Smith Chairman Quits Boards of Top Lender

Smith International Chairman Jerry Neely has resigned from the boards of directors of his company’s largest lender, Security Pacific Corp., as the troubled oil-services firm faces probable default on substantially all of its $260 million in debt.

Both Smith and Security Pacific confirmed Thursday that Neely resigned from the board of directors of Security Pacific National Bank and its parent, Security Pacific National Corp., to avoid a conflict of interest during ongoing negotiations between Smith and its bank creditors.

For the same reason, officials of both Smith and Security Pacific said, Carl E. Hartnack, chairman of the executive committees of Security Pacific National Bank and Security Pacific Corp., resigned last week from Smith International’s board.

Smith has acknowledged that when U.S. District Judge Harry L. Hupp formally enters a judgment against it for infringing on a Hughes Tool Co. patent--which is expected to happen sometime next week--the company technically will go into default on its major credit agreements. Two weeks ago Hupp verbally ordered Smith to pay more than $200 million in damages for the patent infringement, but the judgment is not final until he files a written decision.

Smith’s negotiations with its bank lenders are considered crucial to the survival of the Newport Beach-based company, which is already suffering losses from the sharp plunge in oil prices and drilling activity.

Paying the judgment would force Smith’s net worth to fall below the minimum level of $375,000 required in its loan covenants with Security Pacific and its other bank lenders.

Such technical defaults are not unusual and banks typically try to find an alternative to legal action.

But in this case, sources close to the company said, the banks may be concerned that if they don’t force Smith to pay them now, Hughes will take legal steps to collect the award and leave them with nothing.

Chapter 11 Filing?

Some sources within the company said Smith is “seriously considering” filing for a Chapter 11 bankruptcy reorganization. The company, one source said, has hired a bankruptcy attorney in the Los Angeles office of Sidley & Austin for advice. Officials of the law firm could not be reached.

These sources theorized that Smith may choose bankruptcy as a haven from a tug-of-war between Hughes and the banks.

On Thursday, Smith was also in the midst of a major staff cutback. Layoffs and voluntary resignations are expected to ultimately affect more than 700 workers at the Smith Tool division in Irvine, leaving about 690 workers there. Hundreds more in other Smith divisions, as well as in the corporate offices, are also expected to be laid off.

Among the top corporate officials scheduled to leave Smith this week are Jack Knowlton, senior vice president of technology and marketing; Raymond F. Schuler, vice president and general counsel; Don Thomas, former president of Smith Tool and corporate vice president of business and sales, and Scott Hutchinson, director of strategic planning.

One employee who is leaving said: “When you add the size of the judgment to the operational problems (because of the collapse of oil prices), it (Smith) is not a pleasant place to stay. The future looks dim.”