Smith International Discloses Reorganization Proposal

Smith International of Newport Beach, once one of the world’s largest oil services firms, said Monday that it has reached a tentative settlement of its 16-month bankruptcy reorganization and expects to resume normal business operations by the end of the year.

The plan, scheduled to be filed in U.S. District Court in Los Angeles today, allows the company to erase $415.5 million in debt with a combination of $146 million in cash payments, $155 million in long-term notes and as much as $115.5 million of new stock and warrants. Included in the stock is $50 million worth of preferred shares with an eight-year life span and a cumulative dividend rate of 17%.

A key element of the reorganization is payment of an earlier agreed-upon $95 million to settle a $205-million patent infringement lawsuit Smith lost in early 1986 to its arch rival, Hughes Tool, now known as Baker Hughes. Smith has agreed to pay $85 million in cash by Dec. 31 and to issue Baker Hughes a $10-million, 2 1/2-year note.

The settlement plan should end the uncertainty and acute financial distress that Smith has been operating under since being hit with the twin calamities of the patent infringement penalty and a collapsing worldwide oil market.

Although Smith’s performance has rebounded with the oil industry in recent months, the company lost a total of more than $220 million at the depth of the oil depression from 1983 to 1986. The losses so depleted the company’s resources that it was forced to seek bankruptcy protection in early 1986, when it was ordered to pay the $205-million judgment to Hughes.

The reorganization plan, which would leave Smith with about $30 million in cash with which to rebuild its operations, generally was hailed Monday as an equitable disposition of the competing claims.

“Everybody had to give up a little bit. But everyone is happy,” said Loren Carroll, Smith’s chief financial officer. “We’ve got a new company coming out of this thing.”

The settlement is subject to the approval of the bankruptcy court in Los Angeles, which has scheduled hearings for Aug. 24. Final confirmation has been set for Nov. 12.

Despite the upbeat tone of the news, Smith’s stock closed Monday on the New York Stock Exchange at $9.25 per share, down 62.5 cents on light trading. James L. Carroll, an oil services analyst in the New York offices of Paine Webber Inc., attributed the decline to stock-hyping speculation in recent weeks that the company would emerge from bankruptcy with an announcement that it intended to merge with or be acquired by a competitor. Smith officials said they could not support or substantiate such speculation.

“We have just won a settlement that allows us to operate in the future and that is what we are going to do,” said Loren Carroll, who is not related to the Paine Webber analyst.

Jim Woods, president and chief executive of Baker Hughes in Houston, said his company is pleased with the deal, although it calls for Baker Hughes to accept less than half of the original $205-million judgment.

“We are highly confident we will get our money by the end of the year,” Woods said.

Jeff Chanin, a managing director of Drexel Burnham Lambert Inc. in Los Angeles and chairman of Smith’s equity shareholders committee, said the shareholders were happy that a portion of the payments spelled out in the reorganization plan will be made with new stock and warrants to purchase additional shares.

“If you look at other Chapter 11 filings of similar size, the retained value of these shareholders is higher than most,” Chanin said.

“Shareholders will have a chance to recoup losses. We have great faith in the stock market.”