Shareholders Rap Management of Ailing Smith International

Smith International Inc.’s shareholders criticized the way the ailing firm is being managed Wednesday at Smith’s first annual shareholders meeting since the company filed for bankruptcy protection last March.

In private conversations before the meeting and during a formal question period with management, numerous shareholders complained that the Newport Beach-based oil service company, which lost $428 million in the last three fiscal years and $28.8 million in the first quarter of 1986, is top-heavy with high-salaried executives.

A few of the approximately 200 shareholders who turned out to hear Smith officials give a state-of-the-company report also suggested that Smith, a major drilling bit manufacturer, which is suffering from a severe drop in oil prices and domestic oil production, should be diversifying into new, non-petroleum related product lines.

Meanwhile, a group including some of Smith’s largest shareholders, who collectively represent about 19% of Smith’s common shares, has requested U.S Bankruptcy Judge James R. Dooley to form a shareholders committee to advise the company on its operations during the bankruptcy reorganization. A similar committee of Smith’s major unsecured creditors has already been established.

Want Shareholders’ Committee

“It is very difficult if you own a piece of the company and especially if you saw it grow up from scratch to see it wasted away,” said William S. Bachman, a shareholder and retired group president of Smith International who was among the 11 shareholders requesting the appointment of a shareholders’ committee. “We feel like some adjustments can still be made in the management structure that can help the business,” he added.

Others who signed the petition that was filed Monday in the U.S. Bankruptcy Court in Los Angeles included the largest Smith shareholder, Torray, Clark & Co. Inc., an investment management firm in Bethesda, Md., which, according to court documents, holds 3.4 million shares of Smith International on behalf of investors, primarily private pension plans.

Robert Torray, president of the investment firm, said in a telephone interview Wednesday that he favors the formation of a committee representing shareholders. Otherwise, he said, there is a danger that “shareholders could give up more than they should” during the company’s reorganization.

Addressing the shareholders who met at the Westin South Coast Plaza hotel in Costa Mesa on Wednesday, Jerry Neeley, Smith’s chairman and chief executive officer, told the shareholders that in his opinion Smith stock today is a “good buy” and that over the long term Smith is “a viable company.” Nonetheless, he cautioned that “we will not be profitable in 1986, and I doubt if we will be in 1987.”

Neeley said the company’s problems are “two-fold”: a shrunken market for its products and a $204.8-million judgment slapped against the company in a patent infringement lawsuit brought by Smith’s archrival, Houston-based Hughes Tool Co. The judgment, Neeley said, forced Smith to seek protection under Chapter 11 of the Federal Bankruptcy Code. Ultimate reorganization of Smith’s debts is expected to remain in abeyance until the appeal of the patent suit is decided, which Neeley anticipates will occur next summer.

As a result of these pressures, Neeley said, Smith has taken “drastic, aggressive action,” which has included “downsizing” the company by reducing the number of operating divisions from 10 to four, selling excess property and taking deep employment cuts, slashing its worldwide work force from 8,500 to 4,500 over the last year. Rather than diversify, Neeley said the company has decided to stick to its old product lines, reduce its output and wait for the oil industry to rebound.

Executive Cuts Urged

But some shareholders objected that not enough cuts have been made in executive positions and salaries. Jules Seretan, who said he owns 9,000 Smith shares, told Neeley, whose salary is $562,908 a year, that he believes executive salaries should be cut “to the bone” to reflect the company’s much-worsened financial condition. In an interview after the meeting, Seretan added that he would limit executive salaries to $100,000 a year, with bonuses given only to reflect profits. “The officers (of Smith) seem to be milking the cow (company), and if they do it long enough, the cow is going to die,” he complained.

Harold St. Clair, who was formerly a group vice president and adviser to the chairman of the board at Smith, said he did not believe that Smith any longer needs to finance the positions of both a chairman and a president. The employee cuts at Smith, he said in an interview, have left the company “heavy at the top.”

Neeley avoided discussing the possibility of merging the positions held by himself and Smith President Fred J. Barnes, who is paid a base annual salary of $366,508. Neeley noted that such a management change would be “a board decision.” Answering charges that administrative costs are too great, James R. Hauke, Smith’s vice president of human resources, said that the corporate staff has been reduced from 14 to six officers who have not received a salary increase for the past five years. Also, he said that such “perquisites” as company cars have been eliminated and that no more bonuses will be paid to executives while Smith is in bankruptcy.