "ELECTION OF DIRECTORS" BELOW AND "FOR" PROPOSALS 2,
3 AND 4.
HOW TO REVOKE OR CHANGE YOUR VOTE:
You can revoke or change your proxy at any time before it is exercised by:
(1) delivering written notice of revocation to Smith's Corporate
Secretary in time for him to receive it before the Annual Meeting;
(2) voting again by telephone, Internet or mail; or
(3) voting in person at the Annual Meeting.
1
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 meeting is required to
approve Proposals 2, 3 and 4. The Annual Meeting will be held if the holders of
a majority of the outstanding shares of Common Stock entitled to vote (a
"quorum") are present at the meeting in person or by proxy. 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 at 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 according to your instructions. However, if
the broker, bank or nominee has not received your instructions within ten days
of the meeting, it may vote on matters that the New York Stock Exchange
determines to be routine. If the broker, bank or nominee cannot vote on a
particular matter because it is not routine, there is a "broker non-vote" on
that matter. Broker non-votes do not count as votes for or against any proposal;
however, an abstention counts as a vote 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 that will be presented at the Annual
Meeting, other than those mentioned in this Proxy Statement.
COST OF THIS PROXY SOLICITATION.
We will pay the cost of solicitation of proxies including preparing,
printing and mailing this Proxy Statement. We have retained Morrow & Co. to help
us in soliciting proxies for a fee of $7,000, plus reasonable out-of-pocket
costs and expenses. We will also reimburse brokers, banks and other nominees for
their costs in sending proxy materials to beneficial owners of Smith's Common
Stock. Other proxy solicitation expenses that we will pay include those for
preparation, mailing, returning and tabulating the proxies.
PROPOSAL 1: ELECTION OF DIRECTORS
At the 2005 Annual Meeting, stockholders will elect three persons as Class
I directors to hold office until the 2008 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 Dod A. Fraser.
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 of the nominees listed below.
Each of the nominees are current members of the Board of Directors and have
consented to serve if elected. Although management does not contemplate the
possibility, in the event any nominee is not a candidate or is unable to serve
as a director at the time of the election, the proxies will vote for any nominee
who is designated by the present Board of Directors to fill the vacancy.
2
A brief biography of all directors is presented below:
NOMINEES
Directors to be elected to Class I for a term expiring in 2008:
G. CLYDE BUCK (Photo)
Age: 67
Director Since: 1992
Recent Business Experience: Mr. Buck has extensive experience in
energy-related matters. He received a B.A.
in economics from Williams College and a
M.B.A. from Harvard. He is currently Senior
Vice President and Managing Director
Corporate Finance of the investment banking
firm of Sanders Morris Harris 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;
Nominating and Corporate Governance
Committee.
Other Directorships: Frontier Oil Corporation
LOREN K. CARROLL (Photo)
Age: 61
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
and 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 SWACO, a company in which the Company
holds a 60% interest.
Other Directorships: Fleetwood Enterprises, Inc.; Veritas DGC
Inc.
3
DOD A. FRASER (Photo)
Age: 54
Director Since: 2004
Recent Business Experience: Mr. Fraser is the President of Sackett
Partners Incorporated, a consulting company
for not-for-profit entities. Mr. Fraser
established Sackett Partners in 2000 upon
retiring from a 27-year career in
investment banking. From 1995 to 2000, Mr.
Fraser was with The Chase Manhattan Bank,
now JP Morgan Chase, where he was Managing
Director, Group Executive of the global oil
and gas group. Prior to that, Mr. Fraser
was a General Partner of Lazard Freres &
Co., which he joined in 1978.
Committee Membership: Audit Committee; Compensation and Benefits
Committee.
Other Directorships: Forest Oil Corporation; Terra Industries,
Inc.
THE BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE FOR THE ELECTION OF ALL
NOMINEES FOR DIRECTOR.
DIRECTORS CONTINUING IN OFFICE
Class II directors to continue in office until 2006:
BENJAMIN F. BAILAR (Photo)
Age: 70
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 1987
through June 1997.
Committee Membership: Chairman, Audit Committee; Compensation and
Benefits Committee.
Other Directorships: Dana Corporation; Trustee of the Philatelic
Foundation
DOUG ROCK (Photo)
Age: 58
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.
Other Directorships: Moneygram International, Inc.; CE Franklin
Ltd.
4
Class III directors to continue in office until 2007:
JAMES R. GIBBS (Photo)
Age: 60
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; Chairman, Compensation and
Benefits Committee; Chairman, Nominating
and Corporate Governance Committee.
Other Directorships: Frontier Oil Corporation; Veritas DGC Inc.;
advisory director of Frost Bank-Houston
JERRY W. NEELY (Photo)
Age: 68
Director Since: 1977
Recent Business Experience: Mr. Neely held a number of positions with
the Company from 1965 to 1987. He was
President from February 1976 to December
1977, at which time he assumed the
additional positions of Chairman of the
Board and Chief Executive Officer and
served in those capacities until December
1987. Since that time, Mr. Neely has been a
private investor.
Committee Membership: Audit Committee; Nominating and Corporate
Governance Committee.
Other Directorships: Member of the Board of Trustees of the
University of Southern California
5
STOCK OWNERSHIP OF DIRECTORS AND EXECUTIVE OFFICERS
The following table shows the number of shares of Common Stock beneficially
owned as of March 1, 2005 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 executive officers as a group. Except
as otherwise indicated, the persons listed below have sole voting power and
investment power relating to the shares shown.
SECURITY OWNERSHIP OF DIRECTORS AND EXECUTIVE OFFICERS
COMMON STOCK
BENEFICIALLY OWNED
-----------------------
NO. OF PERCENT
NAME OF INDIVIDUAL SHARES(1)(2) OF CLASS
------------------ ------------ --------
Benjamin F. Bailar(3)........................... 11,592 *
G. Clyde Buck(3)................................ 30,392 *
Loren K. Carroll................................ 138,500 *
Dod A. Fraser................................... 1,000 *
Margaret K. Dorman(4)........................... 54,920 *
James R. Gibbs(3)(5)............................ 12,392 *
Jerry W. Neely(3)(6)............................ 550,209 *
Doug Rock....................................... 426,000 *
Neal S. Sutton.................................. 0
Richard A. Werner(4)............................ 0
All directors and executive officers as a group
(16 persons)(4)................................. 1,299,432 1.2
---------------
* Less than 1%
(1) The amounts reported do not include the shares of Common Stock to be issued
to each outside director on or about April 20, 2005 under the Smith
International, Inc. Stock Plan for Outside Directors (the "Stock Plan"). The
shares to be issued will be based on the closing price of the Company's
Common Stock on the date of such issuance and will be a number of shares to
give each outside director equity compensation of approximately $65,000.
(2) The amounts reported include shares of Common Stock that could be acquired
on or before April 30, 2005 through the exercise of stock options as
follows: Mr. Rock: 176,000 shares; Mr. Carroll: 97,000 shares; Mr. Sutton:
-0- shares; Ms. Dorman: 52,750 shares; Mr. Werner: -0- shares; and all
directors and executive officers as a group: 401,425 shares.
(3) The amounts reported do not include 12,000 restricted stock units held by
each of Messrs. Bailar, Buck, Gibbs and Neely. Each such restricted stock
unit represents a contingent right to receive one share of Common Stock and
were granted to each of Messrs. Bailar, Buck, Gibbs and Neely in 1999 in
connection with the termination of the Directors' Retirement Plan. Messrs.
Bailar, Buck, Gibbs and Neely currently have no voting or investment power
with respect to the related shares of Common Stock, which will not be issued
until the restricted stock units vest.
(4) The amounts reported include shares of Common Stock allocated to accounts
under a 401(k) plan as follows: Ms. Dorman: 2,170 shares; Mr. Werner: 488
shares; and all directors and executive officers as a group: 2,822 shares.
(5) The amounts reported include 1,000 shares held by Mrs. Gibbs and 800 shares
held in a trust for the benefit of their child where Mrs. Gibbs is a
co-trustee.
(6) The amounts reported include 345,383 shares held by Mrs. Neely.
6
INFORMATION ABOUT THE BOARD OF DIRECTORS AND ITS COMMITTEES
THE BOARD. Our Board of Directors currently consists of seven directors as
described in "Proposal 1: Election of Directors." The current Board members and
nominees for election include five independent directors and two members of
Smith's senior management. The primary responsibilities of the Board of
Directors are oversight, counseling and direction to Smith's management in the
long-term interests of Smith and its stockholders. The Board's detailed
responsibilities include: (a) regularly evaluating the performance of the Chief
Executive Officer and other senior executives; (b) planning for succession with
respect to the position of Chief Executive Officer and monitoring management's
succession planning for other senior executives; (c) reviewing and, where
appropriate, approving Smith's major financial objectives, strategic and
operating plans and actions; (d) overseeing the conduct of Smith's business to
evaluate whether the business is being properly managed; and (e) overseeing the
processes for maintaining Smith's integrity with regard to its financial
statements and other public disclosures and compliance with law and ethics. The
Board of Directors has delegated to the Chief Executive Officer, working with
Smith's other executive officers, the authority and responsibility for managing
Smith's business in a manner consistent with Smith's standards and practices,
and in accordance with any specific plans, instructions or directions of the
Board. The Chief Executive Officer and management are responsible for seeking
the advice and, in appropriate situations, the approval of the Board with
respect to extraordinary actions to be undertaken by Smith.
The Board and its committees meet throughout the year on a set schedule,
and also hold special meetings and act by written consent from time to time as
appropriate. Board agendas include regularly scheduled sessions for the
independent directors to meet without management present. The Board has not
designated a Lead Director to chair executive sessions of the non-management
directors. The non-management directors designate a chair at the beginning of
any such executive session. Stockholders and employees who wish to communicate
with the non-management directors may do so by contacting Smith's Corporate
Secretary at 411 North Sam Houston Parkway, Suite 600, Houston, Texas 77060.
Smith's Corporate Secretary will then relay all communications to the
appropriate non-management director.
The Board of Directors held six meetings during 2004. All directors
attended at least 75% of the meetings of the Board of Directors and of all
committees on which they served. The Company does not have a policy regarding
directors' attendance at annual meetings. No directors attended the prior year's
annual meeting.
COMMITTEES OF THE BOARD. The Board has delegated various responsibilities
and authority to different Board Committees as described in this section of the
Proxy Statement.
Audit Committee. The Company has an Audit Committee and its members are
Messrs. Bailar, Fraser, Gibbs and Neely. The Audit Committee assists the Board
in its general oversight of Smith's auditing, accounting, financial reporting
and internal control functions and is directly responsible for the appointment,
compensation and oversight of the work of Smith's independent auditor. This
committee also recommends the firm that the Company should retain as its
independent auditor. All members of the Audit Committee are non-employee
directors and the Board of Directors has made the determination that all members
are financially literate and three members qualify as audit committee financial
experts. During 2004, the Audit Committee held eleven meetings, including
telephone meetings, to discuss the Company's financial results, the status of
the Company's compliance with Section 404 of the Sarbanes-Oxley Act of 2002, and
other relevant accounting, auditing and disclosure matters. The responsibilities
and activities of the Audit Committee are described in greater detail in the
"Audit Committee Report" below.
Compensation and Benefits Committee. The Company has a Compensation and
Benefits Committee, and its members are Messrs. Gibbs, Bailar, Buck, and Fraser.
The Compensation and Benefits Committee reviews the Company's executive
compensation and employee benefit plans and programs, including their
establishment, modification and administration. It also administers the
Company's stock option plan. This committee held three meetings during 2004. The
Committee adopted a written charter on December 3, 2003 which was amended on
February 4, 2004. The full text of the charter is published on our website at
www.smith.com under the "Investor Relations" caption and link to "Governance".
7
Executive Committee. The Company does not have an Executive Committee
because the size of the Company's Board of Directors is small and all directors
are generally available for full Board meetings.
Nominating and Corporate Governance Committee. The Company has a
Nominating and Corporate Governance Committee and its members are Messrs. Gibbs,
Buck and Neely. Smith's Nominating and Corporate Governance Committee is
composed solely of independent directors, as defined in the New York Stock
Exchange current listing standards. The Committee met on February 4, 2005 to
consider certain corporate governance matters and to recommend nominees for
directors at the 2005 Annual Meeting of Stockholders. During 2004, the Committee
held five meetings. The Nominating and Corporate Governance Committee is
responsible for assisting the Board of Directors and management in developing
and maintaining best practices in corporate governance. In this role, the
Nominating and Corporate Governance Committee serves as the nominating
committee, administers a process to measure the effectiveness of the Board, and
recommends to the Board the criteria by which directors will be held
accountable.
The Nominating and Corporate Governance Committee will consider nominees
proposed by stockholders. To recommend a prospective nominee for the Nominating
and Corporate Governance Committee's consideration, you may submit the
candidate's name and qualifications to Smith's Corporate Secretary at 411 North
Sam Houston Parkway, Suite 600, Houston, Texas 77060. Recommendations from
stockholders for nominees must be received by Smith's Corporate Secretary not
later than the date set forth under "Stockholders' Proposals" below.
The process for identifying and evaluating nominees includes the following
steps: (1) the Nominating and Corporate Governance Committee, Chairman of the
Board or other Board members identify a need to fill vacancies or add newly
created directorships; (2) the Chairman of the Nominating and Corporate
Governance Committee initiates a search and seeks input from Board members and
senior management and, if necessary, hires a search firm or obtains advice from
legal or other advisors; (3) director candidates, including any candidates
properly proposed by stockholders in accordance with the Company's Bylaws, are
identified and presented to the Nominating and Corporate Governance Committee;
(4) initial interviews of candidates are conducted by the Chairman of the
Nominating and Corporate Governance Committee; (5) the Nominating and Corporate
Governance Committee meets to consider and approve final candidate(s) and
conduct further interviews as necessary; and (6) the Nominating and Corporate
Governance Committee makes recommendations to the full Board for inclusion in
the slate of directors at the annual meeting. The evaluation process will be the
same whether the nominee is recommended by a stockholder or by a member of the
Board of Directors. The Nominating and Corporate Governance Committee is
responsible for establishing the selection criteria for candidates from time to
time and reviewing with the Board such criteria and the appropriate skills and
characteristics required of Board members in the context of the then current
make-up of the Board. At a minimum, the Nominating and Corporate Governance
Committee must be satisfied that each nominee for director has the business
and/or professional knowledge and experience applicable to the Company, its
business and the goals and perspectives of its stockholders; is well regarded in
the community, with a long term, good reputation for high ethical standards; has
good common sense and judgment; has a positive record of accomplishment in
present and prior positions; has an excellent reputation for preparation,
attendance, participation, interest and initiative on other boards on which he
or she may serve; and has the time, energy, interest and willingness to become
involved in the Company and its future.
The Nominating and Corporate Governance Committee also makes
recommendations to the Board regarding the agenda for the Company's annual
meetings of stockholders and reviews stockholder proposals and makes
recommendations to the Board regarding action on such proposals. The Nominating
and Corporate Governance Committee adopted a written charter on April 23, 2003
which was amended on February 4, 2004 and on October 20, 2004. The full text of
the charter is published on our website at www.smith.com under the "Investor
Relations" caption and link to "Governance".
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 $30,000 annually and $2,000 for each
Board meeting attended. In addition, they are paid $8,000 per year for chairing
a committee (other than the chairman of the Audit Committee who is paid $12,000
per year) and $2,000 for
8
each committee meeting attended. Expenses for Company-related business travel
are either paid or reimbursed by the Company. Outside directors also receive an
annual grant of shares of Common Stock with a value of approximately $65,000.
NON-EMPLOYEE DIRECTOR PROGRAMS. The Company terminated its Directors'
Retirement Plan in 1998. The Company issued restricted stock grants to each of
the non-employee directors to fund the actuarial value of their accrued benefits
under the retirement plan. These grants of 12,000 shares (adjusted for the 2-1
stock split on June 20, 2002) will all vest at once upon retirement after ten
years of service as a director.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION. During 2004,
Messrs. Bailar, Buck, Fraser, Gibbs and Neely served as members of the Company's
Compensation and Benefits Committee. Mr. Neely was a member of the Compensation
and Benefits Committee until April 21, 2004, at which time Mr. Bailar became a
member of this Committee. Mr. Fraser became a member of the Compensation and
Benefits Committee on December 8, 2004. From December 1977 to December 1987, Mr.
Neely was Chief Executive Officer and Chairman of the Board of Directors of the
Company.
CORPORATE GOVERNANCE
CORPORATE GOVERNANCE GUIDELINES. The Board has adopted the Smith
International, Inc. Corporate Governance Guidelines. These guidelines outline
the functions of the Board, director qualifications and responsibilities, and
various processes and procedures designed to ensure effective and responsive
governance. The guidelines are reviewed from time to time in response to
changing regulatory requirements and best practices and are revised accordingly.
The full text of the guidelines is published on our website at www.smith.com
under the "Investor Relations" caption and link to "Governance".
CODE OF BUSINESS CONDUCT. All of our officers, employees and directors are
required to comply with our Code of Business Conduct and Ethics to help ensure
that our business is conducted in accordance with the highest standards of
ethical behavior. Our Code of Business Conduct and Ethics covers all areas of
professional conduct, including customer relationships, conflicts of interest,
insider trading, financial disclosure, intellectual property and confidential
information, as well as requiring strict adherence to all laws and regulations
applicable to our business. Employees are required to report any violations or
suspected violations of the code by using Smith's ethics hotline. The code
includes an anti-retaliation statement. The full text of the Code of Business
Conduct and Ethics is published on our website at www.smith.com under the
"Investor Relations" caption and link to "Governance".
9
AUDIT COMMITTEE REPORT
The ultimate responsibility for good corporate governance rests with the
Board of Directors, whose primary roles are oversight, counseling and direction
to Smith's management in the best long-term interests of the Company and its
stockholders. The Board's Audit Committee has been established for the purpose
of overseeing the accounting and financial reporting processes of the Company
and audits of the Company's annual financial statements.
Smith's Audit Committee is composed solely of independent directors, as
defined in the New York Stock Exchange's current listing standards and Section
10A(m)(3) of the Securities Exchange Act of 1934 (the "Exchange Act"), and it
operates under a written charter adopted by the Board of Directors, a copy of
which is published on our website at www.smith.com under the "Investor
Relations" caption and link to "Governance". Committee members may not
simultaneously serve on the audit committee of more than two other public
companies. The composition of the Audit Committee, the attributes of its members
and its responsibilities, as reflected in its charter, are intended to be in
accordance with applicable requirements for corporate audit committees. The
Audit Committee reviews and assesses the adequacy of its charter on an annual
basis.
During fiscal year 2004, the Audit Committee was composed of three
directors: Mr. Bailar (Chairman), Mr. Gibbs and Mr. Neely. Mr. Fraser became a
member of the Audit Committee on December 8, 2004. Each member of the Audit
Committee is financially literate and three members meet the definition of an
audit committee financial expert as promulgated by the Securities and Exchange
Commission (the "SEC"). If elected to continue serving on Smith's Board, Mr.
Fraser will continue to serve as a member of the Audit Committee.
As described more fully in its charter, the purpose of the Audit Committee
is to assist the Board in its general oversight of Smith's financial reporting,
internal controls and audit functions. Management is responsible for the
preparation, presentation and integrity of the Company's financial statements,
accounting and financial reporting principles, internal controls and procedures
designed to ensure compliance with accounting standards, applicable laws and
regulations. Smith has a full-time Internal Audit Department that reports to the
Audit Committee and to management. This department is responsible for
objectively reviewing and evaluating compliance with the Company's policies and
procedures. Deloitte & Touche LLP, Smith's independent registered public
accounting firm, is responsible for performing an independent audit of the
consolidated financial statements in accordance with the standards of the Public
Company Accounting Oversight Board (United States). In accordance with the
Sarbanes-Oxley Act of 2002, the Audit Committee has ultimate authority and
responsibility to select, compensate, evaluate and, when appropriate, replace
Smith's independent auditors.
The Audit Committee members are not professional accountants or auditors,
and their functions are not intended to duplicate or to certify the activities
of management and the independent auditors, nor can the Audit Committee certify
that the independent auditors are "independent" under applicable rules. The
Audit Committee serves a board-level oversight role, in which it provides
advice, counsel and direction to management and the auditors on the basis of the
information it receives, discussions with management and the auditors, and the
experience of the Audit Committee's members in business, financial and
accounting matters. The Audit Committee has the authority to engage its own
outside advisers, including experts in particular areas of accounting, as it
determines appropriate, apart from counsel or advisers hired by management.
During 2004, the Audit Committee met eleven times, including telephone
meetings, to discuss the Company's financial results, the status of the
Company's compliance with Section 404 of the Sarbanes-Oxley Act of 2002, and
other relevant accounting, auditing and disclosure matters. The Audit
Committee's regularly scheduled meetings were conducted with members of
management, the internal auditors and the Company's independent auditors. During
these meetings, the Audit Committee discussed with the Company's internal and
independent auditors the overall scope and plans for their respective audits.
The Audit Committee also discussed the results of their examinations and their
evaluation of the Company's internal controls, with certain matters discussed in
the absence of Company management. In addition to the regularly scheduled
meetings, the Committee conducted special teleconference meetings to discuss
relevant financial accounting,
10
internal control and financial reporting matters with Company management and the
independent auditors. The majority of these meetings were held to discuss
interim financial information of the Company prior to its release to the public
and, accordingly, included a discussion of the results of the independent
auditors' Statement on Auditing Standards ("SAS") No. 100 reviews. During the
year, the Audit Committee also discussed with the Company's independent auditors
all matters required by the standards of the Public Company Accounting Oversight
Board (United States), including those described in Statement on Auditing
Standards ("SAS") No. 61, as amended, "Communication with Audit Committees".
The Audit Committee obtained a formal written statement from Deloitte &
Touche LLP disclosing that they are independent with respect to the Company
within the meaning of the Securities Act as administered by the SEC and the
requirements of the Independence Standards Board. The Audit Committee discussed
with Deloitte & Touche LLP any relationships that may have an impact on their
objectivity and independence and satisfied itself as to Deloitte & Touche's
independence. The Audit Committee also approved, among other things, the amount
of fees to be paid to Deloitte & Touche LLP for audit and non-audit services and
considered whether the provision of non-audit services by Deloitte & Touche LLP
is compatible with maintaining Deloitte & Touche's independence. In response to
public concerns generally about the integrity of independent audits, the Company
has expanded the role of other firms in providing non-audit services.
In accordance with existing Audit Committee policy and the more recent
requirements of the Sarbanes-Oxley Act, all services to be provided by Deloitte
& Touche LLP are subject to pre-approval by the Audit Committee. The Chairman of
the Audit Committee has been delegated the authority to pre-approve audit and
non-audit services, up to a specified dollar amount, with such pre-approvals
subsequently approved by the full Audit Committee. Typically, however, the Audit
Committee itself reviews the matters to be approved. The Sarbanes-Oxley Act of
2002 prohibits an issuer from obtaining certain non-audit services from its
auditing firm so as to avoid certain potential conflicts of interest; Smith has
not obtained any of these services from Deloitte & Touche LLP, and Smith is able
to obtain such services from other service providers at competitive rates. See
"Proposal 4: Ratification of Deloitte & Touche LLP as Independent Auditors" for
more information regarding fees paid to Deloitte & Touche LLP for services in
fiscal years 2004 and 2003.
The Audit Committee reviewed and discussed the audits of the Company's
internal controls over financial reporting and its consolidated financial
statements as of and for the year ended December 31, 2004 with management and
the independent registered public accountants. Based on the above-mentioned
review and discussions, and subject to the limitations on the Audit Committee's
role and responsibilities described above and in the Audit Committee charter,
the Audit Committee recommended to the Board of Directors that the Company's
audited consolidated financial statements be included in its Annual Report on
Form 10-K for the fiscal year ended December 31, 2004 for filing with the SEC.
Audit Committee
Benjamin F. Bailar, Chairman
Dod A. Fraser
James R. Gibbs
Jerry W. Neely
11
EXECUTIVE COMPENSATION
COMPENSATION AND BENEFITS COMMITTEE REPORT ON EXECUTIVE COMPENSATION
COMPENSATION POLICIES
The Company's executive compensation program is designed to help the
Company attract, motivate and retain the executive resources that the Company
needs 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, and which align the interests
of senior management with the Company's stockholders.
The Compensation and Benefits Committee (the "Compensation Committee"),
administers the executive compensation programs of the Company and determines
the compensation of senior management. The Compensation Committee consists
solely of independent directors, as defined in the New York Stock Exchange
current listing standards. An independent compensation consultant, Towers
Perrin, advises the Compensation Committee on all executive compensation
matters. Towers Perrin has been advising the Compensation Committee with respect
to such matters since April 2001.
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 that affect short and long term share price
performance. The Compensation Committee administers all of the Company's
executive compensation programs, including the design of the programs and the
measurement of their effectiveness. The Compensation Committee also reviews and
approves all salary arrangements and other payments to executives, evaluates
their performance and considers other related matters.
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 for each executive per
year, provided that compensation payable solely upon the attainment of
pre-established performance goals is excluded from the limitation. The
Compensation Committee reviews and establishes compensation for any executive
officer whose compensation might exceed $1 million in any year. The Compensation
Committee consists of four members, Messrs. Gibbs, Bailar, Buck and Fraser, who
are outside directors as defined in Section 162(m) and its regulations. The
Compensation Committee will continue to analyze the Company's executive
compensation practices and plans on an ongoing basis with respect to compliance
with Section 162(m). Where it deems advisable, the Compensation Committee will
consider 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 in the form of bonuses. The Company awards bonuses only when the
Company's financial performance during the year meets a certain level
required under the annual incentive plan.
(2) Long-Term Compensation. This includes stock options, restricted
stock and other long-term incentive awards based on Common Stock. The value
of these awards depends upon the Company's performance and future stock
value.
FACTORS CONSIDERED IN DETERMINING COMPENSATION
The Compensation Committee wants the compensation of the Company's
executives to be competitive within the worldwide energy industry. The
Compensation Committee estimates an executive's competitive
12
level of total compensation based on information from a variety of sources,
including proxy statements, special surveys and the Committee's compensation
consultant. The companies that are part of the Peer Group described in the
Performance Graph are some of the companies used by the Compensation Committee
in establishing both base salary and performance-based targeted incentive
compensation. The sources used by the Compensation Committee are larger than the
Peer Group, but are all in the energy industry. The Compensation 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 the Company's executives includes salary and bonus.
This is similar to the compensation programs of most leading companies.
The Compensation Committee annually reviews each executive's base salary.
The Compensation Committee targets salaries slightly above the median of the
range of compensation paid by similar companies. The Compensation Committee also
looks at the specific job duties, the executive's achievements and other
criteria. Increases in base salary are primarily the result of individual
performance, which may include meeting specific goals established by the
Compensation Committee. The criteria used in evaluating individual performance
vary depending on the executive's function, but generally include leadership
inside and outside the Company; advancing the Company's interests with
customers, vendors and in other business relationships; product quality and
development; advancement in skills and responsibility; and past financial
results. In 2004, all 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. At or prior to the beginning of each fiscal
year, the Compensation Committee sets corporate goals for that fiscal year based
upon financial objectives deemed appropriate by the Compensation Committee.
These objectives may include earnings per share, profit after tax, return on
assets, return on net capital employed, return on shareholder equity and other
financial objectives for the year. Where executives have strategic business unit
responsibilities, their goals are based on financial performance measures of
that business unit. No bonus is paid to corporate executives unless certain
threshold Company performance levels set by the Compensation 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.
At or prior to the beginning of each fiscal year, the Compensation
Committee sets targets for each executive relating to annual incentive
compensation. The target incentive awards for 2004 for eligible Company
executives were based on various Company, business unit and individual
performance measures. The Compensation 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 their respective
areas of responsibility. Awards were made in 2005 under the annual incentive
plan for fiscal year 2004 to ten eligible executives.
Long-Term Incentive Compensation Program
The Compensation Committee strongly believes that the grant of significant
annual equity awards further links the interests of senior management and the
Company's stockholders. Each year, the Compensation Committee, in consultation
with its independent compensation advisor, Towers Perrin, determines the total
amount of shares of Common Stock to be made available to the Company's
executives through awards of stock options, restricted stock and other long-term
incentive awards. These amounts vary each year and are based upon what the
Compensation Committee believes is appropriate. The Compensation Committee
considers an executive's total compensation package, including the amount of
stock options and/or restricted stock 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.
13
At the meeting, the stockholders will be asked to approve the Company's
1989 Long-Term Incentive Compensation Plan, as amended and restated effective
January 1, 2005 (the "LTIC Plan"). The LTIC Plan, if approved by the
stockholders, permits the award of performance-based restricted stock awards,
other stock based awards and other types of incentive awards. As determined by
the Compensation Committee at the time of grant, and assuming the LTIC Plan is
approved by the stockholders, performance-based restricted stock awards, other
stock based awards and other types of incentive awards may be granted by the
Compensation Committee subject to performance objectives relating to one or more
of the following within the meaning of Section 162(m) of the Internal Revenue
Code in order to qualify for the performance-based exception (the "Performance
Criteria"): (a) profits (including, but not limited to, profit growth, net
operating profit or economic profit); (b) profit-related return ratios; (c)
return measures (including, but not limited to, return on assets, capital,
equity, investment or sales); (d) cash flow (including but not limited to,
operating cash flow, free cash flow or cash flow return on capital or
investment); (e) earnings (including, but not limited to, total shareholder
return, earnings per share or earnings before or after taxes); (f) net sales
growth; (g) net earnings or income (before or after taxes, interest,
depreciation and/or amortization); (h) gross, operating or net profit margins;
(i) productivity ratios; (j) share price (including, but not limited to, growth
measures and total shareholder return); (k) turnover of assets, capital or
inventory; (l) expense targets; (m) margins; (n) measures of health, safety or
environment; (o) operating efficiency; (p) customer service or satisfaction; (q)
market share; (r) credit quality; and (s) working capital targets. Performance
Criteria may be stated in absolute terms or relative to comparison companies or
indices to be achieved during a performance period.
Chief Executive Officer Compensation
The Compensation Committee 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. Mr. Rock's
compensation is determined using substantially the same criteria utilized to
determine compensation for other executive officers, as discussed earlier in
this report. Specific actions taken by the Compensation Committee regarding Mr.
Rock's compensation are summarized below.
Base Salary -- The Compensation Committee reviewed Mr. Rock's base salary
at its December 2003 meeting and increased it to $975,000. In setting Mr. Rock's
base salary for fiscal year 2004, the Compensation Committee reviewed the
recommendations by the independent compensation consultant, Towers Perrin, and
market comparisons as well as the Company's acquisition activities and expense
control during fiscal year 2003 and financial results for 2003 and prior years.
The Compensation Committee reviewed Mr. Rock's base salary at its December 2004
meeting and increased his base salary for fiscal year 2005 to $1,000,000.
Annual Incentive -- The Compensation Committee independently reviewed the
bonus objectives for fiscal year 2004 set by the Compensation Committee in
December 2003 against the Company's fiscal year financial performance. For
fiscal year 2004, Mr. Rock earned an annual bonus in the amount of $1,647,750,
which was paid in 2005.
Stock Options -- The Company granted Mr. Rock non-qualified stock options
to purchase 43,000 shares of Common Stock on December 7, 2004, at the
recommendation of the Compensation Committee. The award of stock options to Mr.
Rock was approximately 22.5% of the total stock options granted to all employees
of the Company in 2004. The options were granted with an exercise price equal to
100% of fair market value of the underlying shares of Company stock 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.
14
SUMMARY
The Compensation Committee believes that the compensation program for the
executives of the Company is comparable with compensation programs provided by
other companies in the energy industry and serves the best interests of the
Company's stockholders. The Compensation 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
Benjamin Bailar
G. Clyde Buck
Dod A. Fraser
15
COMPARISON OF FIVE-YEAR CUMULATIVE TOTAL RETURN
The following line graph compares the cumulative total stockholder return
of the Company'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, 1999 and ending December 31, 2004. Our Peer Group consists of the
following companies in the same general line of business as the Company: Baker
Hughes Incorporated, BJ Services Company, Cooper Cameron Corporation,
Halliburton Company, Schlumberger Limited, Varco International, Inc. and
Weatherford International Ltd.
The results are based on an assumed $100 investment on December 31, 1999
and reinvestment of dividends (if applicable). For each index, total return is
based on market capitalization of its components.
(PERFORMANCE GRAPH)
--------------------------------------------------------------------------------------------
Dec. 1999 Dec. 2000 Dec. 2001 Dec. 2002 Dec. 2003 Dec. 2004
--------------------------------------------------------------------------------------------
Smith $100.00 $150.06 $107.91 $131.30 $167.12 $219.01
S&P 500 $100.00 $ 90.90 $ 80.09 $ 62.39 $ 80.29 $ 89.03
Peer Group $100.00 $138.03 $ 94.52 $ 87.56 $105.24 $139.23
16
EXECUTIVE COMPENSATION TABLES
The following table shows compensation for services to the Company of the
persons who during 2004 were the Chief Executive Officer and the other four most
highly compensated executive officers (the "Named Officers"):
SUMMARY COMPENSATION TABLE
LONG TERM
COMPENSATION
AWARDS
------------
ANNUAL COMPENSATION SECURITIES
------------------------ UNDERLYING ALL OTHER
NAME OF INDIVIDUAL AND SALARY BONUS OPTIONS COMPENSATION
PRINCIPAL POSITION YEAR $(1) $(2) (#)(3) $(4)
---------------------- ---- ------------ --------- ------------ ------------
Doug Rock.................................. 2004 974,365 1,647,750 43,000 576,414
Chairman of the Board, Chief Executive 2003 919,654 641,700 210,000 447,308
Officer, President and Chief Operating
Officer 2002 874,808 0 247,000 529,568
Loren K. Carroll........................... 2004 644,596 872,040 18,000 471,846
Executive Vice President, President and 2003 609,615 340,380 100,000 396,703
Chief Executive Officer of M-I SWACO 2002 559,889 150,000 117,000 385,436
Neal S. Sutton............................. 2004 398,780 404,586 8,000 181,731
Senior Vice President -- Administration, 2003 379,846 176,700 45,000 149,311
General Counsel and Secretary 2002 359,942 0 52,000 170,797
Margaret K. Dorman......................... 2004 386,746 392,418 8,000 104,289
Senior Vice President, Chief Financial 2003 364,846 169,725 45,000 74,356
Officer and Treasurer 2002 344,827 0 52,000 96,233
Richard A. Werner.......................... 2004 351,804 422,400 8,000 192,088
President, Smith Services 2003 334,885 37,018 45,000 175,364
2002 319,889 44,640 52,000 178,614
---------------
(1) The amounts in this column include compensation deferred by the Named
Officers in 2002, 2003 and 2004 under the Smith International, Inc.
Supplemental Executive Retirement Plan ("SERP") and the Smith International,
Inc. 401(k) Retirement Plan (the "401(k) Plan").
(2) The amounts in this column include bonuses earned by the Named Officers in
2002, 2003 and 2004 but paid in 2003, 2004 and 2005, respectively.
(3) The Company granted significantly less options in 2004 in contemplation of
issuing performance-based restricted stock awards in 2005 if the LTIC Plan
is approved by the stockholders at the meeting.
(4) The amounts in this column include the Company's contribution to each Named
Officer's account in the SERP for the 2002, 2003 and 2004 plan years,
including interest (at 120% of the applicable Federal long-term rate). For
2004, SERP contributions to each Named Officer's account are as follows: Mr.
Rock: $555,645; Mr. Carroll: $449,027; Mr. Sutton: $160,962; Ms. Dorman:
$88,932 and Mr. Werner: $166,788. In addition, this column also reflects the
Company's contributions to the 401(k) Plan. The 2004 plan year contributions
to each Named Officer's 401(k) account are as follows: Mr. Rock: $20,769;
Mr. Carroll: $22,819; Mr. Sutton: $20,769; Ms. Dorman: $15,357 and Mr.
Werner: $25,300.
17
OPTION/SAR GRANTS IN 2004
The following table shows all grants of options to the Named Officers in
2004. No stock appreciation rights were granted in 2004.
INDIVIDUAL GRANTS
--------------------------------------------------------------------------------
NUMBER OF
SECURITIES % OF TOTAL
UNDERLYING OPTIONS GRANTED EXERCISE OR
OPTIONS TO EMPLOYEES BASE PRICE EXPIRATION GRANT DATE
NAME GRANTED(#)(1) IN 2004 ($/SHARE) DATE PRESENT VALUE($)(2)
---- ------------- --------------- ----------- ---------- -------------------
Doug Rock....................... 43,000 22.5 $56.26 12-07-14 767,120
Loren K. Carroll................ 18,000 9.4 $56.26 12-07-14 321,120
Neal S. Sutton.................. 8,000 4.2 $56.26 12-07-14 142,720
Margaret K. Dorman.............. 8,000 4.2 $56.26 12-07-14 142,720
Richard A. Werner............... 8,000 4.2 $56.26 12-07-14 142,720
---------------
(1) Options were granted to the Named Officers on December 7, 2004 at an
exercise price of $56.26. The exercise price per share is equal to the
closing price of the Common Stock on the New York Stock Exchange Composite
Tape on the date of grant. Options granted vest at a rate of 25% per year
and will not begin to become exercisable until December 7, 2005. If a change
of control of the Company occurs, all outstanding options would become
exercisable immediately.
(2) Present value was calculated using an open form (lattice) model. Use of this
model should not be viewed in any way as a forecast of the future
performance of the Common Stock, which will be determined by future events
and unknown factors. The estimated values under the open form (lattice)
model are based upon certain assumptions as to variables such as interest
rate and stock price volatility. Assumptions used include a risk-free rate
of return of 3.6%, a volatility factor of 31.0%, an expected option life of
5 years and no dividend yield. The ultimate value of the options will depend
on the future market price of the Company's Common Stock.
AGGREGATED OPTION EXERCISES IN 2004 AND DECEMBER 31, 2004 OPTION VALUES
The following table provides information on options exercised by the Named
Officers during 2004 and the value of options held by those officers on December
31, 2004.
NUMBER OF SECURITIES UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED OPTIONS AT IN-THE-MONEY OPTIONS AT
SHARES DECEMBER 31, 2004 DECEMBER 31, 2004($)(1)
ACQUIRED ON VALUE ------------------------------- -------------------------
NAME EXERCISE(#) REALIZED($) EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
---- ----------- ----------- ------------------------------- -------------------------
Doug Rock.................. 1,014,300 31,153,298 176,000/404,500 3,248,955/7,374,160
Loren K. Carroll........... 300,000 8,994,951 247,000/186,000 5,447,885/3,386,925
Neal S. Sutton............. 0 0 192,950/83,250 5,064,771/1,516,948
Margaret K. Dorman......... 52,300 1,402,190 105,750/83,250 2,644,903/1,516,948
Richard A. Werner.......... 42,200 1,352,490 97,150/76,250 2,242,305/1,300,578
---------------
(1) Value based on the closing price on the New York Stock Exchange Composite
Tape for the Common Stock on December 31, 2004 ($54.41).
18
EQUITY COMPENSATION PLAN INFORMATION
The following table shows information as of December 31, 2004, with respect
to the LTIC Plan and the Smith International, Inc. Stock Plan for Outside
Directors under which equity securities of the Company are authorized for
issuance, aggregated as follows:
(a) (b) (c)
--- --- ---
NUMBER OF NUMBER OF SECURITIES
SECURITIES TO BE REMAINING AVAILABLE FOR
ISSUED UPON EXERCISE WEIGHTED-AVERAGE FUTURE ISSUANCE UNDER
OF OUTSTANDING EXERCISE PRICE OF EQUITY COMPENSATION PLANS
OPTIONS, WARRANTS OUTSTANDING OPTIONS, (EXCLUDING SECURITIES
PLAN CATEGORY AND RIGHTS WARRANTS AND RIGHTS REFLECTED IN COLUMN(A))
------------- -------------------- -------------------- -------------------------
Equity compensation plans approved
by security holders:............. 3,631,040 $ 33.88 2,186,182(1)
Equity compensation plans not
approved by security holders..... Not applicable Not applicable Not applicable
-------------- --------------- --------------
Total.............................. 3,631,040 $ 33.88 2,186,182
============== =============== ==============
---------------
(1) Includes 70,832 shares available for issuance pursuant to the Stock Plan for
Outside Directors.
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 to any employee
retiring at normal retirement age in various compensation levels and certain
years-of-service classifications.
PENSION PLAN TABLE
ESTIMATED ANNUAL PENSION
FOR YEARS OF SERVICE
---------------------------
COMPENSATION 20 25 30
------------ ------- ------- -------
$ 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
Since benefit accruals under the Restated Pension Plan have been frozen
since March 1, 1987, the years of service for the Named Officers include only
the period from September 1, 1985 to March 1, 1987. The annual pension benefits
that would be payable at age 65 under the Restated Pension Plan to the Named
19
Officers are as follows: Mr. Rock: $8,150; Mr. Carroll: $4,282; Mr. Sutton:
$-0-; Ms. Dorman: $-0- and Mr. Werner: $-0-. The benefits are not subject to any
reduction for Social Security.
SMITH INTERNATIONAL, INC. POST-2004 SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN
In connection with the recently enacted Section 409A of the Internal
Revenue Code of 1986, (the "Code") which regulates non-qualified deferred
compensation plans, the Board of Directors approved and adopted on December 8,
2004 the Smith International, Inc. Post-2004 Supplemental Executive Retirement
Plan (the "Post-2004 SERP"), to be effective December 31, 2004. In connection
with the adoption of the Post-2004 SERP and recently enacted Code Section 409A,
the Company has also suspended contributions to the Company's existing Smith
International, Inc. Supplemental Executive Retirement Plan ("SERP"), effective
as of December 31, 2004, except as described in the heading below entitled
"Smith International, Inc. Supplemental Executive Retirement Plan". The
following is a summary of the material provisions of the Post-2004 SERP.
The Post-2004 SERP is a non-qualified, deferred compensation plan, for the
benefit of officers and certain other eligible employees of the Company as
selected by the Compensation Committee. Participants may contribute, on a
pre-tax basis, up to 100 percent of their cash compensation. Distributions may
generally be made either as a lump sum or installment payments following the
participant's termination of employment due to death, disability or other
separation from service. Distributions may also be made on a limited basis and
to the extent necessary as a lump sum upon the occurrence of the participant's
unforeseeable financial emergency as approved by the Compensation Committee. The
Post-2004 SERP also provides for Company contributions, as follows:
Age-Weighted Contributions. Effective as of the last day of each quarter
during the year, a contribution by the Company will be allocated under the
Post-2004 SERP based on the participant's age-weighted contribution percentage
("AWCP") ranging from 2% to 6%. The Post-2004 SERP provides that the AWCP for
executive officers is 6% regardless of age. The difference between a
participant's (i) "Total 401(k) Compensation" and (ii) "Net 401(k) Compensation"
is multiplied by the AWCP to compute the age-weighted contribution. "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
Post-2004 SERP, but not to exceed the limit set under Code Section 401(a)(17)
($210,000 in 2005 and $205,000 in 2004).
Matching Contributions. The Post-2004 SERP contains matching provisions
that mirror the matching formulas in effect for the Company's 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 Post-2004 SERP and the 401(k) Plan
combined cannot exceed 6% of a participant's Total 401(k) Compensation net of
any incentive bonus. Executive officers may receive matching contributions up to
6% of their Total 401(k) Compensation.
Additional Company Contributions. In addition to the contributions
described above, the Company may be required to make contributions to
participants' accounts to the extent they are deemed to be invested in the money
market fund that is available as a deemed investment option under the Post-2004
SERP. These additional contributions are made to guarantee an investment return
equal to 120% of the long-term applicable federal rate ("AFR"). Therefore, for
the portion of each participant's account deemed to be invested in the money
market fund that is earning less than 120% of AFR, the Company makes a
contribution equal to the difference in interest accruals between the money
market fund rate actually earned by the money market fund and the AFR, which
contribution is credited to the participant's account under the Post-2004 SERP.
Discretionary Profit Sharing Contributions. The Compensation Committee
may, in its discretion, determine the amount of any profit sharing contribution
for a plan year and how that amount is to be allocated among the accounts of the
Post-2004 SERP participants.
In the event of insolvency or bankruptcy, all assets allocable to the
Post-2004 SERP are available to satisfy the claims of all general unsecured
creditors of the Company. The Company will establish a trust to serve as a
source of funds from which it can satisfy its obligations under the Post-2004
SERP. Participants in
20
the Post-2004 SERP will have no rights to any assets held in the trust, except
as general creditors of the Company. A participant's rights to any amounts
credited to an account under the Post-2004 SERP cannot be anticipated,
alienated, sold, assigned, pledged, encumbered or charged by the participant and
may only pass upon the participant's death pursuant to a beneficiary designation
made by the participant under the Post-2004 SERP. The Company may, by action of
the Compensation Committee, terminate the Post-2004 SERP with respect to future
contributions; provided, however, such termination shall not affect any
participant's right to receive any distribution due under the Post-2004 SERP.
The Post-2004 SERP will be interpreted by the Compensation Committee in
such manner as necessary to comply with the requirements of Code Section 409A
and the authority issued thereunder.
SMITH INTERNATIONAL, INC. SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN
In connection with the adoption of the Post-2004 SERP and recently enacted
Code Section 409A, the Company suspended contributions to the SERP effective
December 31, 2004, other than such contributions that were earned and vested as
of December 31, 2004. However, the Company may be required to make contributions
to participants' accounts to the extent they are deemed to be invested in the
money market fund that is available as a deemed investment option under the
SERP. These contributions are made to guarantee an investment return equal to
120% of the AFR. Therefore, for the portion of each participant's account deemed
to be invested in the money market fund that is earning less than 120% of AFR,
the Company will make a future contribution equal to the difference in interest
accruals between the actual money market fund rate and the AFR, which
contribution is allocated to the participant's account. For the 2004 plan year,
the Company allocated $1,568,600 to participants' accounts for these additional
contributions.
With respect to Company insolvency or bankruptcy, participant's rights,
beneficiary designations and plan termination, the SERP is in all material
respects the same as the Post-2004 SERP.
EMPLOYMENT AGREEMENTS
The Company has employment agreements with Messrs. Rock, Sutton and Werner
dated December 10, 1987, January 2, 1991, and May 1, 1991 respectively. These
agreements have an initial term of three years and are automatically extended
for an additional year at each anniversary date. Each of the employment
agreements with Messrs. Rock, Sutton, and Werner contains the employee's salary
and other conditions of employment and entitles the employee to participate in
the Company's bonus program and other benefit programs. If Mr. Rock, Mr. Sutton
or Mr. Werner is terminated by the Company (other than for cause, death or
disability) or if for any reason his position is eliminated or otherwise becomes
redundant, Mr. Rock, Mr. Sutton or Mr. Werner, as applicable, would be entitled
to receive a lump sum payment in cash equal to his current annual base salary
and bonus through the end of the employment period; provided, however, that in
the event of a change in control, the Change of Control Agreements (as discussed
below) would control, except with respect to any accrued obligations under the
employment agreement that were not fully accrued under the applicable Change of
Control Agreement.
CHANGE OF CONTROL AGREEMENTS
On January 4, 2000, the Company entered into Change-of-Control Employment
Agreements ("Agreements") with seven executive officers, including Messrs. Rock,
Carroll, Sutton, Werner and Ms. Dorman. In the event of a "change of control" of
the Company (as defined in the Agreements), the 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 or her employment for "Good Reason" (as
defined in the Agreements), 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
21
Agreements); 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 Agreements also provide for an
additional payment to the executive of an amount equal to any Excise Tax (as
defined in the Agreements), 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 a certified public
accounting firm designated by the executive.
ADDITIONAL INFORMATION ABOUT OUR
DIRECTORS AND EXECUTIVE OFFICERS
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Smith has not engaged in any transaction, or series of similar
transactions, since the beginning of 2004, nor is there any currently proposed
transaction, or series of similar transactions, to which Smith or any of its
subsidiaries was or is to be a party, in which the amount involved exceeds
$60,000 and in which any of Smith's directors or executive officers or members
of their immediate family had, or will have, a direct or indirect material
interest.
None of the following persons has been indebted to Smith or its
subsidiaries at any time since the beginning of 2004: any director or executive
officer of Smith; any nominee for election as a director; any member of the
immediate family of any of the directors, executive officers or nominees for
director; any corporation or organization of which any of the directors,
executive officers or nominees is an executive officer or partner or is,
directly or indirectly, the beneficial owner of 10% or more of any class of
equity securities (except trade debt entered into in the ordinary course of
business); and any trust or other estate in which any of the directors,
executive officers or nominees for director has a substantial beneficial
interest or for which such person serves as a trustee or in a similar capacity.
Smith does have various types of business arrangements with corporations
and other organizations in which a Smith director, executive officer or nominee
for director may also be a director, trustee, investor or have some other direct
or indirect relationship. Smith enters into these arrangements in the ordinary
course of business and they typically involve Smith receiving or providing some
good or service on a non-exclusive basis and at arms-length negotiated rates.
Examples include: (1) distribution of maintenance, repair and operating supplies
and equipment by Smith's Wilson business unit to Frontier Refining, a subsidiary
of Frontier Oil Corporation (Jim Gibbs, a Smith Director, is Chairman of the
Board, President & Chief Executive Officer of Frontier and Mr. Buck, a Smith
director, is a director of Frontier); and (2) the sale of equipment and services
and drilling fluid products by Smith's M-I SWACO, Smith Technologies, Smith
Services and Wilson business units to Forest Oil Corporation (Dod Fraser, a
Smith director, is a director of Forest Oil). The Board of Directors has
determined that Messrs. Bailar, Buck, Fraser, Gibbs and Neely are independent
and, in addition, satisfy the independence requirements of the New York Stock
Exchange. To be considered independent, the Board of Directors must
affirmatively determine that a director has no material relationship with Smith.
In each case, the Board of Directors broadly considers all relevant facts and
circumstances, including the director's commercial, industrial, banking,
consulting, legal, accounting, charitable and familial relationships and such
other criteria as the Board of Directors may determine from time to time. In
making its independence determination for Messrs. Buck and Gibbs, the Board of
Directors reviewed Frontier Refining's purchases from Smith's Wilson business
unit and Forest Oil's purchases from Smith's M-I SWACO, Smith Technologies,
Smith Services and Wilson business units. During 2004, Frontier Refining paid
$755,887 to Smith and Forest Oil paid $6.5 million to Smith. Frontier Refining
expects to make purchases from Smith's Wilson business unit in 2005 and Forest
Oil expects to make purchases from all of Smith's business units in 2005. The
Board of Directors determined that these relationships do not affect Messrs.
Buck's, Fraser's and Gibbs' independence.
22
Smith does not believe that in any such case either Smith or the other
corporation or organization is a sole-source supplier to the other with regard
to the relevant good or service. Smith further does not believe that in any case
the director, executive officer or nominee for director receives any
compensation from the other corporation or organization that is directly linked
to the revenue or profits of the Smith-related business. Any revenue or profits
from Smith-related business may, of course, be indirectly reflected in the
overall revenue or profits of the other corporation or organization, which in
turn may affect the individual's overall compensation or value of his or her
investments in the corporation or organization.
Smith has a corporate charitable donations program. Smith's charitable
activities focus primarily on education. Smith has a program whereby it will
match certain charitable donations of individual employees to educational
institutions. The maximum matching gift is $5,000 per employee per year;
however, no more than $10,000 will be given to any one school in a year.
Directors and executive officers are eligible to participate in this matching
program on the same terms as other Smith employees. It is possible that, through
this matching program, Smith may make charitable contributions to organizations
where a Smith director or executive officer, or one of their family members, is
a director, trustee, consultant or employee.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Exchange Act requires the Company's officers and
directors, and persons who own more than 10% of the Company's outstanding shares
of Common Stock (collectively, "Section 16 Persons"), to file with the SEC
initial reports of ownership and reports of changes in ownership of Common Stock
and other equity securities. Section 16 Persons are required by Commission
regulations to furnish the Company with copies of all Section 16(a) reports they
file.
Based solely on its review of the copies of such reports received by it, or
written representations from certain Section 16 Persons that all Section 16(a)
reports required to be filed for such persons had been filed, the Company
believes that during 2004 the Section 16 Persons complied with all Section 16(a)
filing requirements applicable to them, except that the Named Officers and five
other Company officers filed a late report disclosing one transaction, each
relating to the grant of options to them on December 7, 2004. Additionally,
Messrs. Bailar, Buck, Gibbs and Neely recently filed a late report disclosing
one transaction, each relating to the award of shares of restricted stock units
to them in 1999 in connection with the termination of the Directors' Retirement
Plan.
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, 2005. This
information is based upon information furnished to the Company by these persons
and statements filed with the SEC:
NAME AND ADDRESS AMOUNT AND NATURE OF PERCENT OF
OF BENEFICIAL OWNER BENEFICIAL OWNERSHIP CLASS
------------------- -------------------- ----------
FMR Corp. .................................................. 15,292,876(1) 14.4
82 Devonshire Street
Boston, Massachusetts 02109
T. Rowe Price Associates, Inc. ............................. 6,276,400(2) 5.9
100 East Pratt Street
Baltimore, Maryland 21202
---------------
(1) Fidelity Management & Research Company ("Fidelity"), a wholly owned
subsidiary of FMR Corp. ("FMR") and an investment adviser, is the beneficial
owner of 10,484,569 shares as a result of acting as investment adviser to
various investment companies (the "Funds"). Edward C. Johnson 3d, FMR's
Chairman, through its control of Fidelity, and the Funds each has sole power
to dispose of the 10,484,569 shares owned by the Funds. Neither FMR nor Mr.
Johnson has the sole power to vote or direct the voting of the shares owned
directly by the Fidelity Funds, which power resides with the Funds'
23
Boards of Trustees. Fidelity carries out the voting of the shares under
written guidelines established by the Funds' Boards of Trustees. Fidelity
Management Trust Company ("FMTC"), a wholly owned subsidiary of FMR, is the
beneficial owner of 2,621,015 shares as a result of its serving as
investment manager of various institutional accounts. Mr. Johnson and FMR,
through its control of FMTC, each has sole dispositive power and sole power
to vote or to direct the voting of 2,621,015 shares. Strategic Advisers,
Inc. ("Strategic"), a wholly owned subsidiary of FMR, provides investment
advisory services to individuals. As such, FMR's beneficial ownership
includes 412 shares beneficially owned through Strategic. Members of the
Edward C. Johnson 3d family are the predominant owners of Class B shares of
common stock of FMR, representing approximately 49% of the voting power of
FMR. Mr. Johnson owns 12.0% and Abigail P. Johnson, a Director of FMR, owns
24.5% of the voting stock of FMR. The Johnson family group and all other
Class B shareholders have entered into a shareholders' voting agreement
under which all Class B shares will be voted in accordance with the majority
vote of Class B shares. Through their ownership of voting common stock and
the shareholders' voting agreement, members of the Johnson family may be
deemed, under the Investment Company Act of 1940, to form a controlling
group with respect to FMR. Fidelity International Limited ("FIL")
beneficially owns 2,186,880 shares, of which it has sole power to vote and
to dispose. FMR and FIL are of the view that they are not acting as a
"group" for purposes of Section 13(d), however the filing made by FMR
includes, on a voluntary basis, ownership as if all the shares are
beneficially owned by FMR and FIL on a joint basis.
(2) These securities are owned by various individual and institutional investors
for which T. Rowe Price Associates, Inc. ("Price Associates") serves as
investment adviser with power to direct investments and/or sole power to
vote the securities. For purposes of the reporting requirements of the
Exchange Act, Price Associates is deemed to be a beneficial owner of such
securities; however, Price Associates expressly disclaims that it is, in
fact, the beneficial owner of such securities.
PROPOSAL 2: APPROVAL OF AN AMENDMENT TO THE RESTATED
CERTIFICATE OF INCORPORATION TO INCREASE THE NUMBER
OF AUTHORIZED SHARES OF COMMON STOCK
At the meeting, you will be asked to approve an amendment to the Restated
Certificate of Incorporation of the Company to increase the number of shares of
Common Stock that the Company has authority to issue from 150,000,000 to
250,000,000. The number of shares of preferred stock authorized would not be
changed by this amendment, nor would the par value of either the Common Stock of
the preferred stock be affected in any way.
As of March 1, 2005, 106,037,836 shares of Common Stock were issued
(including 4,222,466 shares held as treasury stock), an aggregate of 2,115,350
shares were reserved for issuance under the Company's Long-Term Incentive
Compensation Plan and 70,832 shares were reserved for issuance under the
Company's Stock Plan for Outside Directors. As of March 1, 2005, 41,775,982
shares were unreserved. If the proposed amendment is approved, an aggregate of
141,775,982 shares of Common Stock will be available for issuance. The Company
does not have any current plans, agreements or understandings to issue stock
that would involve any of the shares of Common Stock resulting from the increase
in the number of authorized shares.
On February 2, 2005, the Board of Directors of the Company adopted a
resolution approving the amendment to increase the number of authorized shares
of Common Stock, subject to stockholder approval. The Board of Directors of the
Company believes that it is desirable to have the additional authorized shares
of Common Stock available for possible future stock dividends or splits,
financing and acquisition transactions, employee benefit plans and other general
corporate purposes. Having additional authorized shares of Common Stock
available for issuance in the future will give the Company greater flexibility
and may allow these shares to be issued without the expense and delay of a
special meeting of the stockholders. All authorized but unissued shares of
Common Stock, including the additional shares of Common Stock authorized by the
proposed amendment, will be available for issuance without further authorization
of the stockholders, unless stockholder action is required by applicable law or
the rules of a stock exchange on which the Common Stock is listed.
24
Issuing additional shares of Common stock or rights to acquire additional
shares of Common Stock could have the effect of diluting the stock ownership,
earnings per share and voting power of existing stockholders, except in pro rata
distributions such as stock dividends and stock splits.
The affirmative vote of a majority of the shares represented at the annual
meeting will be sufficient to approve the proposed increase in the authorized
number of shares of Common Stock. If the proposed amendment is approved, the
first sentence of Article FOURTH of the Company's Restated Certificate of
Incorporation will read as follows:
"FOURTH: The total number of shares of stock that the Corporation shall
have authority to issue is 255,000,000, consisting of 250,000,000 shares of
Common Stock, par value $1.00 per share (the "Common Stock"), and 5,000,000
shares of Preferred Stock, par value $1.00 per share (the "Preferred Stock")."
THE BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE FOR APPROVAL OF THE
AMENDMENT TO THE RESTATED CERTIFICATE OF INCORPORATION TO INCREASE THE NUMBER OF
AUTHORIZED SHARES OF COMMON STOCK.
PROPOSAL 3: APPROVAL OF THE SMITH INTERNATIONAL, INC. 1989 LONG-TERM
INCENTIVE COMPENSATION PLAN AS AMENDED AND RESTATED
The Smith International, Inc. 1989 Long-Term Incentive Compensation Plan
was originally approved by the stockholders at the Company's 1989 annual meeting
and has been amended since that time. On December 8, 2004, the Board of
Directors approved the Amended and Restated Smith International, Inc. 1989
Long-Term Incentive Compensation Plan effective as of January 1, 2005 (the "LTIC
Plan"), which included material amendments. At the Annual Meeting, the Company's
stockholders will be asked to approve the LTIC Plan, which is attached hereto as
Appendix A, in accordance with the rules of the New York Stock Exchange and the
provisions of the LTIC Plan. The amendments made to the LTIC Plan effective
January 1, 2005 did not increase the aggregate number of shares of the Company's
Common Stock reserved for issuance under the LTIC Plan. Your vote on this
Proposal 3 will not affect the aggregate number of shares of the Company's
Common Stock previously reserved for issuance under the LTIC Plan, and the
Company intends to continue to make awards at the same levels and on the same
criteria as it has done since the inception of the original LTIC Plan.
SUMMARY OF THE LTIC PLAN
General
The Board of Directors has found that long term incentive awards granted to
employees have been highly effective in recruiting and retaining competent
personnel. The Board of Directors believes that the growth of the Company is
dependent upon its ability to attract, employ and retain executives and
employees of outstanding ability who will dedicate their maximum productive
efforts toward the advancement of the Company. The growing competition among
companies for capable managers makes it necessary for the Company to maintain a
strong and competitive incentive program.
Awards Under the Plan
The LTIC Plan provides for the following types of awards: (a) nonqualified
stock option; (b) stock appreciation right; (c) restricted stock; (d)
stock-based award; (e) cash award; (f) any combination of the foregoing. The
LTIC Plan permits the grant of awards subject to performance objectives in order
to qualify for the performance-based exception within Section 162(m) of the
Internal Revenue Code. As of March 1, 2005, only nonqualified stock options and
restricted stock have been awarded under the LTIC Plan.
Plan Administration
The LTIC Plan is administered by the Compensation Committee. The
Compensation Committee determines awards based upon an employee's ability to
influence the Company's performance. Future awards
25
are based on future performance and cannot, therefore, be determined in advance.
Nonqualified stock options have been granted to all Named Officers, five
executive group employees and approximately 452 non-executive officer employees,
for a total of approximately 462 current employees. No directors of the Company,
in their capacity as a director, have been granted awards under the LTIC Plan.
Please see the section entitled "Executive Compensation" earlier in this
document for more information about stock options granted to the executive
officers.
Participation and Eligibility
All full-time salaried employees of the Company who the Compensation
Committee decides are key employees are eligible to receive awards under the
LTIC Plan.
Shares Subject to Awards Under the Plan
Since 1989, as adjusted to reflect the 2-1 stock split, a total of
14,400,000 shares of Common Stock have been reserved for issuance under the LTIC
Plan. Upon expiration, cancellation or termination of unexercised awards granted
under the LTIC Plan or forfeiture of shares of restricted stock, the shares of
Common Stock subject to such awards will again be available for the grant of
awards under the LTIC Plan. If any change occurs in the capitalization of the
Company, such as a stock dividend or stock split, or if a merger takes place in
which the Company is the surviving corporation, the Board of Directors or the
Committee may take such action as it deems appropriate so that the value of each
outstanding award shall not be adversely affected by such corporate event.
General Terms of the Awards
The specific terms and conditions of each award, including the vesting and
termination of such awards, shall be fixed by the Compensation Committee
pursuant to the LTIC Plan at the time the award is granted. Subject to
exceptions, determined by the committee pursuant to the LTIC Plan, the maximum
stock based award that may be granted to a LTIC Plan participant in a given year
is 1,000,000 shares. The maximum cash payout on an award payable in cash that
may be paid to a LTIC Plan participant in a given year is $10,000,000. The grant
price of an option or stock appreciation right ("SAR") may not be less than 100%
of the fair market value of our Common Stock on the date of grant of the option.
Federal Income Tax Consequences Associated with Awards Granted Under the LTIC
Plan
The U.S. federal income tax consequences to the Company and its employees
of awards under the LTIC Plan are complex and subject to change. The following
discussion is only a summary of the general federal income tax rules applicable
to awards granted under the LTIC Plan. This discussion is not to be construed as
tax advice. Recipients of awards under the LTIC Plan should consult their own
tax advisors regarding the federal income tax consequences associated with such
awards under their particular circumstances.
As discussed above, several different types of awards may be issued under
the LTIC Plan. The tax consequences related to the issuance of each type of
award is discussed separately below.
Nonqualified Stock Options. Nonqualified stock options granted under the
LTIC Plan are not intended to qualify as "incentive stock options" and will not
qualify for any special tax benefits to the optionee. An optionee generally will
not recognize any taxable income at the time he or she is granted a nonqualified
option. However, upon the exercise of a nonqualified stock option, the optionee
will recognize ordinary income for federal tax purposes measured by the excess
of the then fair market value of the shares over the exercise price. The income
realized by the optionee will be subject to income and other employment-related
withholding taxes.
In general, there will be no federal income tax deduction allowed to the
Company upon the grant or termination of a nonqualified stock option or a sale
or disposition of the shares acquired upon the exercise of a nonqualified stock
option. However, upon the exercise of a nonqualified stock option, the Company
will be
26
entitled to a deduction for federal income tax purposes equal to the amount of
ordinary income that an optionee is required to recognize as a result of the
exercise, provided that the deduction is not otherwise disallowed under the
Code.
Restricted Stock Awards and Stock-Based Awards. Generally, the recipient
of a restricted stock award has no federal income tax consequences at the time
of grant. Rather, at the time the shares are no longer subject to a substantial
risk of forfeiture, the grantee will recognize ordinary income to the extent of
the excess of the fair market value of the stock on the date the risk of
forfeiture ceases over the amount paid, if any, by the participant for such
stock. A grantee may, however, elect to be taxed at the time of the grant.
If a recipient of a stock-based award receives the cash equivalent of
Company common stock (in lieu of actually receiving Company common stock), the
recipient will recognize ordinary compensation income at the time of the receipt
of such cash in the amount of the cash received.
In the year that the recipient of a restricted stock award or stock based
award recognizes ordinary taxable income in respect of such award, the Company
will be entitled to a deduction for federal income tax purposes equal to the
amount of ordinary income that the recipient is required to recognize, provided
that the deduction is not otherwise disallowed under the Code.
Stock Appreciation Rights. The recipient of a SAR will not recognize any
taxable income at the time the SAR is granted. If the employee receives the
appreciation inherent in the SARs in cash (which can only occur with respect to
any pre-2005 awards as provided under the LTIC Plan), the cash will be taxable
as ordinary compensation income to the employee at the time that it is received.
If the employee receives the appreciation inherent in the SARs in stock, the
employee will recognize ordinary compensation income equal to the excess of the
fair market value of the stock on the day it is received over any amounts paid
by the employee for the stock.
In general, there will be no federal income tax deduction allowed to the
Company upon the grant or termination of SARs. However, upon the exercise of a
SAR, the Company will be entitled to a deduction for federal income tax purposes
equal to the amount of ordinary income that the employee is required to
recognize as a result of the exercise, provided that the deduction is not
otherwise disallowed under the Code.
Performance-Based Awards. Certain awards granted under the LTIC Plan will
be intended to qualify as performance-based compensation under Section 162(m) of
the Internal Revenue Code. Section 162(m) generally disallows deductions for
compensation in excess of $1,000,000 for some executive officers unless the
compensation is excluded for purposes of applying the Section 162(m)
limitations, including an exclusion for compensation that qualifies as
performance-based compensation. The LTIC Plan contains provisions consistent
with the Section 162(m) requirements for performance-based compensation.
However, the Compensation Committee may award non-deductible compensation when
such grants are in the best interest of the Company, balancing tax efficiency
with long-term strategic objectives.
Amendment of the LTIC Plan
The Board of Directors may terminate, modify or amend the LTIC Plan at any
time without stockholder approval, except for amendments that (a) change the
class of persons eligible to receive awards; (b) materially increase benefits;
(c) transfer the administration of the LTIC Plan to anyone who is not a
"disinterested person" under the federal securities law; or (d) increase the
number of shares subject to the LTIC Plan.
Awards Under the LTIC Plan
As of March 1, 2005, 2,873,900 stock options were outstanding under the
LTIC Plan, having exercise prices of $11.78 to $56.26 and expiring from December
3, 2006 to December 7, 2014. The outstanding figure includes stock options for
191,456 shares which were issued on December 7, 2004. As of March 1, 2005,
53,504 restricted stock units were issued and outstanding (and still subject to
restrictions) under the LTIC Plan, each of which units represents a contingent
right to receive one share of Common Stock. All stock options and restricted
stock awards granted under the LTIC Plan are conditioned upon continued
27
employment. The last reported sales price, as reported by the New York Stock
Exchange, of the Company's Common Stock on March 8, 2005 was $64.34 per share.
Under the LTIC Plan, the Named Officers have been granted, in the
aggregate, stock options exercisable into the following number of shares of
Common Stock: Mr. Rock: 2,056,300; Mr. Carroll: 958,100; Mr. Sutton: 448,390;
Ms. Dorman: 272,600; and Mr. Werner: 325,420. All current executive officers as
a group have been granted, in the aggregate, options exercisable into 4,877,860
shares of Common Stock. All employees, other than executive officers, as a
group, have been granted, in the aggregate, options exercisable into, or
restricted stock awards relating to, 8,631,838 shares of Common Stock.
Non-employee directors are not eligible to receive options under the LTIC Plan.
Assuming the proposed amendment to the LTIC Plan is approved by the
stockholders, it is anticipated that approximately 153,340 performance-based
restricted stock units would be issued to employees in 2005, but the recipients
and their respective amounts are not determinable at this time. The
performance-based restricted stock units will have a three-year vesting period,
subject to periodic adjustments to account for changes in expected return on
equity attained by the Company.
Required Approval
The affirmative vote of a majority of the votes represented at the annual
meeting will be sufficient to approve the LTIC Plan. In the event that
stockholder approval of the LTIC Plan is not obtained, the original Smith
International, Inc. 1989 Long-Term Incentive Compensation Plan, as previously
amended and restated, would remain in effect.
Incorporation By Reference
The foregoing is only a summary of the LTIC Plan and is qualified in its
entirety by the full text of the LTIC Plan, a copy of which is attached to this
Proxy Statement as Appendix A.
THE BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE FOR APPROVAL OF THE LTIC
PLAN AS AMENDED AND RESTATED EFFECTIVE JANUARY 1, 2005.
PROPOSAL 4: RATIFICATION OF DELOITTE & TOUCHE LLP AS INDEPENDENT AUDITORS
The Board of Directors has approved Deloitte & Touche LLP as its
independent registered public accountants to audit the books and records of the
Company for its fiscal year ending December 31, 2005. The services of Deloitte &
Touche LLP will include the audit of the effectiveness of internal controls over
financial reporting. The Company has been advised by Deloitte & Touche LLP that
the firm has no relationship with the Company or its subsidiaries other than
that arising from the firm's engagement as independent auditors and, in limited
circumstances, tax advisors. Deloitte & Touche LLP has audited the Company's
financial statements since April 15, 2002.
Deloitte & Touche LLP has offices in or convenient to most of the locations
in the world where the Company and its subsidiaries operate. Representatives of
Deloitte & Touche LLP are not expected to be present at the Annual Meeting, will
not have the opportunity to make a statement and will not be available to
respond to questions.
28
FEES PAID TO DELOITTE & TOUCHE LLP
During fiscal years 2004 and 2003, the Company incurred the following fees
for services performed by Deloitte & Touche LLP:
2004 2003
---------- ----------
Audit Fees.................................................. $4,523,000 $1,611,500
Audit-Related Fees.......................................... 246,000 55,000
Tax Fees.................................................... 35,000 50,000
All Other Fees.............................................. 0 0
---------- ----------
Total....................................................... $4,804,000 $1,716,500
Audit Fees. This category includes the audit of Smith's annual financial
statements, audits of statutory accounts in certain non-U.S. jurisdictions,
review of financial statements included in Smith's quarterly reports on Form
10-Q and services that are normally provided by the independent auditors in
connection with statutory and regulatory filings or engagements for those fiscal
years. This category also includes the audit of the combined financial
statements of M-I SWACO, the Company's majority-owned joint venture. In 2004,
approximately $2.8 million of audit fees were incurred in connection with
Smith's compliance with Section 404 of the Sarbanes-Oxley Act of 2002 relating
to internal controls over financial reporting.
Audit-Related Fees. This category consists of assurance and related
services by Deloitte & Touche LLP that are reasonably related to the performance
of the audit or review of Smith's financial statements and are not reported
above under "Audit Fees". The services for the fees disclosed under this
category primarily relate to the audit of various U.S. employee benefit plans
and the stand-alone audit of a Company subsidiary, which were not directly
related to the audit of either the 2003 or the 2004 consolidated financial
statements. The Audit Committee approved 100% of these Audit-Related Fees
pursuant to its pre-approval policy.
Tax Fees. This category includes fees for professional services performed
by Deloitte & Touche LLP with respect to tax compliance, tax advice and tax
planning. The Audit Committee approved 100% of these Tax Fees pursuant to its
pre-approval policy.
SERVICES PROVIDED BY DELOITTE & TOUCHE LLP
All services rendered by Deloitte & Touche LLP are permissible under
applicable laws and regulations, and are pre-approved by the Audit Committee.
Pursuant to new rules of the SEC, the fees paid to Deloitte & Touche LLP for
services are disclosed in the table above under the categories listed.
Although ratification by stockholders is not required by law, the Board of
Directors has determined that it is desirable to seek stockholder ratification
of this appointment in light of the critical role played by independent
registered public accountants in maintaining the integrity of Company financial
controls and reporting. Notwithstanding its selection, the Board of Directors,
in its discretion, may appoint new independent registered public accountants at
any time during the year if the Board believes that such a change would be in
the best interest of the Company and its stockholders. If the stockholders do
not ratify the appointment of Deloitte & Touche LLP, the Board may reconsider
its selection.
THE BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE FOR THE CONTINUED
ENGAGEMENT OF DELOITTE & TOUCHE LLP AS INDEPENDENT AUDITORS TO AUDIT THE BOOKS
AND RECORDS OF THE COMPANY FOR THE FISCAL YEAR ENDING DECEMBER 31, 2005.
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.
29
STOCKHOLDERS' PROPOSALS
To be considered for inclusion in the proxy statement for next year's
annual meeting, stockholder proposals must be submitted to the Company in
writing by no later than November 28, 2005. In addition, in order for a
stockholder to bring any business before next year's annual meeting, notice must
be received by the Company in writing by no later than November 28, 2005, in
accordance with the Company's Restated Bylaws.
ANNUAL REPORT AND FINANCIAL INFORMATION
A COPY OF OUR 2004 ANNUAL REPORT TO STOCKHOLDERS IS BEING MAILED WITH THIS
PROXY STATEMENT. WE WILL PROVIDE WITHOUT CHARGE THE COMPANY'S ANNUAL REPORT ON
FORM 10-K FOR THE FISCAL YEAR ENDED DECEMBER 31, 2004, TO ANY PERSON REQUESTING
A COPY IN WRITING AND STATING THAT HE OR SHE WAS A BENEFICIAL HOLDER OF THE
COMPANY'S COMMON STOCK ON MARCH 1, 2005. THE ANNUAL REPORT ON FORM 10-K IS ALSO
AVAILABLE ON OUR WEBSITE AT WWW.SMITH.COM USING THE INVESTOR RELATIONS LINK. 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 2004 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
30
APPENDIX A
SMITH INTERNATIONAL, INC.
1989 LONG-TERM INCENTIVE
COMPENSATION PLAN
(AS AMENDED AND RESTATED EFFECTIVE JANUARY 1, 2005)
TABLE OF CONTENTS
PAGE
----
SECTION 1 GENERAL PROVISIONS RELATING TO PLAN GOVERNANCE, COVERAGE AND
BENEFITS........................................................... A-1
(i) 1.1 Background and Purpose...................................... A-1
(ii) 1.2 Definitions................................................. A-1
(a) Authorized Officer.......................................... A-1
(b) Board....................................................... A-1
(c) Cause....................................................... A-1
(d) CEO......................................................... A-2
(e) Change in Control........................................... A-2
(f) Code........................................................ A-2
(g) Committee................................................... A-2
(h) Common Stock................................................ A-2
(i) Company..................................................... A-2
(j) Covered Employee............................................ A-2
(k) Disability.................................................. A-2
(l) Employee.................................................... A-2
(m) Employment.................................................. A-2
(n) Exchange Act................................................ A-3
(o) Fair Market Value........................................... A-3
(p) Grantee..................................................... A-3
(q) Immediate Family............................................ A-3
(r) Incentive Award or Award.................................... A-3
(s) Incentive Agreement......................................... A-3
(t) Independent SAR or SAR...................................... A-3
(u) Insider..................................................... A-3
(v) Nonstatutory Stock Option................................... A-3
(w) Option Price................................................ A-3
(x) Other Stock-Based Award..................................... A-4
(y) Outside Director............................................ A-4
(z) Parent...................................................... A-4
(aa) Performance-Based Exception................................. A-4
(bb) Performance-Based Restricted Stock.......................... A-4
(cc) Performance Criteria........................................ A-4
(dd) Performance Period.......................................... A-4
(ee) Plan........................................................ A-4
(ff) Publicly Held Corporation................................... A-4
(gg) Restricted Stock............................................ A-4
(hh) Restricted Stock Award...................................... A-4
(ii) Restriction Period.......................................... A-4
(jj) Retirement.................................................. A-4
(kk) Share....................................................... A-4
(ll) Share Pool.................................................. A-4
(mm) Spread...................................................... A-4
A-i
PAGE
----
(nn) Stock Appreciation Right or SAR............................. A-4
(oo) Stock Option or Option...................................... A-5
(pp) Subsidiary.................................................. A-5
(qq) Supplemental Payment........................................ A-5
(iii) 1.3 Plan Administration......................................... A-5
(a) Authority of the Committee.................................. A-5
(b) Meetings.................................................... A-5
(c) Decisions Binding........................................... A-5
(d) Modification of Outstanding Incentive Awards................ A-5
(e) Delegation of Authority..................................... A-5
(f) Expenses of Committee....................................... A-6
(g) Surrender of Previous Incentive Awards...................... A-6
(h) Indemnification............................................. A-6
(iv) 1.4 Shares of Common Stock Available for Incentive Awards....... A-6
(v) 1.5 Share Pool Adjustments for Awards and Payouts............... A-7
(vi) 1.6 Common Stock Available...................................... A-7
(vii) 1.7 Eligibility................................................. A-7
(viii) 1.8 Types of Incentive Awards................................... A-8
SECTION 2 STOCK OPTIONS AND STOCK APPRECIATION RIGHTS........................ A-8
(ix) 2.1 Grant of Stock Options...................................... A-8
(x) 2.2 Stock Option Terms.......................................... A-8
(a) Written Agreement........................................... A-8
(b) Number of Shares............................................ A-8
(c) Exercise Price.............................................. A-8
(d) Term........................................................ A-8
(e) Exercise.................................................... A-8
(xi) 2.3 Stock Option Exercises...................................... A-9
(a) Method of Exercise and Payment.............................. A-9
(b) Restrictions on Share Transferability....................... A-9
(c) Proceeds of Option Exercise................................. A-10
(xii) 2.4 Stock Appreciation Rights................................... A-10
(a) Grant....................................................... A-10
(b) General Provisions.......................................... A-10
(c) Exercise.................................................... A-10
(d) Settlement.................................................. A-10
(xiii) 2.5 Supplemental Payment on Exercise of Nonstatutory Stock
Options or Stock Appreciation Rights........................ A-10
SECTION 3 RESTRICTED STOCK................................................... A-11
(xiv) 3.1 Award of Restricted Stock................................... A-11
(a) Grant....................................................... A-11
(b) Immediate Transfer Without Immediate Delivery of Restricted
Stock....................................................... A-11
(xv) 3.2 Restrictions................................................ A-11
(a) Forfeiture of Restricted Stock.............................. A-11
A-ii
PAGE
----
(b) Issuance of Certificates.................................... A-12
(c) Removal of Restrictions..................................... A-12
(xvi) 3.3 Delivery of Shares of Common Stock.......................... A-12
(xvii) 3.4 Supplemental Payment on Vesting of Restricted Stock......... A-12
SECTION 4 OTHER STOCK-BASED AWARDS........................................... A-12
(xviii) 4.1 Grant of Other Stock-Based Awards........................... A-12
(xix) 4.2 Other Stock-Based Award Terms............................... A-13
(a) Written Agreement........................................... A-13
(b) Purchase Price.............................................. A-13
(c) Performance Criteria and Other Terms........................ A-13
(d) Payment..................................................... A-13
SECTION 5 PERFORMANCE CRITERIA............................................... A-13
SECTION 6 PROVISIONS RELATING TO PLAN PARTICIPATION.......................... A-14
(xx) 6.1 Incentive Agreement......................................... A-14
(xxi) 6.2 No Right to Employment...................................... A-15
(xxii) 6.3 Securities Requirements..................................... A-15
(xxiii) 6.4 Transferability............................................. A-15
(xxiv) 6.5 Rights as a Stockholder..................................... A-16
(a) No Stockholder Rights....................................... A-16
(b) Representation of Ownership................................. A-16
(xxv) 6.6 Change in Stock and Adjustments............................. A-16
(a) Changes in Law or Circumstances............................. A-16
(b) Exercise of Corporate Powers................................ A-16
(c) Recapitalization of the Company............................. A-17
(d) Issue of Common Stock by the Company........................ A-17
(e) Assumption under the Plan of Outstanding Stock Options...... A-17
(f) Assumption of Incentive Awards by a Successor............... A-17
(xxvi) 6.7 Termination of Employment, Death, Disability and
Retirement.................................................. A-18
(a) Termination of Employment................................... A-18
(b) Termination of Employment for Cause......................... A-18
(c) Voluntary Resignation....................................... A-19
(d) Retirement.................................................. A-19
(e) Disability or Death......................................... A-19
(f) Continuation................................................ A-19
(xxvii) 6.8 Change in Control........................................... A-20
(xxviii) 6.9 Exchange of Incentive Awards................................ A-21
(xxix) 6.10 Financing................................................... A-21
SECTION 7 GENERAL............................................................ A-21
(xxx) 7.1 Effective Date and Grant Period............................. A-21
(xxxi) 7.2 Funding and Liability of Company............................ A-22
(xxxii) 7.3 Withholding Taxes........................................... A-22
(a) Tax Withholding............................................. A-22
(b) Share Withholding........................................... A-22
(c) Loans....................................................... A-22
A-iii
PAGE
----
(xxxiii) 7.4 No Guarantee of Tax Consequences............................ A-22
(xxxiv) 7.5 Designation of Beneficiary by Participant................... A-22
(xxxv) 7.6 Deferrals................................................... A-23
(xxxvi) 7.7 Amendment and Termination................................... A-23
(xxxvii) 7.8 Requirements of Law......................................... A-23
(a) Governmental Entities and Securities Exchanges.............. A-23
(b) Securities Act Rule 701..................................... A-23
(xxxviii) 7.9 Rule 16b-3 Securities Law Compliance for Insiders........... A-24
(xxxix) 7.10 Compliance with Code Section 162(m) for Publicly Held
Corporation................................................. A-24
(xl) 7.11 Notices..................................................... A-24
(xli) 7.12 Pre-Clearance Agreement with Brokers........................ A-25
(xlii) 7.13 Successors to Company....................................... A-25
(xliii) 7.14 Miscellaneous Provisions.................................... A-25
(xliv) 7.15 Severability................................................ A-25
(xlv) 7.16 Gender, Tense and Headings.................................. A-25
(xlvi) 7.17 Governing Law............................................... A-25
A-iv
SMITH INTERNATIONAL, INC.
1989 LONG-TERM INCENTIVE COMPENSATION PLAN
SECTION 1
GENERAL PROVISIONS RELATING TO
PLAN GOVERNANCE, COVERAGE AND BENEFITS
1.1 BACKGROUND AND PURPOSE
Smith International, Inc., (the "COMPANY"), previously established and
adopted the Smith International, Inc. 1989 Long-Term Incentive Compensation Plan
(the "PLAN"). The Plan has been amended from time to time but not previously
amended and restated.
The Company hereby amends and restates the Plan under the form of this plan
document, effective as of January 1, 2005 (the "EFFECTIVE DATE"), to incorporate
various amendments for the benefit of the Company and the participants in the
Plan.
Effective as of the Effective Date, outstanding stock options and any other
Incentive Awards granted under the Plan, prior to this amendment and
restatement, are assumed and continued hereunder. All outstanding Incentive
Awards that are assumed and continued under the Plan, as amended and restated,
shall remain subject to their individual Incentive Agreements for each such
outstanding Incentive Award.
The purpose of the Plan is to foster and promote the long-term financial
success of the Company and to increase stockholder value by: (a) encouraging the
commitment of selected key Employees, (b) motivating superior performance of key
Employees by means of long-term performance related incentives, (c) encouraging
and providing key Employees with a program for obtaining ownership interests in
the Company which link and align their personal interests to those of the
Company's stockholders, (d) attracting and retaining key Employees by providing
competitive compensation opportunities, and (e) enabling key Employees to share
in the long-term growth and success of the Company.
The Plan provides for payment of various forms of compensation. It is not
intended to be a plan that is subject to the Employee Retirement Income Security
Act of 1974, as amended (ERISA). The Plan will be interpreted, construed and
administered consistent with its status as a plan that is not subject to ERISA.
The Plan will remain in effect, subject to the right of the Board to amend
or terminate the Plan at any time pursuant to Section 7.7, until all Shares
subject to the Plan have been purchased or acquired according to its provisions.
1.2 DEFINITIONS
The following terms shall have the meanings set forth below:
(a) AUTHORIZED OFFICER. The Chairman of the Board, the CEO or any
other senior officer of the Company to whom either of them delegate the
authority to execute any Incentive Agreement for and on behalf of the
Company. No officer or director shall be an Authorized Officer with respect
to any Incentive Agreement for himself.
(b) BOARD. The Board of Directors of the Company.
(c) CAUSE. When used in connection with the termination of a
Grantee's Employment, shall mean the termination of the Grantee's
Employment by the Company or any Subsidiary by reason of (i) the conviction
of the Grantee by a court of competent jurisdiction as to which no further
appeal can be taken of a crime involving moral turpitude or a felony; (ii)
the proven commission by the Grantee of a material act of fraud upon the
Company or any Subsidiary, or any customer or supplier thereof; (iii) the
misappropriation of any funds or property of the Company or any Subsidiary,
or any customer or supplier thereof; (iv) the willful and continued failure
by the Grantee to perform the material duties assigned to him that is not
cured to the reasonable satisfaction of the Company within 30 days after
written notice of
A-1
such failure is provided to Grantee by the Board or CEO (or by another
officer of the Company or a Subsidiary who has been designated by the Board
or CEO for such purpose); (v) the knowing engagement by the Grantee in any
direct and material conflict of interest with the Company or any Subsidiary
without compliance with the Company's or Subsidiary's conflict of interest
policy, if any, then in effect; or (vi) the knowing engagement by the
Grantee, without the written approval of the Board or CEO, in any material
activity which competes with the business of the Company or any Subsidiary
or which would result in a material injury to the business, reputation or
goodwill of the Company or any Subsidiary.
(d) CEO. The Chief Executive Officer of the Company.
(e) CHANGE IN CONTROL. Any of the events described in and subject to
Section 6.8.
(f) CODE. The Internal Revenue Code of 1986, as amended, and the
regulations and other authority promulgated thereunder by the appropriate
governmental authority. References herein to any provision of the Code
shall refer to any successor provision thereto.
(g) COMMITTEE. A committee appointed by the Board to administer the
Plan. While the Company is a Publicly Held Corporation, the Plan shall be
administered by a Committee appointed by the Board consisting of not less
than two directors who fulfill the "nonemployee director" requirements of
Rule 16b-3 under the Exchange Act and the "outside director" requirements
of Code Section 162(m). In either case, the Committee may be the
Compensation and Benefits Committee of the Board, or any subcommittee of
the Compensation and Benefits Committee, provided that the members of the
Committee satisfy the requirements of the previous provisions of this
paragraph.
The Board shall have the power to fill vacancies on the Committee
arising by resignation, death, removal or otherwise. The Board, in its sole
discretion, may bifurcate the powers and duties of the Committee among one
or more separate committees, or retain all powers and duties of the
Committee in a single Committee. The members of the Committee shall serve
at the discretion of the Board.
(h) COMMON STOCK. The common stock of the Company, $1.00 par value
per share, and any class of common stock into which such common shares may
hereafter be converted, reclassified or recapitalized.
(i) COMPANY. Smith International, Inc. and any successor in interest
thereto.
(j) COVERED EMPLOYEE. A named executive officer who is one of the
group of covered employees, as defined in Code Section 162(m) and Treasury
Regulation sec. 1.162-27(c) (or its successor), during any period that the
Company is a Publicly Held Corporation.
(k) DISABILITY. As determined by the Committee in its discretion
exercised in good faith, a physical or mental condition of the Grantee that
would entitle him to payment of disability income payments under the
Company's long term disability insurance policy or plan for employees, as
then effective, if any; or in the event that the Grantee is not covered,
for whatever reason, under the Company's long-term disability insurance
policy or plan, "Disability" means a permanent and total disability as
defined in Code Section 22(e)(3). A determination of Disability may be made
by a physician selected or approved by the Committee and, in this respect,
the Grantee shall submit to any reasonable examination(s) required by such
physician upon request.
(l) EMPLOYEE. Any full-time, salaried employee of the Company (or any
Parent or Subsidiary) within the meaning of Code Section 3401(c) who, in
the opinion of the Committee, is in a position to contribute to the growth,
development or financial success of the Company (or any Parent or
Subsidiary), including, without limitation, officers who are members of the
Board.
(m) EMPLOYMENT. Employment means that the individual is employed as
an Employee, or by any corporation issuing or assuming an Incentive Award
in any transaction described in Code Section 424(a), or by a parent
corporation or a subsidiary corporation of such corporation issuing or
assuming such Incentive Award, as the parent-subsidiary relationship shall
be determined at the time of the corporate
A-2
action described in Code Section 424(a). In this regard, neither the
transfer of a Grantee from Employment by the Company to Employment by any
Parent or Subsidiary, nor the transfer of a Grantee from Employment by any
Parent or Subsidiary to Employment by the Company, shall be deemed to be a
termination of Employment of the Grantee. Moreover, the Employment of a
Grantee shall not be deemed to have been terminated because of an approved
leave of absence from active Employment on account of temporary illness,
authorized vacation or granted for reasons of professional advancement,
education, or health, or during any period required to be treated as a
leave of absence by virtue of any applicable statute, Company personnel
policy or written agreement. All determinations regarding Employment, and
the termination of Employment hereunder, shall be made by the Committee.
(n) EXCHANGE ACT. The Securities Exchange Act of 1934, as amended.
(o) FAIR MARKET VALUE. While the Company is a Publicly Held
Corporation, the Fair Market Value of one Share of Common Stock on the date
in question is deemed to be (i) the average of the high and low prices of a
Share on the date as of which Fair Market Value is to be determined, or if
no such sales were made on such date, the closing sales price on the
immediately preceding business day of a Share as reported on the New York
Stock Exchange or other principal securities exchange on which Shares are
then listed or admitted to trading, or (ii) the closing sales price for a
Share on the date of grant as quoted on the National Association of
Securities Dealers Automated Quotation System ("NASDAQ"), or (iii) if not
quoted on NASDAQ, the average of the closing bid and asked prices for a
Share as quoted by the National Quotation Bureau's "Pink Sheets" or the
National Association of Securities Dealers' OTC Bulletin Board System. If
there was no public trade of Common Stock on the date in question, Fair
Market Value shall be determined by reference to the last preceding date on
which such a trade was so reported.
If the Company is not a Publicly Held Corporation at the time a
determination of the Fair Market Value of the Common Stock is required to
be made hereunder, the determination of Fair Market Value for purposes of
the Plan shall be made by the Committee in its sole and absolute
discretion. In this respect, the Committee may rely on such financial data,
appraisals, valuations, experts, and other sources as, in its sole and
absolute discretion, it deems advisable under the circumstances.
(p) GRANTEE. Any Employee who is granted an Incentive Award under the
Plan.
(q) IMMEDIATE FAMILY. With respect to a Grantee, the Grantee's child,
stepchild, grandchild, parent, stepparent, grandparent, spouse, former
spouse, sibling, mother-in-law, father-in-law, son-in-law, daughter-in-law,
brother-in-law, or sister-in-law, including adoptive relationships.
(r) INCENTIVE AWARD OR AWARD. A grant of an award under the Plan to a
Grantee, including any Nonstatutory Stock Option, Stock Appreciation Right
(SAR), Restricted Stock Award, Performance-Based Restricted Stock Award, or
Other Stock-Based Award, as well as any Supplemental Payment with respect
thereto.
(s) INCENTIVE AGREEMENT. The written agreement entered into between
the Company and the Grantee setting forth the terms and conditions pursuant
to which an Incentive Award is granted under the Plan, as such agreement is
further defined in Section 6.1(a).
(t) INDEPENDENT SAR OR SAR. A Stock Appreciation Right described in
Section 2.4.
(u) INSIDER. If the Company is a Publicly Held Corporation, an
individual who is, on the relevant date, an officer, director or ten
percent (10%) beneficial owner of any class of the Company's equity
securities that is registered pursuant to Section 12 of the Exchange Act,
all as defined under Section 16 of the Exchange Act.
(v) NONSTATUTORY STOCK OPTION. A Stock Option granted by the
Committee to a Grantee under Section 2.
(w) OPTION PRICE. The exercise price at which a Share may be
purchased by the Grantee of a Stock Option.
A-3
(x) OTHER STOCK-BASED AWARD. An award granted by the Committee to a
Grantee under Section 4.1 that is valued in whole or in part by reference
to, or is otherwise based upon, Common Stock.
(y) OUTSIDE DIRECTOR. A member of the Board who is not at the time of
grant of an Incentive Award, an employee of the Company or any Parent or
Subsidiary.
(z) PARENT. Any corporation (whether now or hereafter existing) which
constitutes a "parent" of the Company, as defined in Code Section 424(e).
(aa) PERFORMANCE-BASED EXCEPTION. The performance-based exception
from the tax deductibility limitations of Code Section 162(m), as
prescribed in Code Section 162(m)(4)(C) and Treasury Regulation
sec.1.162-27(e) (or its successor), which is applicable during such period
that the Company is a Publicly Held Corporation.
(bb) PERFORMANCE-BASED RESTRICTED STOCK. Shares of Restricted Stock
awarded to a Grantee pursuant to Section 3, that are subject to a risk of
forfeiture if the specified Performance Criteria are not met within the
Performance Period.
(cc) PERFORMANCE CRITERIA. The business criteria that are specified
by the Committee pursuant to Section 5 for an Incentive Award that is
intended to qualify for the Performance-Based Exception; the satisfaction
of such business criteria during the Performance Period being required for
the grant or vesting of the particular Incentive Award to occur, as
specified in the Incentive Agreement.
(dd) PERFORMANCE PERIOD. A period of time determined by the Committee
over which performance is measured for the purpose of determining a
Grantee's right to and the payment value of any Performance-Based
Restricted Stock Award or Other Stock-Based Award that is intended to
qualify for the Performance-Based Exception.
(ee) PLAN. Smith International, Inc. 1989 Long-Term Incentive
Compensation Plan, as set forth herein and as it may be amended from time
to time.
(ff) PUBLICLY HELD CORPORATION. A corporation issuing any class of
common equity securities required to be registered under Section 12 of the
Exchange Act.
(gg) RESTRICTED STOCK. Shares of Common Stock issued or transferred
to a Grantee pursuant to Section 3.
(hh) RESTRICTED STOCK AWARD. An authorization by the Committee to
issue or transfer Restricted Stock to a Grantee pursuant to Section 3.
(ii) RESTRICTION PERIOD. The period of time determined by the
Committee and set forth in the Incentive Agreement during which the
transfer of Restricted Stock by the Grantee is restricted.
(jj) RETIREMENT. The voluntary termination of Employment from the
Company and any Parent or Subsidiary constituting retirement for age (i) on
any date after the Employee attains the normal retirement age of 65 years,
(ii) an earlier retirement date for age as expressly agreed to by the
Committee prior to termination of Employment, or (iii) or such other age as
may be designated by the Committee in the Employee's individual Incentive
Agreement.
(kk) SHARE. A share of the Common Stock of the Company.
(ll) SHARE POOL. The number of shares authorized for issuance under
Section 1.4, as adjusted for awards and payouts under Section 1.5 and as
adjusted for changes in corporate capitalization under Section 6.6.
(mm) SPREAD. The difference between the exercise price per Share
specified in any SAR grant and the Fair Market Value of a Share on the date
of exercise of the SAR.
(nn) STOCK APPRECIATION RIGHT OR SAR. A Stock Appreciation Right as
described in Section 2.4.
A-4
(oo) STOCK OPTION OR OPTION. Pursuant to Section 2, a Nonstatutory
Stock Option granted to an Employee which provides the optionee with the
right to purchase Shares of Common Stock upon specified terms. The Plan
does not provide for grants of "incentive stock options" as described in
Code Section 422.
(pp) SUBSIDIARY. Any corporation (whether now or hereafter existing)
which constitutes a "subsidiary" of the Company, as defined in Code Section
424(f) of the Code, and any limited liability company, partnership, or
other entity in which the Company controls fifty percent (50%) or more of
the voting power or equity interests.
(qq) SUPPLEMENTAL PAYMENT. Any amount, as described in Sections 2.5,
3.4 and/or 4.2(c), that is dedicated to payment of income taxes which are
payable by the Grantee resulting from an Incentive Award.
1.3 PLAN ADMINISTRATION
(a) AUTHORITY OF THE COMMITTEE. Except as may be limited by law and
subject to the provisions herein, the Committee shall have full power to
(i) select Grantees who shall participate in the Plan; (ii) determine the
sizes, duration and types of Incentive Awards; (iii) determine the terms
and conditions of Incentive Awards and Incentive Agreements; (iv) determine
whether any Shares subject to Incentive Awards will be subject to any
restrictions on transfer; (v) construe and interpret the Plan and any
Incentive Agreement or other agreement entered into under the Plan; and
(vi) establish, amend, or waive rules for the Plan's administration.
Further, the Committee shall make all other determinations which may be
necessary or advisable for the administration of the Plan.
(b) MEETINGS. The Committee shall designate a chairman from among its
members who shall preside at its meetings, and shall designate a secretary,
without regard to whether that person is a member of the Committee, who
shall keep the minutes of the proceedings and all records, documents, and
data pertaining to its administration of the Plan. Meetings shall be held
at such times and places as shall be determined by the Committee and the
Committee may hold telephonic meetings. The Committee may take any action
otherwise proper under the Plan by the affirmative vote, taken with or
without a meeting, of a majority of its members. The Committee may
authorize any one or more of its members or any officer of the Company to
execute and deliver documents on behalf of the Committee.
(c) DECISIONS BINDING. All determinations and decisions of the
Committee shall be made in its discretion pursuant to the terms and
provisions of the Plan, and shall be final, conclusive and binding on all
persons including the Company, its shareholders, Employees, Grantees, and
their estates and beneficiaries. The Committee's decisions with respect to
any Incentive Award need not be uniform and may be made selectively among
Incentive Awards and Grantees, whether or not such Incentive Awards are
similar or such Grantees are similarly situated.
(d) MODIFICATION OF OUTSTANDING INCENTIVE AWARDS. Subject to the
stockholder approval requirements of Section 7.7 if applicable, the
Committee may, in its discretion, provide for the extension of the
exercisability of an Incentive Award, accelerate the vesting or
exercisability of an Incentive Award (except for an Incentive Award in the
form of a SAR which is subject to Code Section 409A), eliminate or make
less restrictive any restrictions contained in an Incentive Award, waive
any restriction or other provisions of an Incentive Award, or otherwise
amend or modify an Incentive Award in any manner that is either (i) not
adverse to the Grantee to whom such Incentive Award was granted or (ii)
consented to by such Grantee. Notwithstanding the above provisions of this
subsection, no amendment or modification of an Incentive Award shall be
made to the extent such modification results in any Stock Option with an
exercise price less than 100% of the Fair Market Value per Share on the
date of grant.
(e) DELEGATION OF AUTHORITY. The Committee may delegate to designated
officers or other employees of the Company any of its duties and authority
under the Plan pursuant to such conditions or limitations as the Committee
may establish from time to time; provided, however, the Committee may not
delegate to any person the authority (i) to grant Incentive Awards or (ii)
if the Company is a
A-5
Publicly Held Corporation, to take any action which would contravene the
requirements of Rule 16b-3 under the Exchange Act, the Performance-Based
Exception under Code Section 162(m), or the Sarbanes-Oxley Act of 2002.
(f) EXPENSES OF COMMITTEE. The Committee may employ legal counsel,
including, without limitation, independent legal counsel and counsel
regularly employed by the Company, and other agents as the Committee may
deem appropriate for the administration of the Plan. The Committee may rely
upon any opinion or computation received from any such counsel or agent.
All expenses incurred by the Committee in interpreting and administering
the Plan, including, without limitation, meeting expenses and professional
fees, shall be paid by the Company.
(g) SURRENDER OF PREVIOUS INCENTIVE AWARDS. The Committee may, in its
absolute discretion, grant Incentive Awards to Grantees on the condition
that such Grantees surrender to the Committee for cancellation such other
Incentive Awards (including, without limitation, Incentive Awards with
higher exercise prices) as the Committee directs. Incentive Awards granted
on the condition precedent of surrender of outstanding Incentive Awards
shall not count against the limits set forth in Section 1.4 until such time
as such previous Incentive Awards are surrendered and cancelled.
(h) INDEMNIFICATION. Each person who is or was a member of the
Committee shall be indemnified by the Company against and from any damage,
loss, liability, cost and expense that may be imposed upon or reasonably
incurred by him in connection with or resulting from any claim, action,
suit, or proceeding to which he may be a party or in which he may be
involved by reason of any action taken or failure to act under the Plan,
except for any such act or omission constituting willful misconduct or
gross negligence. Each such person shall be indemnified by the Company for
all amounts paid by him in settlement thereof, with the Company's approval,
or paid by him in satisfaction of any judgment in any such action, suit, or
proceeding against him, provided he shall give the Company an opportunity,
at its own expense, to handle and defend the same before he undertakes to
handle and defend it on his own behalf. The foregoing right of
indemnification shall not be exclusive of any other rights of
indemnification to which such persons may be entitled under the Company's
Articles or Certificate of Incorporation or Bylaws, as a matter of law, or
otherwise, or any power that the Company may have to indemnify them or hold
them harmless.
1.4 SHARES OF COMMON STOCK AVAILABLE FOR INCENTIVE AWARDS
Subject to adjustment under Section 6.6, there shall be available for
Incentive Awards that are granted wholly or partly in Common Stock (including
rights or Stock Options that may be exercised for or settled in Common Stock)
Fourteen Million Four Hundred Thousand (14,400,000) Shares of Common Stock. The
number of Shares of Common Stock that are the subject of Incentive Awards under
this Plan, which are forfeited or terminated, expire unexercised, are settled in
cash in lieu of Common Stock or in a manner such that all or some of the Shares
covered by an Incentive Award are not issued to a Grantee or are exchanged for
Incentive Awards that do not involve Common Stock, shall again immediately
become available for Incentive Awards hereunder. The Committee may from time to
time adopt and observe such procedures concerning the counting of Shares against
the Plan maximum as it may deem appropriate.
During any period that the Company is a Publicly Held Corporation, then
unless and until the Committee determines that a particular Incentive Award
granted to a Covered Employee is not intended to comply with the
Performance-Based Exception, the following rules shall apply to grants of
Incentive Awards to Covered Employees:
(a) Subject to adjustment as provided in Section 6.6, the maximum
aggregate number of Shares of Common Stock (including Stock Options, SARs,
Restricted Stock, Performance-Based Restricted Stock, and Other Stock-Based
Awards that are paid out in Shares) that may be granted (in the case of
Stock Options and SARs) or that may vest (in the case of Restricted Stock,
Performance-Based Restricted Stock or other Stock-Based Awards), as
applicable, in any calendar year pursuant to any Incentive Award held by
any individual Covered Employee shall be One Million (1,000,000) Shares.
A-6
(b) The maximum aggregate cash payout (including SARs or Other
Stock-Based Awards that are paid out in cash) with respect to Incentive
Awards granted in any calendar year which may be made to any Covered
Employee shall be Ten Million dollars ($10,000,000).
(c) With respect to any Stock Option or SAR granted to a Covered
Employee that is canceled or repriced, the number of Shares subject to such
Stock Option or SAR shall continue to count against the maximum number of
Shares that may be the subject of Stock Options or SARs granted to such
Covered Employee hereunder and, in this regard, such maximum number shall
be determined in accordance with Code Section 162(m).
(d) The limitations of subsections (a), (b) and (c) above shall be
construed and administered so as to comply with the Performance-Based
Exception.
1.5 SHARE POOL ADJUSTMENTS FOR AWARDS AND PAYOUTS.
The following Incentive Awards and payouts shall reduce, on a one Share for
one Share basis, the number of Shares authorized for issuance under the Share
Pool:
(a) Stock Option;
(b) SAR;
(c) Restricted Stock;
(d) Performance-Based Restricted Stock; and
(e) A payout of an Other Stock-Based Award in Shares.
The following transactions shall restore, on a one Share for one Share
basis, the number of Shares authorized for issuance under the Share Pool:
(a) A Payout of a SAR, Restricted Stock Award, Performance-Based
Restricted Stock Award, or Other Stock-Based Award in the form of cash (but
not the "cashless" exercise of a Stock Option as provided in Section
2.3(a));
(b) A cancellation, termination, expiration, forfeiture, or lapse for
any reason of any Shares subject to an Incentive Award; and
(c) Payment of an Option Price with previously acquired Shares or by
withholding Shares which otherwise would be acquired on exercise (i.e., the
Share Pool shall be increased by the number of Shares surrendered or
withheld in payment of the Option Price).
1.6 COMMON STOCK AVAILABLE.
The Common Stock available for issuance or transfer under the Plan shall be
made available from Shares now or hereafter (a) held in the treasury of the
Company, (b) authorized but unissued shares, or (c) shares to be purchased or
acquired by the Company. No fractional shares shall be issued under the Plan;
payment for fractional shares shall be made in cash.
1.7 ELIGIBILITY.
Full-time salaried Employees who have been determined by the Committee to
be key Employees shall be eligible to receive Incentive Awards under the Plan.
The Committee shall from time to time designate those Employees to be granted
Incentive Awards under the Plan, the type of Incentive Awards granted, the
number of Shares, Stock Options, rights or units, as the case may be, which
shall be granted to each such person, and any other terms or conditions relating
to the Incentive Awards as it may deem appropriate to the extent consistent with
the provisions of the Plan. A Grantee who has been granted an Incentive Award
may, if otherwise eligible, be granted additional Incentive Awards at any time.
A-7
No Insider shall be eligible to be granted an Incentive Award that is
subject to Rule 16a-3 under the Exchange Act unless and until such Insider has
granted a limited power of attorney to those officers of the Company who have
been designated by the Committee for purposes of future required filings under
the Exchange Act.
1.8 TYPES OF INCENTIVE AWARDS
The types of Incentive Awards under the Plan are Stock Options, Stock
Appreciation Rights and Supplemental Payments as described in Section 2,
Restricted Stock, Performance-Based Restricted Stock and Supplemental Payments
as described in Section 3, Other Stock-Based Awards and Supplemental Payments as
described in Section 4, or any combination of the foregoing.
SECTION 2
STOCK OPTIONS AND STOCK APPRECIATION RIGHTS
2.1 GRANT OF STOCK OPTIONS
The Committee is authorized to grant Nonstatutory Stock Options to
Employees in accordance with the terms and conditions of the Plan, and with such
additional terms and conditions, not inconsistent with the Plan, as the
Committee shall determine in its discretion. Successive grants may be made to
the same Grantee regardless of whether any Stock Option previously granted to
such person remains unexercised.
2.2 STOCK OPTION TERMS
(a) WRITTEN AGREEMENT. Each grant of a Stock Option shall be
evidenced by a written Incentive Agreement. Among its other provisions,
each Incentive Agreement shall set forth the extent to which the Grantee
shall have the right to exercise the Stock Option following termination of
the Grantee's Employment. Such provisions shall be determined in the
discretion of the Committee, shall be included in the Grantee's Incentive
Agreement, and need not be uniform among all Stock Options issued pursuant
to the Plan.
(b) NUMBER OF SHARES. Each Stock Option shall specify the number of
Shares of Common Stock to which it pertains.
(c) EXERCISE PRICE. The exercise price per Share of Common Stock
under each Stock Option shall be determined by the Committee, but in no
event shall the exercise price be less than 100% of the Fair Market Value
per Share on the date the Stock Option is granted. Each Option shall
specify the method of exercise which shall be consistent with the
requirements of Section 2.3(a).
(d) TERM. In the Incentive Agreement, the Committee shall fix the
term of each Stock Option, not to exceed ten (10) years from the date of
grant. In the event no term is fixed, such term shall be ten (10) years
from the date of grant.
(e) EXERCISE. The Committee shall determine the time or times at
which a Stock Option may be exercised, in whole or in part. Each Stock
Option may specify the required period of continuous Employment and/or the
performance objectives to be achieved before the Stock Option or portion
thereof will become exercisable. Each Stock Option, the exercise of which,
or the timing of the exercise of which, is dependent, in whole or in part,
on the achievement of designated performance objectives, may specify a
minimum level of achievement in respect of the specified performance
objectives below which no Stock Options will be exercisable and a method
for determining the number of Stock Options that will be exercisable if
performance is at or above such minimum but short of full achievement of
the performance objectives. All such terms and conditions shall be set
forth in the Incentive Agreement.
A-8
2.3 STOCK OPTION EXERCISES
(a) METHOD OF EXERCISE AND PAYMENT. Stock Options shall be exercised
by the delivery of a signed written notice of exercise to the Company as of
a date set by the Company in advance of the effective date of the proposed
exercise. The notice shall set forth the number of Shares with respect to
which the Option is to be exercised, accompanied by full payment for the
Shares.
The Option Price upon exercise of any Stock Option shall be payable to
the Company in full either: (i) in cash or its equivalent; or (ii) subject
to prior approval by the Committee in its discretion, by tendering
previously acquired Shares having an aggregate Fair Market Value at the
time of exercise equal to the Option Price (provided that the Shares which
are tendered must have been held by the Grantee for at least six (6) months
prior to their tender to satisfy the Option Price); or (iii) subject to
prior approval by the Committee in its discretion, by withholding Shares
which otherwise would be acquired on exercise having an aggregate Fair
Market Value at the time of exercise equal to the total Option Price; or
(iv) subject to prior approval by the Committee in its discretion, by a
combination of (i), (ii), and (iii) above.
Any payment in Shares shall be effected by the surrender of such
Shares to the Company in good form for transfer and shall be valued at
their Fair Market Value on the date when the Stock Option is exercised.
Unless otherwise permitted by the Committee in its discretion, the Grantee
shall not surrender, or attest to the ownership of, Shares in payment of
the Option Price if such action would cause the Company to recognize
compensation expense (or additional compensation expense) with respect to
the Stock Option for financial accounting reporting purposes.
The Committee, in its discretion, also may allow the Option Price to
be paid with such other consideration as shall constitute lawful
consideration for the issuance of Shares (including, without limitation,
effecting a "cashless exercise" with a broker of the Option), subject to
applicable securities law restrictions and tax withholdings, or by any
other means which the Committee determines to be consistent with the Plan's
purpose and applicable law. At the direction of the Grantee, the broker
will either (i) sell all of the Shares received when the Option is
exercised and pay the Grantee the proceeds of the sale (minus the Option
Price, withholding taxes and any fees due to the broker); or (ii) sell
enough of the Shares received upon exercise of the Option to cover the
Option Price, withholding taxes and any fees due the broker and deliver to
the Grantee (either directly or through the Company) a stock certificate
for the remaining Shares. Dispositions to a broker effecting a cashless
exercise are not exempt under Section 16 of the Exchange Act if the Company
is a Publicly Held Corporation. Moreover, in no event will the Committee
allow the Option Price to be paid with a form of consideration, including a
loan or a "cashless exercise," if such form of consideration would violate
the Sarbanes-Oxley Act of 2002 as determined by the Committee.
As soon as practicable after receipt of a written notification of
exercise and full payment, the Company shall deliver, or cause to be
delivered, to or on behalf of the Grantee, in the name of the Grantee or
other appropriate recipient, evidence of ownership for the number of Shares
purchased under the Stock Option.
Subject to Section 6.4, during the lifetime of a Grantee, each Option
granted to him shall be exercisable only by the Grantee (or his legal
guardian in the event of his Disability) or by a broker-dealer acting on
his behalf pursuant to a cashless exercise under the foregoing provisions
of this Section 2.3(a).
(b) RESTRICTIONS ON SHARE TRANSFERABILITY. The Committee may impose
such restrictions on any grant of Stock Options or on any Shares acquired
pursuant to the exercise of a Stock Option as it may deem advisable,
including, without limitation, restrictions under (i) any stockholders'
agreement, buy/sell agreement, right of first refusal, non-competition, and
any other agreement between the Company and any of its securities holders
or employees; (ii) any applicable federal securities laws; (iii) the
requirements of any stock exchange or market upon which such Shares are
then listed and/or traded; or (iv) any blue sky or state securities law
applicable to such Shares. Any certificate issued to
A-9
evidence Shares issued upon the exercise of an Incentive Award may bear
such legends and statements as the Committee shall deem advisable to assure
compliance with federal and state laws and regulations.
Any Grantee or other person exercising an Incentive Award shall be
required, if requested by the Committee, to give a written representation
that the Incentive Award and the Shares subject to the Incentive Award will
be acquired for investment and not with a view to public distribution;
provided, however, that the Committee, in its discretion, may release any
person receiving an Incentive Award from any such representations either
prior to or subsequent to the exercise of the Incentive Award.
(c) PROCEEDS OF OPTION EXERCISE. The proceeds received by the Company
from the sale of Shares pursuant to Stock Options exercised under the Plan
shall be used for general corporate purposes.
2.4 STOCK APPRECIATION RIGHTS
(a) GRANT. The Committee may grant Stock Appreciation Rights
independent of Nonstatutory Stock Options ("SARs").
(b) GENERAL PROVISIONS. The terms and conditions of each SAR shall be
evidenced by an Incentive Agreement. The exercise price per share of Common
Stock shall be not less than one hundred percent (100%) of the Fair Market
Value of a Share of Common Stock on the date of grant of the SAR. The term
of the SAR shall be determined by the Committee.
(c) EXERCISE. SARs shall be exercisable subject to such terms and
conditions as the Committee shall specify in the Incentive Agreement for
the SAR grant. Effective January 1, 2005, SARs will be subject to the
deferred compensation rules under Code Section 409A. No SAR granted to an
Insider may be exercised prior to six (6) months from the date of grant,
except in the event of his death or Disability which occurs prior to the
expiration of such six-month period.
(d) SETTLEMENT. Upon exercise or vesting of a SAR, as applicable
under Code Section 409A, the Grantee shall receive, for each Share
specified in the SAR grant, an amount equal to the Spread. The Spread, less
applicable withholdings, shall be payable only in Shares within 30 calendar
days of the exercise date. In no event shall any SAR be settled in any
manner other than by delivery of Shares that are traded on an established
securities market. In addition, the Incentive Agreement under which such
SARs are awarded, or any other agreements or arrangements, shall not
provide that the Company will purchase any Shares delivered as a result of
the exercise or vesting of a SAR. Any SARs issued under the Plan prior to
January 1, 2005 shall be subject to the settlement provisions of the Plan
as in effect prior to January 1, 2005, but only to the extent that such
settlement is not considered a payment of deferred compensation that would
be subject to Code Section 409A after December 31, 2004.
2.5 SUPPLEMENTAL PAYMENT ON EXERCISE OF NONSTATUTORY STOCK OPTIONS OR STOCK
APPRECIATION RIGHTS
The Committee, either at the time of grant or as of the time of exercise of
any Nonstatutory Stock Option, may provide in the Incentive Agreement for a
Supplemental Payment by the Company to the Grantee with respect to the exercise
of any Nonstatutory Stock Option. The Supplemental Payment shall be in the
amount specified by the Committee, which amount shall not exceed the amount
necessary to pay the federal and state income tax payable with respect to both
the exercise of the Nonstatutory Stock Option and the receipt of the
Supplemental Payment, assuming the holder is taxed at either the maximum
effective income tax rate applicable thereto or at a lower tax rate as deemed
appropriate by the Committee in its discretion. No Supplemental Payments will be
made with respect to any SARs.
A-10
SECTION 3
RESTRICTED STOCK
3.1 AWARD OF RESTRICTED STOCK
(a) GRANT. In consideration of the performance of Employment by the
Grantee, Shares of Restricted Stock, which may be Performance-Based
Restricted Stock as designated by the Committee in its discretion, may be
awarded by the Committee with such restrictions during the Restriction
Period as the Committee shall designate in its discretion. Any such
restrictions may differ with respect to a particular Grantee. Restricted
Stock shall be awarded for no additional consideration or such additional
consideration as the Committee may determine, which consideration may be
less than, equal to or more than the Fair Market Value of the shares of
Restricted Stock on the grant date. The terms and conditions of each grant
of Restricted Stock shall be evidenced by an Incentive Agreement and,
during the Restriction Period, such Shares of Restricted Stock must remain
subject to a "substantial risk of forfeiture" within the meaning given to
such term under Code Section 83. Any Restricted Stock Award may, at the
time of grant, be designated by the Committee as Performance-Based
Restricted Stock that is intended to qualify for the Performance-Based
Exception.
(b) IMMEDIATE TRANSFER WITHOUT IMMEDIATE DELIVERY OF RESTRICTED
STOCK. Unless otherwise specified in the Grantee's Incentive Agreement,
each Restricted Stock Award shall constitute an immediate transfer of the
record and beneficial ownership of the Shares of Restricted Stock to the
Grantee in consideration of the performance of services as an Employee,
entitling such Grantee to all voting and other ownership rights in such
Shares.
As specified in the Incentive Agreement, a Restricted Stock Award may
limit the Grantee's dividend rights during the Restriction Period in which
the shares of Restricted Stock are subject to a "substantial risk of
forfeiture" (within the meaning given to such term under Code Section 83)
and restrictions on transfer. In the Incentive Agreement, the Committee may
apply any restrictions to the dividends that the Committee deems
appropriate. Without limiting the generality of the preceding sentence, if
the grant or vesting of Shares of Performance-Based Restricted Stock
granted to a Covered Employee, is designed to comply with the requirements
of the Performance-Based Exception, the Committee may apply any
restrictions it deems appropriate to the payment of dividends declared with
respect to such Shares of Restricted Stock, such that the dividends and/or
the Shares of Restricted Stock maintain eligibility for the
Performance-Based Exception. In the event that any dividend constitutes a
derivative security or an equity security pursuant to the rules under
Section 16 of the Exchange Act, if applicable, such dividend shall be
subject to a vesting period equal to the remaining vesting period of the
Shares of Restricted Stock with respect to which the dividend is paid.
Shares awarded pursuant to a grant of Restricted Stock or
Performance-Based Restricted Stock may be issued in the name of the Grantee
and held, together with a stock power endorsed in blank, by the Committee
or Company (or their delegates) or in trust or in escrow pursuant to an
agreement satisfactory to the Committee, as determined by the Committee,
until such time as the restrictions on transfer have expired. All such
terms and conditions shall be set forth in the particular Grantee's
Incentive Agreement. The Company or Committee (or their delegates) shall
issue to the Grantee a receipt evidencing the certificates held by it which
are registered in the name of the Grantee.
3.2 RESTRICTIONS
(a) FORFEITURE OF RESTRICTED STOCK. Restricted Stock awarded to a
Grantee may be subject to the following restrictions until the expiration
of the Restriction Period: (i) a restriction that constitutes a
"substantial risk of forfeiture" (as defined in Code Section 83), or a
restriction on transferability; (ii) unless otherwise specified by the
Committee in the Incentive Agreement, the Restricted Stock that is subject
to restrictions which are not satisfied shall be forfeited and all rights
of the Grantee to such Shares shall terminate; and (iii) any other
restrictions that the Committee determines in advance are appropriate,
including, without limitation, rights of repurchase or first refusal in the
Company or
A-11
provisions subjecting the Restricted Stock to a continuing substantial risk
of forfeiture in the hands of any transferee. Any such restrictions shall
be set forth in the particular Grantee's Incentive Agreement.
(b) ISSUANCE OF CERTIFICATES. Reasonably promptly after the date of
grant with respect to Shares of Restricted Stock, the Company shall cause
to be issued a stock certificate, registered in the name of the Grantee to
whom such Shares of Restricted Stock were granted, evidencing such Shares;
provided, however, that the Company shall not cause to be issued such a
stock certificate unless it has received a stock power duly endorsed in
blank with respect to such Shares. Each such stock certificate shall bear
the following legend or any other legend approved by the Company:
The transferability of this certificate and the shares of stock
represented hereby are subject to the restrictions, terms and conditions
(including forfeiture and restrictions against transfer) contained in
the Smith International, Inc. 1989 Long-Term Incentive Compensation Plan
and an Incentive Agreement entered into between the registered owner of
such shares and Smith International, Inc. A copy of the Plan and
Incentive Agreement are on file in the main corporate office of Smith
International, Inc.
Such legend shall not be removed from the certificate evidencing such
Shares of Restricted Stock unless and until such Shares vest pursuant to
the terms of the Incentive Agreement.
(c) REMOVAL OF RESTRICTIONS. The Committee, in its discretion, shall
have the authority to remove any or all of the restrictions on the
Restricted Stock if it determines that, by reason of a change in applicable
law or another change in circumstance arising after the grant date of the
Restricted Stock, such action is necessary or appropriate.
3.3 DELIVERY OF SHARES OF COMMON STOCK
Subject to withholding taxes under Section 7.3 and to the terms of the
Incentive Agreement, a stock certificate evidencing the Shares of Restricted
Stock with respect to which the restrictions in the Incentive Agreement have
been satisfied shall be delivered to the Grantee or other appropriate recipient
free of restrictions.
3.4 SUPPLEMENTAL PAYMENT ON VESTING OF RESTRICTED STOCK
The Committee, either at the time of grant or vesting of Restricted Stock,
may provide for a Supplemental Payment by the Company to the holder in an amount
specified by the Committee, which amount shall not exceed the amount necessary
to pay the federal and state income tax payable with respect to both the vesting
of the Restricted Stock and receipt of the Supplemental Payment, assuming the
Grantee is taxed at either the maximum effective income tax rate applicable
thereto or at a lower tax rate as deemed appropriate by the Committee in its
discretion.
SECTION 4
OTHER STOCK-BASED AWARDS
4.1 GRANT OF OTHER STOCK-BASED AWARDS
Other Stock-Based Awards may be awarded by the Committee to selected
Grantees that are payable in Shares, as determined by the Committee to be
consistent with the goals of the Company. Other types of Stock-Based Awards
include, without limitation, purchase rights, Shares of Common Stock awarded
that are not subject to any restrictions or conditions, convertible or
exchangeable debentures, other rights convertible into Shares, Incentive Awards
valued by reference to the performance of a specified Subsidiary, division or
department of the Company, and settlement in cancellation of rights of any
person with a vested interest in any other plan, fund, program or arrangement
that is or was sponsored, maintained or participated in by the Company or any
Parent or Subsidiary. As is the case with other types of Incentive Awards, Other
Stock-Based Awards may be awarded either alone or in addition to or in
conjunction with any other Incentive Awards.
A-12
Other Stock-Based Awards are not intended to be deferred compensation that is
subject to Code Section 409A unless otherwise determined by the Committee.
4.2 OTHER STOCK-BASED AWARD TERMS
(a) WRITTEN AGREEMENT. The terms and conditions of each grant of an
Other Stock-Based Award shall be evidenced by an Incentive Agreement.
(b) PURCHASE PRICE. Except to the extent that an Other Stock-Based
Award is granted in substitution for an outstanding Incentive Award or is
delivered upon exercise of a Stock Option, the amount of consideration
required to be received by the Company shall be either (i) no consideration
other than services actually rendered (in the case of authorized and
unissued shares) or to be rendered, or (ii) as otherwise specified in the
Incentive Agreement.
(c) PERFORMANCE CRITERIA AND OTHER TERMS. In its discretion, the
Committee may specify Performance Criteria for (i) vesting in Other
Stock-Based Awards and (ii) payment thereof to the Grantee, as it may
determine in its discretion. The extent to which any such Performance
Criteria have been met shall be determined and certified by the Committee
in accordance with the requirements to qualify for the Performance-Based
Exception under Code Section 162(m). All terms and conditions of Other
Stock-Based Awards shall be determined by the Committee and set forth in
the Incentive Agreement. The Committee may also provide for a Supplemental
Payment similar to such payment as described in Section 3.4.
(d) PAYMENT. Other Stock-Based Awards shall be paid in Shares, in a
single payment or in installments on such dates as determined by the
Committee; all as specified in the Incentive Agreement.
SECTION 5
PERFORMANCE CRITERIA
As determined by the Committee at the time of grant, Performance-Based
Restricted Stock Awards, Other Stock-Based Awards and other types of Incentive
Awards made under the Plan may be granted subject to performance objectives
relating to one or more of the following within the meaning of Code Section
162(m) in order to qualify for the Performance-Based Exception (the "Performance
Criteria"):
(a) profits (including, but not limited to, profit growth, net
operating profit or economic profit);
(b) profit-related return ratios;
(c) return measures (including, but not limited to, return on assets,
capital, equity, investment or sales);
(d) cash flow (including, but not limited to, operating cash flow,
free cash flow or cash flow return on capital or investments);
(e) earnings (including but not limited to, total shareholder return,
earnings per share or earnings before or after taxes);
(f) net sales growth;
(g) net earnings or income (before or after taxes, interest,
depreciation and/or amortization);
(h) gross, operating or net profit margins;
(i) productivity ratios;
(j) share price (including, but not limited to, growth measures and
total shareholder return);
(k) turnover of assets, capital, or inventory;
(l) expense targets;
A-13
(m) margins;
(n) measures of health, safety or environment;
(o) operating efficiency;
(p) customer service or satisfaction;
(q) market share;
(r) credit quality; and
(s) working capital targets.
Performance Criteria may be stated in absolute terms or relative to
comparison companies or indices to be achieved during a Performance Period.
The Committee shall establish one or more Performance Criteria for
each Incentive Award that is intended to qualify for the Performance-Based
Exception on the date of its grant. In establishing the Performance
Criteria for each applicable Incentive Award, the Committee may provide
that the effect of specified extraordinary or unusual events will be
included or excluded (including, but not limited to, all items of gain,
loss or expense determined to be extraordinary or unusual in nature or
infrequent in occurrence or related to the disposal of a segment of
business or related to a change in accounting principle, all as determined
in accordance with standards by Opinion No. 30 of the Accounting Principles
Board (APB Opinion 30) or other authoritative financial accounting
standards). The terms of the stated Performance Criteria for each
applicable Incentive Award must preclude the Committee's discretion to
increase the amount payable to any Grantee that would otherwise be due upon
attainment of the Performance Criteria. The Performance Criteria specified
in any Incentive Agreement need not be applicable to all Incentive Awards,
and may be particular to an individual Grantee's function or business unit.
The Committee may establish the Performance Criteria of the Company or any
entity which is affiliated by common ownership with the Company as
determined and designated by the Committee, in its discretion, in the
Incentive Agreement.
SECTION 6
PROVISIONS RELATING TO PLAN PARTICIPATION
6.1 INCENTIVE AGREEMENT.
Each Grantee to whom an Incentive Award is granted shall be required to
enter into an Incentive Agreement with the Company, in such a form as is
provided by the Committee. The Incentive Agreement shall contain specific terms
as determined by the Committee, in its discretion, with respect to the Grantee's
particular Incentive Award. Such terms need not be uniform among all Grantees or
any similarly situated Grantees. The Incentive Agreement may include, without
limitation, vesting, forfeiture and other provisions particular to the
particular Grantee's Incentive Award, as well as, for example, provisions to the
effect that the Grantee (a) shall not disclose any confidential information
acquired during Employment with the Company, (b) shall abide by all the terms
and conditions of the Plan and such other terms and conditions as may be imposed
by the Committee, (c) shall not interfere with the employment or other service
of any employee, (d) shall not compete with the Company or become involved in a
conflict of interest with the interests of the Company, (e) shall forfeit an
Incentive Award if terminated for Cause, (f) shall not be permitted to make an
election under Code Section 83(b) when applicable, and (g) shall be subject to
any other agreement between the Grantee and the Company regarding Shares that
may be acquired under an Incentive Award including, without limitation, a
stockholders' agreement, buy-sell agreement, or other agreement restricting the
transferability of Shares by Grantee. An Incentive Agreement shall include such
terms and conditions as are determined by the Committee, in its discretion, to
be appropriate with respect to any individual Grantee. The Incentive Agreement
shall be signed by the Grantee to whom the Incentive Award is made and by an
Authorized Officer.
A-14
6.2 NO RIGHT TO EMPLOYMENT.
Nothing in the Plan or any instrument executed pursuant to the Plan shall
create any Employment rights (including without limitation, rights to continued
Employment) in any Grantee or affect the right of the Company to terminate the
Employment of any Grantee at any time without regard to the existence of the
Plan.
6.3 SECURITIES REQUIREMENTS.
The Company shall be under no obligation to effect the registration
pursuant to the Securities Act of 1933 of any Shares to be issued hereunder or
to effect similar compliance under any state laws. Notwithstanding anything
herein to the contrary, the Company shall not be obligated to cause to be issued
or delivered any certificates evidencing Shares pursuant to the Plan unless and
until the Company is advised by its counsel that the issuance and delivery of
such certificates is in compliance with all applicable laws, regulations of
governmental authorities, and the requirements of any securities exchange on
which Shares are traded. The Committee may require, as a condition of the
issuance and delivery of certificates evidencing Shares pursuant to the terms
hereof, that the recipient of such Shares make such covenants, agreements and
representations, and that such certificates bear such legends, as the Committee,
in its discretion, deems necessary or desirable.
The Committee may, in its discretion, defer the effectiveness of any
exercise of an Incentive Award in order to allow the issuance of Shares to be
made pursuant to registration or an exemption from registration or other methods
for compliance available under federal or state securities laws. The Committee
shall inform the Grantee in writing of its decision to defer the effectiveness
of the exercise of an Incentive Award. During the period that the effectiveness
of the exercise of an Incentive Award has been deferred, the Grantee may, by
written notice to the Committee, withdraw such exercise and obtain the refund of
any amount paid with respect thereto.
If the Shares issuable on exercise of an Incentive Award are not registered
under the Securities Act of 1933, the Company may imprint on the certificate for
such Shares the following legend or any other legend which counsel for the
Company considers necessary or advisable to comply with the Securities Act of
1933:
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED ("ACT"), OR THE SECURITIES
LAWS OF ANY STATE. THE SECURITIES MAY NOT BE TRANSFERRED EXCEPT PURSUANT
TO AN EFFECTIVE REGISTRATION STATEMENT UNDER SUCH ACT AND APPLICABLE
STATE SECURITIES LAWS OR PURSUANT TO ANY APPLICABLE EXEMPTION FROM THE
REGISTRATION REQUIREMENTS OF SUCH ACT AND SUCH LAWS OR PURSUANT TO A
WRITTEN OPINION OF COUNSEL REASONABLY SATISFACTORY TO THE COMPANY THAT
SUCH REGISTRATION IS NOT REQUIRED.
6.4 TRANSFERABILITY
Incentive Awards granted under the Plan shall not be transferable or
assignable other than: (a) by will or the laws of descent and distribution or
(b) pursuant to a qualified domestic relations order (as defined under Code
Section 414(p)); provided, however, only with respect to Incentive Awards
consisting of Nonstatutory Stock Options, the Committee may, in its discretion,
authorize all or a portion of the Nonstatutory Stock Options to be granted on
terms which permit transfer by the Grantee to (i) the members of the Grantee's
Immediate Family, (ii) a trust or trusts for the exclusive benefit of Immediate
Family members, (iii) a partnership in which such Immediate Family members are
the only partners, or (iv) any other entity owned solely by Immediate Family
members; provided that (A) there may be no consideration for any such transfer,
(B) the Incentive Agreement pursuant to which such Nonstatutory Stock Options
are granted must be approved by the Committee, and must expressly provide for
transferability in a manner consistent with this Section 6.4, (C) subsequent
transfers of transferred Nonstatutory Stock Options shall be prohibited except
in accordance with clauses (a) and (b) (above) of this sentence, and (D) there
may be no transfer of any
A-15
Incentive Award in a listed transaction as described in IRS Notice 2003-47.
Following any permitted transfer, the Nonstatutory Stock Option shall continue
to be subject to the same terms and conditions as were applicable immediately
prior to transfer, provided that the term "Grantee" shall be deemed to refer to
the transferee. The events of termination of employment, as set out in Section
6.7 and in the Incentive Agreement, shall continue to be applied with respect to
the original Grantee, and the Incentive Award shall be exercisable by the
transferee only to the extent, and for the periods, specified in the Incentive
Agreement.
Except as may otherwise be permitted under the Code, in the event of a
permitted transfer of a Nonstatutory Stock Option hereunder, the original
Grantee shall remain subject to withholding taxes upon exercise. In addition,
the Company and the Committee shall have no obligation to provide any notices to
any Grantee or transferee thereof, including, for example, notice of the
expiration of an Incentive Award following the original Grantee's termination of
employment.
The designation by a Grantee of a beneficiary of an Incentive Award shall
not constitute transfer of the Incentive Award. No transfer by will or by the
laws of descent and distribution shall be effective to bind the Company unless
the Committee has been furnished with a copy of the deceased Grantee's
enforceable will or such other evidence as the Committee deems necessary to
establish the validity of the transfer. Any attempted transfer in violation of
this Section 6.4 shall be void and ineffective. All determinations under this
Section 6.4 shall be made by the Committee in its discretion.
6.5 RIGHTS AS A STOCKHOLDER
(a) NO STOCKHOLDER RIGHTS. Except as otherwise provided in Section
3.1(b) for grants of Restricted Stock, a Grantee of an Incentive Award (or
a permitted transferee of such Grantee) shall have no rights as a
stockholder with respect to any Shares of Common Stock until the issuance
of a stock certificate or other record of ownership for such Shares.
(b) REPRESENTATION OF OWNERSHIP. In the case of the exercise of an
Incentive Award by a person or estate acquiring the right to exercise such
Incentive Award by reason of the death or Disability of a Grantee, the
Committee may require reasonable evidence as to the ownership of such
Incentive Award or the authority of such person. The Committee may also
require such consents and releases of taxing authorities as it deems
advisable.
6.6 CHANGE IN STOCK AND ADJUSTMENTS
(a) CHANGES IN LAW OR CIRCUMSTANCES. Subject to Section 6.8 (which
only applies in the event of a Change in Control), in the event of any
change in applicable law or any change in circumstances which results in or
would result in any dilution of the rights granted under the Plan, or which
otherwise warrants an equitable adjustment because it interferes with the
intended operation of the Plan, then, if the Board or Committee should so
determine, in its absolute discretion, that such change equitably requires
an adjustment in the number or kind of shares of stock or other securities
or property theretofore subject, or which may become subject, to issuance
or transfer under the Plan or in the terms and conditions of outstanding
Incentive Awards, such adjustment shall be made in accordance with such
determination. Such adjustments may include changes with respect to (i) the
aggregate number of Shares that may be issued under the Plan, (ii) the
number of Shares subject to Incentive Awards, and (iii) the Option Price or
other price per Share for outstanding Incentive Awards, but shall not
result in the grant of any Stock Option with an exercise price less than
100% of the Fair Market Value per Share on the date of grant. The Board or
Committee shall give notice to each applicable Grantee of such adjustment
which shall be effective and binding.
(b) EXERCISE OF CORPORATE POWERS. The existence of the Plan or
outstanding Incentive Awards hereunder shall not affect in any way the
right or power of the Company or its stockholders to make or authorize any
or all adjustments, recapitalization, reorganization or other changes in
the Company's capital structure or its business or any merger or
consolidation of the Company, or any issue of bonds, debentures, preferred
or prior preference stocks ahead of or affecting the Common Stock or the
rights
A-16
thereof, or the dissolution or liquidation of the Company, or any sale or
transfer of all or any part of its assets or business, or any other
corporate act or proceeding whether of a similar character or otherwise.
(c) RECAPITALIZATION OF THE COMPANY. Subject to Section 6.8 (which
only applies in the event of a Change in Control), if while there are
Incentive Awards outstanding, the Company shall effect any subdivision or
consolidation of Shares of Common Stock or other capital readjustment, the
payment of a stock dividend, stock split, combination of Shares,
recapitalization or other increase or reduction in the number of Shares
outstanding, without receiving compensation therefor in money, services or
property, then the number of Shares available under the Plan and the number
of Incentive Awards which may thereafter be exercised shall (i) in the
event of an increase in the number of Shares outstanding, be
proportionately increased and the Option Price or Fair Market Value of the
Incentive Awards awarded shall be proportionately reduced; and (ii) in the
event of a reduction in the number of Shares outstanding, be
proportionately reduced, and the Option Price or Fair Market Value of the
Incentive Awards awarded shall be proportionately increased. The Board or
Committee shall take such action and whatever other action it deems
appropriate, in its discretion, so that the value of each outstanding
Incentive Award to the Grantee shall not be adversely affected by a
corporate event described in this Section 6.6(c).
(d) ISSUE OF COMMON STOCK BY THE COMPANY. Except as hereinabove
expressly provided in this Section 6.6 and subject to Section 6.8 in the
event of a Change in Control, the issue by the Company of shares of stock
of any class, or securities convertible into shares of stock of any class,
for cash or property, or for labor or services, either upon direct sale or
upon the exercise of rights or warrants to subscribe therefor, or upon any
conversion of shares or obligations of the Company convertible into such
shares or other securities, shall not affect, and no adjustment by reason
thereof shall be made with respect to, the number of, or Option Price or
Fair Market Value of, any Incentive Awards then outstanding under
previously granted Incentive Awards; provided, however, in such event,
outstanding Shares of Restricted Stock shall be treated the same as
outstanding unrestricted Shares of Common Stock.
(e) ASSUMPTION UNDER THE PLAN OF OUTSTANDING STOCK
OPTIONS. Notwithstanding any other provision of the Plan, the Board or
Committee, in its discretion, may authorize the assumption and continuation
under the Plan of outstanding and unexercised stock options or other types
of stock-based incentive awards that were granted under a stock option plan
(or other type of stock incentive plan or agreement) that is or was
maintained by a corporation or other entity that was merged into,
consolidated with, or whose stock or assets were acquired by, the Company
as the surviving corporation. Any such action shall be upon such terms and
conditions as the Board or Committee, in its discretion, may deem
appropriate, including provisions to preserve the holder's rights under the
previously granted and unexercised stock option or other stock-based
incentive award; such as, for example, retaining an existing exercise price
under an outstanding stock option. Any such assumption and continuation of
any such previously granted and unexercised incentive award shall be
treated as an outstanding Incentive Award under the Plan and shall thus
count against the number of Shares reserved for issuance pursuant to
Section 1.4. In addition, any Shares issued by the Company through the
assumption or substitution of outstanding grants from an acquired company
shall reduce the Shares available for grants under Section 1.4.
(f) ASSUMPTION OF INCENTIVE AWARDS BY A SUCCESSOR. Subject to the
accelerated vesting and other provisions of Section 6.8 that apply in the
event of a Change in Control, in the event of a Corporate Event (defined
below), each Grantee shall be entitled to receive, in lieu of the number of
Shares subject to Incentive Awards, such shares of capital stock or other
securities or property as may be issuable or payable with respect to or in
exchange for the number of Shares which Grantee would have received had he
exercised the Incentive Award immediately prior to such Corporate Event,
together with any adjustments (including, without limitation, adjustments
to the Option Price and the number of Shares issuable on exercise of
outstanding Stock Options). For this purpose, Shares of Restricted Stock
shall be treated the same as unrestricted outstanding Shares of Common
Stock. A "Corporate Event" means any of the following: (i) a dissolution or
liquidation of the Company, (ii) a sale of all or substantially all of the
Company's assets, or (iii) a merger, consolidation or combination involving
the Company (other than a merger, consolidation or combination (A) in which
the Company is the continuing or surviving
A-17
corporation and (B) which does not result in the outstanding Shares being
converted into or exchanged for different securities, cash or other
property, or any combination thereof). The Board or Committee shall take
whatever other action it deems appropriate to preserve the rights of
Grantees holding outstanding Incentive Awards.
Notwithstanding the previous paragraph of this Section 6.6(f), but
subject to the accelerated vesting and other provisions of Section 6.8 that
apply in the event of a Change in Control, in the event of a Corporate
Event (described in the previous paragraph), the Board or Committee, in its
discretion, shall have the right and power to:
(i) cancel, effective immediately prior to the occurrence of the
Corporate Event, each outstanding Incentive Award (whether or not then
exercisable) and, in full consideration of such cancellation, pay to the
Grantee an amount in cash equal to the excess of (A) the value, as
determined by the Board or Committee, of the property (including cash)
received by the holders of Common Stock as a result of such Corporate
Event over (B) the exercise price of such Incentive Award, if any;
provided, however, this subsection (i) shall be inapplicable to an
Incentive Award granted within six (6) months before the occurrence of
the Corporate Event if the Grantee is an Insider and such disposition is
not exempt under Rule 16b-3 (or other rules preventing liability of the
Insider under Section 16(b) of the Exchange Act) and, in that event, the
provisions hereof shall be applicable to such Incentive Award after the
expiration of six (6) months from the date of grant; or
(ii) provide for the exchange or substitution of each Incentive
Award outstanding immediately prior to such Corporate Event (whether or
not then exercisable) for another award with respect to the Common Stock
or other property for which such Incentive Award is exchangeable and,
incident thereto, make an equitable adjustment as determined by the
Board or Committee, in its discretion, in the Option Price or exercise
price of the Incentive Award, if any, or in the number of Shares or
amount of property (including cash) subject to the Incentive Award; or
(iii) provide for assumption of the Plan and such outstanding
Incentive Awards by the surviving entity or its parent.
The Board or Committee, in its discretion, shall have the authority to
take whatever action it deems to be necessary or appropriate to effectuate
the provisions of this Section 6.6(f).
6.7 TERMINATION OF EMPLOYMENT, DEATH, DISABILITY AND RETIREMENT
(a) TERMINATION OF EMPLOYMENT. Unless otherwise expressly provided in
the Grantee's Incentive Agreement, if the Grantee's Employment is
terminated (i) involuntarily by the Company without Cause or (ii) for any
other reason except due to his death, Disability, Retirement, for Cause, or
his voluntary resignation, as subject to the following provisions of this
Section 6.7, then any non-vested portion of any Stock Option or other
Incentive Award at the time of such termination shall automatically expire
and terminate and no further vesting shall occur after the termination date
unless the Committee, in its discretion, provides for an extension of
exercisability or other modification pursuant to Section 1.3(d) or Section
6.7(f). In such event, except as otherwise expressly provided in his
Incentive Agreement or as determined by the Committee in its discretion,
the Grantee shall be entitled to exercise his rights only with respect to
the vested portion of the Incentive Award for a period that shall end on
the earlier of (i) the expiration date set forth in the Incentive Agreement
or (ii) one (1) year after the date of his termination of Employment.
(b) TERMINATION OF EMPLOYMENT FOR CAUSE. Unless otherwise expressly
provided in the Grantee's Incentive Agreement, in the event of termination
of the Grantee's Employment for Cause, all vested and non-vested Stock
Options and other Incentive Awards granted to such Grantee shall
immediately expire, and shall not be exercisable to any extent, as of 12:01
a.m. (CST) on the date of such termination of Employment.
A-18
(c) VOLUNTARY RESIGNATION. Unless otherwise expressly provided in the
Grantee's Incentive Agreement, in the event of termination of the Grantee's
Employment due to his voluntary resignation except resulting from his
Disability or Retirement:
(i) any non-vested portion of any outstanding Option or other
Incentive Award shall immediately terminate and no further vesting shall
occur; and
(ii) any vested Option or other Incentive Award shall expire on the
earlier of (A) the expiration date set forth in the Incentive Agreement
for such Incentive Award, or (B) the expiration of ninety (90) days
after the date of his termination of Employment.
(d) RETIREMENT. Unless otherwise expressly provided in the Grantee's
Incentive Agreement, upon the termination of Employment due to Retirement:
(i) any non-vested portion of any outstanding Option or other
Incentive Award shall immediately terminate and no further vesting shall
occur; and
(ii) any vested Option or other Incentive Award shall expire on the
earlier of (A) the expiration date set forth in the Incentive Agreement
for such Incentive Award, or (B) the expiration of three (3) years after
the date of his termination of Employment.
(e) DISABILITY OR DEATH. Unless otherwise expressly provided in the
Grantee's Incentive Agreement, upon termination of Employment as a result
of the Grantee's Disability or death:
(i) any non-vested portion of any outstanding Option or other
Incentive Award shall immediately terminate upon termination of
Employment and no further vesting shall occur; and
(ii) any vested Incentive Award shall expire on the earlier of
either (A) the expiration date set forth in the Incentive Agreement or
(B) the three-year anniversary date of the Grantee's termination of
Employment date.
In the event that the Grantee dies or becomes permanently and totally
disabled as determined by the Committee within the one-year period
specified in Section 6.7(a) (above), then notwithstanding Section 6.7(a),
the Incentive Award shall expire on the earlier of (A) the expiration date
set forth in the Incentive Agreement for such Incentive Award or (B) the
expiration of one (1) year after the date of his death or the date he is
determined to be permanently and totally disabled as such date is
determined by the Committee.
In the event that the Grantee dies or becomes permanently and totally
disabled as determined by the Committee within the three-year period
specified in Section 6.7(d) (above), then notwithstanding Section 6.7(d),
the Incentive Award shall expire on the earlier of: (A) the expiration date
set forth in the Incentive Agreement for such Incentive Award or (B) the
later of either (i) the expiration of three (3) years after the date of his
Retirement or (ii) one (1) year from the date of his death or the date he
is determined to be permanently and totally disabled as such date is
determined by the Committee.
(f) CONTINUATION. Subject to the conditions and limitations of the
Plan and applicable law and regulation, in the event that a Grantee ceases
to be an Employee, the Committee and Grantee, in their discretion, may
mutually agree with respect to any outstanding Option or other Incentive
Award then held by the Grantee (i) for an acceleration or other adjustment
in any vesting schedule applicable to the Incentive Award; (ii) for a
continuation of the exercise period following termination for a longer
period than is otherwise provided under such Incentive Award; or (iii) to
any other change in the terms and conditions of the Incentive Award. In the
event of any such change to an outstanding Incentive Award, a written
amendment to the Grantee's Incentive Agreement shall be required.
A-19
6.8 CHANGE IN CONTROL
Notwithstanding any contrary provision in the Plan, in the event of a
Change in Control (as defined below), the following actions shall automatically
occur as of the day immediately preceding the Change in Control date unless
expressly provided otherwise in the individual Grantee's Incentive Agreement:
(a) all of the Stock Options and Stock Appreciation Rights then
outstanding shall become 100% vested and immediately and fully exercisable;
(b) all of the restrictions and conditions of any Restricted Stock and
any Other Stock-Based Awards then outstanding shall be deemed satisfied,
and the Restriction Period with respect thereto shall be deemed to have
expired, and thus each such Incentive Award shall become free of all
restrictions and fully vested; and
(c) all of the Performance-Based Restricted Stock and any Other
Stock-Based Awards shall become fully vested, deemed earned in full, and
promptly paid within thirty (30) days to the affected Grantees without
regard to payment schedules and notwithstanding that the applicable
performance cycle, retention cycle or other restrictions and conditions
have not been completed or satisfied.
For all purposes of this Plan, a "Change in Control" of the Company means
the occurrence of any one or more of the following events:
(a) The acquisition by any individual, entity or group (within the
meaning of Section 13(d)(3) or 14(d)(2) of the Exchange Act (a "Person"))
of beneficial ownership (within the meaning of Rule 13d-3 promulgated under
the Exchange Act) of twenty percent (20%) or more of either (i) the then
outstanding shares of common stock of the Company (the "Outstanding Company
Stock") or (ii) the combined voting power of the then outstanding voting
securities of the Company entitled to vote generally in the election of
directors (the "Outstanding Company Voting Securities"); provided, however,
that the following acquisitions shall not constitute a Change in Control:
(i) any acquisition directly from the Company or any Subsidiary, (ii) any
acquisition by the Company or any Subsidiary or by any employee benefit
plan (or related trust) sponsored or maintained by the Company or any
Subsidiary, or (iii) any acquisition by any corporation pursuant to a
reorganization, merger, consolidation or similar business combination
involving the Company (a "Merger"), if, following such Merger, the
conditions described in Section 6.8(c) (below) are satisfied;
(b) Individuals who, as of the Effective Date, constitute the Board of
Directors of the Company (the "Incumbent Board") cease for any reason to
constitute at least a majority of the Board; provided, however, that any
individual becoming a director subsequent to the Effective Date whose
election, or nomination for election by the Company's shareholders, was
approved by a vote of at least a majority of the directors then comprising
the Incumbent Board shall be considered as though such individual were a
member of the Incumbent Board, but excluding, for this purpose, any such
individual whose initial assumption of office occurs as a result of either
an actual or threatened election contest (as such terms are used in Rule
14a-11 of Regulation 14A promulgated under the Exchange Act) or other
actual or threatened solicitation of proxies or consents by or on behalf of
a Person other than the Board;
(c) Consummation of a reorganization, merger or consolidation, or sale
or other disposition of all or substantially all of the assets of the
Company (a "Business Combination"), in each case, unless, following such
Business Combination, (1) all or substantially all of the individuals and
entities who were the beneficial owners, respectively, of the Outstanding
Company Stock and Outstanding Company Voting Securities immediately prior
to such Business Combination beneficially own, directly or indirectly, more
than 60% of, respectively, the then outstanding shares of common stock and
the combined voting power of the then outstanding voting securities
entitled to vote generally in the election of directors, as the case may
be, of the corporation resulting from such Business Combination (including,
without limitation, a corporation which as a result of such transaction
owns the Company or all or substantially all of the Company's assets either
directly or through one or more subsidiaries) in substantially the same
proportions as their ownership, immediately prior to such Business
Combination of the Outstanding Company Stock and Outstanding Company Voting
Securities, as the case may be, (2) no Person
A-20
(excluding any corporation resulting from such Business Combination or any
employee benefit plan (or related trust) of the Company or such corporation
resulting from such Business Combination) beneficially owns, directly or
indirectly, 20% or more of, respectively, the then outstanding shares of
common stock of the corporation resulting from such Business Combination or
the combined voting power of the then outstanding voting securities of such
corporation except to the extent that such ownership existed prior to the
Business Combination, and (3) at least a majority of the members of the
board of directors of the corporation resulting from such Business
Combination were members of the Incumbent Board at the time of the
execution of the initial agreement, or the action of the Board, providing
for such Business Combination;
(d) The adoption of any plan or proposal for the liquidation or
dissolution of the Company; or
(e) Any other event that a majority of the Board, in its sole
discretion, determines to constitute a Change in Control hereunder.
Notwithstanding the occurrence of any of the foregoing events set out in
this Section 6.8 which would otherwise result in a Change in Control, the Board
may determine in its discretion, if it deems it to be in the best interest of
the Company, that an event or events otherwise constituting or reasonably
leading to a Change in Control shall not be deemed a Change in Control
hereunder. Such determination shall be effective only if it is made by the Board
(i) prior to the occurrence of an event that otherwise would be, or reasonably
lead to, a Change in Control, or (ii) after such event only if made by the Board
a majority of which is composed of directors who were members of the Board
immediately prior to the event that otherwise would be, or reasonably lead to, a
Change in Control.
Notwithstanding the foregoing provisions of this Section 6.8, to the extent
that any payment or acceleration hereunder is subject to Code Section 409A for
deferred compensation, Change in Control shall have the meaning set forth in
Code Section 409A(2)(A)(v) and any regulations issued thereunder, which are
incorporated herein by reference, but only to the extent inconsistent with the
foregoing provisions as determined in the discretion of the Committee.
6.9 EXCHANGE OF INCENTIVE AWARDS
The Committee may, in its discretion, permit any Grantee to surrender
outstanding Incentive Awards in order to exercise or realize his rights under
other Incentive Awards or in exchange for the grant of new Incentive Awards, or
require holders of Incentive Awards to surrender outstanding Incentive Awards
(or comparable rights under other plans or arrangements) as a condition
precedent to the grant of new Incentive Awards.
6.10 FINANCING
Subject to the requirements of the Sarbanes-Oxley Act of 2002, the Company
may extend and maintain, or arrange for and guarantee, the extension and
maintenance of financing to any Grantee to purchase Shares pursuant to exercise
of an Incentive Award upon such terms as are approved by the Committee in its
discretion.
SECTION 7
GENERAL
7.1 EFFECTIVE DATE AND GRANT PERIOD
This Plan is adopted by the Board effective as of the Effective Date,
subject to the approval of the stockholders of the Company within one year from
the Effective Date. Incentive Awards may be granted under the Plan at any time
prior to receipt of such stockholder approval; provided, however, if the
requisite stockholder approval is not obtained then any Incentive Awards granted
hereunder shall automatically become null and void and of no force or effect.
Notwithstanding the foregoing, any Incentive Award that is intended to
A-21
satisfy the Performance-Based Exception shall not be granted until the terms of
the Plan are disclosed to, and approved by, Shareholders of the Company in
accordance with the requirements of the Performance-Based Exception.
7.2 FUNDING AND LIABILITY OF COMPANY
No provision of the Plan shall require the Company, for the purpose of
satisfying any obligations under the Plan, to purchase assets or place any
assets in a trust or other entity to which contributions are made, or otherwise
to segregate any assets. In addition, the Company shall not be required to
maintain separate bank accounts, books, records or other evidence of the
existence of a segregated or separately maintained or administered fund for
purposes of the Plan. Although bookkeeping accounts may be established with
respect to Grantees who are entitled to cash, Common Stock or rights thereto
under the Plan, any such accounts shall be used merely as a bookkeeping
convenience. The Company shall not be required to segregate any assets that may
at any time be represented by cash, Common Stock or rights thereto. The Plan
shall not be construed as providing for such segregation, nor shall the Company,
the Board or the Committee be deemed to be a trustee of any cash, Common Stock
or rights thereto. Any liability or obligation of the Company to any Grantee
with respect to an Incentive Award shall be based solely upon any contractual
obligations that may be created by this Plan and any Incentive Agreement, and no
such liability or obligation of the Company shall be deemed to be secured by any
pledge or other encumbrance on any property of the Company. Neither the Company,
the Board nor the Committee shall be required to give any security or bond for
the performance of any obligation that may be created by the Plan.
7.3 WITHHOLDING TAXES
(a) TAX WITHHOLDING. The Company shall have the power and the right
to deduct or withhold, or require a Grantee to remit to the Company, an
amount sufficient to satisfy federal, state, and local taxes, domestic or
foreign, required by law or regulation to be withheld with respect to any
taxable event arising as a result of the Plan or an Incentive Award
hereunder. Upon the lapse of restrictions on Restricted Stock, the
Committee, in its discretion, may elect to satisfy the tax withholding
requirement, in whole or in part, by having the Company withhold Shares
having a Fair Market Value on the date the tax is to be determined equal to
the minimum withholding taxes which could be imposed on the transaction as
determined by the Committee.
(b) SHARE WITHHOLDING. With respect to tax withholding required upon
the exercise of Stock Options or SARs, upon the lapse of restrictions on
Restricted Stock, or upon any other taxable event arising as a result of
any Incentive Awards, Grantees may elect, subject to the approval of the
Committee in its discretion, to satisfy the withholding requirement, in
whole or in part, by having the Company withhold Shares having a Fair
Market Value on the date the tax is to be determined equal to the minimum
withholding taxes which could be imposed on the transaction as determined
by the Committee. All such elections shall be made in writing, signed by
the Grantee, and shall be subject to any restrictions or limitations that
the Committee, in its discretion, deems appropriate.
(c) LOANS. To the extent permitted by the Sarbanes-Oxley Act of 2002
or other applicable law, the Committee may provide for loans, on either a
short term or demand basis, from the Company to a Grantee who is an
Employee or Consultant to permit the payment of taxes required by law.
7.4 NO GUARANTEE OF TAX CONSEQUENCES
Neither the Company nor the Committee makes any commitment or guarantee
that any federal, state or local tax treatment will apply or be available to any
person participating or eligible to participate hereunder.
7.5 DESIGNATION OF BENEFICIARY BY PARTICIPANT
Each Grantee may, from time to time, name any beneficiary or beneficiaries
(who may be named contingently or successively) to whom any benefit under the
Plan is to be paid in case of his death before he receives any or all of such
benefit. Each such designation shall revoke all prior designations by the same
A-22
Grantee, shall be in a form prescribed by the Committee, and will be effective
only when filed by the Grantee in writing with the Committee during the
Grantee's lifetime. In the absence of any such designation, benefits remaining
unpaid at the Grantee's death shall be paid to the Grantee's estate.
7.6 DEFERRALS
The Committee shall not permit a Grantee to defer such Grantee's receipt of
the payment of cash or the delivery of Shares that would otherwise be due to
such Grantee by virtue of the lapse or waiver of restrictions with respect to
Restricted Stock, or the satisfaction of any requirements or goals with respect
to Performance-Based Restricted Stock or Other Stock-Based Awards.
7.7 AMENDMENT AND TERMINATION
The Board shall have the power and authority to terminate or amend the Plan
at any time; provided, however, the Board shall not, without the approval of the
stockholders of the Company within the time period required by applicable law:
(a) except as provided in Section 6.6, increase the maximum number of
Shares which may be issued under the Plan pursuant to Section 1.4;
(b) amend the requirements as to the class of Employees eligible to
purchase Common Stock under the Plan;
(c) extend the term of the Plan; or,
(d) if the Company is a Publicly Held Corporation (i) increase the
maximum limits on Incentive Awards to Covered Employees as set for
compliance with the Performance-Based Exception or (ii) decrease the
authority granted to the Committee under the Plan in contravention of Rule
16b-3 under the Exchange Act.
No termination, amendment, or modification of the Plan shall adversely
affect in any material way any outstanding Incentive Award previously granted to
a Grantee under the Plan, without the written consent of such Grantee or other
designated holder of such Incentive Award.
In addition, to the extent that the Committee determines that (a) the
listing for qualification requirements of any national securities exchange or
quotation system on which the Company's Common Stock is then listed or quoted,
if applicable, or (b) the Code (or regulations promulgated thereunder), require
stockholder approval in order to maintain compliance with such listing
requirements or to maintain any favorable tax advantages or qualifications, then
the Plan shall not be amended in such respect without approval of the Company's
stockholders.
7.8 REQUIREMENTS OF LAW
(a) GOVERNMENTAL ENTITIES AND SECURITIES EXCHANGES. The granting of
Incentive Awards and the issuance of Shares under the Plan shall be subject
to all applicable laws, rules, and regulations, and to such approvals by
any governmental agencies or national securities exchanges as may be
required. Certificates evidencing shares of Common Stock delivered under
this Plan (to the extent that such shares are so evidenced) may be subject
to such stop transfer orders and other restrictions as the Committee may
deem advisable under the rules and regulations of the Securities and
Exchange Commission, any securities exchange or transaction reporting
system upon which the Common Stock is then listed or to which it is
admitted for quotation, and any applicable federal or state securities law,
if applicable. The Committee may cause a legend or legends to be placed
upon such certificates (if any) to make appropriate reference to such
restrictions.
(b) SECURITIES ACT RULE 701. If no class of the Company's securities
is registered under Section 12 of the Exchange Act, then unless otherwise
determined by the Committee, grants of Incentive Awards to "Rule 701
Grantees" (as defined below) and issuances of the underlying shares of
Common Stock, if any, on the exercise or conversion of such Incentive
Awards are intended to comply with all applicable
A-23
conditions of Securities Act Rule 701 ("Rule 701 "'), including, without
limitation, the restrictions as to the amount of securities that may be
offered and sold in reliance on Rule 701, so as to qualify for an exemption
from the registration requirements of the Securities Act. Any ambiguities
or inconsistencies in the construction of an Incentive Award or the Plan
shall be interpreted to give effect to such intention. In accordance with
Rule 701, each Grantee shall receive a copy of the Plan on or before the
date an Incentive Award is granted to him, as well as the additional
disclosure required by Rule 701 (e) if the aggregate sales price or amount
of securities sold during any consecutive 12-month period exceeds
$5,000,000 as determined under Rule 701(e). If Rule 701 (or any successor
provision) is amended to eliminate or otherwise modify any of the
requirements specified in Rule 701, then the provisions of this Section
7.8(b) shall be interpreted and construed in accordance with Rule 701 as so
amended. For purposes of this Section 7.8(b), as determined in accordance
with Rule 701, "Rule 701 Grantees" shall mean any Grantee other than a
director of the Company, the Company's chairman, CEO, president, chief
financial officer, controller and any vice president of the Company, and
any other key employee of the Company who generally has access to financial
and other business related information and possesses sufficient
sophistication to understand and evaluate such information.
7.9 RULE 16b-3 SECURITIES LAW COMPLIANCE FOR INSIDERS
If the Company is a Publicly Held Corporation, transactions under the Plan
with respect to Insiders are intended to comply with all applicable conditions
of Rule 16b-3 under the Exchange Act. Any ambiguities or inconsistencies in the
construction of an Incentive Award or the Plan shall be interpreted to give
effect to such intention, and to the extent any provision of the Plan or action
by the Committee fails to so comply, it shall be deemed null and void to the
extent permitted by law and deemed advisable by the Committee in its discretion.
7.10 COMPLIANCE WITH CODE SECTION 162(M) FOR PUBLICLY HELD CORPORATION
If the Company is a Publicly Held Corporation, unless otherwise determined
by the Committee with respect to any particular Incentive Award, it is intended
that the Plan shall comply fully with the applicable requirements so that any
Incentive Awards subject to Section 162(m) that are granted to Covered Employees
shall qualify for the Performance-Based Exception, except for grants of
Nonstatutory Stock Options with an Option Price set at less than the Fair Market
Value of a Share on the date of grant. If any provision of the Plan or an
Incentive Agreement would disqualify the Plan or would not otherwise permit the
Plan or Incentive Award to comply with the Performance-Based Exception as so
intended, such provision shall be construed or deemed to be amended to conform
to the requirements of the Performance-Based Exception to the extent permitted
by applicable law and deemed advisable by the Committee; provided, however, no
such construction or amendment shall have an adverse effect on the prior grant
of an Incentive Award or the economic value to a Grantee of any outstanding
Incentive Award.
7.11 NOTICES
(a) NOTICE FROM INSIDERS TO SECRETARY OF CHANGE IN BENEFICIAL
OWNERSHIP. Within two business days after the date of a change in
beneficial ownership of the Common Stock issued or delivered pursuant to
this Plan, an Insider should report to the Secretary of the Company any
such change to the beneficial ownership of Common Stock that is required to
be reported with respect to such Insider under Rule 16(a)-3 promulgated
pursuant to the Exchange Act. Whenever reasonably feasible, Insiders will
provide the Committee with advance notification of such change in
beneficial ownership.
(b) NOTICE TO INSIDERS AND SECURITIES AND EXCHANGE COMMISSION. The
Company shall provide notice to any Insider, as well as to the Securities
and Exchange Commission, of any "blackout period," as defined in Section
306(a)(4) of the Sarbanes-Oxley Act of 2002, in any case in which Insider
is subject to the requirements of Section 304 of said Act in connection
with such "blackout period."
A-24
7.12 PRE-CLEARANCE AGREEMENT WITH BROKERS
Notwithstanding anything in the Plan to the contrary, no shares of Common
Stock issued pursuant to this Plan will be delivered to a broker or dealer that
receives such shares for the account of an Insider unless and until the broker
or dealer enters into a written agreement with the Company whereby such broker
or dealer agrees to report immediately to the Secretary of the Company (or other
designated person) a change in the beneficial ownership of such shares.
7.13 SUCCESSORS TO COMPANY
All obligations of the Company under the Plan with respect to Incentive
Awards granted hereunder shall be binding on any successor to the Company,
whether the existence of such successor is the result of a direct or indirect
purchase, merger, consolidation, or otherwise, of all or substantially all of
the business and/or assets of the Company.
7.14 MISCELLANEOUS PROVISIONS
(a) No Employee, Consultant, or other person shall have any claim or
right to be granted an Incentive Award under the Plan. Neither the Plan,
nor any action taken hereunder, shall be construed as giving any Employee
or Consultant any right to be retained in the Employment or other service
of the Company or any Parent or Subsidiary.
(b) The expenses of the Plan shall be borne by the Company.
(c) By accepting any Incentive Award, each Grantee and each person
claiming by or through him shall be deemed to have indicated his acceptance
of the Plan.
7.15 SEVERABILITY
In the event that any provision of this Plan shall be held illegal, invalid
or unenforceable for any reason, such provision shall be fully severable, but
shall not affect the remaining provisions of the Plan, and the Plan shall be
construed and enforced as if the illegal, invalid, or unenforceable provision
was not included herein.
7.16 GENDER, TENSE AND HEADINGS
Whenever the context so requires, words of the masculine gender used herein
shall include the feminine and neuter, and words used in the singular shall
include the plural. Section headings as used herein are inserted solely for
convenience and reference and constitute no part of the interpretation or
construction of the Plan.
7.17 GOVERNING LAW
The Plan shall be interpreted, construed and constructed in accordance with
the laws of the State of Texas without regard to its conflicts of law
provisions, except as may be superseded by applicable laws of the United States.
[Signature page follows.]
A-25
IN WITNESS WHEREOF, the Company has caused this Plan to be duly executed in
its name and on its behalf by its duly authorized officer, effective as of
January 1, 2005.
SMITH INTERNATIONAL, INC.
By: /s/ Neal S. Sutton
-----------------------------------
Name: Neal S. Sutton
Title: Senior Vice President --
Administration, General
Counsel and Secretary
A-26
(SMITH INTERNATIONAL, INC. LOGO)
SMITH INTERNATIONAL,INC.
C/O EQUISERVE TRUST COMPANY N.A.
P.O. BOX 8694
EDISON, NJ 08818-8694
YOUR VOTE IS IMPORTANT. PLEASE VOTE IMMEDIATELY. THANK YOU FOR VOTING.
VOTE-BY-INTERNET VOTE-BY-TELEPHONE
(COMPUTER (TELEPHONE
LOG ON TO THE INTERNET AND GO TO LOGO) OR CALL TOLL-FREE LOGO)
HTTP://WWW.EPROXYVOTE.COM/SII. 1-877-PRX-VOTE (1-877-779-8683)
IF YOU VOTE OVER THE INTERNET OR BY TELEPHONE, PLEASE DO NO MAIL YOUR CARD.
DETACH HERE IF YOU ARE RETURNING YOUR PROXY CARD BY MAIL XXXXX1
-----------------------------------------------------------------------------------------------------------------------------------
PLEASE MARK
[X] VOTES AS IN
THIS EXAMPLE.
------------------------- FOR AGAINST ABSTAIN FOR AGAINST ABSTAIN
SMITH INTERNATIONAL, INC. 2. Approval of 3. Approval of
------------------------- Amendment to [ ] [ ] [ ] Long-Term [ ] [ ] [ ]
1. Election of Directors. Restated Incentive
(Please see reverse) Certificate Compensation
FOR WITHHELD of Plan, as
FOR WITHHELD Incorporation. amended and
ALL [ ] [ ] FROM ALL restated.
NOMINEES NOMINEES
4. Approval of
[ ] Deloitte & [ ] [ ] [ ]
---------------------------------------- Touche LLP
FOR ALL NOMINEES EXCEPT AS WRITTEN ABOVE as
independent
auditors of
the Company.
Mark box at right if an address change or comment [ ]
has been noted on the reverse side of this card.
Please sign this proxy exactly as name appears hereon. When
shares are held by joint tenants, both should sign. When
signing as attorney, administrator, trustee or guardian,
please give full title as such.
Signature: Date: Signature: Date:
--------------------------- ---------------------- ---------------------------- ------------------
(SMITH LOGO)
LOG ONTO OUR WEB SITE AT HTTP://WWW.SMITH.COM
FOR MORE COMPREHENSIVE INFORMATION
TO VIEW YOUR STOCKHOLDER ACCOUNT ON THE INTERNET, PLEASE CALL EQUISERVE TRUST
COMPANY, N.A. TOLL FREE AT 1-877-THEWEB7 (1-877-843-9327) AND THEY WILL MAIL YOU
A PASSWORD THAT PROVIDES YOU SECURE ACCOUNT ACCESS.
IF YOU ARE VOTING BY MAIL, DETACH PROXY CARD HERE, SIGN, DATE AND MAIL IN
POSTAGE-PAID ENVELOPE PROVIDED
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 Stockholders of SMITH INTERNATIONAL, INC.
to be held at 700 King Street, Wilmington, Delaware on April 26, 2005 at 9:00
a.m., and at any adjournments thereof, on all matters that may properly come
before the meeting.
Election of Directors, Nominees:
(01) G. Clyde Buck
(02) Loren K. Carroll and
(03) Dod A. Fraser
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, 2, 3 AND 4.
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.
HAS YOUR ADDRESS CHANGED? DO YOU HAVE COMMENTS?
----------------------------------- -----------------------------------
----------------------------------- -----------------------------------
----------------------------------- -----------------------------------
----------------------------------- -----------------------------------
YOUR VOTE IS VERY IMPORTANT. THANK YOU FOR VOTING.