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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
SCHEDULE 14A
Proxy Statement Pursuant to Section 14(a) of the Securities
Exchange Act of 1934 (Amendment No. )
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RULE 14a-6(e)(2))
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[ ] Soliciting Material Pursuant to Section 240.14a-12
Smith International, Inc.
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(Name of Registrant as Specified In Its Charter)
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SEC 1913 (02-02)
(SMITH INTERNATIONAL, INC. LOGO)
---------------------
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
APRIL 20, 2004
---------------------
To Our Stockholders:
The Annual Meeting of Stockholders (the "Annual Meeting") of Smith
International, Inc. (the "Company") will be held on TUESDAY, APRIL 20, 2004, at
9:00 a.m., at 700 King Street, Wilmington, Delaware, to consider and take action
on the following:
1. Re-election of two directors: James R. Gibbs and Jerry W. Neely,
each for a term of three years;
2. Ratification of Deloitte & Touche LLP as auditors for 2004; and
3. Transaction of any other business properly before the Annual
Meeting.
YOUR BOARD OF DIRECTORS RECOMMENDS A VOTE "IN FAVOR OF" PROPOSALS 1 AND 2.
The Board of Directors has fixed the close of business on February 27, 2004
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.
2003 Annual Report are being distributed on or about March 26, 2004.
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....... 5
Information about the Board of Directors and its
Committees............................................. 6
Corporate Governance...................................... 8
Audit Committee Report.................................... 9
Executive Compensation.................................... 11
Compensation and Benefits Committee Report on Executive
Compensation.......................................... 11
Comparison of Five-Year Cumulative Total Return........ 14
Executive Compensation Tables.......................... 15
I. Summary Compensation Table........................ 15
II. Option/SAR Grants in 2003......................... 16
III. Aggregated Option Exercises in 2003 and December
31, 2003 Option Values................................ 16
Retirement Benefits and Employment Contracts........... 17
Additional Information about Our Directors and Executive
Officers............................................... 19
Stock Ownership of Certain Beneficial Owners.............. 20
PROPOSAL 2: APPROVAL OF DELOITTE & TOUCHE LLP AS AUDITORS... 21
OTHER BUSINESS.............................................. 23
STOCKHOLDERS' PROPOSALS..................................... 23
ANNUAL REPORT AND FINANCIAL INFORMATION..................... 23
Appendix A -- Smith International, Inc. Audit Committee
Charter................................................... A-1
(SMITH INTERNATIONAL, INC. 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 2004 Annual Meeting. This Proxy Statement and
the accompanying proxy card are being mailed to you on or about March 26, 2004.
"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 February 27, 2004. At the
close of business on February 27, 2004, a total of 103,536,543 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 both, one or neither of
the nominees for director. You can also specify whether you approve, disapprove
or abstain from the other proposal. 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 BOTH NOMINEES FOR
DIRECTOR AS SET FORTH UNDER "ELECTION OF DIRECTORS" BELOW AND "FOR' PROPOSAL 2.
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 two nominees receiving the greatest number of votes will be
elected. A majority of the shares represented at the meeting is required to
approve Proposal 2. 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. If any other matter
is properly presented at the Annual Meeting, your proxies will act on such
matter in their best judgment.
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 2004 Annual Meeting, stockholders will elect two persons as Class
III directors to hold office until the 2007 Annual Meeting, or until they are
succeeded by other qualified directors who have been elected. The nominees are
James R. Gibbs and Jerry W. Neely.
Directors must be elected by a plurality of the votes cast at the meeting.
This means that the two nominees receiving the greatest number of votes will be
elected. Votes withheld for any director will not be counted. We will vote your
shares as you specify on your proxy card. If you properly execute and return
your proxy card (in paper form, electronically via the Internet or by
telephone), but don't specify how you want your shares voted, we will vote them
for the election of both the nominees listed below.
Both 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 III for a term expiring in 2007:
JAMES R. GIBBS (Photo)
Age: 59
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.;
Gundle/SLT Environmental Inc.; advisory
director of Frost Bank-Houston.
JERRY W. NEELY (Photo)
Age: 67
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; Compensation and Benefits
Committee.
Other Directorships: Member of the Board of Trustees of the
University of Southern California.
THE BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE FOR THE ELECTION OF BOTH
NOMINEES FOR DIRECTOR.
3
DIRECTORS CONTINUING IN OFFICE
Directors of Class I to continue in office until 2005:
G. CLYDE BUCK (Photo)
Age: 66
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: 60
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.
4
Directors of Class II to continue in office until 2006:
BENJAMIN F. BAILAR (Photo)
Age: 69
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; Nominating and
Corporate Governance Committee.
Other Directorships: Dana Corporation; Trustee of the Philatelic
Foundation.
DOUG ROCK (Photo)
Age: 57
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: VIAD CORP.; CE Franklin Ltd.
STOCK OWNERSHIP OF DIRECTORS AND EXECUTIVE OFFICERS
The following table shows the number of shares of Common Stock beneficially
owned as of February 27, 2004 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.............................. 10,400 *
Roger A. Brown.................................. 0
G. Clyde Buck................................... 29,200 *
Loren K. Carroll................................ 385,450 *
Margaret K. Dorman(3)........................... 57,089 *
James R. Gibbs(4)............................... 11,200 *
Jerry W. Neely(5)............................... 549,017 *
Doug Rock....................................... 922,050 *
Neal S. Sutton.................................. 142,200 *
All directors and executive officers as a group
(14 persons)(3)................................. 2,432,283 2.4
5
---------------
* 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, 2004 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 April 20, 2004 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 27, 2004 through the exercise of stock options as
follows: Mr. Rock: 922,050 shares; Mr. Carroll: 338,950 shares; Mr. Sutton:
142,200 shares; Ms. Dorman: 55,000 shares; and all directors and executive
officers as a group: 1,778,991 shares.
(3) The amounts reported include shares of Common Stock allocated to accounts
under a 401(k) plan as follows: Ms. Dorman: 2,089 shares; and all directors
and executive officers as a group: 5,975 shares.
(4) 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.
(5) The amounts reported include 345,383 shares held by Mrs. Neely.
INFORMATION ABOUT THE BOARD OF DIRECTORS AND ITS COMMITTEES
THE BOARD. Our Board of Directors currently consists of six directors as
described in "Proposal 1: Election of Directors." The current Board members and
nominees for election include four 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 seven meetings during 2003. 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.
6
Audit Committee. The Company has an Audit Committee and its members are
Messrs. Bailar, 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
qualify as audit committee financial experts. During 2003, the Audit Committee
held ten meetings, including telephone meetings to discuss quarterly results.
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, Buck and Neely. 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 two meetings during 2003. The Executive Compensation
Subcommittee of this committee, comprised of Messrs. Gibbs and Buck, held two
meetings during 2003. 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".
Executive Committee. The Company does not have an Executive Committee.
Since the size of the Company's Board of Directors is small and since all
directors have generally been available for full Board meetings and this
Committee had not met in many years, the Company did not reappoint the Executive
Committee at its April 2003 Board of Directors meeting.
Nominating and Corporate Governance Committee. The Company has a
Nominating and Corporate Governance Committee and its members are Messrs. Gibbs,
Bailar and Buck. 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, 2004 to
consider certain corporate governance matters and to recommend nominees for
directors at the 2004 Annual Meeting of Stockholders. During 2003, the Committee
held four 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
7
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. 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 and $2,000 for each committee meeting attended, except the chairman
of the Audit Committee who is paid $12,000 per year. Expenses for
Company-related business travel are either paid or reimbursed by the Company. In
addition, in 2003 outside directors received an annual grant of shares of Common
Stock with a value of approximately $45,000. In 2004, non-employee directors
will 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 "cliff-vest" upon retirement after ten years
of service as a director. This means the grants will all vest at once upon
retirement after ten years of service.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION. During 2003,
Messrs. Buck, Gibbs and Neely served as members of the Company's Compensation
and Benefits Committee. 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".
8
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. During the past year,
the Sarbanes-Oxley Act of 2002 added a number of provisions to federal law to
strengthen the authority of, and increase the responsibility of, corporate audit
committees. Related rules concerning audit committee structure, membership,
authority and responsibility were adopted by the New York Stock Exchange and are
applicable to Smith.
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 attached to this proxy statement as Appendix A. 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 2003, the Audit Committee was composed of three
directors: Mr. Bailar (Chairman), Mr. Gibbs and Mr. Neely. Each member of the
Audit Committee is financially literate and each member meets the definition of
an audit committee financial expert as promulgated by the Securities and
Exchange Commission (the "SEC"). None of the members of the Audit Committee
serve on the audit committee of more than two other public companies. If
re-elected to Smith's Board, Messrs. Gibbs and Neely will continue to serve as
members 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 auditors, is responsible
for performing an independent audit of the consolidated financial statements in
accordance with generally accepted auditing standards. In accordance with the
Sarbanes-Oxley Act, 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 the past fiscal year, the Audit Committee met ten times, including
telephone meetings to discuss quarterly results. 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, internal control and financial reporting matters with
9
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 generally accepted auditing
standards, 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 Audit Committee
periodically monitors the services rendered by and actual fees paid to the
independent auditors to ensure that such services are within the parameters
approved by the Audit Committee. The Sarbanes-Oxley Act 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 2: Approval of
Deloitte & Touche LLP as Auditors" for more information regarding fees paid to
Deloitte & Touche LLP for services in fiscal years 2003 and 2002.
The Audit Committee reviewed and discussed the Company's audited
consolidated financial statements as of and for the year ended December 31, 2003
with management and the independent auditors. 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, 2003 for filing with the SEC.
Audit Committee
Benjamin F. Bailar, Chairman
James R. Gibbs
Jerry W. Neely
10
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.
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 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 per executive per year,
but compensation payable solely upon the attainment of performance goals is
excluded from the limitation. The Compensation Committee has established an
Executive Compensation Subcommittee (the "Subcommittee") to review and establish
compensation for any executive officer whose compensation might exceed $1
million in any year. The Subcommittee consists of two members of the
Compensation Committee, Messrs. Gibbs and Buck, who are independent directors as
defined in the Internal Revenue Code and its regulations. The Compensation
Committee and the Subcommittee will continue to analyze its executive
compensation practices and plans on an ongoing basis with respect to Section
162(m) of the Internal Revenue Code. Where it deems advisable, the Compensation
Committee will take appropriate action to maintain the tax deductibility of its
executive compensation.
TYPES OF COMPENSATION
There are two main types of compensation:
(1) Annual Compensation. This includes base salary and annual
incentives 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 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.
11
FACTORS CONSIDERED IN DETERMINING COMPENSATION
The Compensation Committee wants the compensation of the Company's
executives to be competitive in the worldwide energy industry. The Compensation
Committee estimates an executive's competitive 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 aims to pay 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 person's achievements and other criteria.
Increases in base salary are primarily the result of individual performance,
which includes meeting specific goals established by the 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; and advancement in
skills and responsibility. In 2003, seven executive officers received merit
increases.
Annual Incentive Compensation
The annual incentive plan promotes the Company's pay-for-performance
philosophy by providing executives with direct financial incentives in the form
of cash awards that are paid based on the achievement of performance objectives
established for the fiscal year. Each year, the Compensation Committee sets
corporate goals 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 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.
Each year the Compensation Committee sets targets for each executive
relating to annual incentive compensation. The target incentive awards for 2003
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 2004 under the
annual incentive plan for fiscal year 2003 to nine eligible executives.
Stock Option 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 determines the
total amount of options to be made available to the Company's executives. These
amounts vary each year and are based upon what the Compensation Committee
believes is appropriate. The Compensation Committee considers an executive's
total compensation package, including the amount of stock options previously
awarded. Other important factors are the desire to create stockholder value,
encourage
12
equity ownership, provide an appropriate link to stockholder interests and
provide long-term incentive award opportunities in the same range as similar
companies in the Company's industry.
Chief Executive Officer Compensation
The Subcommittee determines the pay level for the Chief Executive Officer,
considering both a pay-for-performance philosophy and market rates of
compensation for similar positions. A significant portion of compensation for
the Chief Executive Officer is based upon the Company's performance. 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 Subcommittee regarding Mr. Rock's
compensation are summarized below.
Base Salary -- The Subcommittee reviewed Mr. Rock's base salary at its
December 2002 meeting and increased it to $920,000. In setting Mr. Rock's base
salary for fiscal year 2003, the Subcommittee 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 2002.
Annual Incentive -- The Subcommittee reviewed the predetermined bonus
objectives set by the Compensation Committee based on the Company's fiscal year
financial performance. Mr. Rock did not receive a bonus for fiscal year 2002.
For fiscal year 2003, Mr. Rock earned an annual bonus in the amount of $641,700,
which was paid in 2004.
Stock Options -- The Company granted Mr. Rock non-qualified stock options
to purchase 210,000 shares of Common Stock on December 2, 2003, at the
recommendation of the Subcommittee. The award of stock options to Mr. Rock was
approximately 20% of the total stock options granted to all employees of the
Company in 2003. The options were granted at 100% of fair market value on the
date of grant. The performance sensitivity of the grant is built into the option
concept, since the options produce no gain unless the Company's share price
rises over the initial grant price.
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
G. Clyde Buck
Jerry W. Neely
13
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, 1998 and ending December 31, 2003. 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, 1998
and reinvestment of dividends (if applicable). For each index, total return is
based on market capitalization of its components.
(PERFORMANCE GRAPH)
--------------------------------------------------------------------------------------------
Dec. 1998 Dec. 1999 Dec. 2000 Dec. 2001 Dec. 2002 Dec. 2003
--------------------------------------------------------------------------------------------
Smith $100.00 $197.27 $296.03 $212.88 $259.02 $329.69
S&P 500 $100.00 $121.04 $110.02 $ 96.95 $ 75.52 $ 97.18
Peer Group $100.00 $142.78 $197.08 $134.96 $125.02 $150.26
14
EXECUTIVE COMPENSATION TABLES
The following table shows compensation for services to the Company of the
persons who during 2003 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.................................. 2003 919,654 641,700 210,000 447,308
Chairman of the Board, Chief Executive 2002 874,808 0 247,000 529,568
Officer, President and Chief Operating
Officer 2001 825,000 1,222,031 322,000 335,159(5)
Loren K. Carroll........................... 2003 609,615 340,380 100,000 396,703
Executive Vice President, President and 2002 559,889 150,000 117,000 385,436
Chief Executive Officer of M-I SWACO 2001 530,004 628,050 138,000 228,749
Neal S. Sutton............................. 2003 379,846 176,700 45,000 149,311
Senior Vice President -- Administration, 2002 359,942 0 52,000 170,797
General Counsel and Secretary 2001 345,000 340,688 62,000 113,206
Margaret K. Dorman......................... 2003 364,846 169,725 45,000 74,356
Senior Vice President, Chief Financial 2002 344,827 0 52,000 96,233
Officer and Treasurer 2001 300,000 296,250 62,000 66,699
Roger A. Brown............................. 2003 344,846 305,325 45,000 130,682
President, Smith Technologies 2002 324,912 87,523 52,000 132,119
2001 300,000 268,500 62,000 89,573
---------------
(1) The amounts in this column include compensation deferred by the Named
Officers in 2001, 2002 and 2003 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
2001, 2002 and 2003 but paid in 2002, 2003 and 2004, respectively. This
represents a change from prior years where the bonus reflected in this
column was the bonus earned in the prior year but paid in the year noted.
(3) The option numbers for 2001 have been adjusted to reflect the 2-1 stock
split on June 20, 2002.
(4) The amounts in this column include the Company's contribution to each Named
Officer's account in the SERP for the 2001, 2002 and 2003 plan years,
including interest (at 120% of the applicable Federal long-term rate). For
2003, SERP contributions to each Named Officer's account are as follows: Mr.
Rock: $429,808; Mr. Carroll: $379,203; Mr. Sutton: $131,811; Ms. Dorman:
$62,856 and Mr. Brown: $110,932. In addition, this column also reflects the
Company's contributions to the 401(k) Plan. The 2003 plan year contributions
to each Named Officer's 401(k) account are as follows: Mr. Rock: $17,500;
Mr. Carroll: $17,500; Mr. Sutton: $17,500; Ms. Dorman: $11,500 and Mr.
Brown: $19,750.
(5) Mr. Rock received a lump sum cash payment of $9,694 in January 2001 for the
actuarial present value of his vested accrued benefits under the Smith
International, Inc. Supplemental Pension Plan, which was terminated
effective December 31, 2000.
15
OPTION/SAR GRANTS IN 2003
The following table shows all grants of options to the Named Officers in
2003. No stock appreciation rights were granted in 2003.
INDIVIDUAL GRANTS
--------------------------------------------------------------------------------
NUMBER OF
SECURITIES % OF TOTAL
UNDERLYING OPTIONS GRANTED EXERCISE OR
OPTIONS TO EMPLOYEES BASE PRICE EXPIRATION GRANT DATE
NAME GRANTED(#)(1) IN 2003 ($/SHARE) DATE PRESENT VALUE($)(2)
---- ------------- --------------- ----------- ---------- -------------------
Doug Rock....................... 210,000 20.0 38.82 12-02-13 2,734,200
Loren K. Carroll................ 100,000 9.6 38.82 12-02-13 1,302,000
Neal S. Sutton.................. 45,000 4.3 38.82 12-02-13 585,900
Margaret K. Dorman.............. 45,000 4.3 38.82 12-02-13 585,900
Roger A. Brown.................. 45,000 4.3 38.82 12-02-13 585,900
---------------
(1) Options were granted to the Named Officers on December 2, 2003 at an
exercise price of $38.82. The exercise price per share is equal to the
closing price of the Common Stock on the New York Stock Exchange Composite
Tape on the date of grant. Options granted vest at a rate of 25% per year
and will not begin to become exercisable until December 2, 2004. If a change
of control of the Company occurs, all outstanding options would become
exercisable immediately.
(2) Present value was calculated using the Black-Scholes option pricing model.
Use of this model should not be viewed in any way as a forecast of the
future performance of the Common Stock, which will be determined by future
events and unknown factors. The estimated values under the Black-Scholes
model are based upon certain assumptions as to variables such as interest
rate and stock price volatility. Assumptions used for the Black-Scholes
option pricing model include a risk-free rate of return of 3.5%, a
volatility factor of 31.0% and an expected option life of 5 years. A
dividend yield during the option life is not applicable. The ultimate value
of the options will depend on the future market price of the Company's
Common Stock.
AGGREGATED OPTION EXERCISES IN 2003 AND DECEMBER 31, 2003 OPTION VALUES
The following table provides information on options exercised by the Named
Officers during 2003 and the value of options held by those officers on December
31, 2003.
NUMBER OF SECURITIES UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED OPTIONS AT IN-THE-MONEY OPTIONS AT
SHARES DECEMBER 31, 2003 DECEMBER 31, 2003($)(1)
ACQUIRED ON VALUE ------------------------------- -------------------------
NAME EXERCISE REALIZED($) EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
---- ----------- ----------- ------------------------------- -------------------------
Doug Rock.................. 25,000 598,000 947,050/604,750 17,157,934/5,248,413
Loren K. Carroll........... 65,000 1,658,735 430,750/284,250 7,419,093/2,405,378
Neal S. Sutton............. 62,500 1,646,710 142,200/126,000 2,061,220/1,063,400
Margaret K. Dorman......... 27,800 599,559 107,300/126,000 1,666,476/1,063,400
Roger A. Brown............. 0 0 192,300/126,000 3,785,004/1,063,400
---------------
(1) Value based on the closing price on the New York Stock Exchange Composite
Tape for the Common Stock on December 31, 2003 ($41.52).
EQUITY COMPENSATION PLAN INFORMATION
The following table shows information as of December 31, 2003, with respect
to the Smith International, Inc. 1989 Long-Term Incentive Compensation Plan and
the Smith International, Inc. Stock Plan for
16
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:............. 6,107,504 $ 28.53 2,341,970(1)
Equity compensation plans not
approved by security holders..... Not applicable Not applicable Not applicable
-------------- -------------- --------------
Total.............................. 6,107,504 $ 28.53 2,341,970
============== ============== ==============
---------------
(1) Includes 27,200 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
Officers are as follows: Mr. Rock: $8,150; Mr. Carroll: $4,282; Mr. Sutton:
$-0-; Ms. Dorman: $-0- and Mr. Brown: $-0-. The benefits are not subject to any
reduction for Social Security.
17
SMITH INTERNATIONAL, INC. SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN ("SERP")
The Company adopted the SERP effective October 1, 1993. It is a
non-qualified, deferred compensation plan covering all of the executive officers
and certain other participants. The primary purpose of the SERP is to provide
executives who are affected by the Internal Revenue Code limitations under the
Company's 401(k) Retirement Plan (the "401(k) Plan") with the opportunity to
defer a portion of their current compensation. Distributions will generally be
made following a participant's termination of employment, although in-service
withdrawals are permitted in certain circumstances. A participant in the SERP
may defer up to 100% of his or her salary or bonus paid during a plan year. The
Company may also make contributions to the SERP on behalf of its participants.
Age-Weighted Contributions. Effective as of the last day of each quarter
during the year, a contribution by the Company may be allocated under the SERP
based on the participant's age-weighted contribution percentage ("AWCP") ranging
from 2% to 6%. The difference between a participant's (i) "Total 401(k)
Compensation" and (ii) "Net 401(k) Compensation" is multiplied by the AWCP to
compute the age-weighted contribution for the year. "Total 401(k) Compensation"
generally means the total of all cash amounts paid by the Company to a
participant, including deferred amounts. "Net 401(k) Compensation" generally
means Total 401(k) Compensation less participant contributions to the SERP, but
not to exceed the limit set under Section 401(a)(17) of the Internal Revenue
Code ($205,000 in 2004 and $200,000 in 2003). Effective January 1, 1995, the
SERP was amended to fix the AWCP for the executive officers at 6%.
Matching Contributions. The SERP contains matching provisions that mirror
the matching formulas in effect for the 401(k) Plan, but without regard to
certain Internal Revenue Code limits applicable to the 401(k) Plan. Matching
contributions for a plan year in both the SERP and the 401(k) Plan combined
cannot exceed 6% of a participant's Total 401(k) Compensation net of any
incentive bonus. Effective January 1, 1995, the SERP was amended so that
executive officers will receive 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 under 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 actual money market fund rate and the AFR, which contribution is
allocated to the participant's account. For the 2003 plan year, the Company
allocated $1,171,643 to participants' accounts for these additional
contributions.
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 SERP
participants.
EMPLOYMENT AGREEMENTS
The Company has employment agreements with Messrs. Rock and Sutton dated
December 10, 1987 and January 2, 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 and Sutton 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 or Mr. Sutton 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 or Mr. Sutton,
as applicable, would be entitled to receive a lump sum payment in cash equal to
his current annual base salary and bonus through the date of termination;
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.
18
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, Ms. Dorman and Mr. Brown. 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 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 2003, 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 2003: 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 distribution of maintenance, repair and operating supplies and
equipment provided 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). The Board of Directors has
determined that Messrs. Bailar, Buck, 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,
19
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. During 2003, Frontier Refining paid $240,987 to
Smith. Frontier Refining expects to make purchases from Smith's Wilson business
unit in 2004. Based upon these facts, the Board of Directors determined that
this relationship is not material and does not affect Messrs. Buck's and Gibbs'
independence.
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 2003 the Section 16 Persons complied with all Section 16(a)
filing requirements applicable to them.
STOCK OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
The following table shows certain information about stock ownership of all
persons known to the Company to own of record or beneficially more than 5% of
the outstanding Common Stock of the Company as of February 27, 2004. 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.................................................... 15,131,506(1) 14.6
82 Devonshire Street
Boston, Massachusetts 02109
Morgan Stanley.............................................. 7,452,589(2) 7.2
1585 Broadway
New York, NY 10036
T. Rowe Price Associates, Inc............................... 6,581,100(3) 6.4
100 East Pratt Street
Baltimore, Maryland 21202
20
---------------
(1) Fidelity Management & Research Company ("Fidelity"), a wholly owned
subsidiary of FMR Corp. ("FMR") and an investment adviser, is the beneficial
owner of 10,468,421 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 10,468,421 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' 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 2,639,205 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 over 2,639,205 shares and sole
power to vote or to direct the voting of 2,633,205 shares and no power to
vote or to direct the voting of 6,000 shares owned by the institutional
accounts. Strategic Advisers, Inc. ("Strategic"), a wholly owned subsidiary
of FMR, provides investment advisory services to individuals. As such, FMR's
beneficial ownership includes 400 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 2,023,480 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) Morgan Stanley is the parent company of, and indirect beneficial owner of
securities held by, one of its business units.
(3) 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 DELOITTE & TOUCHE LLP AS AUDITORS
The Board of Directors has selected Deloitte & Touche LLP to audit the
books and records of the Company for its fiscal year ending December 31, 2004.
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 auditors and, in limited circumstances, tax advisors.
Upon the recommendation of the Company's Audit Committee and approval of
the Board of Directors, the Company dismissed Arthur Andersen LLP on April 15,
2002 and appointed Deloitte & Touche LLP to serve as its independent auditors.
The appointment of Deloitte & Touche LLP was made after careful consideration by
the Board of Directors, its Audit Committee and management of the Company after
an extensive evaluation process. 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.
21
Change of Independent Public Accountants
As previously disclosed, on April 15, 2002 we dismissed Arthur Andersen and
engaged Deloitte & Touche LLP as our new independent auditors. The decisions
were recommended by the Audit Committee and approved by the Board of Directors.
Arthur Andersen's report on our consolidated financial statements for the
year ended December 31, 2001 did not contain any adverse opinion or disclaimer
of opinion, nor was it qualified or modified as to uncertainty, audit scope, or
accounting principles.
During the year ended December 31, 2001 and the subsequent interim period
through April 15, 2002, there were no disagreements between us and Arthur
Andersen on any matter of accounting principles or practices, financial
statement disclosure, or auditing scope or procedure, which disagreements, if
not resolved to Arthur Andersen's satisfaction, would have caused them to make
reference to the subject matter of the disagreement in connection with their
report.
None of the reportable events described in Item 304(a)(1)(v) of Regulation
S-K occurred during the year ended December 31, 2001 or during the subsequent
interim period through April 15, 2002.
We provided Arthur Andersen with a copy of the foregoing disclosures. A
copy of Arthur Andersen's letter, dated April 15, 2002, stating their agreement
with such statements is attached as Exhibit 16.1 to our Current Report on Form
8-K filed April 18, 2002 with the SEC.
During the year ended December 31, 2001 and the subsequent interim period
through April 15, 2002, we did not consult with Deloitte & Touche LLP regarding
any of the matters or events set forth in Item 302(a)(2)(i) and (ii) of
Regulation S-K.
FEES PAID TO DELOITTE & TOUCHE LLP
During fiscal years 2003 and 2002, the Company incurred the following fees
for services performed by Deloitte & Touche LLP:
2003 2002
---------- ----------
Audit Fees.................................................. $1,611,500 $1,282,355
Audit-Related Fees.......................................... 55,000 38,880
Tax Fees.................................................... 50,000 163,765
All Other Fees.............................................. 0 0
---------- ----------
Total....................................................... $1,716,500 $1,485,000
Audit Fees ($1,611,500; $1,282,355). 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.
Audit-Related Fees ($55,000; $38,800). 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, which were not directly related to the audit of either the 2002 or the
2003 consolidated financial statements. The Audit Committee approved 100% of
these Audit-Related Fees pursuant to its pre-approval policy.
Tax Fees ($50,000; $163,765). 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.
22
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 auditors
in maintaining the integrity of Company financial controls and reporting.
Notwithstanding its selection, the Board of Directors, in its discretion, may
appoint new independent auditors 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 TO AUDIT THE BOOKS AND RECORDS OF THE
COMPANY FOR THE FISCAL YEAR ENDING DECEMBER 31, 2004.
OTHER BUSINESS
The Board of Directors does not intend to present any other business for
action at the meeting, and the Company has not been advised of any other
business intended to be presented by others.
STOCKHOLDERS' PROPOSALS
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 26, 2004. 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 26, 2004, in
accordance with the Company's Restated Bylaws.
ANNUAL REPORT AND FINANCIAL INFORMATION
A COPY OF OUR 2003 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, 2003, 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 FEBRUARY 27, 2004. 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 2003 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
23
APPENDIX A
SMITH INTERNATIONAL, INC.
AUDIT COMMITTEE CHARTER
(AS AMENDED FEBRUARY 4, 2004)
The primary responsibility for the Company's financial reporting and
internal operating controls is vested in senior management as overseen by the
Board of Directors ("Board"). The Audit Committee ("Committee") is a standing
committee appointed by the Board to assist it in overseeing (1) the integrity of
the financial statements of the Company, (2) the compliance by the Company with
legal and regulatory requirements, (3) the independent auditor's qualifications
and independence and (4) the performance of the Company's internal audit
function and independent auditors.
The Committee relies on the expertise and knowledge of management, the
internal auditors, and the independent auditor in carrying out its oversight
responsibilities. Management of the company is responsible for determining the
Company's financial statements are complete, accurate, and in accordance with
generally accepted accounting principles. The independent auditor is responsible
for auditing the Company's financial statements. It is not the duty of the
Committee to plan or conduct audits, to determine that the financial statements
are complete and accurate and are in accordance with generally accepted
accounting principles, to conduct investigations, or to assure compliance with
laws and regulations or the Company's internal policies, procedures, and
controls.
The Committee shall be composed of such number of independent directors as
shall be determined, from time to time, by the Board, but shall consist of no
fewer than three members. Each member of the Committee shall meet the
independence and experience requirements of the New York Stock Exchange, Section
10A(m)(3) of the Securities and Exchange Act of 1934 (the "Act") and the rules
and regulations of the Securities and Exchange Commission (the "Commission"). At
least one member of the Committee shall be an "audit committee financial expert"
as defined by the Commission. Committee members shall not simultaneously serve
on the audit committee of more than two other public companies.
The Committee may form and delegate authority to subcommittees consisting
of one or more members, when appropriate, including the authority to grant
preapprovals of audit and permitted non-audit services, provided that decisions
of such subcommittee to grant preapprovals shall be presented to the full
Committee at its next scheduled meeting.
The Committee will meet at least quarterly and at such other times as it
determines. The Board shall designate one member of the Committee as its Chair.
The Chair shall set the agenda for each meeting. A majority of the members
present at any meeting will constitute a quorum and may act on behalf of the
Committee. Members of the Committee may participate in a meeting of the
Committee by means of conference call or similar communication system by means
of which all persons participating in the meeting can hear each other. In lieu
of a meeting, the Committee may act by a written unanimous consent signed by all
the members of the Committee.
The Committee shall have unrestricted access to Company personnel and
documents and will be given the resources necessary to discharge its
responsibilities. The Committee shall meet periodically with management, the
internal auditors and the independent auditor in separate executive sessions.
The Committee shall have the authority to retain independent legal, accounting
or other consultants to advise the Committee. The Committee may request any
officer or employee of the Company or the Company's outside legal counsel or
independent auditor to attend a meeting of the Committee or to meet with any
members of, or consultants to, the Committee.
The members of the Committee, including its Chair, shall be appointed by
the Board on the recommendation of the Nominating and Corporate Governance
Committee. Committee members may be replaced by the Board.
The Committee shall make regular reports to the Board.
A-1
The Committee shall prepare a report as required by the Commission to be
included in the Company's annual proxy statement.
The Committee shall review and assess the adequacy of this Charter annually
and recommend any proposed changes to the Board for approval. The Committee
shall annually review the Committee's own performance.
The Committee shall have authority to obtain from the Company, and shall
receive appropriate funding, as determined by the Committee, from the Company,
for the payment or compensation to the independent auditor and to outside legal,
accounting and other advisors employed by it and administrative expenses
incurred by it.
The Committee shall have the following duties and responsibilities, which
may be changed from time to time by the Board:
I. FINANCIAL REPORTING
To accomplish its responsibilities to the Board in the area of financial
reporting, the Committee will:
1. Oversee the independent audit coverage, including
(i) Recommend annually to the Board the appointment of the
independent auditor, which firm will be ultimately accountable to the
Board and the Committee, and shall report directly to the Committee. The
Committee shall be directly responsible for the appointment,
compensation, retention and oversight of the work of the independent
auditor, including resolution of any disagreement between management and
the independent auditor regarding financial reporting, for the purpose
of preparing or issuing an audit report or related work.
(ii) Meet with the independent auditor prior to the audit to review
the changes in audit procedures, planned scope and staffing of the audit
and the estimated fees.
(iii) Review and discuss with management and the independent
auditor (a) major issues regarding accounting principles and financial
statement presentations, including any significant changes in the
Company's selection or application of accounting principles, and major
issues as to the adequacy of the Company's internal controls and any
special audit steps adopted in light of material control deficiencies,
(b) analyses prepared by management and/or the independent auditor
setting forth significant financial reporting issues and judgments made
in connection with the preparation of the financial statements,
including analyses of the effects of alternative GAAP methods on the
financial statements, (c) the effect of regulatory and accounting
initiatives, as well as off-balance sheet structures, on the financial
statements of the Company, and (d) the type and presentation of
information to be including in earnings press releases (paying
particular attention to any use of "pro forma" or "adjusted" non-GAAP
information).
(iv) Discuss with management generally the types of information to
be provided and the types of presentation to be made in providing
financial information and earnings guidance to analysts and rating
agencies.
(v) Review and preapprove all auditing services and permitted
non-audit services (including the fees and terms thereof) to be
performed for the Company by the independent auditor, subject to the de
minimus exceptions for non-audit services described in Section
10A(i)(1)(B) of the Exchange Act which are approved by the Committee
prior to the completion of the audit.
(vi) Approve the fees to be paid to the independent auditor.
2. Review the financial statements, including
(i) Review and discuss with management and the independent auditor
the annual audited financial statements, including discussions made in
management's discussion and analysis, and
A-2
recommend to the Board whether the audited financial statements should
be included in the Company's annual report on Form 10-K.
(ii) Review and discuss with management and the independent auditor
the Company's quarterly financial statements, including discussions made
in management's discussion and analysis, prior to the filing of the
Company's quarterly report on Form 10-Q.
(iii) Review and discuss other financial reports requiring approval
by the Board before submission to the Securities and Exchange Commission
or other government agencies.
3. Inquire about the existence and substance of any significant
accounting accruals, reserves or estimates made by management that had or
may have a material impact on the financial statements.
4. Review and discuss reports from the independent auditors on:
(i) All critical accounting policies and practices to be used.
(ii) All alternative treatments of financial information within
generally accepted accounting principles that have been discussed with
management, the ramifications of the use of such alternative disclosures
and treatments and the treatment preferred by the independent auditor.
(iii) Other material written communications between the independent
auditor and management, such as any management letter or schedule of
unadjusted differences.
5. Discuss with the independent auditor the matters required to be
discussed by Statement on Auditing Standards No. 61 relating to the conduct
of the audit, including any audit problems or difficulties encountered in
the course of the audit work and management's response, including any
restrictions on the scope of activities or access to requested information
and any significant disagreements with management.
6. Obtain from management a notification of issues and responses prior
to seeking a second opinion from another independent public accountant.
7. Review disclosures made by the Company's CEO and CFO in connection
with their certification process for Form 10-K and Form 10-Q about any
significant deficiencies in the design or operation of internal controls or
material weaknesses therein and any fraud involving management or other
employees who have a significant role in the Company's internal controls.
8. Obtain and review a report from the independent auditor at least
annually regarding (a) the independent auditor's internal quality control
review, (b) any material issues raised by the most recent internal quality
control review, or peer review, of the firm, or by any inquiry or
investigation by governmental or professional authorities within the
preceding five years respecting one or more independent audits carried out
by the firm, (c) any steps taken to deal with any such issues and (d) all
relationships between the independent auditor and the Company. The
Committee shall present its conclusions with respect to the independent
auditor to the Board.
9. Obtain periodically a formal written statement from the independent
auditor delineating all relationships between the independent auditor and
the Company. The Committee shall actively engage in dialogue with the
independent auditor with respect to any disclosed relationships or services
that may impact the objectivity and independence of the independent
auditor. The Committee shall evaluate the qualifications, performance and
independence of the independent auditor, including considering whether the
independent auditor's quality controls are adequate and the provision of
permitted non-audit services is compatible with maintaining the auditor's
independence, and taking into account the opinions of management and
internal auditors. The Committee shall present its conclusions with respect
to the independent auditor to the Board and shall recommend that the Board
take appropriate action in response to the independent auditor's report to
satisfy itself of the independent auditor's independence.
10. Evaluate the lead partner of the independent auditor team.
A-3
11. Ensure the rotation of the lead (or coordinating) audit partner
having primary responsibility for the audit and the audit partner
responsible for reviewing the audit as required by law.
12. Recommend to the Board policies for the Company's hiring of
employees or former employees of the independent auditor who participated
in any capacity in the audit of the Company.
13. Discuss with the independent auditor any communications with its
national office concerning auditing or accounting issues presented by the
engagement.
II. CORPORATE GOVERNANCE
The responsibility of the Committee to the Board in the area of corporate
governance is to review whether the Company is in reasonable compliance with
pertinent laws and regulations and is maintaining effective controls with
respect to the assets and the books and records of the Company. To accomplish
this, the Committee will:
1. Review corporate policies relating to compliance with laws and
regulations, ethics, conflict of interest and the investigation of
misconduct or fraud. Establish procedures for the receipt, retention and
treatment of complaints received by the Company regarding accounting,
internal accounting controls or auditing matters and the confidential,
anonymous submission by employees of concerns regarding questionable
accounting or auditing matters.
2. Advise the Board with respect to the Company's compliance, and that
of its subsidiaries and foreign affiliate entities, with applicable legal
requirements and the Company's corporate policies and with respect to the
Company's policies and procedures regarding compliance.
3. Discuss with management and the independent auditor correspondence
with regulators or governmental agencies and published reports which raise
material issues regarding the Company's financial statements or accounting
policies.
4. Discuss with management the Company's major financial risk
exposures and the steps management has taken to monitor and control such
exposures, including the Company's risk assessment and risk management
policies.
5. Obtain from the independent auditor assurance that Section 10A(b)
of the Exchange Act has not been implicated.
6. Discuss with the Company's General Counsel:
(i) Any questionable or possible illegal activities or payments
reported to the Committee.
(ii) Any legal matters that may have a material impact on the
financial statements of the Company.
(iii) The Company's compliance policies.
(iv) Any material reports or inquiries received from regulators or
governmental agencies.
III. INTERNAL CONTROL
It is incumbent on the Committee to fulfill its oversight responsibilities
to the Board without unnecessary or inappropriate intervention with the
prerogatives of corporate management. Nevertheless, to carry out its
responsibility, the Committee should:
1. Review the appointment and replacement of the Director of Internal
Audit.
2. Discuss with the independent auditor and management the internal
audit department responsibilities, budget and staffing and any recommended
changes in the planned scope of the internal audit.
3. Review the work and performance of the Company's internal audit
function including the results of significant audits and management's
response. Determine from the internal auditors whether there is a need for
any significant change in the Company's system of internal controls.
A-4
PROXY
(SMITH INTERNATIONAL INC. 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 CALLING FROM
OUTSIDE NORTH AMERICA, PLEASE CALL 201-536-8073.
-- 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 20, 2004 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) James R. Gibbs and
(02) Jerry W. Neely
YOUR SHARES WILL BE VOTED AS DIRECTED ON THIS CARD. IF SIGNED AND NO DIRECTION
IS GIVEN FOR ANY ITEM, IT WILL BE VOTED IN FAVOR OF ITEMS 1 AND 2.
To vote by telephone or internet, please see the reverse of this card. To vote
by mail, please sign and date this card on the reverse, tear off at the
perforation, and mail promptly in the enclosed postage-paid envelope.
HAS YOUR ADDRESS CHANGED? DO YOU HAVE COMMENTS?
----------------------------------- -------------------------------------
----------------------------------- -------------------------------------
----------------------------------- -------------------------------------
----------------------------------- -------------------------------------
YOUR VOTE IS VERY IMPORTANT. THANK YOU FOR VOTING.
(SMITH INTERNATIONAL, INC. LOGO)
SMITH INTERNATIONAL, INC.
C/O EQUISERVE TRUST COMPANY N.A.
P.O. BOX 8932
EDISON, NJ 08818-8932
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----------------------------
----------------------------
Your vote is important. Please vote immediately. Thank you for voting.
-------------------------------- --------------------------------
VOTE-BY-INTERNET VOTE-BY-TELEPHONE
OR
Log on to the Internet and go to Call toll-free
http://www.eproxyvote.com/sii. 1-877-PRX-VOTE (1-877-779-8683)
-------------------------------- --------------------------------
If you vote over the internet or by telephone, please do not mail your card.
--------------------------------------------------------------------------------
DETACH HERE IF YOU ARE RETURNING YOUR PROXY CARD BY MAIL XXXXX1
[X] Please mark 7551
votes as in
this example.
FOR AGAINST ABSTAIN
----------------------------------- 2. Approval of Deloitte
SMITH INTERNATIONAL, INC. & Touche LLP as
----------------------------------- independent auditors
1. Election of Directors. of the Company.
(Please see reverse)
FOR WITHHELD
FOR WITHHELD
ALL FROM ALL
NOMINEES NOMINEES
----------------------------------------
FOR ALL NOMINEES EXCEPT AS WRITTEN ABOVE
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:
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VOTING INSTRUCTIONS
SMITH INTERNATIONAL, INC.
ANNUAL MEETING OF STOCKHOLDERS -- APRIL 20, 2004
TO: ALL SMITH AND M-I EMPLOYEES PARTICIPATING IN THE SMITH STOCK FUND:
We have been requested to forward to you the enclosed proxy material with
respect to securities held by Vanguard in your 401(k) account but not registered
in your name. These securities can be voted only by Vanguard's nominee as the
holder of record. We urge you to send in your instructions so that your
securities may be voted in accordance with your wishes.
The Annual Meeting of Stockholders of SMITH INTERNATIONAL, INC. will be held at
700 King Street, Wilmington, Delaware on April 20, 2004 at 9:00 A.M.
YOUR SHARES WILL BE VOTED AS DIRECTED ON THIS CARD. IF SIGNED AND NO
DIRECTION IS GIVEN FOR ANY ITEM, YOUR SHARES WILL BE VOTED IN FAVOR OF
ITEMS 1 AND 2.
To vote by telephone or internet, please see the reverse of this card. To vote
by mail, please sign and date this card on the reverse, tear off at the
perforation, and mail promptly in the enclosed postage-paid envelope.
------------
SEE
YOUR VOTE IS VERY IMPORTANT. THANK YOU FOR VOTING. REVERSE SIDE
------------
-- IF YOU ARE VOTING BY MAIL, DETACH PROXY CARD HERE, SIGN, DATE AND MAIL IN --
POSTAGE-PAID ENVELOPE PROVIDED
YOUR VOTE IS IMPORTANT!
YOU CAN VOTE IN ONE OF THREE WAYS:
1. Call toll-free 1-888-215-7566 on a Touch-Tone telephone and follow the
instructions on the reverse side. There is NO CHARGE to you for this call.
or
2. Vote by Internet at our Internet address: http://www.proxyvoting.com/smith
or
3. Mark, sign and date your proxy card and return it promptly in the enclosed
envelope.
PLEASE VOTE
(SMITH INTERNATIONAL, INC. LOGO)
[X] PLEASE MARK YOUR 7551
VOTES AS IN THIS
EXAMPLE.
THIS PROXY WILL BE VOTED AS DIRECTED BELOW, OR IF SIGNED AND NO DIRECTION IS
GIVEN, WILL BE VOTED "FOR" ITEMS 1 AND 2 AND AS RECOMMENDED BY THE BOARD OF
DIRECTORS OF SMITH INTERNATIONAL, INC. ON ALL OTHER MATTERS.
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THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR PROPOSALS 1 AND 2.
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FOR WITHHELD NOMINEES: FOR AGAINST ABSTAIN
1. Election of 01. James R. Gibbs 2. Approval of Deloitte & Touche LLP as
Directors. independent auditors of the Company.
02. Jerry W. Neely
For, except vote withheld from the following nominee(s):
3. In the discretion of the proxies on any other matters that may properly
come before the meeting or any adjournment thereof.
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SIGNATURES(S) DATE
------------------------------------ ---------------
NOTE: Signature(s) should agree with name(s) as printed on this proxy.
-- PLEASE CAREFULLY DETACH HERE AND RETURN THIS PROXY IN THE ENCLOSED REPLY ENVELOPE --
VOTE BY TELEPHONE OR INTERNET
24 HOURS A DAY, 7 DAYS A WEEK
QUICK *** EASY *** IMMEDIATE
Your telephone or Internet vote authorizes the named proxies to vote your shares in the same manner as if you
marked, signed and returned your proxy card.
VOTE BY PHONE: YOU WILL BE ASKED TO ENTER A CONTROL NUMBER LOCATED IN THE BOX
IN THE LOWER RIGHT OF THIS FORM.
OPTION A: TO VOTE AS THE BOARD OF DIRECTORS RECOMMENDS ON ALL PROPOSALS: PRESS 1
OPTION B: IF YOU CHOOSE TO VOTE ON EACH ITEM SEPARATELY; PRESS 0. YOU WILL HEAR THESE INSTRUCTIONS:
ITEM 1: TO VOTE FOR ALL NOMINEES, PRESS 1; TO WITHHOLD FOR ALL NOMINEES, PRESS 9
TO WITHHOLD FOR AN INDIVIDUAL NOMINEE, PRESS 0 AND LISTEN TO THE INSTRUCTIONS.
ITEM 2: TO VOTE FOR, PRESS 1; AGAINST, PRESS 9; ABSTAIN, PRESS 0.
WHEN ASKED, YOU MUST CONFIRM YOUR VOTE BY PRESSING 1.
VOTE BY INTERNET: THE WEB ADDRESS IS http://www.proxyvoting.com/smith
IF YOU VOTE BY PHONE OR INTERNET -- DO NOT MAIL THE PROXY CARD
THANK YOU FOR VOTING.
CALL TOLL FREE ON A TOUCH
TONE TELEPHONE
1-888-215-7566 ==============================
THERE IS NO CHARGE TO YOU FOR THIS CALL
==============================
CONTROL NUMBER
FOR TELEPHONE/INTERNET VOTING