Smith’s Reorganization Plan Confirmed : Newport Oil Services Firm Agrees to Reimburse Creditors in Full

Twenty long months after it filed for court protection from its creditors, Smith International received a hearty round of applause Thursday as it emerged from federal bankruptcy proceedings.

U.S. Bankruptcy Judge James R. Dooley signed orders confirming Smith’s $289.5-million reorganization plan following a two-hour hearing. The plan will take effect Dec. 31.

About 11,000 Smith creditors and shareholders “overwhelmingly accepted” the reorganization plan, according to Richard T. Peters, Smith’s bankruptcy attorney. The plan calls for Smith’s creditors to receive full reimbursement of the amounts they were owed.

“I think the true character of the company was borne out during this tough time,” said Jerry Neely, chairman and chief executive officer of the Newport Beach oil services firm.

Thursday’s court action, which was greeted by applause from executives and attorneys, means that Smith will meet a Dec. 31 deadline to settle a 14-year-old patent infringement suit filed over Smith’s use of a patented rubber seal in a line of drilling bits.

The settlement, originally set at $205 million by a Los Angeles federal court judge, precipitated Smith’s decision to file for protection from creditors under Chapter 11 of the federal bankruptcy code in March, 1986.

In June, 1987, shortly after Baker International merged with Hughes Tool to become Baker Hughes, the combined firm agreed to accept $100 million on the condition that it be paid by Dec. 31.

Smith will pay Baker Hughes $90 million in cash and a $10-million note due in 2 1/2 years.

“We are pleased,” said Daniel M. Lewis, an attorney representing Baker Hughes. “The Dec. 31 deadline served its purpose to get our money.”

Attorneys representing Smith’s shareholders and its unsecured creditors’ committee testified that they wholeheartedly supported the reorganization plan.

Several Smith debt holders previously filed objections to the plan, but they withdrew their objections after further negotiations with the company.

Only one group threatened confirmation of Smith’s plan at Thursday’s hearing.

Judge Dooley heard and overruled an objection raised by an attorney for Chevron USA and 12 other companies that, along with Smith, dumped industrial wastes at a Monterey Park landfill site about 10 years ago.

The U.S. Environmental Protection Agency has required Smith and the other companies to help pay for the $300-million cleanup of the site. Smith has already settled with the EPA, agreeing to pay no more than $5 million.

The other companies wanted assurances that Smith might reimburse them if additional costs arise in the future. Dooley said the reorganization plan already dealt with that issue and did not require any changes.

According to Peters, Smith’s attorney, Smith has $215 million in cash on hand, more than enough to satisfy approximately $188 million in cash obligations for reorganization.

Reduction of Debt

Peters said an additional $51.5 million in cash from the recent sale of Smith’s McEvoy-Willis division may be added to the $30 million already earmarked for payment to creditors. That $51.5 million would be used to reduce the amount of notes Smith planned to issue, Peters said.

According to the reorganization plan, Smith’s unsecured creditors will receive $90 million of Class A notes at a 13% fixed interest rate and $55 million of Class B notes at a floating interest rate of 2% above the prime rate. They also will receive $50 million in preferred stock.

Shareholders will receive $54.5 million of newly issued common stock and $10 million of warrants to purchase additional Smith shares. Smith’s existing shareholders will retain about 81% of the company’s equity after the reorganization, attorney Peters said. Smith projects that it will have assets of $358.5 million on Dec. 31, compared to $546.4 million before the bankruptcy filing.

Neely said the reorganized company is expecting its operating profits to pick up as the market for oil-drilling equipment improves.

Smith employs about 400 people in Orange County and has a worldwide work force of 2,500. In early 1988, Neely said Smith plans to move its corporate headquarters from Von Karman Avenue in Newport Beach to a vacant building on Gillette Avenue in Irvine.

Financial Officer Pleased

“It worked out just great,” said a beaming Loren Carroll, Smith’s chief financial officer, after the hearing. “Everything we said we were going to do came together at the same time.”

Carroll said he was also pleased that Smith’s stock has been trading at nearly the same level it was before last month’s stock market crash. Smith stock closed Thursday at $8.125 a share, down 25 cents on the New York Stock Exchange.

Thursday’s action--coupled with a gradual recovery in drilling activity worldwide--heralds a bright future for Smith, according to Robin Shoemaker, a New York-based analyst with the brokerage firm of E.F. Hutton.

“I think Smith comes out of Chapter 11 in good financial condition,” Shoemaker said Thursday. “They have approximately $150 million in debt, $135 million in equity and a positive cash flow from operations.”

Smith holds a 32% share of the world drill-bit market, which Shoemaker called “one of the most attractive segments of the oil services industry.”

It is second only to Baker Hughes, he said, which has captured about 36% of the market.

“I believe that they either are or are very close to being profitable and will have earnings per share next year of about 25 cents,” said Shoemaker, adding that was “a conservative estimate.”

Times staff writer Maria L. La Ganga in Orange County contributed to this story. HIGHLIGHTS OF SMITH REORGANIZATION PLAN The confirmed reorganization plan, effective Dec. 31, calls for Smith creditors to receive 100 cents on the dollar. It was overwhelmingly approved by Smith’s creditors and shareholders and confirmed by U.S. Bankruptcy Court Judge James R. Dooley on Thursday.

Unsecured creditors, including banks, will receive:

$30 million in cash.

$90 million in Class A notes at a 13% fixed interest rate.

$55 million in Class B notes at a floating interest rate of 2% above the prime rate.

$50 million in preferred stock.

Current shareholders will receive:

$54.5 million of common stock. Stockholders will retain 81% of the company when Smith emerges from bankruptcy.

$10 million of warrants to purchase Smith common shares.

To settle a 14 year-old patent infringement lawsuit, by Dec. 31 Baker Hughes will receive $90 million in cash and a $10-million note, due in 2 1/2 years.

SMITH INTERNATIONAL, FROM 1936 TO TODAY

1936--H.C. Smith buys small oil tool company and names it Smith Oil Tool. Name later changed to Smith International, and corporate headquarters moved from Los Angeles County to Newport Beach.

1965--Jerry Neely joins Smith International as a manager.

1972--Fred Barnes joins Smith as controller.

1972--Failing to design an alternative to a successful drilling product sold by competitor Hughes Tool Co. of Houston, Smith adopts the patented technology and sues Hughes for attempting to protect a device that Smith said could not be patented. The device: an “O-ring” drill bit seal.

1975--Neely named president and chief operating officer. Neely warns in a prophetic speech that while oil drilling equipment companies are doing well, they face tough challenges and only those with “fantastic” annual earnings will survive.

1977--Neely is named chairman, president and chief executive.

1979--A U.S. District Court holds that the Hughes patent is invalid. Hughes appeals.

1981--Smith’s annual sales top $1 billion.

1982--Employment reaches historic peak of 14,000.

1982--A slump in the oil industry causes a series of layoffs to begin.

1982--U.S. 9th Circuit Court of Appeals reverses the judgment against Hughes and sends the case back to District Court for further action.

1982--Smith reports first drop in annual profits in 12 years.

1983--Smith closes its 2-year-old San Bernardino drill-bit manufacturing plant. Layoffs continue, and total employment falls to 7,800.

1983--Smith reports first quarterly loss in 20 years.

1983--After several complicated legal maneuvers, a federal appeals court rules in December that Smith’s seal design infringed the Hughes patent.

1985--Smith begins year by laying off 700 workers.

1985--Smith sets aside a $22.8-million reserve to help pay anticipated damage award to Hughes.

1985--Damage portion of patent infringement trial begins in federal court in Los Angeles on Dec. 30.

Feb. 14, 1986--Federal judge rules that Smith tentatively must pay Hughes damages of $207 million. Smith lays off 357 workers the same day.

Feb. 18, 1986--Smith says it may default on $260 million in loans.

Feb. 26, 1986--Smith announces 700 more layoffs Feb. 26. Total employment now below 5,500.

Feb. 27, 1986--Smith acknowledges that Neely has resigned from boards of directors of Security Pacific and Security Pacific National Bank, both among Smith’s largest creditors.

March 7, 1986--Smith files for reorganization and protection from creditors under Chapter 11 of U.S. Bankruptcy Code.

March 13, 1986--A federal judge formally orders Smith to pay Hughes Tool $204.6 million, making the Houston-based firm Smith’s single largest creditor.

June 24, 1986--Fred Barnes resigns as Smith president and chief operating officer.

April 3, 1987--Hughes Tool merges with Orange-based Baker International in a deal that gives Baker management control.

June 6, 1987--Smith and Baker Hughes agree to settle the 14-year-old patent infringement case for $95 million--plus $5 million in interest, provided that Smith pays by Dec. 31.

July 22, 1987--Smith files its reorganization plan on schedule in U.S. Bankruptcy Court in Los Angeles.

Nov. 12, 1987--Smith’s reorganization plan is approved.