EXHIBIT 10.5
Agreement No. 89«Agr_No»
SMITH INTERNATIONAL, INC.
NONSTATUTORY OPTION AGREEMENT
               OPTIONEE: «Full_Legal_Name»
     1. Grant of Stock Option. As of the Grant Date (identified in Section 2
below), Smith International, Inc. (the “Company”) hereby grants a Nonstatutory
Stock Option (the “Option”) to Optionee, an Employee of the Company and/or one
or more of its Subsidiaries, to purchase the number of shares of the Company’s
common stock, $1.00 par value per share (the “Common Stock”), identified in
Section 2 below (the “Shares”), subject to the terms and conditions of this
agreement (the “Agreement”) and 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
reference. The Shares, when issued to Optionee upon the exercise of the Option,
shall be fully paid and nonassessable. The Option is not an “incentive stock
option” as defined in Section 422 of the Internal Revenue Code.
     2. Definitions and Other Terms. The following capitalized terms shall have
those meanings set forth opposite them:

             
 
  (a)   Optionee:   «Full_Legal_Name»
 
           
 
  (b)   Grant Date:   «Grant_Date»
 
           
 
  (c)   Shares:   «Shares_Granted» Shares of the Company’s Common Stock.
 
           
 
  (d)   Option Price:   $«Price» per Share.
 
           
 
  (e)   Option Period:   «Grant_Date» through «Expire_Date» (until 5:00 p.m.
CST).
 
                (f)   Vesting Schedule: Options as follows:

        Date     Options Vesting «Vest_Date1»     «Shares1»         «Vest_Date2»
    «Shares2»         «Vest_Date3»     «Shares3»         «Vest_Date4»    
«Shares4»               Total «Shares_Granted»        

     3. Definitions. All capitalized terms used herein shall have the meanings
set forth in the Plan unless otherwise provided herein. Section 2 sets forth
meanings for certain of the capitalized terms used in this Agreement.
     4. Option Term. The Option shall commence on the Grant Date (identified in
Section 2 above) and terminate on the tenth (10th) anniversary of the Grant Date
as specified in Section 2. The period during which the Option is in effect and
may be exercised is referred to herein as the “Option Period”.
     5. Option Price. The Option Price per Share is identified in Section 2.
     6. Vesting. The total number of Shares subject to this Option shall vest in
accordance with the Vesting Schedule (described in Section 2). The Shares may be
purchased at any time after they become vested, in whole or in part, during the
Option Period; provided, however, the Option may only be exercisable to acquire
whole Shares. The right of exercise provided herein shall be cumulative so that
if the Option is not exercised to the maximum extent permissible after vesting,
the vested portion of the Option shall be exercisable, in whole or in part, at
any time during the Option Period.

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     7. Method of Exercise. The Option is exercisable by delivery of a written
notice to the Secretary of the Company, signed by Optionee or delivered via
email communication from a verifiable email address of Optionee, specifying the
number of Shares to be acquired on, and the effective date of, such exercise.
Optionee may withdraw notice of exercise of this Option, in writing, at any time
prior to the close of business on the business day preceding the proposed
exercise date.
     8. Method of Payment. Subject to applicable provisions of the Plan, the
Option Price upon exercise of the Option shall be payable to the Company in full
either: (i) in cash or its equivalent; (ii) subject to prior approval by the
Committee in its discretion, by tendering previously acquired Shares having an
aggregate Fair Market Value (as defined in the Plan) at the time of exercise
equal to the total Option Price (provided that the Shares must have been held by
Optionee for at least six (6) months prior to their tender to satisfy the Option
Price); or (iii) any other permitted method pursuant to the applicable terms and
conditions of the Plan.
     As soon as practicable after receipt of a written notification of exercise
and full payment, including any applicable taxes as described in Section 17
below, the Company shall deliver to or on behalf of Optionee, in the name of
Optionee or other appropriate recipient, Share certificates or other evidence of
ownership for the number of Shares purchased under the Option.
     9. Restrictions on Exercise. The Option may not be exercised if the
issuance of such Shares or the method of payment of the consideration for such
Shares would constitute a violation of any applicable federal or state
securities or other laws or regulations, or any rules or regulations of any
stock exchange on which the Common Stock may be listed. In addition, Optionee
understands and agrees that the Option cannot be exercised if the Company
determines that such exercise, at the time of such exercise, will be in
violation of the Company’s insider trading policy.
     10. Termination of Employment. Voluntary or involuntary termination of
Employment shall affect Optionee’s rights under the Option as follows:
     (a) Termination for Cause. The entire Option, including any vested portion
thereof, shall expire on 12:01 a.m. (CST) on the date of termination of
Employment and shall not be exercisable to any extent if Optionee’s Employment
is terminated for Cause (as defined in the Plan at the time of such termination
of Employment).
     (b) Death or Disability. If Optionee’s Employment is terminated by death or
Disability (as defined in the Plan at the time of such termination of
Employment), then (i) the Option shall become fully vested as of such date of
termination and (ii) the Option shall expire on the date that is three (3) years
after such date of termination of Employment (to the extent not exercised by
Optionee) or, in the case of death, by the person or persons to whom Optionee’s
rights under the Option have passed by will or by the laws of descent and
distribution or, in the case of Disability, by Optionee or Optionee’s legal
representative. In no event may the Option be exercised by anyone on or after
the earlier of (i) the expiration of the Option Period or (ii) three years after
the date of Optionee’s death or termination of Employment due to Disability.
     (c) Involuntary Termination Without Cause. If Optionee’s Employment is
terminated involuntarily by the Company or a Subsidiary without Cause, then
(i) the non-vested portion of the Option shall immediately expire on the
termination of Employment date; and (ii) the vested portion of the Option shall
expire to the extent not exercised within one (1) year after such termination
date. In no event may the Option be exercised by anyone after the earlier of
(i) the expiration of the Option Period or (ii) one (1) year after the
termination of Employment date even if Optionee becomes deceased during such
period.
     (d) Voluntary Termination. If Optionee’s Employment is terminated due to
voluntary resignation, then (i) the non-vested portion of the Option shall
immediately expire on the termination of Employment date and (ii) the vested
portion of the Option shall expire to the extent not exercised within ninety
(90) calendar days after such termination date. In no event may the Option be
exercised by anyone after the earlier of (i) the expiration of the Option Period
or (ii) ninety (90) calendar days after the termination of Employment date even
if Optionee becomes deceased or disabled during such period.
     (e) Transfer of Employment. A transfer of Employment by Optionee, without
an interruption of Employment service, between or among the Company and any
Subsidiary of the Company shall not be considered a termination of Employment
for purposes of this Agreement.

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     11. Independent Legal and Tax Advice. Optionee understands that he or she
may suffer adverse tax consequences as a result of the grant, vesting or
exercise of the Option granted hereunder. Optionee represents that he or she has
consulted with any tax consultants he or she deems advisable in connection with
the acquisition or disposition of the Option and any Shares acquired thereby and
that he or she is not relying on the Company or Subsidiary for any tax advice.
     12. Reorganization of Company. The existence of the Option shall not affect
in any way the right or power of the Company or its stockholders to make or
authorize any or all adjustments, recapitalizations, reorganizations or other
changes in Company’s capital structure or its business, or any merger or
consolidation of the Company, or any issue of bonds, debentures, preferred or
prior preference stock ahead of or affecting the Shares or the rights thereof,
or the dissolution or liquidation of the Company, or any sale or transfer of all
or any part of its assets or business, or any other corporate act or proceeding,
whether of a similar character or otherwise.
     13. Adjustment of Shares. In the event of stock dividends, spin-offs of
assets or other extraordinary dividends, stock splits, combinations of shares,
recapitalizations, mergers, consolidations, reorganizations, liquidations,
issuances of rights or warrants and similar transactions or events involving the
Company, appropriate adjustments shall be made to the terms and provisions of
the Option as provided in the Plan. However, such adjustments shall not result
in the Option being considered to be deferred compensation subject to Code
Section 409A, unless otherwise determined at the discretion of the Company.
     14. No Rights in Shares. Optionee shall have no rights as a stockholder in
respect of the Shares until Optionee becomes the record holder of such Shares.
     15. Investment Representation. Optionee will enter into such written
representations, warranties and agreements as the Company may reasonably request
in order to comply with any federal or state securities law. Moreover, any stock
certificate for any Shares issued to Optionee hereunder may contain a legend
restricting their transferability as determined by the Company in its
discretion. Optionee agrees that the Company shall not be obligated to take any
affirmative action in order to cause the issuance or transfer of Shares
hereunder to comply with any law, rule or regulation that applies to the Shares
subject to the Option.
     16. No Effect on Employment or Service. Optionee acknowledges and agrees
that the vesting of the Option pursuant to Section 2 hereof is earned only by
continuing as an employee. Optionee further acknowledges and agrees that this
Agreement, the transactions contemplated hereunder and the vesting schedule set
forth herein do not constitute an express or implied promise of continued
engagement as an employee for the vesting period, for any period, or at all, and
will not interfere with Optionee’s right, or the Company’s or Subsidiary’s
right, to terminate Optionee’s relationship as an employee at any time.
     17. Withholding of Taxes. To the extent that the exercise of the Option
hereunder results in compensation income to Optionee for federal, state or local
income tax purposes, Optionee shall deliver to Company at such time the sum that
the Company requires to meet its tax withholding obligations under applicable
law or regulation.
     18. General.
     (a) Delivery of Documents and Notices. Any document relating to
participating in the Plan and/or notice required or permitted hereunder shall be
given in writing and shall be deemed effectively given (except to the extent
that this Agreement provides for effectiveness only upon actual receipt of such
notice) upon personal delivery, by telegram, telex, telecopy or similar
facsimile means, electronic delivery, or upon deposit in the U.S. Post Office or
foreign postal service, by certified or registered mail, return receipt
requested, with postage and fees prepaid, addressed to the Company at its
then-current main corporate address or by electronic mail to [name@smith.com],
and to Optionee at his or her address indicated on the Company’s records, at the
e-mail address, if any, provided for Optionee by the Company or its Subsidiary,
or at such other address and number as a party has previously designated in
writing from time to time to the other party.
          (i) Description of Electronic Delivery. The Plan documents, which may
include but do not necessarily include the Plan Prospectus, this Agreement and
U.S. financial reports of the Company, may be delivered to Optionee
electronically. Such means of delivery may include but do not necessarily
include the delivery of a link to a Company intranet or the internet site of a
third party involved in administering the Plan, the delivery of the document via
electronic mail or such other delivery determined at the Company’s discretion.

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          (ii) Consent to Electronic Delivery. Optionee acknowledges that
Optionee has read this Section 18(a) of this Agreement and consents to the
electronic delivery of the Plan documents. Optionee acknowledges that he or she
may receive from the Company a paper copy of any documents delivered
electronically at no cost if Optionee contacts the Company by telephone, through
a postal service or electronic mail at [name@smith.com]. Optionee further
acknowledges that Optionee will be provided with a paper copy of any documents
delivered electronically if electronic delivery fails; similarly, Optionee
understands that Optionee must provide the Company or any designated third party
with a paper copy of any documents delivered electronically by Optionee if
electronic delivery fails. Optionee understands that Optionee’s consent may be
revoked or changed, including any change in the electronic mail address to which
documents are delivered (if Optionee has provided an electronic mail address),
at any time by notifying the Company of such revised or revoked consent by
telephone, postal service or electronic mail at [name@smith.com]. Finally,
Optionee understands that he or she is not required to consent to electronic
delivery but that, to the extent permitted by applicable law, such refusal may
affect Grantee’s ability to participate in the Plan.
     (b) Transferability of Option. The Option is transferable only to the
extent permitted under the Plan at the time of transfer (i) by will or by the
laws of descent and distribution, (ii) by a qualified domestic relations order
(as defined in Code Section 414(p), or (iii) to Optionee’s Immediate Family or
entities established for the benefit of, or solely owned by, Optionee’s
Immediate Family to the extent permitted under the Plan. No right or benefit
hereunder shall in any manner be liable for or subject to any debts, contracts,
liabilities, obligations or torts of Optionee or any permitted transferee
thereof.
     (c) Amendment and Termination. No amendment, modification or termination of
this Agreement shall be made at any time without the written consent of Optionee
and Company.
     (d) Nature of the Grant. In accepting this Agreement, Optionee acknowledges
that:
          (i) the Plan is established voluntarily by the Company, it is
discretionary in nature and may be modified, amended, suspended or terminated by
the Company at any time, unless otherwise provided in the Plan and this
Agreement;
          (ii) the grant of the Option is voluntary and occasional and does not
create any contractual or other right to receive future awards of Options, or
benefits in lieu of Options, even if Options have been awarded repeatedly in the
past;
          (iii) all decisions with respect to future grants of Options, if any,
will be at the sole discretion of the Company;
          (iv) Optionee’s participation in the Plan is voluntary;
          (v) Options are an extraordinary item that do not constitute
compensation of any kind for services of any kind rendered to the Company or any
Subsidiary, and Options are outside the scope of Optionee’s employment contract,
if any;
          (vi) Options are not part of normal or expected compensation or salary
for any purpose, including, but not limited to, calculation of any severance,
resignation, termination, redundancy, end of service payments, bonuses,
long-service awards, pension or retirement benefits or similar payments and in
no event should be considered as compensation for, or relating in any way to,
past services for the Company or any Subsidiary;
          (vii) the future value of the underlying Shares is unknown and cannot
be predicted with certainty;
          (viii) if the underlying Shares do not increase in value, the Option
will have no value;
          (ix) the value of the Shares acquired upon exercise of the Option may
increase or decrease in value; and
          (x) in consideration of the grant of the Option, no claim or
entitlement to compensation or damages arises from termination of the Option or
diminution in value of the Option or Shares acquired upon

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exercise of the Option resulting from termination of Optionee’s employment by
the Company or any Subsidiary (for any reason whatsoever and whether or not in
breach of local labor laws), and Optionee irrevocably releases the Company and
each Subsidiary from any such claim that may arise; if, notwithstanding the
foregoing, any such claim is found by a court of competent jurisdiction to have
arisen, then, by signing this Agreement, Optionee shall be deemed irrevocably to
have waived his or her entitlement to pursue such claim.
     (e) Data Privacy Notice and Consent. Optionee hereby explicitly and
unambiguously consents to the collection, use and transfer, in electronic or
other form, of his or her personal data as described in this Agreement by and
among, as applicable, the Company and its Subsidiaries and other affiliates for
the exclusive purpose of implementing, administering and managing Optionee’s
participation in the Plan.
          Optionee understands that the Company and its Subsidiaries may hold
certain personal information about Optionee, including, but not limited to,
Optionee’s name, home address and telephone number, date of birth, social
insurance number or other identification number, salary, nationality, job title,
any shares of stock or directorships held in the Company and its Subsidiaries,
details of all Options or any other entitlement to Shares awarded, canceled,
vested, unvested or outstanding in Optionee’s favor, for the purpose of
implementing, administering and managing the Plan (“Data”).
          Optionee understands that Data may be transferred to any third parties
assisting in the implementation, administration and management of the Plan, that
these recipients may be located in Optionee’s country or elsewhere, and that the
recipients’ countries may have different data privacy laws and protections than
Optionee’s country. Optionee understands that he or she may request a list with
the names and addresses of any potential recipients of the Data by contacting
his or her local human resources representative. Optionee authorizes the
recipients to receive, possess, use, retain and transfer the Data, in electronic
or other form, for the purposes of implementing, administering and managing
Optionee’s participation in the Plan, including any requisite transfer of such
Data as may be required to a broker, escrow agent or other third party with whom
the Shares received upon exercise of the Option may be deposited. Optionee
understands that Data will be held only as long as is necessary to implement,
administer and manage his or her participation in the Plan. Optionee understands
that he or she may, at any time, view Data, request additional information about
the storage and processing of Data, require any necessary amendments to Data or
refuse or withdraw the consent herein, in any case without cost, by contacting
in writing his or her local human resources representative. Optionee
understands, however, that refusal or withdrawal of consent may affect his or
her ability to participate in the Plan and, to the extent permitted by
applicable law, may void this Agreement. For more information on the
consequences of his or her refusal to consent or withdrawal of consent, Optionee
understands that he or she may contact his or her local human resources
representative.
     (f) Language. If Optionee has received this Agreement or any other document
related to the Plan translated into a language other than English and if the
translated version is different than the English version, the English version
will control.
     (g) Severability. In the event that any provision of this Agreement shall
be held illegal, invalid, or unenforceable for any reason, such provision shall
be fully severable, but shall not affect the remaining provisions of the
Agreement, and the Agreement shall be construed and enforced as if the illegal,
invalid, or unenforceable provision had not been included herein.
     (h) Supersedes Prior Agreements. This Agreement shall supersede and replace
all prior agreements and understandings, oral or written, between the Company
and Optionee regarding the grant of the Options covered hereby.
     (i) Governing Law. The Option shall be construed in accordance with the
laws of the State of Texas, without regard to its conflict of law provisions, to
the extent federal law does not supersede and preempt Texas law.
[Signature page follows.]
     IN WITNESS WHEREOF, the Company, as of the Grant Date, has caused this
Agreement to be executed on its behalf by its duly authorized officer and
Optionee has hereunto executed this Agreement as of the same date.

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              SMITH INTERNATIONAL, INC.
 
       
 
  By:    
 
       
 
       
 
  Name:    
 
       
 
       
 
  Title:    
 
       
 
            Address for Notices:
 
            Smith International, Inc.
c/o Corporate Secretary
16740 Hardy Street
Houston, Texas 77032
 
            Optionee:
 
                  Signature
 
            Address for Notices:
 
             
 
             
 
             
 
             
 
             
 
             

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