EXHIBIT 10.5
SMITH INTERNATIONAL, INC.
PERFORMANCE-BASED RESTRICTED STOCK UNIT AGREEMENT
     THIS PERFORMANCE-BASED RESTRICTED STOCK UNIT AGREEMENT (this “Agreement”)
is made and entered into by and between Smith International, Inc., a Delaware
corporation (the “Company”) and «Full_Legal_Name», an individual and employee of
the Company (“Grantee”), on the «Grant_Date» day of «Grant_Date», «Grant_Date»,
(the “Grant Date”), subject to the terms and provisions of the Smith
International, Inc., 1989 Long-Term Incentive Compensation Plan, as amended and
restated effective January 1, 2005 (the “Plan”). The Plan is hereby incorporated
herein in its entirety by this reference. Capitalized terms not otherwise
defined in this Agreement shall have the meaning given to such terms in the
Plan.
     WHEREAS, Grantee is an employee of the Company, and in connection
therewith, the Company desires to grant to Grantee performance-based restricted
stock units, subject to the terms and conditions of this Agreement and the Plan,
with a view to increasing Grantee’s interest in the Company’s success and
growth; and
     WHEREAS, Grantee desires to be the holder of such units subject to the
terms and conditions of this Agreement;
     NOW, THEREFORE, in consideration of the premises, mutual covenants and
agreements contained herein, and other good and valuable consideration, the
receipt and sufficiency of which is hereby acknowledged, the parties hereto,
intending to be legally bound hereby, agree as follows:
     1. Grant of Target Units. Subject to the terms and conditions of this
Agreement and the Plan, the Company hereby grants to Grantee «Shares_Granted»
(«Shares_Granted») Target Units (“Target Units”). Subject to Section 3 hereof,
each Target Unit shall initially represent one share of the Company’s Common
Stock (“Share”), $1.00 par value. Each Target Unit represents an unsecured
promise of the Company to deliver Shares to the Grantee pursuant to the terms
and conditions of the Plan and this Agreement. As a holder of Target Units, the
Grantee has only the rights of a general unsecured creditor of the Company.
     2. Transfer Restrictions. Grantee shall not sell, assign, transfer,
exchange, pledge, encumber, gift, devise, hypothecate or otherwise dispose of
(collectively, “Transfer”) any Target Units granted hereunder. Any purported
Transfer of Target Units in breach of this Agreement shall be void and
ineffective, and shall not operate to Transfer any interest or title in the
purported transferee.
     3. Performance Criteria and Stock Awards. Upon satisfaction of the
Performance Criteria as established by the Compensation and Benefits Committee
of the Company’s Board of Directors (the “Committee”), the Company shall
determine the number of Shares payable to Grantee as provided under this
Agreement, subject to certification by the Committee that the specified
Performance Criteria have been satisfied. The maximum number of Shares of the
Company’s Common Stock that will be awarded under this Agreement is determined
as a percentage of Grantee’s Target Units, such percentage based on the
Company’s fiscal year «YEAR» return on equity, as calculated by reference to the
Company’s audited financial statements, in such manner as established by the
Committee.
     4. Vesting and Payment of Target Units.
          (a) Grantee’s interest in the Target Units granted hereunder shall
vest in accordance with the following schedule, conditioned on Grantee’s
continued employment with the Company as of each such vesting date (the “Vesting
Date”), except as provided in Section 5 hereof.

      Vesting Date   Percentage of Target Units Vested «Vest_Date1»   33 1/3 %
«Vest_Date2»   33 1/3 % «Vest_Date3»   33 1/3 %       TOTAL   100%

          (b) Settlement of Target Units. Subject to Section 7 hereof, the
Company shall grant to Grantee, within two and one-half (21/2) months after the
end of the calendar year in which Target Units become vested pursuant to
Section 4(a) above, a number of Shares equal to the number of such vested Target
Units determined in accordance with

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Sections 3 and 4, (provided Grantee has not terminated employment prior to the
applicable Vesting Date) unless otherwise provided under Section 5 hereof. Each
vested Target Unit shall thus be exchanged by the Company for one Share, and
such Target Unit shall be cancelled as of the effective time of such exchange as
reflected on the Company’s stock records. All Shares delivered to or on behalf
of Grantee in exchange for vested Target Units shall be subject to any further
vesting, transfer or other restrictions as may be required by securities law or
other applicable law as determined by the Company.
          (c) Dividends, Splits and Voting Rights. If the Company (i) declares a
stock dividend or makes a distribution on Common Stock in Shares,
(ii) subdivides or reclassifies outstanding Shares into a greater number of
Shares, or (iii) combines or reclassifies outstanding Shares into a smaller
number of Shares, then the number of Target Units granted under this Agreement
shall be proportionately increased or reduced, as applicable, so as to prevent
the enlargement or dilution of Grantee’s rights and duties hereunder. The
determination of the Committee regarding such adjustments shall be binding.
Until such time as Shares are actually delivered to Grantee in exchange for
vested Target Units pursuant to Section 4(b) (above), Grantee shall have no
voting, dividend or other ownership rights in such Shares.
     5. Forfeiture.
          (a) Termination Due to Death or Disability. If Grantee’s employment
with the Company is terminated due to death or Disability of the Grantee, then,
in either such event, all outstanding Units hereunder shall become fully vested
as of such termination date and shall be payable to Grantee, or Grantee’s
Beneficiary in the event of Grantee’s death, in Shares within thirty (30) days
of such date; provided, however, that if Grantee’s employment with the Company
is terminated due to death or Disability of the Grantee before the date upon
which the number of Shares payable to Grantee is determined under Section 3,
then payment for such outstanding Units that are payable hereunder shall be made
to Grantee, or Grantee’s Beneficiary in the event of Grantee’s death, within the
time provided under Section 4(b).
          For purposes of this Section 5(a), “Disability” means, as determined
by the Committee in its discretion exercised in good faith, a physical or mental
condition of the Grantee that would entitle Grantee to payment of disability
income payments under the Company’s long-term disability insurance policy or
plan for employees, as then effective, if any; or in the event that the Grantee
is not covered, for whatever reason, under the Company’s long-term disability
insurance policy or plan, “Disability” means a permanent, and total disability
as defined in Section 22(e)(3) of the Internal Revenue Code of 1986, as amended
(the “Code”). A determination of Disability may be made by a physician selected
or approved by the Committee and, in this respect, the Grantee must submit to
any reasonable examination(s) required by such physician upon request in order
to render an opinion regarding whether there is a Disability. This definition of
Disability shall be construed in accordance with the meaning given such term
under the Code with respect to a termination of Employment due to Disability for
a “Key Employee” as defined in Code Section 409A.
          (b) Termination Other than Death or Disability. If Grantee’s
employment with the Company is voluntarily or involuntarily terminated by the
Company or Grantee for any reason other than due to death or Disability, then
Grantee shall immediately forfeit all Target Units which are not already vested
as of such date. Upon the forfeiture of any Target Units hereunder, the Grantee
shall cease to have any rights in connection with such Target Units as of the
date of such forfeiture. A transfer of employment by the Grantee, without an
interruption of employment service, between or among the Company and any parent
or subsidiary of the Company, shall not be considered a termination of
employment for purposes of this Agreement.
     6. Grantee’s Representations. Notwithstanding any provision hereof to the
contrary, the Grantee hereby agrees and represents that Grantee will not acquire
any Shares, and that the Company will not be obligated to issue any Shares to
the Grantee hereunder, if the issuance of such Shares constitutes a violation by
the Grantee or the Company of any law or regulation of any governmental
authority. Any determination in this regard that is made by the Committee, in
good faith, shall be final and binding. The rights and obligations of the
Company and the Grantee are subject to all applicable laws and regulations.
     7. Tax Withholding. To the extent that the receipt of Shares hereunder
results in compensation income to Grantee for federal, state or local income tax
purposes, the Company, in its complete discretion, is authorized to
(a) withhold, at such time as determined by the Company, from any cash or other
remuneration (including withholding from delivery to Grantee a number of Shares,
based on the market value of such Shares, as of the applicable Vesting Date), or
combination thereof, then or thereafter payable to Grantee, an amount that the
Company requires to meet its tax withholding obligations under applicable law or
regulation (the “Withholding Liability”); or (b) require Grantee to pay an
amount, at such time as the Company shall specify, equal to the Withholding
Liability in cash, by certified or cashier’s check payable to the Company, or in
any other form acceptable to the Company. Further, the Company’s obligation to
deliver vested Shares, or any stock

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certificate or certificates representing vested Shares, to Grantee shall be
subject to, and conditioned upon, payment of the Withholding Liability.
     8. Miscellaneous.
          (a) No Fractional Shares. All provisions of this Agreement concern
whole Shares. If the application of any provision hereunder would yield a
fractional Share, such fractional Share shall be rounded down to the next whole
Share.
          (b) Not an Employment Agreement. This Agreement is not an employment
agreement, and no provision of this Agreement shall be construed or interpreted
to create any employment relationship between Grantee and the Company for any
time period. The employment of Grantee with the Company shall be subject to
termination to the same extent as if this Agreement had not been executed.
          (c) Dispute Resolution. Any dispute or controversy arising out of or
relating to this Agreement, or any breach hereof, shall be resolved by binding
arbitration in accordance with (i) the Commercial Arbitration Rules (“Rules”) of
the American Arbitration Association (“AAA”) before a single arbitrator (unless
otherwise mutually agreed by the parties) as selected pursuant to the Rules and
(ii) the Federal Arbitration Act. Judgment on any award rendered by the
arbitrator may be entered in any court of competent jurisdiction. The venue for
any arbitration proceeding shall be in Harris or Montgomery County, Texas,
except if otherwise mutually agreed by the parties. The fees of the AAA and the
arbitrator shall be split equally by the parties. All other costs and expenses,
including attorneys’ fees, relating to the resolution of any such dispute shall
be borne by the party incurring such costs and expenses.
          (d) Notices. Any notice, instruction, authorization, request or demand
required hereunder shall be in writing, and shall be delivered either by
personal delivery, by telegram, telex, telecopy or similar facsimile means, by
certified or registered mail, return receipt requested, or by courier or
delivery service, addressed to the Company at its then current main corporate
address, and to Grantee at his address indicated on the Company’s records, or at
such other address and number as a party has previously designated by written
notice given to the other party in the manner hereinabove set forth. Notices
shall be deemed given when received, if sent by facsimile means (confirmation of
such receipt by confirmed facsimile transmission being deemed receipt of
communications sent by facsimile means); and when delivered and receipted for
(or upon the date of attempted delivery where delivery is refused), if
hand-delivered, sent by express courier or delivery service, or sent by
certified or registered mail, return receipt requested.
          (e) Amendment, Termination and Waiver. This Agreement may be amended,
modified, terminated or superseded only by written instrument executed by or on
behalf of the Company and by Grantee. Any waiver of the terms or conditions
hereof shall be made only by a written instrument executed and delivered by the
party waiving compliance. Any waiver granted by the Company shall be effective
only if executed and delivered by a duly authorized executive officer of the
Company other than Grantee. The failure of any party at any time or times to
require performance of any provisions hereof shall in no manner affect the right
to enforce the same. No waiver by any party of any term or condition herein, or
the breach thereof, in one or more instances shall be deemed to be, or construed
as, a further or continuing waiver of any such condition or breach or a waiver
of any other condition or the breach of any other term or condition.
          (f) Governing Law and Severability. This Agreement shall be governed
by the internal laws, and not the laws of conflict, of the State of Texas. The
invalidity of any provision of this Agreement shall not affect any other
provision of this Agreement, which shall remain in full force and effect.
          (g) Successors and Assigns. This Agreement shall bind, be enforceable
by, and inure to the benefit of, the Company and its successors and assigns, and
Grantee and Grantee’s permitted assigns under the Plan in the event of death or
Disability.
[Signature page follows.]

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     IN WITNESS WHEREOF, this Restricted Stock Unit Agreement is approved,
granted and executed as of the date first written above.

              SMITH INTERNATIONAL, INC.
 
       
 
  By:    
 
       
 
       
 
  Name:    
 
       
 
       
 
  Title:    
 
       
 
       
 
  GRANTEE:    
 
            «Full_Legal_Name»  
 
                  Signature
 
                  Print Name

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