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Smith Turns to Chapter 11 for Bankruptcy Protection

March 08, 1986|CARLA LAZZARESCHI and ROBERT HANLEY | Times Staff Writers

Smith International Inc., one of the world's largest oil services companies, Friday filed for bankruptcy protection, just three weeks after being ordered to pay its largest competitor more than $200 million to settle a patent infringement lawsuit.

The filing under Chapter 11 of the U.S. Bankruptcy Code gives Smith, which has lost more than $221 million in the last three years, some much-needed breathing room while it sorts out its troubled finances and determines how it will pay the huge lawsuit settlement to Hughes Tool Co.

Perhaps the single largest effect of the Newport Beach-based company's bankruptcy maneuver is that it will force Hughes to wait months, and possibly years, to receive its settlement payment.

"The net effect is that the filing puts an immediate roadblock in Hughes' efforts to collect the settlement," explained David B. Toy, a Los Angeles attorney who represented Hughes during the lawsuit.

William A. Kistler, Hughes Tool's president and chief executive, said that while he was "very disappointed" at Smith's filing, his company was "prepared to work under these kinds of conditions." However, Kistler declined to outline Hughes' contingency plans.

Some analysts said the move would force Hughes to the bargain

ing table to settle the damage award.

Friday's filing came less than 24 hours after U.S. District Judge Harry L. Hupp in Los Angeles released a 65-page rough draft of his order spelling out the extent of damages Hughes is entitled to collect because Smith infringed on its patent for a rubber seal used in a drilling bit. Attorneys, who were still calculating the exact damage award late Friday, estimated that the final settlement would be between $202 million and $205 million.

Hupp's move Thursday afternoon signaled that he was ready to enter a final judgment against Smith. The final ruling would have thrown Smith into default on $260 million in bank loans and hindered its ability to manage its operations because it would have made the settlement to Hughes immediately payable.

Ronald J. Trost, Smith's bankruptcy attorney from the Los Angeles firm of Sidley & Austin, confirmed that Hupp's pending ruling prompted the bankruptcy filing. "We couldn't pay a $200-million judgment today," he said.

In its filing with the court, Smith said its directors voted on Feb. 24 to file for Chapter 11 after discussions with its 20 largest creditors, many of whom supported the filing. Furthermore, Loren Carroll, chief financial officer, said in a sworn statement, "I received the impression . . . that some of our banks were considering the filing of an involuntary Chapter 11 petition . . . to prevent Hughes and other creditors from obtaining liens."

Stock Down 87.5 Cents

Trading in Smith stock was halted by officials of the New York Stock Exchange just after noon Eastern time as news of the bankruptcy action was disseminated. The issue had lost just 25 cents a share on light volume before trading was halted. But after trading resumed at about 3 p.m. EST, Smith's shares fell to $1.875 a share, down 87.5 cents for the day.

In a prepared statement, Smith Chairman and Chief Executive Jerry W. Neely admitted that the company "initiated the bankruptcy proceedings in order to bring its assets and operations under the protection of the bankruptcy court while it reorganizes its financial affairs."

But while the filing suspends payment of the award and any attempts by Hughes to collect it, Trost said it does not rule out the possibility of an appeal of the award which capped a bitter 14-year battle between the two rivals and is believed to be among the largest in any U.S. patent-infringement case.

The bankruptcy petition, which included some five volumes more than one foot thick, surprised few who had been watching the company. Some analysts had predicted the move since Hupp's initial ruling Feb. 14. Others welcomed it as a wise maneuver to buy time before it has to settle with Hughes.

"This provides for an orderly settlement of affairs," said Philip Meyer, an analyst with Eberstadt Fleming Inc. in New York. "This company is not going out of business. It is going to survive."

Creditors Listed

The company's bankruptcy petition listed assets as of Dec. 31, 1985, of $671.3 million and liabilities of $483.9 million. Although its assets outweigh its debts, Smith would be forced to liquidate a substantial part of its holdings to pay its huge debt to Hughes.

In addition to Hughes, Smith's filing listed its 10 largest creditors as First Fidelity Bank of Newark, N.J., $77.4 million; Chase Manhattan Bank in New York, $58.2 million; Security Pacific National Bank in Los Angeles, $27.4 million; Midland Bank of London, $25.5 million; Bank of America, $19.1 million; Morgan Guaranty Trust Co. of New York, $15.1 million; Amsterdam-Rotterdam Bank, $13.6 million; Royal Bank of Scotland, $12.3 million; Aetna Life & Casualty Insurance Co., $10.8 million, and Banque National de Paris, $10.3 million.

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