<PAGE> 1
Filed Pursuant to Rule 424(b)(1)
Registration No. 333-35117
PROSPECTUS
12,000,000 SHARES
IRI INTERNATIONAL CORPORATION
COMMON STOCK
---------------------------
[IRI INTERNATIONAL CORPORATION LOGO]
Of the 12,000,000 shares of common stock, par value $.01 per share (the
"Common Stock"), of IRI International Corporation (the "Company") offered
hereby, 9,000,000 shares are being issued and sold by the Company, and 3,000,000
shares are being offered for the account of certain stockholders of the Company
(the "Selling Stockholders"). Of the shares being offered hereby, 9,600,000
shares are being offered initially in the United States and Canada by the U.S.
Underwriters (the "U.S. Offering"), and 2,400,000 shares are being offered
initially outside the United States and Canada by the International Managers
(the "International Offering" and, together with the U.S. Offering, the
"Offering"). The initial public offering price and underwriting discounts and
commissions are identical for both offerings. See "Underwriting." The Company
will not receive any of the proceeds from the sale of the shares by the Selling
Stockholders.
Prior to the Offering, there has been no public market for the Common
Stock. See "Underwriting" for information relating to the factors considered in
determining the initial public offering price. The Common Stock has been
approved, subject to notice of issuance, for listing on the New York Stock
Exchange (the "NYSE") under the symbol "IIR."
---------------------------
SEE "RISK FACTORS" BEGINNING ON PAGE 7 OF THIS PROSPECTUS FOR INFORMATION
THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE COMMON STOCK OFFERED
HEREBY.
---------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY
STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
=============================================================================================================
UNDERWRITING PROCEEDS TO
PRICE TO DISCOUNTS AND PROCEEDS TO SELLING
PUBLIC COMMISSIONS (1) COMPANY (2) STOCKHOLDERS
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per Share.................. $18.00 $1.21 $16.79 $16.79
- -------------------------------------------------------------------------------------------------------------
Total (3).................. $216,000,000 $14,520,000 $151,110,000 $50,370,000
=============================================================================================================
</TABLE>
(1) The Company and the Selling Stockholders have agreed to indemnify the U.S.
Underwriters and the International Managers against certain liabilities,
including liabilities under the Securities Act of 1933, as amended (the
"Securities Act"). See "Underwriting."
(2) Before deducting offering expenses payable by the Company estimated at
$2,000,000.
(3) Each of the Company and the Selling Stockholders have granted the U.S.
Underwriters a 30-day option to purchase up to 720,000 additional shares of
Common Stock on the same terms and conditions as set forth above to cover
over-allotments, if any. Each of the Company and the Selling Stockholders
have granted to the International Managers a similar option to purchase up
to 180,000 additional shares of Common Stock to cover over-allotments, if
any. If such options (the "Underwriters' Over-Allotment Options") are
exercised in full, the total Price to Public, Underwriting Discounts and
Commissions, Proceeds to Company and Proceeds to Selling Stockholders will
be $248,400,000, $16,698,000, $166,221,000 and $65,481,000, respectively.
See "Underwriting."
---------------------------
The shares of Common Stock offered by this Prospectus are offered by the
U.S. Underwriters subject to prior sale, to withdrawal, cancellation or
modification of the offer without notice, to delivery to and acceptance by the
U.S. Underwriters and to certain further conditions. It is expected that
delivery of the shares of Common Stock will be made at the offices of Lehman
Brothers Inc., New York, New York on or about November 19, 1997.
---------------------------
LEHMAN BROTHERS
HOWARD, WEIL, LABOUISSE, FRIEDRICHS
INCORPORATED
PRUDENTIAL SECURITIES INCORPORATED
CREDIT LYONNAIS SECURITIES (USA) INC.
November 13, 1997
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[PHOTOGRAPH OF COMPANY'S PRODUCT TRADENAMES\TRADEMARKS.]
[SCHEMATIC DRAWING OF A DRILLING RIG, COMPONENTS AND FISHING TOOL PRODUCTS.]
[PHOTOGRAPHS OF COMPANY PRODUCTS.]
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK. SUCH
TRANSACTIONS MAY INCLUDE THE PURCHASE OF SHARES OF COMMON STOCK FOLLOWING THE
PRICING OF THE OFFERING TO COVER A SYNDICATE SHORT POSITION IN THE COMMON STOCK
OR FOR THE PURPOSE OF MAINTAINING THE PRICE OF THE COMMON STOCK, AND THE
IMPOSITION OF PENALTY BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE
"UNDERWRITING."
<PAGE> 3
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and the financial statements and notes thereto appearing elsewhere
in this Prospectus. Unless the context otherwise requires, references in this
Prospectus to the "Company" refer to IRI International Corporation together with
its subsidiaries and its predecessors, including its Bowen Tools Division
("Bowen"), its IRI Division ("IRI") and its wholly-owned subsidiary, Cardwell
International, Ltd. ("Cardwell"). Except as otherwise specified herein, the
information in this Prospectus (i) gives effect to the merger (the "Merger") of
IRI International Corporation into its parent, Energy Services International
Ltd., prior to the consummation of the Offering and the corresponding increase
in the number of outstanding shares of common stock of the Company from 163,600
to 30,000,000 and (ii) assumes that the Underwriters' Over-Allotment Options
will not be exercised. This Prospectus contains certain forward-looking
statements within the meaning of the federal securities laws. Actual results and
the timing of certain events could differ materially from those projected in the
forward-looking statements due to a number of factors, including those set forth
under "Risk Factors" and elsewhere in this Prospectus.
THE COMPANY
The Company is one of the world's largest manufacturers of land-based
drilling and well-servicing rigs and rig component parts for use in the global
oil and gas industry and is principally engaged in the design, manufacture,
service, sale and rental of onshore and offshore oilfield equipment for the
domestic and international markets. Through its IRI and Cardwell operations, the
Company designs and produces rigs to meet the special requirements of its global
clientele for service in remote areas and harsh climatic conditions. Through its
Bowen Tools Division, the Company is a leading manufacturer of downhole fishing
and drilling tools and offers a complete line of oilfield power equipment,
including top drives, power swivels, wireline pressure control equipment and
coiled tubing systems, which complement the Company's drilling and well-
servicing rigs. The Company also manufactures and maintains a significant
inventory of replacement parts for rigs produced by the Company and by others,
enabling it to meet the needs of its customers on a timely basis. As a result of
its diverse product lines and the availability, on a sale or rental basis, of
the products of the Bowen Tools Division, the Company is able to satisfy a wide
range of its customers' special requirements. Through its Specialty Steel
Division, the Company produces premium alloy steel for commercial and military
use and for use in manufacturing oilfield equipment products.
The Company markets its oilfield equipment primarily through its own sales
force and through designated agents and distributors in every major oil and gas
producing region in the world. The Company supplements its marketing efforts by
maintaining 27 domestic sales, parts and service centers in areas of significant
drilling and production operations and 7 international parts and service
centers. The Company's network of service centers in the United States provides
its customers with refurbishment or repair services as well as ready access to
replacement parts for equipment in the field. The Company's worldwide sales and
marketing activities are closely coordinated with and supported by a staff of
more than 70 engineers and design technicians, resulting in a competitive
advantage for the Company to provide its customers with products meeting
customized design specifications for drilling and well-servicing rigs and
associated equipment.
The Company has combined the global recognition of its strong brand names,
the extensive background and experience of its management team in international
markets and its commitment to technological excellence and high quality products
to achieve significant growth in a favorable industry climate. As of June 30,
1997, the Company's backlog was $76.7 million. See "Business -- Drilling and
Well-Servicing Rigs -- Backlog." In the fiscal year ended March 31, 1996, the
nine month period ended December 31, 1996 and the nine month period ended
September 30, 1997, the Company's revenues were $52.5 million, $62.3 million and
$112.1 million, respectively. Operating income for the same periods was $7.6
million, $9.1 million and $9.4 million, respectively. Giving pro forma effect to
the Acquisitions (as defined below) as if they had been completed as of January
1, 1996, revenues for the year ended December 31, 1996 and the nine month period
ended September 30, 1997 would have been $188.4 million and $134.5 million,
respectively. Pro forma operating income for the same periods would have been
$17.6 million and $10.4 million, respectively.
The Company, together with its predecessors, traces its history in the
oilfield equipment industry for nearly 100 years. The Company was formed in 1985
through the combination of Ingersoll-Rand Oilfield
3
<PAGE> 4
Products Company and the Ideco Division of Dresser Industries, Inc. and was
acquired by an affiliate of the Company's current stockholders in 1994. The
Company acquired the business and operations of Bowen (the "Bowen Acquisition")
on March 31, 1997 and Cardwell (the "Cardwell Acquisition") on April 17, 1997
(together, the "Acquisitions"). See "-- Recent Developments."
BUSINESS STRATEGY
The Company's business strategy is to continue its significant expansion
and growth as a leader in the design, manufacture, service, sale and rental of
oilfield equipment products by:
Leveraging Strong Brand Names and Leading Market Shares. The Company
manufactures its drilling rigs and well-servicing rigs and component parts under
internationally recognized brand names which include IDECO(R), FRANKS(R),
CARDWELL(TM), and IRI(TM). The Company manufactures fishing and drilling tools,
top drives, power swivels and coiled tubing systems under the BOWEN(R) brand
name. The Company believes the leading share of well-servicing rigs currently
operating domestically were manufactured by it, together with its predecessors.
In addition, the Company estimates that rigs manufactured by it, together with
its predecessors, comprise a significant portion of the worldwide fleet of
well-servicing rigs manufactured in North America. BOWEN(R) fishing tools,
considered the industry standard since they were first introduced by S.R. Bowen
in 1930, are estimated by the Company to maintain the leading share of the
worldwide market for such products. Under the BOWEN(R) brand name, the Company
is among the market leaders in power swivels, drilling tools and wireline
equipment. The Company believes it will benefit significantly from increased
demand for oilfield equipment and products as customers seek to obtain new
equipment or replace existing equipment with similarly branded products.
Building on Manufacturing, Engineering and Design Capabilities. The
Company manufactures a substantial portion of the equipment and components for
its rigs, as contrasted with most of its competitors, which primarily assemble
components manufactured by third parties. The Company's integrated design,
engineering and manufacturing process is central to the production of its high
quality products and enables the Company to provide its customers with products
meeting customized design specifications. The Company employs more than 70
people on its engineering and design staff and maintains a research and
development program to develop creative solutions for its customers. Recent
innovations include light-weight mobile drilling rigs, disc brake systems for
drawworks, portable top drives, coiled tubing drilling structures and the V/S
110/130 power swivel. The Company believes its manufacturing, engineering and
design capabilities give it a strategic competitive advantage.
Capitalizing on Strategic Acquisitions. The Company expects to evaluate
and, where feasible, make strategic acquisitions that (i) strengthen the
Company's market shares for existing products, (ii) diversify the Company's
product lines in key business segments or (iii) increase the Company's
geographic diversity. The Company believes that strategic acquisitions should
also enhance profitability by leveraging the Company's existing products,
engineering and design capabilities, sales force or network of parts and service
centers. The Company believes the recent Bowen Acquisition and Cardwell
Acquisition were consistent with these criteria, and the Company will seek to
capitalize on similar opportunities when available.
Emphasizing Recurring Revenue Businesses. The Company intends to focus on
its recurring revenue businesses to mitigate the effects of potential
fluctuations in the worldwide demand for rigs. The Company's replacement parts
business takes advantage of the increased demand for parts required by the aging
worldwide rig fleet, which was generally constructed prior to 1982. The Company
is well positioned to provide replacement parts as a result of the large number
of operating rigs manufactured under the Company's brand names and the
preference of equipment owners to obtain replacement parts fabricated by the
original manufacturer. The Company's rental tool business takes advantage of the
increased number of customers who prefer to rent or lease equipment on a
temporary basis.
Increasing Efficiency and Cost Containment. The Company is in the process
of implementing MRP II, a fully integrated business planning and control system
supported by Baan and Symix software packages designed to increase productivity
and enhance the Company's ability to coordinate design engineering, raw material
orders and deliveries and manufacturing schedules. The Company expects the new
system to increase its ability to process large orders simultaneously and reduce
working capital requirements by shortening cycle
4
<PAGE> 5
times. The MRP II system should enable the Company to improve its profit margins
and respond more effectively to the current strong demand for oilfield equipment
products and services.
RECENT DEVELOPMENTS
On March 31, 1997, the Company acquired substantially all of the assets and
business of Bowen from Air Liquide America Corporation ("Air Liquide") and
established its Bowen Tools Division. Management believes that the acquisition
of Bowen significantly facilitates its acquisition strategy by diversifying into
key product lines that are complementary to the Company's existing product
lines. The Bowen Acquisition brings to the Company an additional brand name long
recognized in the oilfield equipment industry as being associated with
innovative products. BOWEN(R) tools have significant, and in the case of fishing
tools and power-swivels, dominant, market shares. The Company's Bowen Tools
Division will continue to market its products under the BOWEN(R) brand name.
On April 17, 1997, the Company acquired all of the outstanding capital
stock of Cardwell. Cardwell designs and manufactures a full line of land-based
drilling and well-servicing rigs and related components. Management believes
that the acquisition of Cardwell furthers its acquisition strategy by
strengthening its overall market share in the land-based drilling and
well-servicing rig market. Land-based well-servicing rigs manufactured under the
Company's brand names together with those manufactured by Cardwell accounted for
a majority of the number of 1996 sales of such products worldwide. In addition
to the IDECO(R), FRANKS(R) and IRI(TM) brand names, the Company will continue to
market land-based drilling and well-servicing rigs under the CARDWELL(TM) brand
name.
The Acquisitions were financed with the proceeds of a $65.0 million Term
Loan (as defined below), of which $64.0 million remained outstanding as of
September 30, 1997, and $31.0 million principal amount of the Company's Senior
Notes (as defined below), all of which remained outstanding as of September 30,
1997. See "Use of Proceeds."
THE OFFERING
<TABLE>
<S> <C>
Common Stock Offered by:
The Company............................. 9,000,000 shares
The Selling Stockholders................ 3,000,000 shares
Total Shares............................... 12,000,000 shares
Common Stock to be Outstanding after the
Offering................................... 39,000,000 shares(1)
Use of Proceeds.............................. The net proceeds of the Offering received by
the Company will be used to repay in full the
indebtedness incurred in connection with the
Acquisitions and for general corporate
purposes. See "Use of Proceeds."
New York Stock Exchange Symbol............... "IIR"
</TABLE>
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(1) Excludes Common Stock issuable upon exercise of options to purchase Common
Stock granted under the Incentive Plan (as defined below). See
"Management - Stock Options."
RISK FACTORS
See "Risk Factors" for a discussion of certain material factors that should
be considered in connection with an investment in the Common Stock offered
hereby.
5
<PAGE> 6
SUMMARY SELECTED HISTORICAL AND PRO FORMA FINANCIAL DATA
The following tables set forth certain summary historical and pro forma
condensed consolidated financial data of the Company. The summary historical
financial data presented below for the period from April 1, 1994 through
September 19, 1994, the period from September 20, 1994 through March 31, 1995,
the year ended March 31, 1996 and the nine month period ended December 31, 1996
are derived from the audited financial statements of the Company included
elsewhere in this Prospectus. The summary historical financial data presented
below for the nine months ended December 31, 1995 are derived from unaudited
financial statements of the Company. The summary historical financial data
presented below for the nine month periods ended September 30, 1996 and 1997 are
derived from the unaudited financial statements of the Company included
elsewhere in this Prospectus which, in the opinion of management, include all
adjustments necessary for a fair presentation of the financial data for such
periods.
The summary unaudited pro forma consolidated statements of operations are
derived from the unaudited Pro Forma Condensed Consolidated Statements of
Operations included elsewhere in this Prospectus. The unaudited pro forma
consolidated statements of operations give effect to (i) the Acquisitions and
(ii) the completion of this Offering and the application of the net proceeds to
the Company therefrom as if these transactions occurred on January 1, 1996. The
unaudited as adjusted balance sheet data give effect to the completion of this
Offering and the application of the net proceeds to the Company therefrom as
described under "Use of Proceeds" as if these transactions occurred on September
30, 1997. The pro forma information set forth below is not necessarily
indicative of results that actually would have been achieved as of the dates and
for the periods set forth below or that may be achieved in the future. The
summary financial data set forth below should be read in conjunction with
Management's Discussion and Analysis of Financial Condition and Results of
Operations, the Selected Financial Data, the Financial Statements of the Company
and related notes thereto and the unaudited Pro Forma Condensed Consolidated
Financial Statements and related notes thereto included elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
THE COMPANY
------------------------------------------------------------------------------------------------
PREDECESSOR HISTORICAL
------------- HISTORICAL ------------------
---------------------------------------------- PRO FORMA PRO FORMA
PERIOD FROM PERIOD FROM NINE MONTHS ------------ NINE MONTHS -------------
APRIL 1, 1994 SEPTEMBER 20, ENDED YEAR ENDED NINE MONTHS
THROUGH 1994 THROUGH YEAR ENDED DECEMBER 31, ENDED SEPTEMBER 30, ENDED
SEPTEMBER 19, MARCH 31, MARCH 31, ------------------ DECEMBER 31, ------------------ SEPTEMBER 30,
1994 1995 1996 1995 1996 1996 1996 1997 1997
------------- ------------- ----------- -------- -------- ------------ ------- -------- -------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
OPERATING DATA:
Revenues........ $16,473 $20,206 $52,506 $39,141 $62,298 $188,391 $58,217 $112,130 $ 134,540
Cost of goods
sold(1)....... 16,216 14,058 36,877 28,815 44,968 126,500 42,397 86,816 99,937
Administrative
and selling
expense....... 2,102 2,305 7,990 5,400 8,220 44,303 8,096 15,871 24,163
------- ------- ------- ------- ------- -------- ------- -------- --------
Operating income
(loss)........ (1,845) 3,843 7,639 4,926 9,110 17,588 7,724 9,443 10,440
Interest
expense....... (2,675) (25) (47) -- (615) (1,308) (412) (6,540) (174)
Other income
(expense) --
net........... 106 8 371 210 (20) (72) 161 387 574
Income taxes.... -- (263) -- -- (98) (1,896) -- (339) (2,803)
------- ------- ------- ------- ------- -------- ------- -------- --------
Net income
(loss)........ $(4,414) $ 3,563 $ 7,963 $ 5,136 $ 8,377 $ 14,312 $ 7,473 $ 2,951 $ 7,906
======= ======= ======= ======= ======= ======== ======= ======== ========
Common stock
outstanding(2)... 30,000 30,000 30,000 30,000 30,000 39,000 30,000 30,000 39,000
======= ======= ======= ======= ======= ======== ======= ======== ========
Income (loss)
per common
share(2)...... $ (0.15) $ 0.12 $ 0.27 $ 0.17 $ 0.28 $ 0.37 $ 0.25 $ 0.10(3) $ 0.20
======= ======= ======= ======= ======= ======== ======= ======== ========
</TABLE>
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(1) Amortization of negative goodwill decreased cost of goods sold in all
periods except the period from April 1, 1994 through September 19, 1994
(predecessor period). See Notes to Pro Forma Condensed Consolidated
Financial Statements and "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- General."
(2) Pursuant to the Merger, the Company increased its issued and outstanding
shares of Common Stock to 30,000,000 and effected the cancellation of all
issued and outstanding shares of its preferred stock (including all accrued
and unpaid dividends thereon). See "Certain Relationships and Related
Transactions -- Corporate Consolidation."
(3) Earnings per common share would be $0.24 for the nine months ended September
30, 1997 giving effect on a pro forma basis to the completion of the
Offering and the application of the net proceeds therefrom as if these
transactions occurred on January 1, 1997.
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997
--------------------------
HISTORICAL AS ADJUSTED
---------- -----------
(IN THOUSANDS)
<S> <C> <C>
BALANCE SHEET DATA:
Working capital................................................................................... $ 96,477 $ 139,003
Total assets...................................................................................... 183,474 219,948
Long-term debt and obligations under capital lease, less current installments..................... 108,035 535
Shareholders' equity.............................................................................. 27,854 174,328
</TABLE>
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RISK FACTORS
In addition to the other information contained in this Prospectus, the
following risks and investment considerations should be carefully considered
before purchasing shares of Common Stock offered hereby. Each of the following
factors may have a material adverse effect on the Company's operations,
financial results, financial condition, liquidity, market valuation or market
liquidity in future periods. In addition, this Prospectus contains
forward-looking statements reflecting the Company's current views with respect
to future events and financial performance. Actual results could differ
materially from those expressed in such forward-looking statements due to a
number of factors described in this Prospectus, including those set forth below.
DEPENDENCE ON OIL AND GAS INDUSTRY
The Company's business is substantially dependent upon the condition of the
oil and gas industry and worldwide levels of exploration, development and
production activity, including the number of oil and gas wells being drilled,
the depth and drilling conditions of such wells, the number of well completions
and the level of workover activity. Exploration, development and production
activity is largely dependent on the prevailing view of future oil and natural
gas prices, which have been characterized by significant volatility over the
last 20 years. Oil and natural gas prices are influenced by numerous factors
affecting the supply and demand for oil and gas, including the level of drilling
activity, worldwide economic activity, interest rates and the cost of capital,
environmental regulation, tax policies, political requirements of national
governments, coordination by the Organization of Petroleum Exporting Countries
("OPEC") and the cost of producing oil and gas. Demand for the Company's
products in certain emerging market countries may depend somewhat less on the
prevailing view of future oil and natural gas prices as such countries may
generally place greater emphasis on their need for internal development, energy
self-sufficiency or hard currency earnings. Since 1986, domestic spot oil prices
(West Texas Intermediate) have ranged from a month-end low of approximately
$11.63 per barrel in July 1986 to a month-end high of approximately $40 per
barrel in October 1990; domestic spot gas prices (Henry Hub) have ranged from a
month-end low of approximately $1.19 per Mcf of gas in July 1991 to a month-end
high of approximately $4.41 per Mcf in February 1996. These price changes have
caused numerous shifts in the strategies of oil and gas companies and drilling
contractors and their expenditure levels and patterns, particularly with respect
to decisions to purchase major capital equipment of the type manufactured by the
Company. Any significant reduction in oil and natural gas prices would likely
cause a reduction in exploration, development and production activity which, in
turn, would likely result in a drop in demand for products manufactured and sold
by the Company. No assurance can be given as to the future price levels of oil
and gas or the volatility thereof or that the future price of oil and gas will
be sufficient to support the level of exploration and production-related
activities necessary for the Company to grow or maintain its business. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- General."
COMPETITION
The Company's revenues and earnings are affected by a competitive oilfield
equipment industry, the introduction of new or improved products by competitors,
increases in the supply of, or improvements in the deliverability of, competing
products and significant price competition. The Company competes with a number
of entities, some of which may possess greater financial and other resources
than the Company. See "Business."
INTEGRATION OF RECENT ACQUISITIONS
The Company recently consummated the Bowen Acquisition and the Cardwell
Acquisition and expects to evaluate and, where feasible, make additional
strategic acquisitions in the future. The Company expects to successfully
integrate the operations and assets of Bowen and Cardwell with those of IRI;
however, there is no guarantee that the Company will not encounter integration
difficulties or that it will extract expected cost savings and margin
enhancements.
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RISKS OF INTERNATIONAL SALES
For the twelve months ended December 31, 1996, 68% of the Company's
combined historical total revenues (including Bowen and Cardwell revenues for
the periods prior to the Acquisitions) were earned from international sales of
its products, and as of June 30, 1997, approximately 74% of the Company's
backlog consisted of orders from customers outside of North America.
International sales may be subject to risks of instability of certain foreign
economies, currency fluctuations, risks of expropriation and changes in law
affecting international trade and investment. In sales to international markets,
the Company attempts to mitigate certain financial risks by requiring, where
commercially feasible, cash advances, irrevocable letters of credit or similar
credit support arrangements. See "Business -- Drilling and Well-Servicing
Rigs -- Backlog."
SIGNIFICANT CONTRACTS
A significant portion of the Company's revenues has historically been
derived from a limited number of rig manufacturing contracts. For the twelve
month period ended December 31, 1996, 37% of the Company's combined historical
total revenues (including Bowen and Cardwell revenues for the periods prior to
the Acquisitions) were derived from five contracts with five customers. The
cancellation of any significant rig manufacturing contract or failure to replace
such contracts as they are completed could adversely affect future revenues. In
addition, the existence of a limited number of large contracts increases the
effect associated with potential cost overruns.
POTENTIAL PRODUCT LIABILITY AND WARRANTY CLAIMS
Certain products of the Company are used in potentially hazardous drilling,
completion and production applications that can cause personal injury or loss of
life, damage to property, equipment or the environment and suspension of
operations. In addition, claims for loss of oil and gas production and damages
to formations can occur in the workover business. The Company maintains
insurance coverage against such risks in such amounts as it believes to be in
accordance with normal industry practice. See "Business -- Risks and Insurance."
Such insurance does not, however, provide coverage for all liabilities
(including liabilities for certain events involving pollution), and there can be
no assurance that such insurance will be adequate to cover all losses or
liabilities that may be incurred by the Company in its operations. Moreover, no
assurance can be given that in the future the Company will be able to maintain
insurance at levels it deems adequate and at rates it considers reasonable or
that any particular types of coverage will be available. Litigation arising from
a major accident or occurrence at a location where the Company's equipment is
used may, in the future, result in the Company's being named as a defendant in
product liability or other lawsuits asserting potentially large claims. The
Company is a party to various legal and administrative proceedings which have
arisen for ongoing and discontinued operations. See "Business -- Legal
Proceedings." No assurance can be given with respect to the outcome of these or
any other pending legal and administrative proceedings or the effect such
outcomes may have on the Company.
IMPACT OF GOVERNMENTAL REGULATIONS
Many aspects of the Company's operations are affected by political
developments and are subject to both domestic and foreign governmental
regulation, including regulations relating to oilfield operations, worker safety
and the protection of the environment. The technical requirements of these laws
and regulations, particularly those related to the environment, are becoming
increasingly expensive, complex and stringent. In addition, the Company depends
on the demand for its services from the oil and gas industry and, therefore, is
affected by changing taxes, price controls and other laws and regulations
relating to the oil and gas industry generally, such as those curtailing
exploration for or production of oil and gas for economic or other policy
reasons. The Company cannot determine the extent to which its future operations
and earnings may be affected by new legislation, new regulations or changes in
existing regulations. See "Business -- Environmental Matters."
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RELIANCE ON MANAGEMENT
The Company is dependent on the services of several key management
personnel. The loss of the services of certain of these individuals could have a
material adverse effect on the Company. Except as described under
"Management -- Employment Agreements, Severance Agreements and Change-in-Control
Agreements," the Company has not entered into employment agreements with any of
its key executives. The Company does not maintain key-man life insurance on any
member of management. See "Management."
CONTROL BY PRINCIPAL STOCKHOLDER
Following the Offering, Hushang Ansary, the Chairman of the Board and the
Chief Executive Officer of the Company, will directly own or have direct voting
control of approximately 47.9% of the outstanding shares of Common Stock
(excluding approximately 7.6% of the outstanding shares of Common Stock owned by
each of his two children and assuming exercise of all vested options held by
Directors, officers and certain employees of the Company). See "Security
Ownership of Certain Beneficial Owners and Management." As a result of such
ownership, Mr. Ansary may be able to control the vote on matters submitted to
stockholders, including the election of members of the Company's Board of
Directors. The interests of Mr. Ansary may not always reflect the interests of
other stockholders.
NO ANTICIPATED DIVIDENDS
The Company does not anticipate paying any dividends on the Common Stock in
the foreseeable future following the consummation of the Offering, and in
addition, the payment of dividends is limited by the terms of the Senior
Facility (as defined below). The Company intends to retain earnings to provide
funds for the continued growth and development of the Company's business. See
"Dividend Policy."
NO PRIOR PUBLIC MARKET FOR COMMON STOCK; POSSIBLE VOLATILITY OF STOCK PRICE
Prior to the Offering, there has been no public market for the Common
Stock. The Common Stock has been approved, subject to notice of issuance, for
listing on the NYSE. However, there can be no assurance that an active public
market for the Common Stock will develop upon completion of the Offering or, if
developed, that such market will be sustained. The initial public offering price
of the Common Stock has been determined through negotiations among the Company,
the Selling Stockholders and the Underwriters and may bear no relationship to
the market prices of the Common Stock after the Offering. For information
relating to the factors considered in determining the initial public offering
price, see "Underwriting." Prices for the Common Stock after the Offering may be
influenced by a number of factors, including the liquidity of the market for the
Common Stock, the Company's results of operations, actual or anticipated
announcements of technical innovations or new products and services by the
Company or its competitors, general conditions in the oilfield services industry
and the oil and gas industry and general economic and other conditions. Sales of
substantial amounts of Common Stock in the public market, or the perception of
the availability of shares for sale, following the Offering could adversely
affect the prevailing market price of the Common Stock. Subject to Rule 144
restrictions, 27,000,000 shares of Common Stock will be eligible to be sold in
the public market within 180 days after the Offering. See "Shares Eligible for
Future Sale." Additionally, the Company has granted to its Directors, officers
and certain of its employees options to purchase 1,955,000 shares of Common
Stock, of which options to purchase 628,333 vest on the effective date of the
Offering. See "Management -- Stock Options."
DILUTION
Purchasers of the Common Stock offered hereby will experience immediate and
substantial dilution in the net tangible book value per share of the Common
Stock from the initial public offering price. The dilution to new investors will
be $13.40 per share. See "Dilution."
9
<PAGE> 10
THE COMPANY
The Company is one of the world's largest manufacturers of land-based
drilling and well-servicing rigs and rig component parts for use in the global
oil and gas industry and is principally engaged in the design, manufacture,
service, sale and rental of onshore and offshore oilfield equipment for the
domestic and international markets. Through its IRI and Cardwell operations, the
Company designs and produces rigs to meet the special requirements of its global
clientele for service in remote areas and harsh climatic conditions. Through its
Bowen Tools Division, the Company is a leading manufacturer of downhole fishing
and drilling tools and offers a complete line of oilfield power equipment,
including top drives, power swivels, wireline pressure control equipment and
coiled tubing systems, which complement the Company's drilling and well-
servicing rigs. The Company also manufactures and maintains a significant
inventory of replacement parts for rigs produced by the Company and by others,
enabling it to meet the needs of its customers on a timely basis. As a result of
its diverse product lines and the availability, on a sale or rental basis, of
the products of the Bowen Tools Division, the Company is able to satisfy a wide
range of its customers' special requirements. Through its Specialty Steel
Division, the Company produces premium alloy steel for commercial and military
use and for use in manufacturing oilfield equipment products.
The Company markets its oilfield equipment primarily through its own sales
force and through designated agents and distributors in every major oil and gas
producing region in the world. The Company supplements its marketing efforts by
maintaining 27 domestic sales, parts and service centers in areas of significant
drilling and production operations and 7 international parts and service
centers. The Company's network of service centers in the United States provides
its customers with refurbishment or repair services as well as ready access to
replacement parts for equipment in the field. The Company's worldwide sales and
marketing activities are closely coordinated with and supported by a staff of
more than 70 engineers and design technicians, resulting in a competitive
advantage for the Company to provide its customers with products meeting
customized design specifications for drilling and well-servicing rigs and
associated equipment.
The Company has combined the global recognition of its strong brand names,
the extensive background and experience of its management team in international
markets and its commitment to technological excellence and high quality products
to achieve significant growth in a favorable industry climate. As of June 30,
1997, the Company's backlog was $76.7 million. See "Business -- Drilling and
Well-Servicing Rigs -- Backlog." In the fiscal year ended March 31, 1996, the
nine month period ended December 31, 1996 and the nine month period ended
September 30, 1997, the Company's revenues were $52.5 million, $62.3 million and
$112.1 million, respectively. Operating income for the same periods was $7.6
million, $9.1 million and $9.4 million, respectively. Giving pro forma effect to
the Acquisitions as if they had been completed as of January 1, 1996, revenues
for the year ended December 31, 1996 and the nine month period ended September
30, 1997 would have been $188.4 million and $134.5 million, respectively. Pro
forma operating income for the same periods would have been $17.6 million and
$10.4 million, respectively.
The Company's executive offices are located at 1000 Louisiana, Suite 5900,
Houston, Texas 77002, and its telephone number at that address is (713)
651-8002.
10
<PAGE> 11
USE OF PROCEEDS
Net proceeds to the Company from the Offering are expected to be
approximately $149.1 million, after deducting underwriting discounts and
commissions and estimated offering expenses. The Company will use a portion of
the net proceeds of the Offering to repay indebtedness outstanding under the
Company's credit facilities, which consist of the Senior Notes, the Term Loan
and the Revolving Credit Facility (each as defined below and collectively, the
"Credit Facilities") as follows:
(i) $31.0 million to redeem the Senior Notes in full;
(ii) $64.0 million to repay in full the principal amount outstanding under
the Term Loan; and
(iii) $15.0 million to repay all amounts anticipated to be outstanding
under the Revolving Credit Facility.
The remaining proceeds to the Company of approximately $39.1 million will
be used for general corporate purposes, which may include, under certain
circumstances, the making of strategic acquisitions. See "Business -- Business
Strategy." Pending the application of the net proceeds of the Offering, such net
proceeds will be invested in short-term, investment grade, interest bearing
instruments. The Company will not receive any proceeds from the sale of Common
Stock by the Selling Stockholders offered hereby.
The Credit Facilities consist of (i) a senior secured credit facility (the
"Senior Facility") and (ii) the Company's outstanding $31.0 million aggregate
principal amount Senior Subordinated Increasing Rate Notes (the "Senior Notes").
In March 1997, pursuant to the Senior Facility, certain financial institutions,
as lenders, Credit Lyonnais New York Branch, as a lender and as administrative
agent, and Lehman Commercial Paper Inc., an affiliate of Lehman Brothers Inc.,
as a lender and as advisor, arranger and syndication agent (collectively, the
"Lenders"), provided to the Company a $65.0 million five-year term loan (the
"Term Loan") and a $25.0 million three-year revolving credit facility with a
$20.0 million sublimit for the issuance of letters of credit (the "Revolving
Credit Facility"). As of September 30, 1997, the outstanding indebtedness under
the Term Loan and the Revolving Credit Facility was $64.0 million and $15.0
million, respectively. Absent a default or an event of default (as defined in
the Senior Facility), outstanding borrowings under the Term Loan accrue interest
at a rate per annum equal to one, two, three or six month LIBOR plus 3 1/4% and
outstanding borrowings under the Revolving Credit Facility accrue interest at a
rate per annum equal to one, two, three or six month LIBOR plus 2 3/4%. As of
September 30, 1997, the interest rate applicable to outstanding borrowings under
the Term Loan was 8.94% and the weighted average interest rate applicable to
outstanding borrowings under the Revolving Credit Facility was 8.68%. For a
description of the Senior Facility, see "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources."
In March 1997, the Company issued the Senior Notes pursuant to a Senior
Subordinated Increasing Rate Note Purchase Agreement (the "Senior Notes
Agreement") to certain investors, as interim lenders, including Strategic
Resource Partners, an affiliate of Lehman Brothers Inc. As of September 30,
1997, the principal amount of the outstanding Senior Notes was $31.0 million. As
of September 30, 1997, the interest rate applicable to the outstanding principal
amounts of the Senior Notes was 12.28%.
DIVIDEND POLICY
The Company does not anticipate paying any dividends on the Common Stock
for the foreseeable future following the consummation of the Offering. The
Company intends to retain earnings to provide funds for the continued growth and
development of the Company's business. Any determination to pay dividends in the
future will be at the discretion of the Board of Directors and will be dependent
upon the Company's results of operations, financial condition, contractual
restrictions and other factors deemed relevant by the Board of Directors. In
addition, the payment of dividends is limited by the terms of the Revolving
Credit Facility. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources."
11
<PAGE> 12
CAPITALIZATION
The following table sets forth (i) the historical capitalization of the
Company at September 30, 1997 and (ii) the adjusted capitalization of the
Company at September 30, 1997 after giving effect to the Offering, certain
changes in its capital structure effected by the Company in contemplation of the
Offering and the application of the estimated net proceeds therefrom as
described under "Use of Proceeds." The net proceeds to the Company from the
Offering (after deduction of the underwriting discounts and commissions and
estimated offering expenses payable by the Company) are estimated to be
approximately $149.1 million. The information below should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the pro forma financial information and the
financial statements and notes thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997
--------------------------
HISTORICAL AS ADJUSTED
---------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Short-term debt:
Current installments of long-term debt and current obligations
under capital lease........................................... $ 2,695 $ 195
--------- ---------
Long-term debt and obligations under capital lease (less current
installments):
Obligations under capital lease.................................. 500 500
Term Loan........................................................ 61,500 --
Revolving Credit Facility........................................ 15,000 --
Senior Notes..................................................... 31,000 --
Other............................................................ 35 35
--------- ---------
Total long-term debt............................................. 108,035 535
--------- ---------
Shareholders' equity:
Preferred Stock, $1.00 par value, 8,000,000 shares authorized, 0
issued and outstanding (historical and as adjusted)(1)........ -- --
Common Stock, $.01 par value, 100,000,000 shares authorized,
30,000,000 issued and outstanding (historical); 100,000,000
shares authorized, 39,000,000 shares issued and outstanding
(as adjusted)(1).............................................. 300 390
Additional paid-in capital......................................... 4,700 153,720
Retained earnings(2)............................................... 22,854 20,218
--------- ---------
Total shareholders' equity.................................... 27,854 174,328
--------- ---------
Total capitalization..................................... $ 138,584 $ 175,058
========= =========
</TABLE>
- ---------------
(1) Pursuant to the Merger, the Company increased its issued and outstanding
shares of Common Stock to 30,000,000, effected the cancellation of all
issued and outstanding shares of its preferred stock (including all accrued
and unpaid dividends thereon) and of its treasury stock. See "Certain
Relationships and Related Transactions -- Corporate Consolidation."
(2) As adjusted reflects a charge of $2.6 million for write-off of deferred debt
issuance costs associated with the Credit Facilities to be repaid with the
net proceeds of the Offering.
12
<PAGE> 13
DILUTION
"Dilution" means the difference between the initial public offering price
per share of Common Stock and the pro forma tangible book value per share of
Common Stock after giving effect to the Offering. Pro forma net tangible book
value per share represents the amount of tangible assets of the Company, less
total liabilities, divided by the number of shares of Common Stock outstanding.
The pro forma net tangible book value of the Company prior to the Offering at
September 30, 1997 was $29.5 million, or $0.98 per share of Common Stock.
Without taking into account any other changes in pro forma net tangible book
value after September 30, 1997, other than to give effect to the sale of
9,000,000 shares of Common Stock offered hereby by the Company (after deduction
of the underwriting discounts and commissions and other estimated offering
expenses and the application of the estimated net proceeds therefrom as
specified in "Use of Proceeds"), the pro forma net tangible book value of the
Company at September 30, 1997 would have been $179.5 million, or $4.60 per
share. This represents an immediate increase in pro forma net tangible book
value of $3.62 per share of Common Stock to existing stockholders and an
immediate dilution of approximately $13.40 per share to new investors purchasing
shares in the Offering. The following table illustrates the per share dilution
to new investors:
<TABLE>
<S> <C> <C>
Initial public offering price per share............................. $18.00
Pro forma net tangible book value per share as of September 30,
1997.............................................................. 0.98
Increase per share attributable to new investors.................... 3.62
----
Pro forma net tangible book value per share after the Offering...... 4.60
-----
Dilution per share to new investors................................. $13.40
======
</TABLE>
The following table sets forth on a pro forma basis at September 30, 1997
the number of shares of Common Stock purchased from the Company, the total
consideration paid to the Company and the average price per share paid by the
existing stockholders (including the Selling Stockholders) and new investors
purchasing shares of Common Stock in the Offering.
<TABLE>
<CAPTION>
SHARES PURCHASED(1) TOTAL CONSIDERATION
------------------------ ----------------------- AVERAGE PRICE
NUMBER PERCENT(2) AMOUNT PERCENT PER SHARE
---------- ---------- ------------ ------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders.......... 30,000,000 77% $ 5,000,000 3% $ 0.17
New investors.................. 9,000,000 23% 162,000,000 97% $ 18.00
---------- --- ------------ ---
Total................... 39,000,000 100% $167,000,000 100%
========== === ============ ===
</TABLE>
- ---------------
(1) Does not include 1,955,000 shares of Common Stock issuable pursuant to
options granted to Directors, officers and certain employees of the Company.
See "Management -- Stock Options" and "Management -- Compensation Plans and
Arrangements."
(2) Sales by the Selling Stockholders in the Offering will reduce the number of
shares of Common Stock held by existing stockholders to 27,000,000 or 69% of
the shares of Common Stock outstanding after the Offering. New investors
will hold 31% of the shares of Common Stock outstanding after the Offering.
13
<PAGE> 14
PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The following tables set forth (i) the unaudited pro forma condensed
consolidated balance sheet as of September 30, 1997 after giving effect to the
Offering, as if it had occurred on September 30, 1997, and (ii) the unaudited
pro forma condensed consolidated statements of income for the twelve months
ended December 31, 1996 and the nine months ended September 30, 1997 after
giving effect to the Bowen Acquisition, the Cardwell Acquisition and the
Offering, as if these transactions had occurred on January 1, 1996. The
unaudited pro forma condensed consolidated balance sheet is based on the
unaudited balance sheet of the Company as of September 30, 1997, included
elsewhere in this Prospectus. The unaudited pro forma condensed consolidated
statements of income are based on the historical Statements of Income of the
Company and unaudited financial information related to the Acquisitions.
The pro forma adjustments are based upon available information and certain
assumptions that management believes are reasonable. The pro forma financial
information does not purport to represent what the Company's financial position
or results of operations would actually have been had the transactions occurred
on the dates set forth above. In addition, the pro forma financial statements
are not necessarily indicative of the results of future operations of the
Company and should be read in conjunction with "Capitalization," "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the Consolidated Financial Statements of the Company and the related notes
thereto included elsewhere in this Prospectus.
14
<PAGE> 15
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
AS OF SEPTEMBER 30, 1997
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
IRI PRO FORMA
HISTORICAL ADJUSTMENTS PRO FORMA
CONSOLIDATED FOR THE OFFERING CONSOLIDATED
------------ ---------------- ------------
<S> <C> <C> <C>
ASSETS:
Current assets:
Cash and cash equivalents.......................... $ 5,584 $ 150,026(a) $ 45,610
(110,000)(b)
Accounts receivable................................ 21,866 -- 21,866
Inventories........................................ 96,307 -- 96,307
Other current assets............................... 8,455 -- 8,455
-------- ---------- --------
Total current assets....................... 132,212 40,026 172,238
Property, plant and equipment, net................... 41,949 -- 41,949
Excess of cost over fair value of net tangible assets
of businesses acquired, net........................ 5,545 -- 5,545
Other assets......................................... 3,768 (2,636)(b) 216
(916)(a)
-------- ---------- --------
Total assets............................... $183,474 $ 36,474 $219,948
======== ========== ========
LIABILITIES AND SHAREHOLDERS' EQUITY:
Current liabilities:
Accounts payable and accrued liabilities........... $ 22,812 $ -- $ 22,812
Customer advances and security deposits............ 8,364 -- 8,364
Other liabilities.................................. 1,864 -- 1,864
Current installment of long-term debt and capital
lease........................................... 2,695 (2,500)(b) 195
-------- ---------- --------
Total current liabilities.................. 35,735 (2,500) 33,235
Negative goodwill, net............................... 10,734 -- 10,734
Long-term debt and capital lease, less current
installments....................................... 108,035 (107,500)(b) 535
Accrued postretirement benefits...................... 1,116 -- 1,116
-------- ---------- --------
Total liabilities.......................... 155,620 (110,000) 45,620
-------- ---------- --------
Shareholders' equity:
Preferred stock.................................... -- -- --
Common stock....................................... 300 90(a) 390
Additional paid-in capital......................... 4,700 149,020(a) 153,720
Retained earnings.................................. 22,854 (2,636)(b) 20,218
-------- ---------- --------
Total shareholders' equity................. 27,854 146,474 174,328
-------- ---------- --------
Total liabilities and shareholders'
equity................................... $183,474 $ 36,474 $219,948
======== ========== ========
</TABLE>
15
<PAGE> 16
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1996
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
PRO FORMA FOR
THE ACQUISITIONS PRO FORMA
IRI CARDWELL BOWEN --------------------- FOR THE PRO FORMA
HISTORICAL HISTORICAL HISTORICAL CARDWELL BOWEN SUBTOTAL OFFERING CONSOLIDATED
---------- ---------- ---------- -------- ------- -------- --------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues................ $ 75,663 $ 45,871 $ 66,857 $ -- $ -- $188,391 $ -- $188,391
Cost of goods sold(1)... 53,030 35,885 36,636 (498) (c) 228(d) 126,500 -- 126,500
1,219 (d)
---------- ---------- ---------- -------- ------- -------- --------- ------------
Gross profit........ 22,633 9,986 30,221 (721) (228) 61,891 61,891
Administrative and
selling expense....... 10,810 8,026 25,362 48 (d) 57(d) 44,303 -- 44,303
---------- ---------- ---------- -------- ------- -------- --------- ------------
Operating income...... 11,823 1,960 4,859 (769) (285) 17,588 -- 17,588
---------- ---------- ---------- -------- ------- -------- --------- ------------
Other income (expense):
Interest expense...... (662) (646) -- (1,302) (e) (8,823)(e) (11,433) 10,125(f) (1,308)
Interest income....... 251 116 -- -- -- 367 -- 367
Other, net............ (110) 123 (452) -- -- (439) -- (439)
---------- ---------- ---------- -------- ------- -------- --------- ------------
(521) (407) (452) (1,302) (8,823) (11,505) 10,125 (1,380)
---------- ---------- ---------- -------- ------- -------- --------- ------------
Income before taxes..... 11,302 1,553 4,407 (2,071) (9,108) 6,083 10,125 16,208
Income taxes............ (98) (407) (1,603) 301 (g) 1,462(g) (345) (1,551)(g) (1,896)
---------- ---------- ---------- -------- ------- -------- --------- ------------
Net income.......... $ 11,204 $ 1,146 $ 2,804 $(1,770) $(7,646) $ 5,738 $ 8,574 $ 14,312
========= ========= ========= ======== ======= ======== ========== ===========
Net income per common
share................. $ 0.37 $ 0.19 $ 0.37
========= ======== ===========
Weighted average shares
outstanding........... 30,000 30,000 9,000(h) 39,000
========= ======== ========== ===========
</TABLE>
- ---------------
(1) Amortization of negative goodwill decreased cost of goods sold. See Notes to
Pro Forma Condensed Consolidated Financial Statements and "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- General."
16
<PAGE> 17
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1997
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
PRO FORMA FOR
THE ACQUISITIONS PRO FORMA
IRI CARDWELL BOWEN ------------------- FOR THE PRO FORMA
HISTORICAL(2) HISTORICAL(3) HISTORICAL(3) CARDWELL BOWEN SUBTOTAL OFFERING CONSOLIDATED
------------- ------------- ------------- -------- ------- -------- --------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues............ $ 112,130 $ 5,818 $16,592 $ -- $ -- $134,540 $ -- $134,540
Cost of goods
sold(1)........... 86,816 4,736 8,141 (125)(c) 64(d) 99,937 -- 99,937
305(d)
-------- ------ ------- ----- ------- -------- ------- -------
Gross profit...... 25,314 1,082 8,451 (180) (64) 34,603 -- 34,603
Administrative and
selling expense... 15,871 1,016 7,257 12(d) 7(d) 24,163 -- 24,163
-------- ------ ------- ----- ------- -------- ------- -------
Operating income
(loss).......... 9,443 66 1,194 (365) (71) 10,440 -- 10,440
-------- ------ ------- ----- ------- -------- ------- -------
Other income
(expense):
Interest
expense......... (6,540) (132) -- (365)(e) (2,240)(e) (9,277) 9,103(f) (174)
Interest income... 128 41 -- -- -- 169 -- 169
Other, net........ 259 22 124 -- -- 405 -- 405
-------- ------ ------- ----- ------- -------- ------- -------
(6,153) (69) (124) (365) (2,240) (8,703) 9,103 400
Income (loss) before
taxes............. 3,290 (3) 1,318 (557) (2,311) 1,731 9,103 10,840
Income taxes........ (339) -- (493) -- 323(g) (509) (2,294)(g) (2,803)
-------- ------ ------- ----- ------- -------- ------- -------
Net income
(loss).......... $ 2,951 $ (3) $ 825 $ (557) $(1,988) $ 1,228 $ 6,809 $ 7,906
======== ====== ======= ===== ======= ======== ======= =======
Net income (loss)
per common
share............. $ 0.10 $ 0.04 $ 0.20
======== ======== =======
Weighted average
shares
outstanding....... 30,000 30,000 9,000(h) 39,000
======== ======== ======= =======
</TABLE>
- --------------------------------------------------------------------------------
(1) Amortization of negative goodwill decreased cost of goods sold. See Notes to
Pro Forma Condensed Consolidated Financial Statements and "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- General."
(2) Includes Cardwell and Bowen operations from their acquisition dates of April
17, 1997 and March 31, 1997, respectively.
(3) Represents Cardwell and Bowen pre-acquisition operations from January 1,
1997 to their respective acquisition dates discussed in Note (2) above.
17
<PAGE> 18
NOTES TO PRO FORMA CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
GENERAL
The following sets forth the assumptions used in preparing the unaudited
pro forma condensed consolidated financial statements. The pro forma adjustments
are based on estimates made by the Company's management using information
currently available. For purposes of preparing these unaudited pro forma
condensed consolidated financial statements, the allocations of the purchase
prices of the Cardwell Acquisition and the Bowen Acquisition were based on
preliminary purchase price allocations and are subject to change pending the
completion of detailed evaluation and appraisal of the assets acquired and
liabilities assumed.
The pro forma condensed statement of income for the year ended December 31,
1996 does not include $1.6 million of additional cost of sales related to the
purchase price allocation to inventory which is expected to be sold in the year
following the Bowen Acquisition. The pro forma condensed consolidated statement
of operations for the year ended December 31, 1996 does not reflect amortization
of debt acquisition costs ($3.2 million) associated with the Company's
indebtedness assumed to be retired with net Offering proceeds as described in
(b). The $1.6 million non-recurring item will be charged to cost of sales as the
inventory is sold during the year following the Bowen Acquisition. The
non-recurring $3.2 million charge will be recorded as an extraordinary
item -- debt restructuring charge after retirement of the debt upon consummation
of the Offering.
PRO FORMA ADJUSTMENTS
BALANCE SHEET
(a) To record the sale by the Company of 9,000,000 shares of Common Stock
at the initial public offering price of $18.00 per share in this
Offering after deducting estimated underwriting discounts and
commissions of $10,890,000 and offering expenses of $2,000,000,
including $916,000 incurred as of September 30, 1997.
(b) To record the reduction of indebtedness and write-off of related
deferred debt issuance costs of the Company through the application of
a portion of the net proceeds to the Company from the Offering.
STATEMENTS OF OPERATIONS
(c) To reverse payments under license agreements for the use of trademark,
patterns and prints purchased by the Company as part of the Cardwell
Acquisition.
(d) To record additional depreciation and amortization expense as a result
of the purchase price allocations of the net assets acquired in the
Acquisitions as follows:
<TABLE>
<CAPTION>
YEAR NINE MONTHS
ENDED ENDED
DECEMBER 31, SEPTEMBER 30,
ESTIMATED LIFE 1996 1997
-------------- ------------ -------------
<S> <C> <C> <C>
Additional depreciation of Bowen Acquisition
property, plant, and equipment.................... 10 years $ 285,000 $ 71,000
Additional depreciation of Cardwell Acquisition
property, plant and equipment..................... 7 to 30 years 48,000 12,000
Amortization of excess of cost over fair value of
Cardwell net tangible assets acquired............. 5 years 403,000 101,000
Amortization of excess of cost over fair value of
Cardwell affiliate tangible assets acquired....... 5 years 816,000 204,000
---------- ---------
$1,552,000 $ 388,000
========== =========
</TABLE>
(e) To record additional interest expense and related amortization of debt
issuance costs associated with Company indebtedness incurred related to
the Acquisitions. Amortization of debt issuance costs is based on the
interest method. Interest expense was estimated based on the average
90-Day LIBOR as of September 30, 1997 plus the applicable percentage as
specified in the debt agreements.
(f) To record reduction in interest expense and amortization of debt
issuance costs for repayment of Company indebtedness related to the
Acquisitions.
(g) To record the income tax related to the effects of the pro forma
adjustments.
(h) To adjust weighted average shares outstanding to reflect issuance of
9,000,000 shares of Common Stock in conjunction with the Offering.
18
<PAGE> 19
SELECTED FINANCIAL DATA
The following table sets forth selected historical financial information
for the Company. The information presented for the period from September 20,
1994 through March 31, 1995, for the year ended March 31, 1996 and the nine
month period ended December 31, 1996 is derived from the audited financial
statements of the Company. The information presented for the period from April
1, 1994 through September 19, 1994 is derived from the audited financial
statements of the Company while owned by Dresser Industries, Inc. and
Ingersoll-Rand Corporation (the "Predecessor"). The information presented as of
and for the years ended March 31, 1993 and 1994 is derived from the unaudited
financial statements of the Company while owned by the Predecessor. The
information for the nine month period ended December 31, 1995 is derived from
the unaudited financial statements of the Company. The information presented as
of September 30, 1997 and for the nine month periods ended September 30, 1996
and 1997 is derived from the unaudited financial statements of the Company,
which include all adjustments that the Company considers necessary for a fair
presentation of the financial position and results of operations for those
periods. Operating results for the nine months ended September 30, 1997 are not
necessarily indicative of the results that may be expected for the entire year
ending December 31, 1997. The following information should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the Financial Statements of the Company,
including the notes thereto, included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
PREDECESSOR THE COMPANY
---------------------------------- -------------------------------------------------------------------
PERIOD FROM PERIOD FROM NINE MONTHS NINE MONTHS
YEARS ENDED APRIL 1, 1994 SEPTEMBER 20, ENDED ENDED
MARCH 31, THROUGH 1994 THROUGH YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------ SEPTEMBER 19, MARCH 31, MARCH 31, ----------------- ------------------
1993 1994 1994 1995 1996 1995 1996 1996 1997
-------- ------- ------------- ------------- ---------- ------- ------- ------- --------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
OPERATING DATA:
Revenue.............. $ 45,547 $95,312 $16,473 $20,206 $ 52,506 $39,141 $62,298 $58,217 $112,130
Cost of goods
sold(1)............ 46,747 87,073 16,216 14,058 36,877 28,815 44,968 42,397 86,816
-------- ------- ------- ------- ------- ------- ------- ------- --------
Gross profit
(loss)............. (1,200) 8,239 257 6,148 15,629 10,326 17,330 15,820 25,314
Selling and
administrative
expense............ 5,430 5,027 2,102 2,305 7,990 5,400 8,220 8,096 15,871
-------- ------- ------- ------- ------- ------- ------- ------- --------
Operating income
(loss)............. (6,630) 3,212 (1,845) 3,843 7,639 4,926 9,110 7,724 9,443
Interest expense..... (7,981) (7,015) (2,675) (25) (47) -- (615) (412) (6,540)
Other income
(expense) -- net(2)... (17,257) (617) 106 8 371 210 (20) 161 387
Income taxes......... -- -- -- (263) -- -- (98) -- (339)
-------- ------- ------- ------- ------- ------- ------- ------- --------
Net income (loss).... $(31,868) $(4,420) $(4,414) $ 3,563 $ 7,963 $ 5,136 $ 8,377 $ 7,473 $ 2,951
======== ======= ======= ======= ======= ======= ======= ======= ========
Weighted average
shares
outstanding........ 30,000 30,000 30,000 30,000 30,000 30,000 30,000 30,000 30,000
======== ======= ======= ======= ======= ======= ======= ======= ========
Income (loss) per
common share....... $ (1.06) $ (0.15) $ (0.15) $ 0.12 $ 0.27 $ 0.17 $ 0.28 $ 0.25 $ 0.10(3)
======== ======= ======= ======= ======= ======= ======= ======= ========
</TABLE>
<TABLE>
<CAPTION>
PREDECESSOR THE COMPANY
--------------------- ------------------------------------------------------
MARCH 31,
--------------------------------------------- DECEMBER 31, SEPTEMBER 30,
1993 1994 1995 1996 1996 1997
-------- -------- ------- ------- ------------ -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital.............................. $(45,343) $(47,776) $33,767 $35,461 $ 38,658 $ 96,477
Total assets................................. 97,655 71,200 40,130 46,631 58,671 183,474
Long-term debt and obligation under capital
lease, less current installments........... -- -- -- -- 522 108,035
Shareholders' equity (deficit)............... (56,063) (60,483) 8,563 16,526 24,903 27,854
</TABLE>
- ---------------
(1) Amortization of negative goodwill decreased cost of goods sold in all
periods except the period from April 1, 1994 through September 19, 1994
(predecessor period). See Notes to Pro Forma Condensed Consolidated
Financial Statements and "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- General."
(2) Other expense for the year ended March 31, 1993 includes a charge of
approximately $17.5 million related to the adoption of Statement of
Financial Accounting Standards No. 106, "Employer's Accounting for
Postretirement Benefits Other than Pensions."
(3) Earnings per common share would be $0.24 for the nine months ended September
30, 1997 giving effect on a pro forma basis to the completion of the
Offering and the application of the net proceeds therefrom as if these
transactions occurred on January 1, 1997.
19
<PAGE> 20
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following analysis of the financial condition and results of operations
of the Company should be read in conjunction with the Company's Consolidated
Financial Statements, including the notes thereto, included elsewhere in this
Prospectus.
GENERAL
Introduction
The Company is one of the world's largest manufacturers of land-based
drilling and well-servicing rigs and rig component parts for use in the domestic
and international markets. The Company's revenues are substantially dependent
upon the condition of the oil and gas industry and worldwide levels of
exploration, development and production activity, including the number of oil
and gas wells being drilled, the depth and drilling conditions of such wells,
the number of well completions and the level of workover activity. Exploration,
development and production activity is largely dependent on the prevailing view
of future oil and natural gas prices which have been characterized by
significant volatility over the last 20 years. Oil and natural gas prices are
influenced by numerous factors affecting the supply of and demand for oil and
gas, including the level of drilling activity, worldwide economic activity,
interest rates and the cost of capital, environmental regulation, tax policies,
political requirements of national governments, coordination by OPEC and the
cost of producing oil and gas. Demand for the Company's products in certain
emerging market countries may depend somewhat less on the prevailing view of
future oil and natural gas prices as such countries may generally place greater
emphasis on their need for internal development, energy self-sufficiency or hard
currency earnings.
The Company has achieved significant growth in recent years through the
efforts of its experienced management team and its focus on expanding the
Company's international sales and marketing activities, while also taking
advantage of the favorable industry climate. The Company's revenues were $36.7
million, $52.5 million and $62.3 million, respectively, in the fiscal year ended
March 31, 1995 (which included the results of operations of the Company's
predecessor from April 1, 1994 through September 19, 1994), for the fiscal year
ended March 31, 1996 and for the nine month period ended December 31, 1996.
Operating income for the same periods was $2.0 million, $7.6 million and $9.1
million, respectively. As discussed below, the Company Acquisition (as defined
below) was recorded using the purchase method of accounting, making operating
income for the fiscal year ended March 31, 1995 not comparable to operating
income for later periods.
An important component of the Company's growth strategy has been, and will
continue to be, to evaluate and, where feasible, make strategic acquisitions
that (i) strengthen the Company's market share for existing products, (ii)
diversify the Company's product lines in key business segments or (iii) increase
the Company's geographic diversity. In furtherance of these strategies, the
Company recently acquired the businesses and operations of Bowen and Cardwell.
See "-- Acquisitions and Capital Expenditures."
The Company currently expects that 1997 results will continue to benefit
from the efforts of its experienced management team, the implementation of the
Company's business plan and the favorable industry climate. Results, however,
will be dependent on market conditions, in particular the level of worldwide oil
and gas exploration and production activity. Accordingly, there can be no
assurance as to future results and profitability.
Foreign Exchange Transactions
Sales denominated in currencies other than U.S. dollars are made only by
the Bowen Tools Division. The Company attempts to limit its exposure to foreign
currency fluctuations by limiting the amount of sales denominated in currencies
other than U.S. dollars and by, with the exception of the Company's Canadian
subsidiary, maintaining its cash and cash equivalents in U.S. dollar denominated
accounts and investments (except to the extent needed for local operating
expenses). For the nine month period ended September 30, 1997 and the year ended
December 31, 1996, Bowen's Canadian sales (expressed in U.S. dollars) were $2.9
million and $4.2 million, respectively, and all other non-U.S. dollar
denominated sales (expressed in U.S. dollars) were $4.4 million and $9.1
million, respectively. The Company has not engaged in and does not currently
intend to engage in any significant hedging or currency trading transactions
designed to compensate for adverse currency fluctuations among foreign
currencies.
20
<PAGE> 21
Negative Goodwill
On September 20, 1994, all of the outstanding stock of the Company was
acquired by an affiliate of the Selling Stockholders for $5.0 million in cash
(the "Company Acquisition"). The Company Acquisition was recorded using the
purchase method of accounting and the purchase price allocated to the assets
acquired and liabilities assumed based upon their estimated fair values at the
date of the Company Acquisition. The excess of the fair value of net assets
acquired over the consideration paid was applied against nonmonetary assets
(property, plant and equipment), reducing the balances of these assets at the
date of the Company Acquisition to zero, and the remaining excess of the fair
value of net assets acquired over consideration paid was recorded as negative
goodwill. The purchase price has been allocated to the assets acquired and
liabilities assumed based upon their fair values at the date of the acquisition
as follows (in thousands):
<TABLE>
<S> <C>
Inventories....................................... $ 33,287
Other current assets.............................. 7,743
Current liabilities............................... (7,372)
Accrued retirement benefits....................... (1,821)
Negative goodwill................................. (26,837)
--------
$ 5,000
========
</TABLE>
Negative goodwill is being amortized using the straight-line method over
five years ending September 19, 1999. The comparability of the results of
operations between the years ended March 31, 1995 (which included the results of
operations of the Company's predecessor from April 1, 1994 to September 19,
1994) and March 31, 1996 is affected by, in addition to the amortization of
negative goodwill (which reduces the post-Company Acquisition cost of sales),
the exclusion of depreciation expense related to fixed assets written down to
zero on the Company Acquisition date, both of which have a positive effect on
earnings. See Note 1 to the Consolidated Financial Statements. Amortization of
negative goodwill decreased cost of goods sold by $4.0 million in each of the
nine month periods ended September 30, 1997 and September 30, 1996, $4.0 million
in each of the nine month periods ended December 31, 1996 and December 31, 1995,
$5.4 million in the year ended March 31, 1996 and $2.7 million for the period
from September 20, 1994 through March 31, 1995.
RESULTS OF OPERATIONS
In June 1997 the Company changed its fiscal year from a March 31 year-end
to a December 31 year-end, effective with the period ended December 31, 1996, in
order to harmonize the fiscal years of IRI, Cardwell and Bowen. The following
discussion of the results of operations of the Company's business units does not
reflect allocation of corporate overhead expense, unallocated administrative
expense or amortization of goodwill and negative goodwill. See Note 13 to the
Company's Financial Statements for a presentation of segment information.
Sales of new rigs manufactured by the Company can produce large
fluctuations in revenues depending on the size and the timing of the
construction of orders. Individual orders of rig packages range from $1 million
to $25 million and cycle times for the design, engineering and manufacturing or
rig packages range from six to nine months. These fluctuations may affect the
Company's quarterly revenues and operating income.
The lack of material tax provisions for the historical periods discussed
below results primarily from (i) the amortization of negative goodwill which
does not give rise to taxable income and (ii) the availability of net operating
loss carryforwards. As discussed above, negative goodwill is being amortized
over five years ending September 19, 1999. See "-- General -- Negative
Goodwill." See Note 8 to the Company's Consolidated Financial Statements for a
discussion of the Company's net operating loss carryforwards.
RESULTS OF SEGMENT OPERATIONS
The following discussion of the results of operations of the Company's
oilfield equipment, downhole tools and specialty steel segments does not reflect
the allocation of corporate and unallocated administrative expenses,
amortization of negative goodwill and amortization of goodwill on an individual
segment basis.
21
<PAGE> 22
Certain information that reconciles the discussion of the results of operations
of the individual segments to the Company's Consolidated Financial Statements is
as follows:
<TABLE>
<CAPTION>
PREDECESSOR THE COMPANY
------------- --------------------------------------------------------------------------
PERIOD FROM PERIOD FROM NINE MONTHS NINE MONTHS
APRIL 1, 1994 SEPTEMBER 20, ENDED ENDED
THROUGH 1994 THROUGH YEAR ENDED DECEMBER 31, SEPTEMBER 30,
SEPTEMBER 19, MARCH 31, MARCH 31, ------------------- --------------------
1994 1995 1996 1995 1996 1996 1997
------------- ------------- ---------- ------- ------- ------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues
Oilfield equipment............. $12,545 $14,399 $ 40,176 $30,668 $52,029 $47,682 $ 60,312
Downhole tools................. -- -- -- -- -- -- 42,015
Specialty steel................ 3,928 5,807 12,330 8,473 10,269 10,535 9,803
------- ------- ------- ------- ------- ------- --------
Total...................... $16,473 $20,206 $ 52,506 $39,141 $62,298 $58,217 $112,130
======= ======= ======= ======= ======= ======= ========
Segment operating income (loss)
Oilfield equipment............. $ (671) $ 1,269 $ 4,141 $ 1,607 $ 7,399 $ 5,734 $ 5,834
Downhole tools................. -- -- -- -- -- 6,022
Specialty steel................ 232 1,240 2,608 2,003 2,879 3,032 2,880
------- ------- ------- ------- ------- ------- --------
Total...................... (439) 2,509 6,749 3,610 10,278 8,766 14,736
Corporate overhead and
unallocated administrative
expenses..................... (1,406) (1,350) (4,477) (2,710) (5,194) (5,068) (8,766)
Amortization of negative
goodwill..................... -- 2,684 5,367 4,026 4,026 4,026 4,026
Amortization of goodwill....... -- -- -- -- -- -- (553)
------- ------- ------- ------- ------- ------- --------
Operating income (loss)........ $(1,845) $ 3,843 $ 7,639 $ 4,926 $ 9,110 $ 7,724 $ 9,443
======= ======= ======= ======= ======= ======= ========
</TABLE>
NINE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO NINE MONTHS ENDED SEPTEMBER
30, 1996
Oilfield Equipment
Revenues and operating income for the oilfield equipment unit were $60.3
million and $5.8 million, respectively, for the nine month period ended
September 30, 1997, as compared to $47.7 million and $5.7 million, respectively,
for the nine month period ended September 30, 1996. For the nine month period
ended September 30, 1997, revenues and operating income reflect contributions
thereto by Cardwell of $13.8 million and $0.1 million. The increase in revenues
resulted from the Cardwell Acquisition and increased sales of rig packages by
the IRI Division. Increased operating income resulted from the IRI Division's
increased sales in the period. Gross margin for the nine month period ended
September 30, 1997 was 14.0%, as compared to 18.1% for the nine month period
ended September 30, 1996. This decrease resulted principally from the inclusion
of Cardwell's operations (gross margin of 11.6%) in the results for the nine
month period ended September 30, 1997. Cardwell's comparatively lower gross
margin resulted from lower margin rig manufacturing contracts entered into prior
to the date of the Cardwell Acquisition, the pricing terms of which reflected
Cardwell's lower fixed overhead cost structure. The Company has implemented a
uniform pricing policy that the Company believes will result in higher overall
gross margins.
Downhole Tools
The Company acquired the Bowen Tools Division on March 31, 1997 and prior
to such date the Company had no downhole tools unit. Revenues and operating
income for the downhole tools unit were $42.0 million and $6.0 million,
respectively, for the six months ended September 30, 1997, as compared to $34.7
million and $3.9 million, respectively, for the six month period ended September
30, 1996. Increased revenues and operating income at the downhole tools unit was
primarily attributable to increased exploration, production and drilling
activity worldwide. Gross margin for the six month period ended September 30,
1997 was 24.8%, as compared to 20.5% for the six month period ended September
30, 1996. The increase in gross margin was primarily due to improved pricing,
increased volume and more efficient capacity utilization.
Specialty Steel
Revenues and operating income for the specialty steel unit were $9.8
million and $2.9 million, respectively, for the nine month period ended
September 30, 1997, as compared to $10.5 million and $3.0
22
<PAGE> 23
million, respectively, for the nine month period ended September 30, 1996. The
decrease in revenues was primarily the result of reduced demand from a major
customer. Gross margin for the nine month period ended September 30, 1997 was
30.6%, as compared to 30.0% for the nine month period ended September 30, 1996.
The decrease in operating income resulted primarily from the reduction in sales.
Corporate Administrative and Interest Expenses
Corporate administrative expenses were $8.8 million for the nine month
period ended September 30, 1997, as compared to $5.1 million for the nine month
period ended September 30, 1996. The increase was due primarily to the inclusion
of Bowen and Cardwell's administrative expenses of $1.8 million and $0.7
million, respectively, for the 1997 period.
Interest expense increased from $0.4 million for the nine month period
ended September 30, 1996 to $6.5 million for the nine month period ended
September 30, 1997. The increase in interest expense is a result of (i)
borrowings on March 31, 1997 under the Term Loan and the issuance of the Senior
Notes on such date to fund the Acquisitions and (ii) borrowings under the
Revolving Credit Facility during the period to fund working capital requirements
of Cardwell.
NINE MONTHS ENDED DECEMBER 31, 1996 COMPARED TO NINE MONTHS ENDED DECEMBER 31,
1995
Oilfield Equipment
Revenues and operating income for the oilfield equipment unit were $52.0
million and $7.4 million, respectively, for the nine month period ended December
31, 1996, as compared to $30.7 million and $1.6 million, respectively, for the
nine month period ended December 31, 1995. The increases in revenues and
operating income were primarily attributable to an increase in sales of the
Company's oilfield equipment products to exploration and production companies
and contract drillers. The elevated levels of sales of the Company's products
reflected the increased oil and gas exploration and production activity
worldwide. Gross margin for the nine month period ended December 31, 1996 was
19.7% compared to 13.7% for the nine month period ended December 31, 1995, as a
result of price increases, greater fixed overhead absorption and more efficient
capacity utilization due to increased manufacturing volume.
Specialty Steel
Revenues and operating income for the specialty steel unit were $10.3
million and $2.9 million respectively, for the nine month period ended December
31, 1996, as compared to $8.5 million and $2.0 million, respectively, for the
nine month period ended December 31, 1995. The increases in revenues and
operating income were primarily the result of increased sales to steel service
centers and a major customer. Gross margin for the nine month period ended
December 31, 1996 was 29.9%, as compared to 24.8% for the nine month period
ended December 31, 1995, as a result of more efficient capacity utilization.
Corporate Administrative and Interest Expenses
Corporate administrative expenses were $5.2 million, representing 8.3% of
revenues, for the nine month period ended December 31, 1996 and $2.7 million,
representing 6.9% of revenues, for the nine month period ended December 31,
1995. The higher levels of expense were a consequence of establishing a
corporate headquarters in Houston, Texas, and expanding the Company's management
team and related support personnel.
Interest expense was $0.6 million for the nine month period ended December
31, 1996, compared to $0.2 million of interest income for the nine month period
ended December 31, 1995, due to borrowings by the Company under a former credit
facility established in April 1996. The funds borrowed were used by the Company
to fund increased working capital needs necessitated by the increases in the
orders for its oilfield equipment products during the nine month period ended
December 31, 1996.
23
<PAGE> 24
YEAR ENDED MARCH 31, 1996 COMPARED TO YEAR ENDED MARCH 31, 1995
The Company Acquisition was recorded using the purchase method of
accounting and the purchase price was allocated to the assets acquired and
liabilities assumed based upon their estimated fair values at the date of the
acquisition. See "-- General" and Note 1 to the Consolidated Financial
Statements.
Oilfield Equipment
Revenues and operating income for the oilfield equipment unit were $40.2
and $4.1 million, respectively, in the fiscal year ended March 31, 1996,
compared to $27.0 million and $0.6 million, respectively, in the fiscal year
ended March 31, 1995 (which included the results of operations of the Company's
predecessor from April 1, 1994 to September 19, 1994). This increase was due
primarily to an increase in sales of the Company's oilfield equipment products
to exploration and production companies and contract drillers, resulting from
the increase in oil and gas production activities worldwide and management's
focus on expanding the Company's international marketing activities and sales
and reductions in overhead and labor costs subsequent to September 19, 1994.
Specialty Steel
Revenues and operating income for the specialty steel unit were $12.3
million and $2.6 million, respectively, in the fiscal year ended March 31, 1996,
compared to $9.7 million and $1.5 million, respectively, in the fiscal year
ended March 31, 1995 (which included the results of operations of the Company's
predecessor from April 1, 1994 to September 19, 1994). This increase was
primarily due to increased sales to a major customer as well as increased
military and commercial sales and reductions in overhead and labor costs
subsequent to September 19, 1994.
ACCOUNTING POLICIES
In March 1995, the Financial Accounting Standards Board (the "FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of," which requires that long-lived assets and certain identifiable intangibles
be reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. The methodology
required by SFAS No. 121 is not materially different from the Company's past
practice, and its adoption on April 1, 1996 did not have a material impact on
the Company's financial position.
In February 1997, the FASB issued SFAS No. 128, "Earnings per Share," which
specifies the computation, presentation and disclosure requirements for earnings
per share for entities with publicly held common stock or potential common
stock. This Statement is effective for financial statements for both interim and
annual periods ending after December 15, 1997. Earlier application is not
permitted. The Company believes the adoption of this Statement will not have a
material effect on its financial statements.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income," which establishes standards for reporting and display of comprehensive
income and its components (revenues, expenses, gains and losses) in a full set
of general-purpose financial statements. This Statement is effective for fiscal
years beginning after December 15, 1997. The Company believes the adoption of
this Statement will not have a material effect on its financial statements.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information," which establishes standards for the way
that public business enterprises report information about operating segments in
annual financial statements and requires that those enterprises report selected
information about operating segments in interim financial reports issued to
shareholders. It also establishes standards for related disclosures about
products and services, geographic areas and major customers. This Statement is
effective for financial statements for periods beginning after December 15,
1997. The Company has not determined the effect of adoption of this Statement on
its financial statements.
24
<PAGE> 25
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1997, the Company had cash and cash equivalents of $5.6
million, compared to $8.6 million at December 31, 1996. At September 30, 1997,
the Company's working capital was $96.5 million, compared to $38.7 million at
December 31, 1996. The increased working capital at September 30, 1997 was
attributable to the addition of Bowen and Cardwell's working capital which was
acquired using long-term debt. At September 30, 1997, the Company's debt to
total capitalization ratio was approximately 79.9%.
On March 31, 1997, the Company established the Credit Facilities and
borrowed approximately $98 million thereunder, primarily to fund the
Acquisitions. The Credit Facilities replaced a $15 million revolving credit
facility established in April 1996. At September 30, 1997, approximately $1.4
million was available for additional borrowings under the Credit Facilities, and
the weighted average interest rate under the Credit Facilities was 9.8%.
The Credit Facilities consist of the Senior Facility, which includes the
Term Loan and the Revolving Credit Facility, and the Senior Notes. With proceeds
of the Offering, the Company will redeem fully the Senior Notes, repay in full
the outstanding balance of the Term Loan and reduce the outstanding balance of
the Revolving Credit Facility to zero. See "Use of Proceeds."
Management believes that cash flows from operations in conjunction with
borrowings under the Revolving Credit Facility and credit facilities that may be
arranged in the future, if necessary, will be sufficient to meet the Company's
short-term (i.e., less than one year) and long-term liquidity needs. Though
there can be no assurance in this regard, management believes that any credit
facilities arranged in the near future would be on commercially reasonable
terms.
The Revolving Credit Facility
The Revolving Credit Facility matures on March 31, 2000, and prior thereto
amounts repaid may be reborrowed.
The Company's obligations under the Revolving Credit Facility are secured
by first priority security interests in substantially all of the assets of the
Company, including all personal property and material real property, the pledge
by the Company of all of the outstanding capital stock of Cardwell and the
pledge by the Company or Cardwell, as the case may be, of 66% of the outstanding
capital stock of each of the Company's direct and indirect foreign subsidiaries.
Such obligations are also guaranteed by Cardwell.
The Revolving Credit Facility contains certain representations and
warranties and covenants customary for facilities of this type, including: (i)
financial maintenance tests consisting of a fixed charge coverage ratio, an
interest coverage ratio, a leverage ratio and a minimum EBITDA test; (ii)
conduct of business, preservation of corporate existence, compliance with laws,
maintenance of properties and insurance, maintenance of interest rate protection
and reporting requirements; and (iii) limitations (subject to certain baskets
and exceptions) on indebtedness, liens, guarantees, mergers and acquisitions,
asset sales, cash dividends, stock repurchases and redemptions, capital
expenditures, leases, investments, loans and advances, optional prepayments of
indebtedness, material amendments to the Company's organizational documents,
transactions with affiliates, changes in the Company's fiscal year, negative
pledge clauses, changes in lines of business and creation of foreign
subsidiaries.
The Revolving Credit Facility contains events of default customary for
facilities of this type, including: (i) the nonpayment of principal, interest or
other amounts due under the Revolving Credit Facility when due; (ii) breaches of
representations and warranties by the Company; (iii) the failure of the Company
to observe certain covenants contained in the Revolving Credit Facility, subject
to applicable cure periods; (iv) the nonpayment of principal or interest on
certain other indebtedness of the Company having an outstanding principal amount
of $1.0 million or more; (v) the occurrence of certain events of insolvency or
bankruptcy involving the Company; (vi) the occurrence of certain events under
ERISA; (vii) a judgment for the payment of money in the amount of $1.0 million
or more being rendered against the Company and not being discharged, stayed or
bonded pending appeal for a period of 60 days; (viii) the failure of any of the
security
25
<PAGE> 26
documents securing the Revolving Credit Facility to be in full force and effect
or to create enforceable security interests; and (ix) certain changes in control
of the Company.
ACQUISITIONS AND CAPITAL EXPENDITURES
On March 31, 1997, the Company acquired substantially all of the assets and
business of Bowen from Air Liquide America Corporation for a purchase price of
approximately $73.1 million, and established its Bowen Tools Division. On April
17, 1997, the Company acquired all of the outstanding capital stock of Cardwell,
a privately owned company, as well as certain assets held by affiliates of
Cardwell, for approximately $12.0 million in cash and partial payment ($3.0
million) of a note payable to one of Cardwell's bank lenders. In addition, the
Company incurred approximately $2.4 million ($1.8 million for Bowen and $0.6
million for Cardwell) of transaction costs in connection with the Acquisitions.
The Acquisitions were financed with the proceeds of the Credit Facilities.
The Acquisitions have been recorded using the purchase method of
accounting, and the results of operations of the acquired companies are included
in the statement of operations of the Company from the date of the respective
closings.
In addition to funds used to finance the Acquisitions, capital expenditures
by the Company, Bowen and Cardwell during the nine months ended September 30,
1997 totaled $6.7 million. During the nine month period ended December 31, 1996,
capital expenditures by the Company, Bowen and Cardwell were $6.4 million and
included those relating to information technology hardware and software, the
re-opening of the Company's Beaumont, Texas plant, which had been closed since
1985, and the purchase of machinery and equipment at its Pampa, Texas facility.
For the nine months ended September 30, 1997, the Company used cash flow in
operations of $14.2 million primarily to increase inventory levels to support
anticipated increases in sales. The Company believes that cash generated from
operations, amounts available under the Revolving Credit Facility and proceeds
from this Offering will be sufficient to fund operations, working capital needs,
capital expenditure requirements and financing obligations.
Ongoing routine capital expenditures for the last quarter of 1997 are
budgeted at $3.5 million and include approximately $0.6 million for the MRP II
system, $1.2 million for purchases of equipment and fixed assets and $1.7
million for the manufacture of equipment and tools for use in the Bowen Tools
Division's rental operations. For 1998, the Company has budgeted capital
expenditures of $14.7 million, including $5.5 million for the purchase of
equipment and fixed assets and $9.2 million for equipment and tools manufactured
at the Bowen Tools Division for use in its rental operations. Capital
expenditures are expected to be funded with available cash, cash flow from
operations and borrowings under the Revolving Credit Facility.
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BUSINESS
The Company is one of the world's largest manufacturers of land-based
drilling and well-servicing rigs and rig component parts for use in the global
oil and gas industry and is principally engaged in the design, manufacture,
service, sale and rental of onshore and offshore oilfield equipment for the
domestic and international markets. Through its IRI and Cardwell operations, the
Company designs and produces rigs to meet the special requirements of its global
clientele for service in remote areas and harsh climatic conditions. Through its
Bowen Tools Division, the Company is a leading manufacturer of downhole fishing
and drilling tools and offers a complete line of oilfield power equipment,
including top drives, power swivels, wireline pressure control equipment and
coiled tubing systems, which complement the Company's drilling and well-
servicing rigs. The Company also manufactures and maintains a significant
inventory of replacement parts for rigs produced by the Company and by others,
enabling it to meet the needs of its customers on a timely basis. As a result of
its diverse product lines and the availability, on a sale or rental basis, of
the products of the Bowen Tools Division, the Company is able to satisfy a wide
range of its customers' special requirements. Through its Specialty Steel
Division, the Company produces premium alloy steel for commercial and military
use and for use in manufacturing oilfield equipment products.
The Company markets its oilfield equipment primarily through its own sales
force and through designated agents and distributors in every major oil and gas
producing region in the world. The Company supplements its marketing efforts by
maintaining 27 domestic sales, parts and service centers in areas of significant
drilling and production operations and 7 international parts and service
centers. The Company's network of service centers in the United States provides
its customers with refurbishment or repair services as well as ready access to
replacement parts for equipment in the field. The Company's worldwide sales and
marketing activities are closely coordinated with and supported by a staff of
more than 70 engineers and design technicians, resulting in a competitive
advantage for the Company to provide its customers with products meeting
customized design specifications for drilling and well-servicing rigs and
associated equipment.
The Company has combined the global recognition of its strong brand names,
the extensive background and experience of its management team in international
markets and its commitment to technological excellence and high quality products
to achieve significant growth in a favorable industry climate. As of June 30,
1997, the Company's backlog was $76.7 million. See "-- Drilling and
Well-Servicing Rigs -- Backlog." In the fiscal year ended March 31, 1996, the
nine month period ended December 31, 1996 and the nine month period ended
September 30, 1997, the Company's revenues were $52.5 million, $62.3 million and
$112.1 million, respectively. Operating income for the same periods was $7.6
million, $9.1 million and $9.4 million, respectively. Giving pro forma effect to
the Acquisitions as if they had been completed as of January 1, 1996, revenues
for the year ended December 31, 1996 and the nine month period ended September
30, 1997 would have been $188.4 million and $134.5 million, respectively. Pro
forma operating income for the same periods would have been $17.6 million and
$10.4 million, respectively.
The Company, together with its predecessors, traces its history in the
oilfield equipment industry for nearly 100 years. The Company was founded in
1985 through the combination of Ingersoll-Rand Oilfield Products Company and the
Ideco Division of Dresser Industries, Inc. and was acquired by an affiliate of
the Company's current stockholders in 1994.
BUSINESS STRATEGY
The Company's business strategy is to continue its significant expansion
and growth as a leader in the design, manufacture, service, sale and rental of
oilfield equipment products by:
Leveraging Strong Brand Names and Leading Market Shares. The Company
manufactures its drilling rigs and well-servicing rigs and component parts under
internationally recognized brand names which include IDECO(R), FRANKS(R),
CARDWELL(TM) and IRI(TM). The Company manufactures fishing and drilling tools,
top drives, power swivels and coiled tubing systems under the BOWEN(R) brand
name. The Company believes the leading share of the well-servicing rigs
currently operating domestically were manufactured by it, together with its
predecessors. In addition, the Company estimates that rigs manufactured by it,
together with its predecessors, comprise a significant portion of the worldwide
fleet of well-servicing rigs manufactured in
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North America. BOWEN(R) fishing tools, considered the industry standard since
they were first introduced by S.R. Bowen in 1930, maintain the leading share of
the worldwide market for such products. Under the BOWEN(R) brand name, the
Company is among the market leaders in power swivels, drilling tools and
wireline equipment. The Company believes it will benefit significantly from
increased demand for oilfield equipment and products as customers seek to obtain
new equipment or replace existing equipment with similarly branded products.
Building on Manufacturing, Engineering and Design Capabilities. The
Company manufactures a substantial portion of the equipment and components for
its rigs, as contrasted with most of its competitors, which primarily assemble
components manufactured by third parties. The Company's integrated design,
engineering and manufacturing process is central to the production of its high
quality products and enables the Company to provide its customers with products
meeting customized design specifications. The Company employs more than 70
people on its engineering and design staff and maintains a research and
development program to develop creative solutions for its customers. Recent
innovations include light-weight mobile drilling rigs, disc brake systems for
drawworks, portable top drives, coiled tubing drilling structures and the V/S
110/130 power swivel. The Company believes its manufacturing, engineering and
design capabilities give it a strategic competitive advantage.
Capitalizing on Strategic Acquisitions. The Company expects to evaluate
and, where feasible, make strategic acquisitions that (i) strengthen the
Company's market shares for existing products, (ii) diversify the Company's
product lines in key business segments or (iii) increase the Company's
geographic diversity. The Company believes that strategic acquisitions should
also enhance profitability by leveraging the Company's existing products,
engineering and design capabilities, sales force or network of parts and service
centers. The Company believes the recent Bowen Acquisition and Cardwell
Acquisition were consistent with these criteria, and the Company will seek to
capitalize on similar opportunities when available.
Emphasizing Recurring Revenue Businesses. The Company intends to focus on
its recurring revenue businesses to mitigate the effects of potential
fluctuations in the worldwide demand for rigs. The Company's replacement parts
business takes advantage of the increased demand for parts required by the aging
worldwide rig fleet, which was generally constructed prior to 1982. The Company
is well positioned to provide replacement parts as a result of the large number
of operating rigs manufactured under the Company's brand names and the
preference of equipment owners to obtain replacement parts fabricated by the
original manufacturer. The Company's rental tool business takes advantage of the
increased number of customers who prefer to rent or lease equipment on a
temporary basis.
Increasing Efficiency and Cost Containment. The Company is in the process
of implementing MRP II, a fully integrated business planning and control system
supported by Baan and Symix software packages designed to increase productivity
and enhance the Company's ability to coordinate design engineering, raw material
orders and deliveries and manufacturing schedules. The Company expects the new
system to increase the Company's ability to process large orders simultaneously
and reduce working capital requirements by shortening cycle times. The MRP II
system should enable the Company to improve its profit margin and respond more
effectively to the current strong demand for oilfield equipment products and
services.
DRILLING AND WELL-SERVICING RIGS
The Company designs, constructs and sells a complete line of drilling and
well-servicing rigs which utilize component parts manufactured by the Company
under the IDECO(R), FRANKS(R), CARDWELL(TM) and IRI(TM) brand names. The sale of
drilling and well-servicing rigs accounted for $36.7 million of the Company's
revenues for the nine month period ended September 30, 1997.
A drilling rig is used to bore an oil production hole and to install pipe
in order for the continuous extraction of oil to begin. A well-servicing rig
performs services on producing wells in need of service in order to sustain or
accelerate production, including removing the existing wellhead equipment,
installing or pulling up the down-hole pump, installing or pulling up the
existing pipe and reversing this process by installing new pipe and replacing
the down-hole pump and wellhead. A well-servicing rig also handles certain
completion operations that must take place before the oil extraction process can
begin.
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The Company specializes in manufacturing highly mobile rigs that are
designed to meet the specified requirements of its customers, many of whom
demand products suitable for harsh and remote environments, including arctic,
desert and jungle locations. In addition, the Company manufactures offshore
platform well-servicing rigs in modular, easily transported units that allow for
a significant reduction in the time and expense historically associated with
offshore workover operations.
A typical well-servicing rig package consists of a mast, guy wires for
stability, drawworks (or large winch) and multiple motors mounted on a truck
chassis. A drilling rig package is equipped with modules including engines, an
AC/DC converter, rotary table with substructure, mast to support the drill
string, racking for pipe, tools, air compressors and a mud pump system. The
hoisting system, which consists of a mast or derrick, drawworks, crown block,
traveling block and deadline anchor, is used to raise and lower the drill pipe.
Power transmission from electric motors or diesel engines to the drawworks,
rotary table and mud pumps is through a drive group. The mud system, which
consists of separators, degassers, hoppers, valves and pumps, is used to
circulate and clean drilling mud which carries the cuttings from the drill bit
to the surface. The function of a rig, either drilling or well-servicing,
dictates the size of the rig chassis, drawworks and mast, and also determines
the type of equipment necessary for operation.
In addition to the production of complete drilling and well-servicing rigs,
the Company designs, manufactures and sells component products used in the
original construction, modernization or repair of land and offshore rigs under
its IDECO(R), FRANKS(R), CARDWELL(TM) and IRI(TM) brand names, including masts,
derricks, substructures and other components used in hoisting, power
transmission, pumping and mud systems.
Products
The Company manufactures a total of 48 standard models of land-based
drilling and well-servicing rigs under the IDECO(R), FRANKS(R), CARDWELL(TM) and
IRI(TM) brand names. In addition to the standard models, the Company
manufactures customized drilling and well-servicing rigs to customer
specifications to accommodate, among other things, extreme weather conditions,
moving systems or hook load capacities. The Company's drilling and
well-servicing rigs and component parts fall within the following categories and
classifications:
Land-Based Skid-Mounted Drilling Rigs. Large, high-horsepower and
skid-mounted, these rigs are used primarily for exploration drilling. With the
addition of a moving system, these rigs can be used for multi-well production
pad drilling. The Company manufactures 14 models of skid-mounted rigs under the
IDECO(R) and CARDWELL(TM) brand names ranging from 500 to 3,000 horsepower for
operations at well depths up to 35,000 feet. These rigs are furnished complete
with power, drawworks, mast, mud pumps and mud circulation systems.
Offshore Drilling and Well-Servicing Rigs. The Company manufactures 34
models of offshore drilling and well-servicing rigs under the IDECO(R) and
CARDWELL(TM) brand names. The Company's offshore well-servicing rigs are
specifically engineered and manufactured in module units to be deployable on an
existing offshore production platform using the platform's own pedestal crane.
This innovative design has enhanced the economics of offshore workovers by
eliminating the need for a heavy-lift barge crane, thereby reducing the expense
and eliminating one of the scheduling difficulties historically associated with
offshore platform rig deployment.
Self-Propelled Drilling and Well-Servicing Rigs. These land-based rigs can
be driven from location to location. Each unit utilizes its diesel engines for
both road transportation and rig machinery operation. Highly mobile, this type
of rig is used for well-servicing and shallow drilling and makes up the largest
portion of the land-based rig fleet currently in operation. The Company believes
that the FRANKS(R) well-servicing rig is the most popular mobile rig in the
domestic market and that the Company's IDECO(R), FRANKS(R) and CARDWELL(TM)
brands have the leading share of the domestic market. The Company offers 30
models of self-propelled rigs ranging from 200 horsepower to 900 horsepower.
Trailer Drilling Rigs. The Company manufactures three models of trailer
drilling rigs designed for medium depth drilling to 16,000 feet, in 1,100, 1,200
and 1,500 horsepower ratings under its IDECO(R) and
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CARDWELL(TM) brand names. These rigs are designed to accommodate 500 to 1,000
horsepower mechanical or electric drawworks and 350,000 to 750,000 pound hook
load masts.
Slant Hole Drilling Rigs. The Company's slant hole drilling and
well-servicing rigs are manufactured under the IDECO(R), FRANKS(R) and
CARDWELL(TM) brand names and are available mounted on carriers, trailers,
truck-type carriers and skid units. Carrier-mounted units are typically equipped
with a combination top-head drive and pull-down unit, a platform with hydraulic
slip specially designed for slant mast use, pipe handling equipment to add or
remove pipe and all necessary controls. All units are capable of drilling from 0
degrees (vertical) to 45 degrees.
Heli-Rigs. The Company's heli-rigs are manufactured under the IDECO(R) and
CARDWELL(TM) brand names and consist of drawworks, substructure and a
free-standing cantilever mast in mechanical and electrical units. All components
can be divided into loads of 4,000, 6,000, 8,000 and 16,000 pounds for transport
by helicopter. The drawworks is equipped with rotary drive, assist brakes and
hydraulic make-up and break-out systems. Rig assembly for operations is done at
ground level so no crane is required.
Masts and Derricks. Hoisting systems consist of a mast or derrick,
drawworks, crown block, traveling block and deadline anchor. Masts and derricks
manufactured by the Company are designed to support vertical loads ranging from
60 to 1,000 tons for drilling to depths of more than 35,000 feet. Masts are
generally used on land-based drilling rigs and are manufactured in easily joined
sections so that they are easily transportable. Once at the drilling site, masts
are self-erected or, after assembly, are erected by the drawworks. Derricks are
generally used on offshore drilling rigs and are delivered in pieces for
semi-permanent assembly on the rig.
Substructures. Substructures are rig floors and support structures which
are used on both land and offshore rigs. The Company manufactures substructures
in a wide range of sizes, depending upon the size of mast or derrick chosen, the
drawworks and power transmission system used and the working floor space and
floor height required.
Mud Pumps and Mud Systems. Mud systems are used to contain and treat
drilling mud which is circulated through the drill pipe and drill bits to remove
cuttings from the hole being drilled. The Company manufactures mud system
components and fabricates complete mud systems using components manufactured by
the Company and by others. Mud pumps manufactured by the Company under the
IDECO(R) trade name include duplex and triplex mud pumps.
Drawworks. A drawworks is essentially a large winch used to raise and
lower drill pipe. Drawworks manufactured by the Company under the IDECO(R) and
CARDWELL(TM) trade names range in size from 250 to 3,000 input horsepower and
are suitable for drilling to depths up to 35,000 feet.
Drawwork Braking Systems. The Company manufactures drawwork braking
systems under the IRI(TM) and CARDWELL(TM) brand names. The Company's patented
DuraBrake(TM) system features engineered brake blocks which allow for better air
flow, improved flexibility between the brakes and the flange and improved
braking efficiency. The Company believes the DuraBrake(TM) system is one of the
simplest, safest and most affordable drawworks braking systems in the industry.
The Company has also developed and patented a hydraulic actuated disc brake
which eliminates water cooling and hydromatic retardation and is simple to
maintain. This new braking system is being installed on new rigs and is being
retro-fitted on the older rigs with standard band brake systems.
Additional Drilling and Well-Servicing Equipment. Under the CARDWELL(TM),
IDECO(R), VARI-SWIVEL(TM) and HYDRAULIC FLOORMAN(TM) trade names, the Company
manufactures tubing and traveling blocks and power swivels. The Company also
manufactures drive groups that transmit power to the drawworks and mud pumps,
independent rotary drives that transmit power to the rotary table, crown blocks,
traveling blocks and deadline anchors that attach the drilling line to the
hoisting system.
Competition
The Company's revenues and earnings are affected by the actions of
competitors, including price changes, introduction of new or improved products
and changes in the supply of, and improvements in the deliverability
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of, competing products. The Company's principal competitors in the manufacture
of drilling rigs and components are National-Oilwell, Inc., Continental Emsco
Company and Varco International, Inc.
The Company believes that its manufacturing capabilities distinguish it
from certain of its competitors that are believed to subcontract the production
of the majority of their manufactured drilling equipment and rig component parts
to third parties. The Company believes that its ability to control the complete
manufacturing process, and thus product delivery schedules, is a competitive
advantage.
Backlog
Sales of the Company's drilling and well-servicing rigs are made almost
exclusively on the basis of written purchase orders or contracts. The Company
includes in its rig backlog those orders or purchase commitments which
management believes to be reasonably certain of consummation based on industry
practice, the historical relationship between the Company and the customer or
the financial terms of the sale, including cash advances, letters of credit or
similar credit support arrangements. Giving pro forma effect to the Acquisitions
as if they had occurred on January 1, 1996, the Company estimates that the total
value of its rig backlog as of June 30, 1997 and June 30, 1996 was $76.7 million
and $75.9 million, respectively. The Company expects that substantially all of
its backlog at June 30, 1997 will be shipped during the remainder of 1997.
However, no assurance can be given that contracts included in the Company's
backlog will ultimately generate anticipated revenues in the period expected or
otherwise.
The Company attempts to mitigate certain financial risks in sales to
customers by requiring, where commercially feasible, cash advances, irrevocable
letters of credit or similar credit support arrangements. As of June 30, 1997,
the Company has received approximately $7.7 million in cash down payments and
approximately $18.8 million of letters of credit or assignments of letters of
credit to support customer orders.
Raw Materials
The Company's manufacturing operations require a variety of components,
parts and raw materials which the Company purchases from multiple commercial
sources. The Company believes that the loss of any of its suppliers would not
have a material adverse effect on the Company's operations.
FISHING AND DRILLING TOOLS
Through Bowen, the Company designs, manufactures, sells and rents fishing
and drilling tools under the BOWEN(R) brand name. Fishing and drilling tool
sales and rentals accounted for $30.7 million of the Company's revenues for the
six months ended September 30, 1997.
Fishing tools are used in the retrieval of drill bits, drill pipe, tubing,
casings and bottomhole assemblies from a well bore in order to permit normal
drilling operations or production to continue. Bowen fishing tools have been
considered the industry standard since they were first introduced in 1930 by
S.R. Bowen, who pioneered the forerunner of all modern fishing tools, the Bowen
Overshot. Drilling tools are used to assist in drilling operations. The Company
provides certain of its drilling equipment, principally stroking tools such as
jars and bumper subs as well as top drives, to its domestic customers on a
rental basis.
Products
Bowen manufactures a broad range of fishing and drilling tools, including:
External Catch Fishing Tools. Products in this group include releasing and
circulating overshots, sucker rod overshots, overshot accessories, die collars
and impression blocks. These products are primarily used to retrieve tubing,
casing or drill pipe when well bore conditions allow the external diameter to be
engaged. The "Series 150" overshot is a widely used fishing tool that employs an
internal "grapple" with sharp teeth to engage the fish while an outer bowl with
internal tapers forces the grapple into the fish with increasing force as pull
loads increase.
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Internal Catch Fishing Tools. Products in this group include rotary taper
taps, a variety of releasing spears, knuckle joints and packer retrievers. These
products are used to retrieve tubing, casing drill pipe and packers when well
bore conditions allow only the internal diameter of the fish to be engaged. The
ITCO spear is the most widely used internal catch fishing tool and operates much
like the overshot described above except from an internal catch direction.
Packer retrievers are used specifically for catching and retrieving a packer
which must be disengaged from the casing and removed from a well.
Junk Catch Fishing Tools. Products in this group include standard junk
baskets, reverse circulation junk baskets and fishing magnets. These products
are used to retrieve small irregularly shaped bits of debris from the well bore.
A junk basket employs a series of spring loaded "fingers" which flex upward to
allow a bit of debris to enter but will not flex downward to allow it to escape.
Reverse circulation baskets use a series of fluid ports to redirect flow from a
mud pump and "pull" bits of debris into the fingers. A fishing magnet is a
permanent magnet fitted within a housing to allow retrieval of a variety of
metallic debris from a well. These tools are frequently used to "clean" a well
bore so that drilling may continue.
Milling and Cutting Tools. Products in this group include Itcoloy milling
tools, junk subs, ditch magnets, magnet chargers, internal cutters and external
cutters. Milling tools are available in a variety of shapes and employ crushed
carbide (Itcoloy) teeth to mill or cut away a fish that cannot otherwise be
retrieved. They may also be used to reshape the top of a fish for retrieval with
an overshot. Ditch magnets and junk subs are employed to catch the cuttings from
milling operations. Internal and external cutters are used to cut pipe for
removal in sections. They are available in both mechanical and hydraulically
operated models.
Accessory Tools. Products in this group include jars, jar intensifiers and
bumper subs. Tools in this group are often referred to as "stroking" tools since
they all operate by telescoping open and closed as they perform their function.
Jars are most often used in conjunction with a fishing tool and provide the
operator with a means of delivering a sharp upward or downward blow to a fish
that is "stuck" in the well bore. The jar intensifier is often used with a jar
as a means of enhancing or "intensifying" the jarring blow. A computer program
developed by Bowen accurately predicts the intensity of the "jarring" blow
delivered to a stuck fish. Jars are available in a wide variety of types and
sizes. Bumper subs may be used to aid in loosening a stuck fish but are most
often used to release a fishing tool from a fish downhole if necessary. Drilling
tools in this category include a drilling jar designed for continuous drilling
operations and the Bowen Cushion Sub. The Cushion Sub is a fluid filled shock
sub which is used near the drilling bit to reduce shock load on the bit and
improve drilling penetration rates. The low spring rates of the fluid spring
make this tool highly desirable.
Repair and Remedial Tools. Products in this group include casing patches,
tubing patches, casing scrapers and tubing and casing rollers. Casing and tubing
patches are devices related to the overshot which allow a portion of damaged
casing or tubing to be replaced downhole without removing the entire string.
They are available in a wide range of sizes, types and pressure ratings. Casing
scrapers employ a series of blades set in a housing to scrape paraffin and scale
from the internal diameter of casing. Rollers are a series of eccentric rollers
mounted on a shaft which are used to "roll" the internal diameter of casing back
to the original size after it has been damaged, possibly by a formation shift.
Competition
In the fishing and drilling tool business, like the rig manufacturing
business, the Company's revenues and earnings can be affected by actions of
competitors, including price changes, the introduction of new products or
improved products and changes in supply of, and improvements in the
deliverability of, competing products. The Company's primary competitors in the
manufacture of fishing tools are Gotco International Inc. and Houston Engineers
Inc. In the drilling tool market, the Company's primary competitors are Houston
Engineers Inc. and Dailey Petroleum Services Corp.
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POWER AND WIRELINE/PRESSURE CONTROL EQUIPMENT
Power Equipment
The Company, through its Bowen Tools Division, has more than 50 years'
experience in the power equipment market, particularly with power-swivel systems
used in well-servicing and drilling applications. Other power equipment products
include top drives, power subs, bucking units, power tongs and coiled tubing
systems. Sales and rentals of power equipment products accounted for $5.7
million of the Company's revenues for the six month period ended September 30,
1997. The Company manufactures power equipment under the BOWEN(R) brand name.
Top drives play a critical role in new drilling and well-servicing
applications, replacing a rig's rotary swivel, kelly and rotary table. Top
drives enable drilling companies to significantly reduce drilling times, lessen
the probability of stuck pipe and improve well control.
The Company's top drive features a fully integrated swivel and pipe
handler, which the Company believes is more compact and lighter than competing
products and can be installed in hours, as opposed to days for similar products.
The Company's top drives are all portable. The portable segment of the top drive
market enjoys the greatest demand since these systems offer customers increased
flexibility. The Company currently manufactures two top drive models: a 350 ton
unit for offshore and heavy-duty land applications and a 120-ton model designed
for the workover rig market. The Company is developing a 250-ton unit for
applications between its 120-ton and 350-ton designs, as well as a high range
unit having a capacity of 450 to 500 tons.
Other products in this group include power tongs, manufactured under the
Peck-O-Matic brand name, grease injection systems and bucking units.
The market for power equipment is very competitive. Competition is based on
product design and quality, ability to meet delivery requirements and pricing.
The Company's principal competitor in this segment is Tesco Drilling Company. In
addition, the Company's power equipment products compete with products
manufactured by Maritime Hydraulics US, Inc., Canadian Rig Ltd. and Varco
International, Inc.
Wireline/Pressure Control Equipment
The Company manufactures products in this group under the BOWEN(R) brand
name. The products include small blowout preventers, unions, tool traps, tool
catchers, lubricator risers, control heads, stuffing boxes and wellhead
adapters. These products are designed to seal around a wireline and control well
pressure during wireline logging operations. Tool traps and tool catchers are
included in a set of pressure control equipment to catch expensive logging tools
which may be inadvertently pulled loose from the logging cable. Many of these
products are also adapted for use in controlling well pressure during coiled
tubing operations. This line of products accounted for $4.7 million of the
Company's revenues for the six month period ended September 30, 1997.
The market for pressure control equipment is very competitive. Competition
is based on product design, quality, ability to meet delivery requirements and
pricing. The Company's principal competitors in the market include Hydrolex,
Inc., Elmar Ltd. and Texas Oil Tools.
REPLACEMENT PARTS AND REFURBISHMENT
The Company manufactures and maintains a significant inventory of
replacement parts and replacement components. The Company also refurbishes older
rigs for its customers. The Company believes that the replacement parts and
refurbishment businesses will grow significantly over the next several years as
a result of increased worldwide rig utilization and the age of the international
rig fleet, which was generally constructed prior to 1982. The Company is well
positioned to provide replacement parts and refurbishment services as a result
of the large number of operating rigs manufactured under the Company's brand
names and the preference of equipment owners to obtain replacement parts and
refurbishment services from the original manufacturer. Replacement parts and
refurbishment accounted for $23.6 million of the Company's revenues for the nine
month period ended September 30, 1997.
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SPECIALTY STEEL PRODUCTS
Through its Specialty Steel Division, the Company manufactures premium
specialty steel forgings for commercial and military use and for use in
manufacturing oilfield equipment products. Specialty steel products accounted
for $9.8 million of the Company's revenues for the nine month period ended
September 30, 1997.
The Company manufactures over 100 different alloys to form forged products
in round, square and rectangular solid, trepanned, counterbored and stepped
forms to meet customer specifications. The Company sells its specialty steel
products primarily to customers in the heavy equipment, aircraft, petroleum and
power generation industries in North America and to the United States military.
Specialty steel products are also sold as feedstock directly to forgers and
extruders. The Division's largest customer accounted for 24% of the Division's
revenue for the nine months ended December 31, 1996. In addition, 13% of
production for 1996 was sold to the government and military sectors.
Raw Materials
Raw materials used to manufacture specialty steel products consist of
premium steel scrap and various alloys, of which the Company believes there is
an adequate supply in the North American market.
Competition
The U.S. specialty steel market is highly competitive due primarily to the
high cost of freight associated with moving small amounts of high tonnage
finished goods. Competitive factors include price, delivery, quality and
service. Steel ingots and billets are commodities and are extremely price
competitive. The Company's major competitors in the specialty steel market are
National Flame and Forge Company Inc., Ellwood Group Inc., Scot Forge Company
Inc., Erie Forge and Steel Inc., First Miss Steel Inc. and British Steel PLC.
ENGINEERING AND PRODUCT DEVELOPMENT
The Company maintains a staff of more than 70 engineers and design
technicians to (i) design and test new products, components and systems for use
in manufacturing and drilling applications, (ii) enhance the capabilities of
existing products and (iii) assist the Company's sales organization and
customers with special requirements and products. The Company intends to
continue its research, engineering and product development programs to develop
proprietary products that are complementary to the Company's existing products,
particularly with respect to harsh environment rigs and equipment. Recent
innovations include (i) light-weight mobile drilling rigs, (ii) disc brake
systems for drawworks, (iii) portable top drives, (iv) coiled tubing drilling
structures and (v) the V/S 110/130 power swivel. The Company's total engineering
and product development expenses for the six month period ended June 30, 1997
were $1.5 million, which includes the Bowen and Cardwell expenses only since the
dates of their respective acquisitions. The Company has budgeted $3.2 million
for engineering and product development expenses for the remainder of the 1997
fiscal year.
MARKETING, SALES AND DISTRIBUTION
The Company markets its oilfield products primarily through its own sales
force and through designated agents and distributors in every major oil and gas
producing region in the world. The Company's customers include international and
domestic drilling contractors and international and domestic oil and gas
exploration and production companies, including foreign state-owned oil and gas
enterprises. The Company supplements its marketing efforts by maintaining 27
domestic sales and service centers in areas of significant drilling and
production operations and 7 international parts and service centers.
See Note 13 to the Financial Statements for financial information related
to the Company's revenues by geographic region.
34
<PAGE> 35
INTELLECTUAL PROPERTY
The Company owns or has license to use a number of U.S. and foreign patents
covering a variety of products. Although in the aggregate these patents are of
importance to the Company, the Company does not consider any single patent to be
essential. In general, the Company depends upon product name recognition,
manufacturing quality control and application of its expertise rather than
patented technology in the conduct of its business. The Company enjoys product
brand name recognition, principally through its BOWEN(R), IDECO(R), FRANKS(R),
CARDWELL(TM), and IRI(TM) trademarks, and considers such trademarks to be
important to its business.
EMPLOYEES
As of September 30, 1997 the Company employed a total of 1,437 persons, of
whom 30 were employed outside the United States. Approximately 23% of these
employees were salaried and the balance were compensated on an hourly basis.
Approximately 23% of the Company's employees are represented by a union or are
parties to a collective bargaining agreement, which is effective for the period
from July 1997 until July 2000, covers approximately 330 employees and contains
customary provisions with respect to wages, hours and working conditions for
certain production and maintenance employees in the Bowen Tools Division. The
wage rates governing the first year of the contract represented a 4.5% increase
over the rates previously in effect, and the agreement provides for further 3%
increases in each of the second and third year thereof. The Company considers
its relations with its employees to be good.
RISKS AND INSURANCE
The Company's operations are subject to the usual hazards inherent in
manufacturing products and providing services for the oil and gas industry.
These hazards can cause personal injury and loss of life, business
interruptions, property and equipment damage and pollution or environmental
damage. The Company maintains comprehensive insurance covering its assets and
insuring against risks at levels which management believes to be appropriate and
in accordance with industry practice. No assurance can be given, however, that
insurance coverage will be adequate in all circumstances or against all hazards
or risks, or that the Company will be able to maintain adequate insurance
coverage in the future at commercially reasonable rates or on acceptable terms.
The Company's services and products are used in drilling, production and
well-servicing operations which are subject to inherent risks that could result
in property damage, personal injury, suspension of operations or loss of
production. The Company maintains product liability and worker's compensation
insurance. Although the limits of its insurance coverage against an accident are
generally in accordance with industry practice, such insurance may not be
adequate to protect the Company against liability or losses accruing from all
the consequences of such an incident.
ENVIRONMENTAL MATTERS
The manufacture of oilfield equipment and specialty steel products is
subject to a broad range of federal, state and local environmental laws and
regulations, both in the United States and in foreign jurisdictions, including
those governing discharges into the air and water, the handling and disposal of
solid and hazardous wastes, the remediation of soil and groundwater contaminated
by petroleum products or hazardous substances or wastes, and the health and
safety of employees. It has been the Company's policy to eliminate and minimize
generation of wastes at its facilities through plant operations, process design
and maintenance. The Company continually strives to reduce wastes by sending
these materials off-site for recycling and/or reuse. The Company has taken, and
continues to take, into account the requirements of such environmental laws and
regulations in the improvement, modernization, expansion and start-up of its
facilities and believes that it is currently in substantial compliance with such
material laws and regulations. As is the case with most industrial
manufacturers, the Company could incur significant costs related to
environmental compliance. To the extent the Company might incur any such
compliance costs, these costs most likely would be incurred over a number of
years; however, no assurance can be given that future regulatory action
regarding soil or groundwater at the
35
<PAGE> 36
Company's facilities, as well as continued compliance with environmental
requirements, will not require the Company to incur significant costs that may
have a material adverse effect on the Company's financial condition and results
of operations.
The Comprehensive Environmental Response, Compensation and Liability Act
("CERCLA") imposes liability without regard to fault or the legality of the
original conduct, on certain classes of persons with respect to the release of a
hazardous substance into the environment. These persons include the owner and
operator of the disposal site or sites where the release occurred and companies
that disposed or arranged for the disposal of the hazardous substances found at
such site. Persons who are or were responsible for releases of hazardous
substances under CERCLA may be subject to joint and several liability for the
costs of cleaning up the hazardous substances that have been released into the
environment and for damages to natural resources, and it is not uncommon for
neighboring landowners and other third parties to file claims for personal
injury and property damage allegedly caused by the hazardous substances released
into the environment.
The Company currently owns or leases, and has in the past owned or leased,
numerous properties that for many years have been used for the manufacture and
storage of products and equipment containing or requiring oil and/or hazardous
substances. Although the Company has utilized operating and disposal practices
that were standard in the industry at the time, hydrocarbons or other wastes may
have been disposed of or released on or under the properties owned or leased by
the Company or on or under other locations where such wastes have been taken for
disposal. In addition, many of these properties have been operated by third
parties whose treatment and disposal or release of hydrocarbons or other wastes
was not under the Company's control. These properties and the wastes disposed
thereon may be subject to CERCLA, the Resource Conservation and Recovery Act and
analogous state laws. Under such laws, the Company could be required to remove
or remediate previously disposed wastes (including wastes disposed of or
released by prior owners or operators) or property contamination (including
groundwater contamination) or to perform remedial operations to prevent future
contamination.
Various federal, state and local laws, regulations and ordinances govern
the removal, encapsulation or disturbance of asbestos containing materials
("ACMs"). Such laws and regulations may impose liability for the release of ACMs
and may provide for third parties to seek recovery from owners or operators of
facilities at which ACMs were or are located for personal injury associated with
exposure to ACMs. The Company is aware of the presence of ACMs at its
facilities, but it believes that such materials are in acceptable condition at
this time. The Company believes that any future costs related to remediation of
ACMs at these sites will not be material, either on an annual basis or in the
aggregate, although there can be no assurance with respect thereto.
The Company has sought to reduce the impact of costs arising from or
related to actual or potential environmental conditions at the Bowen Tools
Division facilities caused or created by Bowen or its predecessors in title
through the Company's contractual arrangements with Air Liquide. Pursuant to
such arrangements, Air Liquide and Bowen agreed to indemnify the Company for
such costs. Air Liquide provided the Company with certain environmental
assessments with respect to most of the Bowen properties conveyed to the
Company. In some cases, these initial assessments recommended the performance of
further investigation to evaluate the need for and to determine the extent of
the removal or remediation of hazardous substances required to address
historical operations of Bowen. Air Liquide is conducting a further
environmental review of the Bowen Tools Division facilities to determine the
potential scope of remediation to be conducted at such facilities by Air Liquide
or Bowen. There can be no assurance that Air Liquide or Bowen will meet its
obligations under the indemnification arrangements or that there will not be
future contamination for which the Company might be fully liable and that may
require the Company to incur significant costs that could have a material
adverse effect on the Company's financial condition and results of operations.
Although the Company believes that it is in substantial compliance with
existing laws and regulations, there can be no assurance that substantial costs
for compliance will not be incurred in the future. Moreover, it is possible that
other developments, such as stricter environmental laws, regulations and
enforcement policies thereunder, could result in additional, presently
unquantifiable, costs or liabilities to the Company.
36
<PAGE> 37
FACILITIES
The principal offices and facilities owned or leased by the Company and
their current uses are described in the following table:
<TABLE>
<CAPTION>
FACILITY SIZE PROPERTY SIZE
LOCATION (SQ. FT.) (ACRES) TENANCY USE
----------------------- ------------- ------------- -------- --------------------
<S> <C> <C> <C> <C>
Pampa, TX.............. 1,000,000 499 Owned Rig and specialty
steel manufacturing,
administration and
warehousing
Houston, TX............ 539,700 19 Owned Drilling tool
manufacturing,
administration and
warehousing
Beaumont, TX........... 350,000 10 Owned Rig manufacturing,
administration and
warehousing
El Dorado, KS.......... 139,912 23 Owned Rig manufacturing,
administration and
warehousing
Houston, TX............ 16,249 N/A Leased Executive Offices
Houston, TX............ 50,154 2 Owned Administration
</TABLE>
The Company also owns or leases facilities at 34 domestic and international
locations, substantially all of which are sales, service or warehouse locations.
LEGAL PROCEEDINGS
There are pending or threatened against the Company various claims,
lawsuits and administrative proceedings all arising from the ordinary course of
business with respect to commercial product liability and employee matters which
seek remedies or damages. Although no assurance can be given with respect to the
outcome of these or any other pending legal and administrative proceedings and
the effects such outcomes may have on the Company, management believes that any
ultimate liability resulting from the outcome of such proceedings to the extent
not otherwise provided for will not have a material adverse effect on the
Company's consolidated financial statements.
The Company maintains comprehensive liability insurance. The Company
believes such coverage to be of a nature and amount sufficient to ensure that it
is adequately protected from any material financial loss as a result of such
claims. The Company currently is not the subject of any legal actions for which
it is neither insured nor indemnified and which the Company believes will
individually or in the aggregate have a material adverse effect on the Company's
financial condition or results of operations, nor to the Company's knowledge is
any such litigation threatened.
37
<PAGE> 38
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The Company's directors and executive officers, and their ages and
positions with the Company as of the date of this Prospectus, are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ----------------------------------------- --- -----------------------------------------
<S> <C> <C>
Hushang Ansary........................... 70 Chairman of the Board and Chief Executive
Officer
Daniel G. Moriarty....................... 63 Vice-Chairman of the Board
Abdallah Andrawos........................ 40 Director and Secretary
Nina Ansary.............................. 31 Director
Frank C. Carlucci........................ 67 Director
Dr. Philip David......................... 66 Director
Munawar H. Hidayatallah.................. 53 Director, Executive Vice President and
Chief Financial Officer
Richard D. Higginbotham.................. 60 Director, President and Chief Operating
Officer -- Bowen Tools Division
John D. Macomber......................... 69 Director
Edward L. Palmer......................... 80 Director
Stephen J. Solarz........................ 57 Director
Gary W. Stratulate....................... 41 Director, President and Chief Operating
Officer -- IRI Division
Arthur C. Teichgraeber................... 41 Director, President and Chief Operating
Officer -- Cardwell International Ltd.
Alexander B. Trowbridge.................. 67 Director
J. Robinson West......................... 51 Director
</TABLE>
Except as described under "-- Compensation Plans and Arrangements," all
executive officers of the Company serve at the pleasure of the Board of
Directors of the Company. Directors are elected at the Company's annual meeting
of stockholders and serve for a one-year term or until their successors are
elected and qualified or until their earlier resignation or removal in
accordance with the Company's Certificate of Incorporation and Bylaws.
HUSHANG ANSARY is an international entrepreneur, investor and
industrialist. He has served as Chairman of the Board of the Company since
September 1994 and was elected to the additional position of Chief Executive
Officer of the Company in March 1997. He has served as Chairman of SunResorts,
Ltd. N.V., a resort company, since 1986 and of Parman Capital Investments Ltd.,
a private investment company, since 1982.
DANIEL G. MORIARTY has been a director of the Company since 1994 and served
as Chief Executive Officer of the Company from 1994 to April 1997, when he was
elected Vice-Chairman of the Board. He served as President of Cooper
Manufacturing, a rig manufacturing division of Allied Production Corp. from 1992
to 1994 and of Smith Energy Services, an oilfield services division of Allied
Production Corp., from 1987 to 1992. From 1982 to 1987, Mr. Moriarty served as
the President and Chief Executive Officer of Leamco Services, Inc. From 1960 to
1982, Mr. Moriarty held various positions with Halliburton Company, rising from
engineer to Vice President of the Central Region.
ABDALLAH ANDRAWOS has been Secretary of the Company since 1994 and a
director of the Company since April 1997. Since 1989 Mr. Andrawos has served as
Secretary and Chief Financial Officer of SunResorts, Ltd. N.V., a resort
company.
38
<PAGE> 39
NINA ANSARY has served as a director of the Company since April 1997. Ms.
Ansary has been a Vice President of Parman Capital Investments Ltd., a private
investment company, since 1994. Prior to 1994 Ms. Ansary was a student. Ms.
Ansary is the daughter of Hushang Ansary and holds a masters degree in political
science from Columbia University.
FRANK C. CARLUCCI has been a director of the Company since 1994. Since
1993, Mr. Carlucci has served as Chairman and partner of The Carlyle Group, a
Washington, D.C. based merchant bank and from 1989 to 1993 served as
Vice-Chairman and partner. Mr. Carlucci serves on the following corporate
boards: BDM International, Mass Mutual Life Insurance Company, General Dynamics
Corporation, Kaman Corporation, Neurogen Corporation, Northern Telecom Ltd.,
Quaker Oats Company, SunResorts, Ltd. N.V., Texas Biotechnology Corporation,
Pharmacia & Upjohn Inc., Ashland Inc. and Westinghouse Electric Corporation. He
is also a Trustee of the Rand Corporation.
DR. PHILIP DAVID has been a director of the Company since 1994. Dr. David
was a consultant to Fairchild Corporation from January 1988 to June 1993 and was
a Professor of Urban Studies and Planning at the Massachusetts Institute of
Technology from 1971 until June 1987. Dr. David is a director of Fairchild
Corporation.
MUNAWAR H. HIDAYATALLAH has been a director and Executive Vice
President -- Corporate Development of the Company since 1994 and the Company's
Chief Financial Officer since April 1997. From 1982 to 1994, Mr. Hidayatallah
served as President and Chief Executive Officer of Crescott Inc., a holding
company with interests in financial services, food processing and franchising,
and from 1992 to 1994 he served as President and Chief Executive Officer of its
subsidiary, Beverly Hills Securities Company.
RICHARD D. HIGGINBOTHAM has been a director of the Company and President
and Chief Operating Officer of the Bowen Tools Division of the Company since
April 1997. Prior to the Bowen Acquisition, Mr. Higginbotham served as President
of Bowen since 1988 and from 1982 to 1988 served as Bowen's Senior Vice
President of Marketing.
JOHN D. MACOMBER has been a director of the Company since 1994. Mr.
Macomber has been a principal of JDM Investment Group, a private investment
company, since 1992. From 1988 to 1992, he was Chairman and President of the
Export-Import Bank of the United States, from 1973 to 1986 he was Chairman of
the Board and Chief Executive Officer of Celanese Corp. and from 1954 to 1973 he
was a managing partner of McKinsey & Co. He is also a director of Bristol-Myers
Squibb Company, The Brown Group, Lehman Brothers Holdings Inc., Pilkington Ltd.,
Textron Inc. and Xerox Corporation. He is also a director and Vice-Chairman of
The Atlantic Council of the United States and a director of the French American
Foundation and the National Executive Services Corp. Mr. Macomber is a trustee
of The Folger Library and a member of the Council on Foreign Relations and the
Bretton Woods Committee. Mr. Macomber is Chairman of the Council for Excellence
in Government and a trustee of the Carnegie Institute of Washington.
EDWARD L. PALMER has been a director of the Company since June 1997. Mr.
Palmer has been President of the Mill Neck Group Inc., a management consulting
firm, since 1982, and prior thereto he served as Chairman of the Executive
Committee and a director of Citicorp and Citibank, N.A. He is also a director of
Devon Group Inc., Holmes Protection Group Inc. and SunResorts, Ltd. N.V.
STEPHEN J. SOLARZ has been a director of the Company since 1994. Mr. Solarz
has been President of Solarz Associates, an international consulting firm, since
1993. From 1975 to 1993, he was a member of the U.S. House of Representatives,
where he served on the Foreign Affairs, the Merchant Marine and Fisheries, the
Intelligence and the Joint Economic Committees. He is also a director of
Samsonite Corp., Culligan Water Technologies Inc., Geophone Company, L.L.C. and
First Philippine Fund Inc.
GARY W. STRATULATE has been a director of the Company and President and
Chief Operating Officer of its IRI Operations since April 1997. From December
1994 to April 1997, he served as the Executive Vice President of the
International Division of the Company. From June 1991 to May 1994, Mr.
Stratulate was the Chief Operating Officer of Dreco Energy Services Ltd., a
manufacturer of oilfield equipment.
39
<PAGE> 40
ARTHUR C. TEICHGRAEBER has been a director of the Company and President and
Chief Operating Officer of Cardwell since April 1997. Prior to the Cardwell
Acquisition, Mr. Teichgraeber held various positions at Cardwell, rising from
sales engineer to President.
ALEXANDER B. TROWBRIDGE has been a director of the Company since 1994.
Since 1990, Mr. Trowbridge has been the President of Trowbridge Partners, Inc.,
a management consulting firm. He was President of the National Association of
Manufacturers from 1980 through 1989. He is also a director of The Gillette
Company, New England Life Insurance Company, E.M. Warburg-Pincus Counsellors
Fund, Rouse Company, Sun Company, Harris Corporation, Waste Management Inc.,
ICOS Corporation and SunResorts, Ltd. N.V. He is a charter trustee of Phillips
Academy, Andover.
J. ROBINSON WEST has been a director of the Company since 1994. Mr. West is
Chairman of The Petroleum Finance Company, Ltd., a petroleum industry consulting
firm, and served as its President from 1984 to 1996.
COMMITTEES
The Company has the following standing committees of the Board of
Directors:
Executive Committee. The Executive Committee consists of Messrs. Ansary,
Carlucci, Solarz and Moriarty, with Mr. Ansary serving as Chairman. The
Executive Committee has full power and authority to exercise all the powers of
the Board of Directors in the management of the business except the power to
fill vacancies on the Board of Directors and the power to amend the Bylaws and
except as provided by law.
Audit Committee. The Audit Committee consists of Mr. Macomber and Dr.
David, with Mr. Macomber serving as Chairman. The Audit Committee has
responsibility for, among other things, (i) recommending the selection of the
Company's independent accountants, (ii) reviewing and approving the scope of the
independent accountants' audit activity and extent of non-audit services, (iii)
reviewing with management and the independent accountants the adequacy of the
Company's basic accounting systems and the effectiveness of the Company's
internal audit plan and activities, (iv) reviewing with management and the
independent accountants the Company's financial statements and exercising
general oversight of the Company's financial reporting process, (v) reviewing
the Company's litigation and other legal matters that may affect the Company's
financial condition and (vi) monitoring compliance with the Company's business
ethics and other policies.
Compensation Committee. The Compensation Committee consists of Dr. David
and Mr. West, with Dr. David serving as Chairman. The Compensation Committee has
responsibility for (i) reviewing and approving the recommendations of the Chief
Executive Officer as to appropriate compensation of the Company's principal
executive officers, (ii) examining periodically the general compensation
structure of the Company and (iii) supervising the welfare, pension and
compensation plans of the Company.
DIRECTOR COMPENSATION
Directors who are not also officers or employees of the Company are paid
annual fees equal to $30,000 plus $1,000 for each Board of Directors' meeting
(but not committee meeting) attended.
40
<PAGE> 41
EXECUTIVE COMPENSATION
The following table sets forth certain information regarding the
compensation paid to Hushang Ansary, Chairman and Chief Executive Officer, and
each of the five other most highly compensated executive officers of the Company
for the 12 months ended December 31, 1996 (collectively, the "Named Executive
Officers").
SUMMARY COMPENSATION TABLE(1)
<TABLE>
<CAPTION>
LONG-TERM COMPENSATION
-----------------------------------
AWARDS
ANNUAL COMPENSATION -------------------------
---------------------------------- RESTRICTED SECURITIES
NAME AND PRINCIPAL OTHER ANNUAL STOCK UNDERLYING LTIP ALL OTHER
POSITION SALARY BONUS COMPENSATION AWARDS OPTIONS/SARS PAYOUTS COMPENSATION
- -------------------------- -------- -------- ------------ ---------- ------------ ------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Hushang Ansary............ -- -- -- -- -- -- --
Chairman and Chief
Executive Officer
Daniel G. Moriarty........ $145,254 $106,504 -- -- -- -- --
Vice-Chairman of the
Board
Munawar H. Hidayatallah... $186,750 $121,324 -- -- -- -- --
Executive Vice President
and Chief Financial
Officer
Richard D. Higginbotham... $135,000 -- -- -- -- -- --
President and Chief
Operating Officer of
Bowen Tools Division
Gary W. Stratulate........ $186,750 $137,500 -- -- -- -- --
President and Chief
Operating Officer of IRI
Division
Arthur C. Teichgraeber.... $102,870 -- -- -- -- -- $498,110(2)
President and Chief
Operating Officer of
Cardwell
</TABLE>
- ---------------
(1) Under rules promulgated by the Securities and Exchange Commission, since the
Company was not a reporting company during the three immediately preceding
fiscal years, only the information with respect to the most recent completed
fiscal year is required to be presented in the Summary Compensation Table.
As a consequence of the change in its fiscal year, the Company's most recent
completed fiscal year is a nine month period. In order to provide
compensation information for a twelve month period, the information provided
in the Summary Compensation Table is for the twelve months ended December
31, 1996.
(2) Consists of license fees paid by Cardwell to Mr. Teichgraeber and to certain
entities directly or indirectly owned by Mr. Teichgraeber.
STOCK OPTIONS
Pursuant to the Incentive Plan (described below under "-- Compensation
Plans and Arrangements -- The Incentive Plan"), in anticipation of the Offering,
the Company granted to its Directors and certain of its officers and employees
an aggregate of 1,955,000 options to purchase shares of Common Stock. Such
options and the terms thereof are described in the following paragraphs.
On June 17, 1997, in anticipation of the Offering, the Company granted
options to purchase 20,000 shares of Common Stock to each of the Directors not
employed by the Company (the "Outside Directors") contingent on the consummation
of the Offering. The options were granted pursuant to the Incentive Plan and are
not intended to qualify as "incentive stock options" (as described below under
"-- Compensation Plans and Arrangements -- The Incentive Plan -- Options"). The
options have an exercise price per share equal to the Offering price per share
and generally have a five-year term. The options are exercisable (i)
cumulatively to the extent of one-half of the shares on the effective date of
the Offering and (ii) cumulatively to the extent
41
<PAGE> 42
of one-quarter of the shares after each of the first two anniversaries of the
effective date of the Offering for so long as the Outside Director remains in
continuous service with the Company. In addition, the options become immediately
exercisable upon an Outside Director's death or disability.
As of December 31, 1996, no stock options or stock appreciation rights had
been granted to the Named Executive Officers. On October 14, 1997, in
anticipation of the Offering, the Compensation Committee granted, effective upon
completion of the Offering, certain stock options to the Named Executive
Officers as described in the following tables and discussion.
OPTION GRANTS IN 1997
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT ASSUMED ANNUAL
NUMBER OF % OF TOTAL RATES OF STOCK PRICE
SECURITIES OPTIONS EXERCISE APPRECIATION FOR OPTION
UNDERLYING GRANTED TO PRICE OR TERM
OPTIONS EMPLOYEES IN BASE EXPIRATION -------------------------
NAME GRANTED 1997(1) PRICE(2)(3) DATE 5% 10%
- ----------------------------------- ---------- ------------ ----------- ----------------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Hushang Ansary..................... 1,000,000 55.71% $ 18.00 November 13, 2007 $11,320,103 $28,687,364
Daniel G. Moriarty................. 50,000 2.79 $ 18.00 November 13, 2007 566,005 1,434,368
Munawar H. Hidayatallah............ 45,000 2.51 $ 18.00 November 13, 2007 509,405 1,290,931
Richard D. Higginbotham............ 35,000 1.95 $ 18.00 November 13, 2007 396,204 1,004,058
Gary W. Stratulate................. 40,000 2.23 $ 18.00 November 13, 2007 452,804 1,147,495
Arthur C. Teichgraeber............. 35,000 1.95 $ 18.00 November 13, 2007 396,204 1,004,058
</TABLE>
- ---------------
(1) Calculated assuming grants to employees, other than Named Executive
Officers, of options to purchase an aggregate of 590,000 shares of Common
Stock.
(2) As described below, the exercise price as to one-third of the shares covered
by the options is the Offering price, the exercise price as to the second
one-third of the shares covered by the options is the greater of the
Offering price and the fair market value per share on the first anniversary
of the effective date of the Offering, and the exercise price as to the
final one-third of the shares covered by the options is the greater of the
Offering Price and the fair market value per share on the second anniversary
of the effective date of the Offering.
(3) Market price has been assumed to equal the initial public offering price.
The following table sets forth information regarding the values of the
stock options granted on October 14, 1997, effective upon the completion of the
Offering, to the Named Executive Officers.
OPTION VALUES AT NOVEMBER 13, 1997
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT IN-THE-MONEY OPTIONS
NAME NOVEMBER 13, 1997 AT NOVEMBER 13, 1997(1)
- ------------------------------------------------------ ---------------------- ------------------------
<S> <C> <C>
Hushang Ansary........................................ 1,000,000 $0
Daniel G. Moriarty.................................... 50,000 0
Munawar H. Hidayatallah............................... 45,000 0
Richard D. Higginbotham............................... 35,000 0
Gary W. Stratulate.................................... 40,000 0
Arthur C. Teichgraeber................................ 35,000 0
</TABLE>
- ---------------
(1) Market price has been assumed to equal the initial public offering price.
42
<PAGE> 43
All of the stock options granted to the Named Executive Officers in 1997
were granted pursuant to the Incentive Plan. The stock options have a ten-year
term and are not intended to qualify as "incentive stock options" (as described
below under "-- Compensation Plans and Arrangements -- The Incentive Plan --
Options"). The stock options granted to each Named Executive Officer are
exercisable cumulatively to the extent of one-third of the shares of Common
Stock covered thereby on the effective date of the Offering ("Tranche A
Shares"), one-third of the shares of Common Stock covered thereby on the first
anniversary of the effective date of the Offering ("Tranche B Shares"), and
one-third of the shares of Common Stock covered thereby on the second
anniversary of the effective date of the Offering ("Tranche C Shares"), for so
long as the Named Executive Officer remains in continuous employment with the
Company or one of its affiliates. In addition, the options become immediately
exercisable upon the Named Executive Officer's death or disability. Once
exercisable, the options have the following exercise prices: Tranche A
Shares -- the Offering Price; Tranche B Shares -- the greater of the initial
public offering price and the fair market value per share on the first
anniversary of the effective date of the Offering; Tranche C Shares -- the
greater of the initial public offering price and the fair market value per share
on the second anniversary of the effective date of the Offering.
On October 14th, 1997 in anticipation of the Offering, the Compensation
Committee granted, effective upon completion of the Offering, a total of 215,000
stock options to designated senior employees. All of the stock options granted
to the designated senior employees were granted pursuant to the Incentive Plan.
The stock options have a ten-year term and are not intended to qualify as
"incentive stock options" (as described below under "-- Compensation Plans and
Arrangements -- The Incentive Plan -- Options"). The stock options granted to
each designated senior employee have the same terms and conditions as the stock
option granted to the Named Executive Officers described above.
On October 14th, 1997, in anticipation of the Offering, the Compensation
Committee granted, effective upon completion of the Offering, a total of 375,000
stock options to employees of the Company having at least five years of service
with the Company or its predecessors. The number of stock options granted to
each such employee is 500, and such options are exercisable cumulatively to the
extent of 100 shares of Common Stock on the effective date of the Offering
("Tranche 1 Shares"), 100 shares of Common Stock on the first anniversary of the
effective date of the Offering ("Tranche 2 Shares"), 100 shares of Common Stock
on the second anniversary of the effective date of the Offering ("Tranche 3
Shares"), 100 shares of Common Stock on the third anniversary of the effective
date of the Offering ("Tranche 4 Shares") and 100 shares of Common Stock on the
fourth anniversary of the effective date of the Offering ("Tranche 5 Shares"),
for so long as such employee remains in continuous employment with the Company
or one of its affiliates. In addition, the options become immediately
exercisable upon such employee's death or disability. Once exercisable, the
options have the following exercise prices: Tranche 1 Shares -- the Offering
Price; Tranche 2 Shares -- the greater of the initial public offering price and
the fair market value per share on the first anniversary of the effective date
of the Offering; Tranche 3 Shares -- the greater of the initial public offering
price and the fair market value per share on the second anniversary of the
effective date of the Offering; Tranche 4 Shares -- the greater of the initial
public offering price and the fair market value per share on the third
anniversary of the effective date of the Offering; and Tranche 5 Shares -- the
greater of the initial public offering price and the fair market value per share
on the fourth anniversary of the effective date of the Offering.
COMPENSATION PLANS AND ARRANGEMENTS
Compensation of Named Executive Officers -- In General
Prior to the Offering, the compensation of the Named Executive Officers was
as approved by the Compensation Committee upon the recommendation of the Chief
Executive Officer and, in the case of Mr. Teichgraeber, in accordance with his
employment agreement with Cardwell. Following the Offering, the compensation of
the Named Executive Officers will continue to be approved by the Compensation
Committee upon the recommendation of the Chief Executive Officer and, in the
case of Mr. Teichgraeber, in accordance with his employment agreement with
Cardwell (described below).
43
<PAGE> 44
The Incentive Plan
On June 17, 1997, the Company adopted an equity incentive plan (the
"Incentive Plan") to attract and retain qualified officers, directors and other
key employees of, and consultants to, the Company.
Shares Available Under the Incentive Plan. Subject to adjustment as
provided in the Incentive Plan, the number of shares of Common Stock that may be
issued or transferred and covered by outstanding awards granted under the
Incentive Plan will not exceed 4,000,000, which may be shares of original
issuance or treasury shares or a combination thereof. Officers, directors and
other key employees of and consultants to the Company ("Participants") may be
selected by the Compensation Committee to receive benefits under the Incentive
Plan.
Options. The Compensation Committee may authorize the grant of rights that
entitle the optionee to purchase Common Stock ("Option Rights") at a price equal
to or greater or less than market value on the date of grant. Subject to
adjustment as provided in the Incentive Plan, no participant will be granted
Option Rights, in the aggregate, for more than 3,000,000 shares during any three
consecutive calendar years. The Compensation Committee may provide that the
option price is payable at the time of exercise (i) in cash, (ii) by the
transfer to the Company of nonforfeitable, unrestricted shares of Common Stock,
(iii) with any other legal consideration the Compensation Committee may deem
appropriate, or (iv) by any combination of the foregoing methods of payment. A
grant may provide for deferred payment of the option price from the proceeds of
sale through a broker on the date of exercise of some or all of the shares of
Common Stock to which the exercise relates if there is then a public market for
the Common Stock. A grant may provide for automatic grant of reload option
rights upon the exercise of Option Rights, including reload option rights, for
shares of Common Stock or any other noncash consideration authorized under the
Incentive Plan, except that the term of any reload option right may not extend
beyond the term of the Option Right originally exercised. The Compensation
Committee has the authority to specify at the time Option Rights are granted
that shares of Common Stock will not be accepted in payment of the option price
until they have been owned by the optionee for a specified period; however, the
Incentive Plan does not require any such holding period and would permit
immediate sequential exchanges of shares of Common Stock at the time of exercise
of Option Rights.
Option Rights granted under the Incentive Plan may be Option Rights that
are intended to qualify as "incentive stock options" within the meaning of
Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"), or
Option Rights that are not intended to so qualify. Any grant may provide for the
payment of dividend equivalents to the optionee on a current, deferred or
contingent basis or may provide that dividend equivalents be credited against
the option price.
No Option Right may be exercised more than 10 years from the date of grant.
Each grant must specify the period of continuous employment with, or continuous
engagement of consulting services by, the Company that is necessary before the
Option Rights will become exercisable and may provide for the earlier exercise
of the Option Rights in the event of a change of control of the Company or other
similar transaction or event. Successive grants may be made to the same optionee
regardless of whether Option Rights previously granted to him or her remain
unexercised.
Transferability. No Option Right is transferable by a participant except
by will or the laws of descent and distribution. Option Rights may not be
exercised during a participant's lifetime except by the participant or, in the
event of the participant's incapacity, by the participant's guardian or legal
representative acting in a fiduciary capacity on behalf of the participant under
state law and court supervision. Notwithstanding the foregoing, the Compensation
Committee, in its sole discretion, may provide for the transferability of
particular awards under the Incentive Plan.
The Compensation Committee may specify at the date of grant that all or any
part of shares of Common Stock that is to be issued or transferred by the
Company upon the exercise of Option Rights shall be subject to further
restrictions on transfer.
Adjustments. The maximum number of shares that may be issued or
transferred under the Incentive Plan, the number of shares covered by
outstanding Option Rights and the option prices or base prices per
44
<PAGE> 45
share applicable thereto are subject to adjustment in the event of stock
dividends, stock splits, combinations of shares, recapitalizations, mergers,
consolidations, spinoffs, reorganizations, liquidations, issuances of rights or
warrants and similar transactions or events. In the event of any such
transaction or event, the Committee may in its discretion provide in
substitution for any or all outstanding awards under the Incentive Plan such
alternative consideration as it may in good faith determine to be equitable in
the circumstances and may require the surrender of all awards so replaced. The
Compensation Committee may also, as it determines to be appropriate in order to
reflect any such transaction or event, make or provide for such adjustments in
the number of shares that may be issued or transferred and covered by
outstanding awards granted under the Incentive Plan and the number of shares
permitted to be covered by awards granted under the plan to any one participant
during any calendar year.
Administration and Amendments. The Incentive Plan will be administered by
the Compensation Committee of the Board (such committee is referred to in this
description of the Incentive Plan as the "Committee"). Following the
consummation of the Offering, the Committee must consist of not less than two
members who are "non-employee directors" within the meaning of Rule 16b-3 and
"outside directors" within the meaning of Section 162(m) of the Code. In
connection with its administration of the Incentive Plan, the Committee is
authorized to interpret the Incentive Plan and related agreements and other
documents. The Committee may make grants to participants under any or a
combination of all of the various categories of awards that are authorized under
the Incentive Plan and may condition the grant of awards on the surrender or
deferral by the participant of the participant's right to receive a cash bonus
or other compensation otherwise payable by the Company to the participant.
The Incentive Plan may be amended from time to time by the Committee, but
without further approval by the shareholders of the Company no such amendment
may cause the Incentive Plan to cease to satisfy any applicable condition of
Rule 16b-3 or cause any award under the Incentive Plan to cease to qualify for
any applicable exception to Section 162(m) of the Code.
Federal Income Tax Consequences. The following is a brief summary of
certain of the federal income tax consequences of certain transactions under the
Incentive Plan based on federal income tax laws in effect on the date of this
Prospectus. This summary is not intended to be exhaustive and does not describe
state or local tax consequences.
In general, (i) no income will be recognized by an optionee at the time a
nonqualified Option Right is granted, (ii) at the time of exercise of a
nonqualified Option Right, ordinary income will be recognized by the optionee in
an amount equal to the difference between the option price paid for the shares
and the fair market value of the shares if they are nonrestricted on the date of
exercise and (iii) at the time of sale of shares acquired pursuant to the
exercise of a nonqualified Option Right, any appreciation (or depreciation) in
the value of the shares after the date of exercise will be treated as either
short-term or long-term capital gain (or loss) depending on how long the shares
have been held.
No income generally will be recognized by an optionee upon the grant or
exercise of an incentive stock option. If shares of Common Stock are issued to
an optionee pursuant to the exercise of an incentive stock option and no
disqualifying disposition of the shares is made by the optionee within two years
after the date of grant or within one year after the transfer of the shares to
the optionee, then upon the sale of the shares any amount realized in excess of
the option price will be taxed to the optionee as long-term capital gain and any
loss sustained will be a long-term capital loss. If shares of Common Stock
acquired upon the exercise of an incentive stock option are disposed of prior to
the expiration of either holding period described above, the optionee generally
will recognize ordinary income in the year of disposition in an amount equal to
any excess of the fair market value of the shares at the time of exercise (or,
if less, the amount realized on the disposition of the shares in a sale or
exchange) over the option price paid for the shares. Any further gain (or loss)
realized by the optionee generally will be taxed as short-term or long-term gain
(or loss) depending on the holding period.
In limited circumstances where the sale of stock that is received as the
result of a grant of an award could subject an officer or director to suit under
Section 16(b) of the Securities Exchange Act of 1934 (the "Exchange Act"), the
tax consequences to the officer or director may differ from the tax consequences
45
<PAGE> 46
described above. In these circumstances, unless a special election has been
made, the principal difference usually will be to postpone valuation and
taxation of the stock received so long as the sale of the stock received could
subject the officer or director to suit under Section 16(b) of the Exchange Act,
but not longer than six months.
To the extent that a participant recognizes ordinary income in the
circumstances described above, the Company will be entitled to a corresponding
deduction provided that, among other things, (i) the income meets the test of
reasonableness, is an ordinary and necessary business expense and is not an
"excess parachute payment" within the meaning of Section 280G of the Code and is
not disallowed by the Section 162(m) $1.0 million limitation on certain
executive compensation and (ii) any applicable reporting obligations are
satisfied.
Other Compensation Plans or Programs
The Company does not maintain any other compensation plans or programs that
apply to the Named Executive Officers, other than broad-based retirement plans.
EMPLOYMENT AGREEMENTS, SEVERANCE AGREEMENTS AND CHANGE-IN-CONTROL AGREEMENTS
Mr. Teichgraeber has a five-year employment agreement with Cardwell,
commencing as of April 17, 1997 and ending as of April 16, 2002. Under the
agreement, Mr. Teichgraeber receives an annual base salary of $250,000, subject
to review by Cardwell for increase (but not decrease) at the end of each twelve
month period. Commencing with the twelve month period ending March 31, 1998, Mr.
Teichgraeber also is eligible to receive an annual performance bonus of up to
$600,000. The actual amount of such bonus, if any, is determined by the Company
in its sole discretion. If a Change in Control (as defined in such agreement)
occurs during the term of the agreement and while Mr. Teichgraeber is still
employed by Cardwell, Mr. Teichgraeber is eligible to receive a special change
in control bonus. The actual amount of such bonus, if any, shall be determined
by the Company in its sole discretion. If Mr. Teichgraeber's employment with
Cardwell is terminated during the term of the agreement: (i) by Cardwell for
Cause (as defined in such agreement) or by Mr. Teichgraeber for any reason other
than Good Reason (as defined in such agreement), Mr. Teichgraeber is not
entitled to receive any further compensation or benefits under the agreement;
(ii) by Cardwell for any reason other than Cause or Disability (as defined in
such agreement), Mr. Teichgraeber is entitled to receive a lump sum payment
equal to his then-current base salary for the remainder of the term of the
agreement; or (iii) as a result of his death or by Cardwell as a result of his
Disability, Mr. Teichgraeber is entitled to receive payments equal to his
then-current base salary (less any applicable disability benefits) for a period
of six months. Finally, during the period ending on the later of the effective
date of the termination of Mr. Teichgraeber's employment with Cardwell or the
last day of the term of the agreement, Mr. Teichgraeber is prohibited from
engaging in Competitive Activity (as defined in such agreement) with the
Company, and is prohibited from soliciting any employee of the Company or any of
its affiliates to terminate employment.
No other Named Executive Officer has an employment agreement, severance
agreement or change-in-control agreement with the Company or any affiliate.
46
<PAGE> 47
SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the beneficial
ownership of Common Stock as of October 14, 1997 and as adjusted to reflect the
sale of the shares of Common Stock offered hereby by (i) each person that owns
beneficially more than 5% of the Common Stock, (ii) each director and Named
Executive Officer of the Company and (iii) all directors and executive officers
of the Company as a group. For purposes of the table, a person or group of
persons is deemed to have "beneficial ownership" of any shares as of a given
date which such person has the right to acquire within 60 days after such date.
<TABLE>
<CAPTION>
PERCENTAGE OF SHARES
NUMBER OF SHARES OWNED OWNED
--------------------------- ----------------------
PRIOR TO AFTER PRIOR TO AFTER
OFFERING OFFERING(1) OFFERING OFFERING(1)
---------- ---------- -------- -----------
<S> <C> <C> <C> <C>
DIRECTORS AND EXECUTIVE OFFICERS
Hushang Ansary.............................. 27,300,000(2) 24,913,333(3) 91.0% 62.9%
Daniel G. Moriarty.......................... 0 16,667(3) 0 *
Abdallah Andrawos........................... 0 13,333(3) 0 *
Nina Ansary................................. 3,000,000 3,010,000(3) 10.0% 7.6%
Frank C. Carlucci........................... 1,200,000 1,090,000(3) 4.0% 2.8%
Dr. Philip David............................ 1,500,000 1,360,000(3) 5.0% 3.4%
Munawar H. Hidayatallah..................... 0 15,000(3) 0 *
Richard D. Higginbotham..................... 0 11,667(3) 0 *
John D. Macomber............................ 0 10,000(3) 0 *
Edward L. Palmer............................ 0 10,000(3) 0 *
Stephen J. Solarz........................... 0 10,000(3) 0 *
Gary W. Stratulate.......................... 0 13,333(3) 0 *
Arthur C. Teichgraeber...................... 0 11,667(3) 0 *
Alexander B. Trowbridge..................... 0 10,000(3) 0 *
J. Robinson West............................ 0 10,000(3) 0 *
All Directors and executive officers as
a group (15 persons)...................... 30,000,000(2) 27,495,000(2)(3) 100% 69.4%
CERTAIN OTHER HOLDERS
Nader Ansary................................ 3,000,000 3,000,000 10.0% 7.6%
The Ansary Family Trust..................... 2,850,000(2) 2,850,000(2) 9.5% 7.2%
</TABLE>
- ---------------
* Less than 1%.
(1) Assumes exercise of vested options. See "Management -- Stock Options."
(2) Mr. Ansary, The Ansary Family Trust, a trust controlled by Mr. Ansary for
the benefit, inter alia, of members of his immediate family, and a private
charitable foundation controlled by Mr. Ansary directly own in the aggregate
21,300,000 shares of Common Stock. Includes shares of Common Stock owned by
Nina Ansary and Nader Ansary (Mr. Ansary's daughter and son), of which Mr.
Ansary disclaims beneficial ownership.
(3) Including, in the case of Mr. Ansary, Ms. Ansary, Mr. Carlucci and Mr.
David, and otherwise consisting of, options to purchase shares of Common
Stock granted pursuant to the Incentive Plan. See "Management -- Stock
Options."
SELLING STOCKHOLDERS
The Selling Stockholders consist of Mr. Ansary, Mr. Carlucci and Dr. David,
who are offering 2,730,000, 120,000 and 150,000 shares of Common Stock,
respectively. If the Underwriters' Over-Allotment Options are exercised, Mr.
Ansary, Mr. Carlucci and Dr. David will sell an additional 819,000, 36,000 and
45,000 shares, respectively. See "Security Ownership of Certain Beneficial
Owners and Management." The Company is
47
<PAGE> 48
paying all the expenses of the Offering, including the expenses attributable to
the shares being sold by the Selling Stockholders, other than underwriting
discounts and commissions.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
CORPORATE CONSOLIDATION
On October 14, 1997, in anticipation of the Offering, the Company and its
then sole stockholder, Energy Services International Ltd. ("ESI"), merged
pursuant to Section 253 of the Delaware General Corporation Law (the "Merger"),
and ESI, as the surviving entity, changed its name to IRI International
Corporation. As a result of the Merger, the stockholders of ESI became the
stockholders of the Company, the number of issued and outstanding shares of
Common Stock was increased to 30,000,000 and all issued and outstanding shares
of the Company's preferred stock (including all accrued and unpaid dividends
thereon) and all shares of treasury stock were cancelled.
OTHER TRANSACTIONS
During the three month period ended March 31, 1997, the Company paid ESI
approximately $450,000 to reimburse ESI for certain administrative services
costs (compensation and related expenses) paid by ESI on behalf of the Company
for services rendered between September 20, 1994 and March 31, 1997.
At December 31, 1996, the Company was owed $158,000 by an affiliate for
services rendered by Company personnel to the affiliate during 1996. Payment was
received in July 1997, and no further services have been rendered.
REGISTRATION RIGHTS AGREEMENT
In connection with the Offering, the Company will enter into a registration
rights agreement with each of the current stockholders (the "Registration Rights
Agreement"). The Registration Rights Agreement will provide for demand
registration rights pursuant to which, upon the request of a holder or holders
(the "Requesting Holders") who are affiliates of the Company or who own at least
10% of the shares of Common Stock subject to such agreement (the "Registrable
Securities"), the Company will file a registration statement under the
Securities Act to register Registrable Securities held by the Requesting Holder
and any other stockholders holding Registrable Securities, provided that at
least 10% of the number of shares of Registrable Securities or aggregate
principal amount of Registrable Securities outstanding at such time is requested
to be registered. In addition, subject to certain conditions and limitations,
the Registration Rights Agreement will provide that holders of Registrable
Securities may participate in any registration by the Company of its shares of
Common Stock in an underwritten offering. The Registration Rights conferred by
the Registration Rights Agreement will be transferable to transferees of the
Registrable Securities covered thereby.
Under the Registration Rights Agreement, the Company is required to pay all
the costs associated with such an offer other than underwriting discounts and
commissions and transfer taxes attributable to the Registrable Securities sold.
In addition, the Company will indemnify the Requesting Holders, and the
Requesting Holders will indemnify the Company, against certain liabilities in
respect of any registration statement or offering covered by the Registration
Rights Agreement.
INDEMNIFICATION AGREEMENTS
In connection with the Offering, the Company will enter into an
indemnification agreement (each, an "Indemnification Agreement") with each of
its directors and executive officers (each, an "Indemnitee"). Each
Indemnification Agreement will provide that the Company will indemnify each
Indemnitee when he or she is involved in any manner or is threatened to be
involved in any proceeding (i) by reason of the fact he or she is or was or had
agreed to become a director or officer of the Company, or is or was serving or
had agreed to serve at the request of the Company as a director, officer,
employee or agent of another entity, or by reason of any action alleged to have
been taken or omitted in such capacity, against all liabilities actually
incurred by the Indemnitee in connection therewith so long as the Indemnitee
acted in good faith and in a manner he or
48
<PAGE> 49
she reasonably believed to be in or not opposed to the best interests of the
Company, and, with respect to any criminal proceeding, had no reasonable cause
to believe his or her conduct was unlawful or (ii) by or in the right of the
Company to procure a judgment in its favor by reason of the fact that he or she
is or was or had agreed to become a director or officer of the Company, or is or
was serving or had agreed to serve at the request of the Company as a director,
officer, employee or agent of another entity, against all liabilities actually
incurred by the Indemnitee in connection therewith so long as he or she acted in
good faith and in a manner he or she reasonably believed to be in or not opposed
to the best interests of the Company, except no indemnification will be made if
the Indemnitee is adjudged to be liable to the Company, unless and only to the
extent a proper court determines that despite the adjudication of liability the
Indemnitee is entitled to indemnity.
The Company will also agree to indemnify each Indemnitee against
liabilities arising from the Indemnitee's alleged or actual negligence or breach
of duty or misstatement made, or acquiesced to, in his or her capacity as an
officer or director of the Company, or while serving at the request of the
Company as a director, officer, employee or agent of another entity.
In the event the Company disputes an Indemnitee's right to indemnification
under an Indemnification Agreement, the Company has agreed to pay all expenses
relating to the Indemnitee's enforcement of its rights under his or her
Indemnification Agreement.
DESCRIPTION OF CAPITAL STOCK
GENERAL
The Company's Certificate of Incorporation (the "Certificate of
Incorporation") provides that the authorized capital stock of the Company
consists of 100,000,000 shares of Common Stock, par value $.01 per share, and
25,000,000 shares of Preferred Stock, par value $1.00 per share (the "Preferred
Stock"). Upon consummation of the Offering, 39,000,000 shares of Common Stock
will be issued and outstanding, and no shares of Preferred Stock will be issued
and outstanding. The summary below is a description summary and is qualified in
its entirety by the provisions of the Certificate of Incorporation.
COMMON STOCK
Except as may otherwise be provided in a Preferred Stock designation, the
holders of shares of Common Stock are entitled to one vote per share on all
matters to be voted on by shareholders and do not have cumulative voting rights.
Subject to preferential rights that may be applicable to any Preferred Stock
outstanding, holders of Common Stock are entitled to receive dividends, if, as
and when declared by the Board of Directors out of funds legally available
therefor. In the event of a liquidation, dissolution or winding up of the
Company, holders of Common Stock are entitled to share equally and ratably in
assets remaining after payment of liabilities, subject to prior distribution
rights of any outstanding Preferred Stock. Holders of Common Stock have no
preemptive or conversion rights or other subscription rights, and there are no
redemption or sinking fund provisions applicable to the Common Stock.
PREFERRED STOCK
The Board of Directors has the authority, with the approval of the holders
of a majority of the outstanding shares of Common Stock, to issue the Preferred
Stock in one or more series and to fix the number of shares to be included in
any such series and the designations, relative powers, preferences, rights and
qualifications, limitations or restrictions of all shares of each such series.
The issuance of Preferred Stock could decrease the amount of earnings and assets
available for distributions to the holders of Common Stock.
LIMITATIONS OF LIABILITY
Under Delaware law, a corporation may include provisions in its certificate
of incorporation that will relieve its directors of monetary liability for
breaches of their fiduciary duty to the corporation, except under certain
circumstances, including a breach of the director's duty of loyalty, acts or
omissions of the director not in good faith or which involve intentional conduct
or a knowing violation of law, the approval of an improper
49
<PAGE> 50
payment of a dividend or an improper purchase by the Company of stock or any
transaction from which the director derived an improper personal benefit. The
Certificate of Incorporation provides that, to the full extent permitted by
Delaware law, no director will be personally liable to the Company or its
stockholders for or with respect to any acts or omissions in the performance of
his or her duties as a director of the Company.
TRANSFER AGENT AND REGISTRAR
The Company has appointed Continental Stock Transfer & Trust Co. as the
transfer agent and registrar for the Common Stock.
SHARES ELIGIBLE FOR FUTURE SALE
Upon consummation of the Offering (assuming the Underwriters'
Over-Allotment Options are not exercised), the Company will have 39,000,000
shares (39,628,333 shares assuming exercise of all vested options) of Common
Stock outstanding. The 12,000,000 shares of Common Stock sold in the Offering
will be freely tradeable by persons other than "affiliates" of the Company
without restriction or limitation under the Securities Act. The remaining
27,000,000 shares are "restricted securities" within the meaning of Rule 144
under the Securities Act (the "Restricted Shares") and may not be sold in the
absence of registration under the Securities Act unless an exemption from
registration is available, including the exemption contained in Rule 144.
In general, under Rule 144, if one year has elapsed since the later of the
date of acquisition of Restricted Shares from the Company or any "affiliate" of
the Company, as that term is defined under the Securities Act, the acquiror or
subsequent holder thereof is entitled to sell within any three-month period a
number of shares that does not exceed the greater of 1% of the Common Stock then
outstanding or the average weekly trading volume of the Common Stock during the
four calendar weeks preceding the date on which notice of the sale is filed with
the Commission. Sales under Rule 144 are also subject to certain manner of sale
provisions, notice requirements and the availability of current public
information about the Company. If two years have elapsed since the date of
acquisition of Restricted Shares from the Company or from any "affiliate" of the
Company, and the acquiror or subsequent holder thereof is deemed not to have
been an affiliate of the Company at any time during the preceding 90 days
preceding a sale, such person would be entitled to sell such shares in the
public market under Rule 144(k) without regard to the volume limitations, manner
of sale provisions, public information requirements or notice requirements. The
Company, the stockholders of the Company prior to the Offering and the Named
Executive Officers have agreed that, subject to certain limited exceptions, for
a period of 180 days from the date of this Prospectus they will not, without the
prior written consent of Lehman Brothers Inc., sell, contract to sell or
otherwise dispose of any shares of Common Stock or any securities convertible
into or exercisable for Common Stock. See "Certain Relationships and Related
Transactions -- Registration Rights Agreement."
The Company intends to file a registration statement on Form S-8 under the
Securities Act to register the shares of Common Stock reserved or to be
available for issuance pursuant to the Incentive Plan. Shares of Common Stock
issued pursuant to such plan generally will be available for sale in the open
market by holders who are not affiliates of the Company and, subject to the
volume and other limitations of Rule 144, by holders who are affiliates of the
Company.
Prior to the Offering there has been no public market for the Common Stock.
See "Risk Factors -- No Prior Public Market for Common Stock; Possible
Volatility of Stock Price." The Company can make no predictions as to the
effect, if any, that future sales of Restricted Shares, or the availability of
such Restricted Shares for sale, or the issuance of shares of Common Stock upon
the exercise of options or otherwise, or the perception that such sales or
exercise could occur, will have on the market price prevailing from time to
time. Sales of substantial amounts of Restricted Shares in the public market or
the perception that such sales might occur could have an adverse effect on the
market price of the Common Stock.
50
<PAGE> 51
UNDERWRITING
Under the terms of, and subject to the conditions contained in, the U.S.
Underwriting Agreement, the U.S. Underwriters, for whom Lehman Brothers Inc.,
Howard, Weil, Labouisse, Friedrichs Incorporated, Prudential Securities
Incorporated and Credit Lyonnais Securities (USA) Inc. are acting as
representatives (the "Representatives"), have severally agreed to purchase from
the Company and the Selling Stockholders, and the Company and the Selling
Stockholders have agreed to sell to each U.S. Underwriter, the aggregate number
of shares of Common Stock set forth opposite the name of each U.S. Underwriter
below:
<TABLE>
<CAPTION>
NUMBER OF
U.S. UNDERWRITERS SHARES
---------------------------------------------------------------------------- ---------
<S> <C>
Lehman Brothers Inc. ....................................................... 2,920,000
Howard, Weil, Labouisse, Friedrichs Incorporated............................ 1,460,000
Prudential Securities Incorporated.......................................... 2,190,000
Credit Lyonnais Securities (USA) Inc. ...................................... 730,000
Bear, Stearns & Co. Inc..................................................... 150,000
CIBC Oppenheimer Corp....................................................... 150,000
Credit Suisse First Boston Corporation...................................... 150,000
Donaldson, Lufkin & Jenrette Securities Corporation......................... 150,000
Goldman, Sachs & Co......................................................... 150,000
Merrill Lynch, Pierce, Fenner & Smith Incorporated.......................... 150,000
Morgan Stanley & Co. Incorporated........................................... 150,000
Salomon Brothers Inc........................................................ 150,000
SBC Warburg Dillon Read Inc................................................. 150,000
Schroder & Co............................................................... 150,000
Jefferies & Company, Inc.................................................... 80,000
Legg Mason Wood Walker Inc.................................................. 80,000
LoewenBaum & Company, Inc................................................... 80,000
Petrie Parkman & Co., Inc................................................... 80,000
Rauscher Pierce Refsnes, Inc................................................ 80,000
Raymond James & Associates, Inc............................................. 80,000
Sanders Morris Mundy Inc.................................................... 80,000
Sands Brothers & Co., Ltd................................................... 80,000
Simmons & Company International............................................. 80,000
Stephens Inc................................................................ 80,000
---------
Total.............................................................. 9,600,000
=========
</TABLE>
Under the terms of, and subject to the conditions contained in, the
International Underwriting Agreement, Lehman Brothers International (Europe),
Credit Lyonnais Securities, Howard, Weil, Labouisse, Friedrichs Incorporated and
Prudential-Bache Securities (U.K.) Inc. (the "International Managers") have
severally agreed to purchase from the Company and the Selling Stockholders, and
the Company and the Selling Stockholders have agreed to sell to each
International Manager, the aggregate number of shares of Common Stock set forth
opposite the name of each International Manager below:
<TABLE>
<CAPTION>
NUMBER OF
INTERNATIONAL MANAGERS SHARES
---------------------------------------------------------------------------- ---------
<S> <C>
Lehman Brothers International (Europe)...................................... 600,000
Credit Lyonnais Securities.................................................. 600,000
Howard, Weil, Labouisse, Friedrichs Incorporated............................ 600,000
Prudential-Bache Securities (U.K.) Inc. .................................... 600,000
---------
Total.............................................................. 2,400,000
=========
</TABLE>
The U.S. Underwriters and the International Managers (collectively, the
"Underwriters") propose to offer the shares to the public at the initial public
offering price set forth on the cover page of this Prospectus, and to certain
selected dealers (who may include the U.S. Underwriters and the International
Managers) at such price, less a selling concession not in excess of $0.70 per
share. The U.S. Underwriters and the International Managers may allow, and such
dealers may re-allow, a concession not in excess of $0.10 per share to certain
other Underwriters or to certain other brokers and dealers. After the initial
offering to the public, the offering price and other selling terms may be
changed by the Representatives and the International Managers.
51
<PAGE> 52
The U.S. Underwriting Agreement and the International Underwriting
Agreement (collectively, the "Underwriting Agreements") provide that the
obligations of the several U.S. Underwriters and the International Managers,
respectively, to pay for and accept delivery of the shares of Common Stock
offered hereby are subject to the approval of certain legal matters by counsel
and certain other conditions. The nature of the U.S. Underwriters' and the
International Managers' obligations is such that, if any of the shares of Common
Stock are purchased by the U.S. Underwriters pursuant to the U.S. Underwriting
Agreement or by the International Managers pursuant to the International
Underwriting Agreement, all the shares of Common Stock agreed to be purchased by
either the U.S. Underwriters or the International Managers, as the case may be,
pursuant to their respective Underwriting Agreements, must be so purchased. The
initial public offering price and underwriting discounts and commissions for the
U.S. Offering and the International Offering are identical. The closing of the
U.S. Offering is a condition to the closing of the International Offering. The
closing of the International Offering is a condition to the closing of the U.S.
Offering.
The Company and the Selling Stockholders have agreed in the Underwriting
Agreements to indemnify the U.S. Underwriters and the International Managers
against certain liabilities, including liabilities under the Securities Act, and
to contribute to payments that the U.S. Underwriters and the International
Managers may be required to make in respect thereof.
Each of the Company and the Selling Stockholders has granted to the U.S.
Underwriters a 30-day option to purchase up to 720,000 additional shares on the
same terms and conditions as set forth above to cover over-allotments, if any.
Each of the Company and the Selling Stockholders has granted to the
International Managers a similar option to purchase up to 180,000 additional
shares to cover over-allotments, if any. To the extent that such options are
exercised, each Underwriter will be committed, subject to certain conditions, to
purchase a number of the additional shares of Common Stock proportionate to such
Underwriter's initial commitment, as indicated in the preceding tables.
The U.S. Underwriters and the International Managers have entered into an
Agreement Between U.S. Underwriters and International Managers (the "Agreement
Between") pursuant to which each U.S. Underwriter has agreed that, as part of
the distribution of the shares of Common Stock (plus any of the shares of Common
Stock to cover over-allotments) offered in the U.S. Offering, (a) it is not
purchasing any of such shares for the account of anyone other than a U.S. or
Canadian Person (as defined below) and (b) it has not offered or sold, and will
not offer, sell, resell or deliver, directly or indirectly, any of such shares
outside the United States or Canada or to anyone other than a U.S. or Canadian
Person. In addition, pursuant to the Agreement Between, each International
Manager has agreed that, as part of the distribution of the shares of Common
Stock (plus any of the shares of Common Stock to cover over-allotments) offered
in the International Offering, (a) it is not purchasing any of such shares for
the account of any U.S. or Canadian Person and (b) it has not offered or sold,
and will not offer, sell, resell or deliver, directly or indirectly, any of such
shares in the United States or Canada or to any U.S. or Canadian Person. Each
International Manager has also agreed that it will offer to sell shares of
Common Stock only in compliance with all relevant requirements of any applicable
laws.
As used herein, "U.S. or Canadian Person" means any resident or citizen of
the United States or Canada, any corporation, partnership or other entity
created or organized in or under the laws of the United States or Canada or any
political subdivision thereof or any estate or trust, the income of which is
subject to United States federal income taxation or Canadian income taxation
regardless of the source of income (other than a foreign branch of any U.S. or
Canadian Person), and includes any United States or Canadian branch of a person
who is not otherwise a U.S. or Canadian Person. The term "United States" means
the United States of America (including the District of Columbia) and its
territories, possessions and other areas subject to its jurisdiction. The term
"Canada" means Canada, its provinces, territories and possessions and other
areas subject to its jurisdiction.
The foregoing limitations do not apply to stabilization transactions or to
certain other transactions specified in the Underwriting Agreements and the
Agreement Between, including: (i) certain purchases and sales between the U.S.
Underwriters and the International Managers; (ii) certain offers, sales,
resales, deliveries or distributions to or through investment advisors or other
persons exercising investment discretion; (iii) purchases, offers or sales by a
U.S. Underwriter who is also acting as an International Manager or by an
52
<PAGE> 53
International Manager who also is acting as a U.S. Underwriter; and (iv) other
transactions specifically approved by the Representatives and the International
Managers.
Pursuant to the Agreement Between, sales may be made between the U.S.
Underwriters and the International Managers of such number of shares of Common
Stock as may be mutually agreed upon. Unless otherwise agreed, the price of any
shares of Common Stock so sold shall be the public offering price then in effect
for the shares of Common Stock being sold by the U.S. Underwriters and the
International Managers, less the selling concession allocable to such shares. To
the extent that there are sales between the U.S. Underwriters and the
International Managers pursuant to the Agreement Between, the number of shares
initially available for sale by the U.S. Underwriters or by the International
Managers may be more or less than the amount specified on the cover page of this
Prospectus.
This Prospectus is not, and under no circumstances is to be construed as,
an advertisement or a public offering of shares of Common Stock in Canada or any
province or territory thereof. Any offer or sale of shares of Common Stock in
Canada may only be made pursuant to an exemption from the requirement to file a
prospectus in the province or territory of Canada in which such offer or sale is
made.
Each International Manager has represented and agreed that: (i) it has not
offered or sold and, prior to the date six months after the latest closing date,
will not offer or sell any shares of Common Stock to persons in the United
Kingdom except to persons whose ordinary activities involve them in acquiring,
holding, managing or disposing of investments (as principal or agent) for the
purposes of their businesses or otherwise in circumstances which have not
resulted and will not result in an offer to the public in the United Kingdom
within the meaning of the Public Offers of Securities Regulations 1995; (ii) it
has complied and will comply with all applicable provisions of the Financial
Services Act 1986 (the "1986 Act") with respect to anything done by it in
relation to the shares of Common Stock in, from or otherwise involving the
United Kingdom; and (iii) it has only issued or passed on, and will only issue
or pass on, to any person in the United Kingdom any investment advertisement
(within the meaning of the 1986 Act) relating to the shares of Common Stock if
that person falls within Article II(3) of the Financial Services Act 1986
(Investment Advertisements) (Exemptions) Order 1996 or is a person to whom such
document may otherwise lawfully be issued or passed on.
No action has been taken or will be taken in any jurisdiction by the
Company, the Selling Stockholders or the Underwriters that would permit a public
offering of shares of Common Stock in any jurisdiction where action for that
purpose is required, other than the United States. Persons into whose possession
this Prospectus comes are required by the Company, the Selling Stockholders and
the Underwriters to inform themselves about, and to observe any restrictions as
to, the offering of shares of Common Stock offered pursuant to the Offering and
the distribution of this Prospectus.
Purchasers of the shares of Common Stock offered hereby may be required to
pay stamp taxes and other charges in accordance with the laws and practices of
the country of purchase in addition to the initial public offering price set
forth on the cover page hereof.
The Company, each of its stockholders prior to the Offering and the Named
Executive Officers have agreed, for a period of 180 days from the date of this
Prospectus, not to, directly or indirectly, offer, sell or otherwise dispose of
(or enter into any transaction or device which is designed to, or could be
expected to, result in the disposition by any person at any time in the future
of) any Common Stock of the Company, or sell or grant options, rights or
warrants with respect to any Common Stock of the Company, without the prior
written consent of Lehman Brothers Inc. on behalf of the Representatives and the
International Managers.
Prior to the Offering, there has been no public market for the Common
Stock. The initial public offering price has been negotiated among the Company,
the Selling Stockholders, the Representatives and the International Managers.
Among the factors considered in determining the initial public offering price of
the Common Stock, in addition to prevailing market conditions, are recent
financial and operating results of the Company, the proposed capital structure,
assets and liabilities of the Company, estimates of the business potential and
earnings prospects of the Company, the prospects for the industry in which the
Company operates, an assessment of the Company's management, consideration of
the above factors in relation to market valuation of companies in related
businesses and other factors deemed relevant. Additionally, consideration was
given to the general status of the securities markets, the market conditions for
new offerings of securities, the demand for similar securities of publicly
traded companies in related businesses and other
53
<PAGE> 54
relevant factors. The initial public offering price set forth on the cover page
of this Prospectus should not, however, be considered an indication of the
actual value of the Common Stock. Such price will be subject to change as a
result of market conditions and other factors. There can be no assurance that an
active trading market will develop for the Common Stock or that the Common Stock
will trade in the public market subsequent to the Offering at or above the
initial public offering price.
At September 30, 1997, Lehman Commercial Paper Inc. and Strategic Resource
Partners Inc., each an affiliate of Lehman Brothers Inc., in the aggregate owned
10% or more of the outstanding subordinated debt of the Company. As a result of
such ownership, the National Association of Securities Dealers, Inc. ("NASD")
may view the Offering as a participation by Lehman Brothers Inc. in the
distribution in a public offering of securities issued by a company with which
Lehman Brothers Inc. has a conflict of interest. As a result, the Offering is
being made pursuant to the provisions of Rule 2720 of the NASD's Conduct Rules.
Such provisions require, among other things, that the initial public offering
price be no higher than that recommended by a "qualified independent
underwriter," who must participate in the preparation of the registration
statement and the prospectus and who must exercise the usual standards of "due
diligence" with respect thereto. Prudential Securities Incorporated is acting as
a qualified independent underwriter in this Offering, and the initial public
offering price of the shares is not higher than the price recommended by
Prudential Securities Incorporated, which price was determined based on the
factors discussed above. In accordance with such Rule 2720, the U.S.
Underwriters and the International Managers will not make sales of shares of
Common Stock offered hereby to customers' discretionary accounts without the
prior specific written approval of such customers.
In connection with its roles as Advisor, Arranger and Syndication Agent
under the Senior Credit Facility, Lehman Commercial Paper Inc., an affiliate of
Lehman Brothers Inc., was paid customary fees. In connection with its role as an
interim lender under the Senior Notes Agreement, Strategic Resource Partners, an
affiliate of Lehman Brothers Inc., was paid customary fees. Lehman Brothers Inc.
acted as financial advisor to the Company in connection with the Acquisitions,
for which it received customary compensation.
Until the distribution of the Common Stock is completed, rules of the
Securities and Exchange Commission may limit the ability of the Underwriters and
certain selling group members to bid for and purchase shares of Common Stock. As
an exception to these rules, the Representatives and the International Managers
are permitted to engage in certain transactions that stabilize the price of the
Common Stock. Such transactions may consist of bids or purchases for the purpose
of pegging, fixing or maintaining the price of the Common Stock.
If the Representatives and International Managers create a short position
in the Common Stock in connection with the Offering, (i.e., if they sell more
shares of Common Stock than are set forth on the cover page of this Prospectus),
the Representatives and the International Managers may reduce that short
position by purchasing Common Stock in the open market. The Representatives and
the International Managers also may elect to reduce any short position by
exercising all or part of the Underwriters' Over-Allotment Options described
herein.
The Representatives and the International Managers also may impose a
penalty bid on certain Underwriters and selling group members. This means that
if the Representatives or the International Managers purchase shares of Common
Stock in the open market to reduce such Underwriters' short position or to
stabilize the price of the Common Stock they may reclaim the amount of the
selling concession from the Underwriters and selling group members who sold
those shares as part of the Offering.
In general, purchases of a security for the purpose of stabilization or to
reduce a syndicate short position could cause the price of the security to be
higher than it might otherwise be in the absence of such purchases. The
imposition of a penalty bid might have an effect on the price of a security to
the extent that it were to discourage resales of the security by purchasers in
the Offering.
Neither the Company, the Selling Stockholders nor any of the Underwriters
makes any representation or prediction as to the direction or magnitude of any
effect that the transactions described above may have on the price of the Common
Stock. In addition, neither the Company, the Selling Stockholders nor any of the
Underwriters makes any representation that the Representatives or International
Managers will engage in such transactions or that such transactions, once
commenced, will not be discontinued without notice.
54
<PAGE> 55
The Common Stock has been approved, subject to notice of issuance, for
listing on the NYSE. In order to meet one of the requirements for listing the
Common Stock on the NYSE, the U.S. Underwriters have undertaken to sell lots of
100 or more shares of Common Stock to a minimum of 2,000 beneficial owners.
LEGAL MATTERS
Certain legal matters with respect to the Common Stock offered hereby will
be passed upon for the Company by Jones, Day, Reavis & Pogue, New York, New York
and for the Underwriters by Baker & Botts, L.L.P., Houston, Texas.
EXPERTS
The financial statements of the Company for the period from April 1, 1994
through September 19, 1994 (Predecessor), the period from September 20, 1994
through March 31, 1995, the year ended March 31, 1996 and the nine months ended
December 31, 1996; the financial statements of Bowen Tools, Inc. as of December
31, 1995 and 1996 and for each of the years in the three year period ended
December 31, 1996; and the financial statements of Cardwell International, Ltd.
as of October 31, 1996 and for the ten month period then ended, have been
included herein and in the Registration Statement in reliance upon the reports
of KPMG Peat Marwick LLP, independent certified public accountants, and upon the
authority of said firm as experts in accounting and auditing. The report of KPMG
Peat Marwick LLP covering the December 31, 1996 financial statements of the
Company refers to a change in the Company's method of recognizing revenues.
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission a
Registration Statement on Form S-1 under the Securities Act with respect to the
shares of Common Stock offered hereby. This Prospectus, which is a part of the
Registration Statement, omits certain information contained in the Registration
Statement, and reference is made to the Registration Statement and the exhibits
thereto for further information with respect to the Company and the Common Stock
offered hereby. Statements contained herein concerning the provisions of any
documents are not necessarily complete, and in each instance reference is made
to the copy of such document filed as an exhibit to the Registration Statement.
Each such statement is qualified in its entirety by such reference. The
Registration Statement, including exhibits filed therewith, may be inspected and
copied at the public reference facilities maintained by the Securities and
Exchange Commission at Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C.
20549, and will also be available for inspection and copying at the regional
offices of the Securities and Exchange Commission located at 7 World Trade
Center, 13th Floor, New York, New York 10048 and Citicorp Center, 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of such materials
may also be obtained from the Public Reference Section of the Securities and
Exchange Commission at 450 Fifth Street, N.W., Washington, D.C. 20549 upon
payment of the fees prescribed by the Securities and Exchange Commission. The
Securities and Exchange Commission maintains a World Wide Web site on the
Internet at http://www.sec.gov that contains reports, proxy and information
statements and other information regarding registrants that file electronically
with the Securities and Exchange Commission.
The Company will be required to file reports and other information with the
Securities and Exchange Commission pursuant to the Exchange Act. The Company
intends to furnish its stockholders annual reports containing consolidated
financial statements certified by its independent accountants and quarterly
reports containing unaudited condensed consolidated financial statements for
each of the first three quarters of each fiscal year.
55
<PAGE> 56
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
IRI INTERNATIONAL CORPORATION
Independent Auditors' Report......................................................... F-2
Balance Sheets as of March 31, 1996 and December 31, 1996............................ F-3
Statements of Operations for the Period from April 1, 1994 through September 19, 1994
(predecessor), Period from September 20, 1994 through March 31, 1995, Year Ended
March 31, 1996 and Nine Months Ended December 31, 1996............................ F-4
Statements of Shareholders' Equity for the Period from April 1, 1994 through
September 19, 1994 (predecessor), Period from September 20, 1994 through March 31,
1995, Year Ended March 31, 1996 and Nine Months Ended December 31, 1996........... F-5
Statements of Cash Flows for the Period from April 1, 1994 through September 19, 1994
(predecessor), Period from September 20, 1994 through March 31, 1995, Year Ended
March 31, 1996 and Nine Months Ended December 31, 1996............................ F-6
Notes to Financial Statements........................................................ F-7
Condensed Consolidated Balance Sheet as of September 30, 1997 (unaudited)............ F-18
Condensed Consolidated Statements of Operations for the Nine Months Ended September
30, 1996 and 1997 (unaudited)..................................................... F-19
Condensed Consolidated Statement of Shareholders' Equity for the Nine Months Ended
September 30, 1997 (unaudited).................................................... F-20
Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September
30, 1996 and 1997 (unaudited)..................................................... F-21
Notes to Condensed Consolidated Financial Statements (unaudited)..................... F-22
BOWEN TOOLS, INC. AND SUBSIDIARIES
Independent Auditors' Report......................................................... F-25
Consolidated Balance Sheets as of December 31, 1995 and December 31, 1996............ F-26
Consolidated Statements of Operations for the Years Ended December 31, 1994, 1995 and
1996.............................................................................. F-27
Consolidated Statements of Shareholder's Equity for the Years Ended December 31,
1994, 1995 and 1996............................................................... F-28
Consolidated Statements of Cash Flows for the Years Ended December 31, 1994, 1995 and
1996.............................................................................. F-29
Notes to Consolidated Financial Statements........................................... F-30
Condensed Consolidated Statements of Operations for the Three Months Ended March 31,
1996 and 1997 (unaudited)......................................................... F-38
Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31,
1996 and 1997 (unaudited)......................................................... F-39
Notes to Condensed Consolidated Financial Statements (unaudited)..................... F-40
CARDWELL INTERNATIONAL LTD. AND SUBSIDIARIES
Independent Auditors' Report......................................................... F-41
Consolidated Balance Sheet as of October 31, 1996.................................... F-42
Consolidated Statement of Operations for the Ten Months Ended October 31, 1996....... F-43
Consolidated Statement of Shareholders' Equity for the Ten Months Ended October 31,
1996.............................................................................. F-44
Consolidated Statement of Cash Flows for the Ten Months Ended October 31, 1996....... F-45
Notes to Consolidated Financial Statements........................................... F-46
Condensed Consolidated Statements of Operations for the Five Months Ended March 31,
1996 and 1997 (unaudited)......................................................... F-52
Condensed Consolidated Statement of Shareholders' Equity for the Five Months Ended
March 31, 1997 (unaudited)........................................................ F-53
Condensed Consolidated Statements of Cash Flows for the Five Months Ended March 31,
1996 and 1997 (unaudited)......................................................... F-54
Notes to Condensed Consolidated Financial Statements (unaudited)..................... F-55
</TABLE>
F-1
<PAGE> 57
INDEPENDENT AUDITORS' REPORT
The Board of Directors
IRI International Corporation:
We have audited the accompanying balance sheets of IRI International
Corporation as of March 31, 1996 and December 31, 1996 and the related
statements of operations, shareholders' equity and cash flows for the period
from April 1, 1994 through September 19, 1994 (Predecessor), the period from
September 20, 1994 through March 31, 1995, the year ended March 31, 1996 and the
nine months ended December 31, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of IRI International
Corporation as of March 31, 1996 and December 31, 1996 and the results of its
operations and its cash flows for the period from April 1, 1994 through
September 19, 1994 (Predecessor), the period from September 20, 1994 through
March 31, 1995, the year ended March 31, 1996 and the nine months ended December
31, 1996 in conformity with generally accepted accounting principles.
As discussed in Note 2(e) to the financial statements, in 1996 the Company
changed its method for recognizing revenues.
KPMG Peat Marwick LLP
Dallas, Texas
June 27, 1997, except as to
note 16, which is as of
October 14, 1997
F-2
<PAGE> 58
IRI INTERNATIONAL CORPORATION
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
ASSETS
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1996 1996
--------- ------------
<S> <C> <C>
Current assets:
Cash and cash equivalents.......................................... $ 7,704 $ 8,635
Accounts receivable, less allowance for doubtful accounts of $27 at
March 31, 1996 and $36 at December 31, 1996..................... 5,442 8,036
Inventories........................................................ 31,155 37,995
Costs and estimated earnings in excess of billings on uncompleted
contracts....................................................... -- 23
Other current assets............................................... 855 957
--------- ------------
Total current assets....................................... 45,156 55,646
Property, plant and equipment, net................................... 775 2,398
Prepaid pension cost................................................. 700 627
--------- ------------
$46,631 $ 58,671
======= ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Notes payable...................................................... $ -- $ 3,157
Accounts payable................................................... 4,470 6,790
Accrued liabilities................................................ 3,122 3,530
Customer advances.................................................. 1,720 2,607
Other liabilities.................................................. 383 760
Current installments of obligation under capital lease............. -- 144
--------- ------------
Total current liabilities.................................. 9,695 16,988
Negative goodwill, less accumulated amortization..................... 18,786 14,760
Obligation under capital lease, less current installments............ -- 522
Accrued postretirement benefits other than pensions.................. 1,624 1,498
--------- ------------
Total liabilities.......................................... 30,105 33,768
--------- ------------
Shareholders' equity:
Preferred stock, $1.00 par value, 25,000,000 shares authorized, 0
issued and outstanding.......................................... -- --
Common stock, $.01 par value, 100,000,000 shares authorized,
30,000,000 shares issued and outstanding........................ 300 300
Additional paid-in capital......................................... 4,700 4,700
Retained earnings.................................................. 11,526 19,903
--------- ------------
Total shareholders' equity................................. 16,526 24,903
Commitments and contingencies
--------- ------------
$46,631 $ 58,671
======= ==========
</TABLE>
See accompanying notes to financial statements.
F-3
<PAGE> 59
IRI INTERNATIONAL CORPORATION
STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
PERIOD FROM PERIOD FROM
APRIL 1, SEPTEMBER 20, NINE MONTHS
1994 THROUGH 1994 THROUGH YEAR ENDED ENDED
SEPTEMBER 19, MARCH 31, MARCH 31, DECEMBER 31,
1994 1995 1996 1996
------------- ------------- ---------- ------------
(PREDECESSOR)
<S> <C> <C> <C> <C>
Revenues.................................... $16,473 $20,206 $ 52,506 $ 62,298
Cost of goods sold.......................... 16,216 14,058 36,877 44,968
------- ------- ------- -------
Gross profit...................... 257 6,148 15,629 17,330
Selling expense............................. 696 955 3,513 3,026
Administrative expense...................... 1,406 1,350 4,477 5,194
------- ------- ------- -------
Operating income (loss)........... (1,845) 3,843 7,639 9,110
Other income (expense):
Interest income........................... 16 21 371 90
Interest expense.......................... (2,675) (25) (47) (615)
Other, net................................ 90 (13) -- (110)
------- ------- ------- -------
(2,569) (17) 324 (635)
------- ------- ------- -------
Income (loss) before income
taxes........................... (4,414) 3,826 7,963 8,475
Income taxes................................ -- 263 -- 98
------- ------- ------- -------
Net income (loss)................. $(4,414) $ 3,563 $ 7,963 $ 8,377
======= ======= ======= =======
Net income (loss) per common share.......... $ (0.15) $ 0.12 $ 0.27 $ 0.28
======= ======= ======= =======
</TABLE>
See accompanying notes to financial statements.
F-4
<PAGE> 60
IRI INTERNATIONAL CORPORATION
STATEMENTS OF SHAREHOLDER'S EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONAL RETAINED TOTAL
COMMON PAID-IN EARNINGS SHAREHOLDER'S
STOCK CAPITAL (DEFICIT) EQUITY
------ ---------- -------- -------------
<S> <C> <C> <C> <C>
Balances at April 1, 1994 (predecessor)............ $300 $ 24,060 $(84,843) $ (60,483)
Net loss (predecessor)............................. -- -- (4,414) (4,414)
------ ---------- -------- -------------
Balances at September 19, 1994 (predecessor)....... 300 24,060 (89,257) (64,897)
Acquisition by Energy Services International....... 0 (19,360) 89,257 69,897
------ ---------- -------- -------------
Balances at September 20, 1994..................... 300 4,700 -- 5,000
Net income......................................... -- -- 3,563 3,563
------ ---------- -------- -------------
Balances at March 31, 1995......................... 300 4,700 3,563 8,563
Net income......................................... -- -- 7,963 7,963
------ ---------- -------- -------------
Balances at March 31, 1996......................... 300 4,700 11,526 16,526
Net income......................................... -- -- 8,377 8,377
------ ---------- -------- -------------
Balances at December 31, 1996...................... $300 $ 4,700 $ 19,903 $ 24,903
====== ======== ======== =========
</TABLE>
See accompanying notes to financial statements.
F-5
<PAGE> 61
IRI INTERNATIONAL CORPORATION
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
PERIOD FROM PERIOD FROM
APRIL 1, SEPTEMBER 20, YEAR NINE MONTHS
1994 THROUGH 1994 THROUGH ENDED ENDED
SEPTEMBER 19, MARCH 31, MARCH 31, DECEMBER 31,
1994 1995 1996 1996
------------- ------------- --------- ------------
(PREDECESSOR)
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)............................. $(4,414) $ 3,563 $ 7,963 $ 8,377
Adjustments to reconcile net income to net
cash provided by operations:
Depreciation............................... 341 6 64 98
Amortization of negative goodwill.......... -- (2,684) (5,367) (4,026)
Change in employee benefit accounts........ 370 (648) (249) (53)
Changes in assets and liabilities:
Accounts receivable...................... (662) 378 72 (2,594)
Inventories.............................. 684 4,175 (2,043) (6,840)
Other current assets..................... (101) 708 (201) (125)
Accounts payable and accrued
liabilities........................... (555) 995 3,580 2,728
Customer advances and other
liabilities........................... 3,957 (2,612) 360 1,264
Intercompany payable..................... 101 -- -- --
------- ------- ------- -------
Net cash provided by (used in)
operations.......................... (279) 3,881 4,179 (1,171)
------- ------- ------- -------
Cash flows used in investing
activities -- purchases of property, plant and
equipment..................................... (109) (128) (717) (911)
------- ------- ------- -------
Cash flows from financing activities:
Payments on capital lease obligation.......... -- -- -- (144)
Proceeds from notes payable................... -- -- -- 3,157
------- ------- ------- -------
Net cash flows provided by financing
activities.......................... -- -- -- 3,013
------- ------- ------- -------
Increase (decrease) in cash and cash
equivalents................................... (388) 3,753 3,462 931
Cash and cash equivalents at beginning of
year.......................................... 877 489 4,242 7,704
------- ------- ------- -------
Cash and cash equivalents at end of year........ $ 489 $ 4,242 $ 7,704 $ 8,635
======= ======= ======= =======
Interest paid................................... $ -- $ 25 $ 47 $ 303
======= ======= ======= =======
Income taxes paid............................... $ -- $ -- $ 263 $ --
======= ======= ======= =======
</TABLE>
See accompanying notes to financial statements.
F-6
<PAGE> 62
IRI INTERNATIONAL CORPORATION
NOTES TO FINANCIAL STATEMENTS
(1) GENERAL
IRI International Corporation (IRI or Company), a Delaware corporation, was
formed on July 30, 1985, through the combination of Ingersoll-Rand Oilfield
Products company, a wholly-owned subsidiary of Ingersoll-Rand Company,
established August 1, 1980, and the Ideco Division of Dresser Industries, Inc.
The Company manufactures and sells a full line of oil and gas mobile well
servicing and drilling rigs, deep oil and gas skid-mounted drilling rigs,
associated drilling equipment (Oilfield Equipment), and specialty steel products
(Specialty Steel). Most of the Company's customers are located in Asia. Raw
materials are readily available and the Company is not dependent upon a single
or a few suppliers.
On September 20, 1994, all of the outstanding common and preferred stock of
IRI was acquired by Energy Services International (ESI) for cash of $5 million.
The acquisition has been recorded using the purchase method of accounting and
the purchase price has been allocated to the assets acquired and liabilities
assumed based upon their estimated fair values at the date of the acquisition as
follows (in thousands):
<TABLE>
<S> <C>
Inventories....................................... $ 33,287
Other current assets.............................. 7,743
Current liabilities............................... (7,372)
Accrued retirement benefits....................... (1,821)
Negative goodwill................................. (26,837)
--------
$ 5,000
========
</TABLE>
The excess of the fair value of net assets acquired over consideration paid
was applied against nonmonetary assets (property, plant and equipment) reducing
the balances at the acquisition date to zero. The remaining excess of the fair
value of net assets acquired over consideration paid was recorded as negative
goodwill and is being amortized using the straight-line method over 5 years.
Negative goodwill amortization of $2.7 million for the period from September 20,
1994 through March 31, 1995, $5.4 million for the year ended March 31, 1996, and
$4.0 million for the nine months ended December 31, 1996 is included in cost of
goods sold in the accompanying statements of operations.
Financial statements previously issued by the Company for the period from
September 20, 1994 through March 31, 1995 and the year ended March 31, 1996 have
been restated to reflect the purchase adjustments arising from the acquisition
of the Company by ESI.
During 1997, the Company elected to change its fiscal year end from March
31 to December 31.
(2) SIGNIFICANT ACCOUNTING POLICIES
(a) Statements of Cash Flows
Cash equivalents of $7.7 million and $8.6 million at March 31, 1996 and
December 31, 1996, respectively, consisted of interest-bearing cash deposits.
For purposes of the statement of cash flows, the Company considers all cash and
short-term investments with original maturities of three months or less to be
cash equivalents.
During the nine months ended December 31, 1996, the Company entered into a
capital lease obligation of $810,000.
(b) Inventories
Inventories are stated at the lower of cost or market. Cost is determined
using standard costs which approximate actual cost on a first-in, first-out
basis.
F-7
<PAGE> 63
IRI INTERNATIONAL CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(c) Property, Plant and Equipment
Depreciation of property, plant and equipment is provided over the
estimated service lives of assets principally using the straight-line method.
Maintenance, repairs and minor replacements are charged to operations as
incurred; major repairs, replacements or improvements are capitalized.
(d) Income Taxes
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.
(e) Revenue Recognition
During 1996, the Company changed its method for recognizing revenues on
construction contracts from the completed contract method to the
percentage-of-completion method. The change was made to better match recognition
of income on contracts to the related costs incurred as construction progresses.
The accompanying financial statements have been restated to reflect the new
accounting method for all periods presented. The Company continues to utilize
the completed contract method of revenue recognition for tax purposes.
Under the percentage-of-completion method, revenues and profits are
recognized based on the percentage of completion throughout the performance
period of the contract. The percentage-of-completion is calculated based on the
ratio of contract costs incurred to date to total estimated contract costs after
providing for all known or anticipated costs. Costs include material, direct
labor and engineering and manufacturing overhead. Selling expenses and general
and administrative expenses are charged to operations as incurred. The effect of
changes in estimates of contract costs is recorded currently. All remaining
revenue is generally recorded when the equipment is shipped.
Costs and estimated earnings in excess of billings on uncompleted contracts
represent revenues earned under the percentage-of-completion method but not yet
billable under the terms of the contract. Amounts are billable under contracts
generally upon shipment of the products or completion of the contracts. Included
in revenues and cost of goods sold for the nine months ended December 31, 1996
is $764,000 and $741,000, respectively, related to uncompleted contracts
($23,000 net) at December 31, 1996.
(f) Earnings per Common Share
Earnings per common share is based on the net income applicable to common
stock and weighted average common stock outstanding (30,000,000 shares) during
the periods and year presented (See note 16).
(g) Financial Instruments and Credit Risk Concentrations
The Company invests its excess cash in financial instruments, primarily
overnight investments and money market mutual funds. These financial instruments
could potentially subject the Company to concentrations of credit risk; however,
the Company's management considers the financial stability and creditworthiness
of a financial institution before investing the Company's funds. The carrying
amounts of the financial instruments in the accompanying financial statements
(cash, accounts receivable and payables) approximate fair value because of the
short maturities of these instruments. The note payable to bank and capital
lease obligation
F-8
<PAGE> 64
IRI INTERNATIONAL CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
bear interest at rates that approximate market rates and, thus the carrying
amount of debt approximates estimated fair value.
A substantial portion of the Company's customers are engaged in the energy
industry. This concentration of customers may impact the Company's overall
exposure to credit risk, either positively or negatively, in that customers may
be similarly affected by changes in economic and industry conditions. The
Company performs ongoing credit evaluations of its customers. The Company
maintains reserves for potential credit losses, and actual losses have
historically been within the Company's expectations. Foreign sales also present
various risks, including risks of war, civil disturbances and governmental
activities that may limit or disrupt markets, restrict the movement of funds or
result in the deprivation of contract rights or the taking of property without
fair consideration. Most of the Company's foreign sales, however, are to large
international companies or are secured by letters of credit or similar
arrangements.
(h) Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
(i) Long-Lived Assets
In March 1995, Statement of Financial Accounting Standards (SFAS) No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of, was issued which requires impairment losses to be recorded on
long-lived assets used in operations when indicators of impairment are present
and estimated future undiscounted cash flows indicate the carrying value of
those assets may not be recoverable. The Company implemented SFAS No. 121 on
April 1, 1996 and the adoption did not have a material effect on the financial
statements.
(3) CHANGE IN ACCOUNTING METHOD
As discussed in note 2(e), the Company adopted the percentage of completion
method of accounting for long-term contracts to conform its accounting policies
with industry standards. The accompanying financial statements have been
restated to reflect the new accounting method for all periods presented.
(4) INVENTORIES
A summary of inventories follows (in thousands):
<TABLE>
<CAPTION>
MARCH DECEMBER
31, 31,
1996 1996
-------- -----------
<S> <C> <C>
Raw materials and supplies.................. $22,473 $29,163
Work in process............................. 7,237 7,645
Finished goods.............................. 1,445 1,187
-------- -----------
Total............................. $31,155 $37,995
======= =========
</TABLE>
F-9
<PAGE> 65
IRI INTERNATIONAL CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(5) PROPERTY, PLANT AND EQUIPMENT
A summary of property, plant and equipment follows (in thousands):
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1996 1996
--------- ------------
<S> <C> <C>
Land and land improvements................... $ -- $ 13
Buildings.................................... 203 277
Machinery and equipment...................... 642 2,276
--------- ------------
845 2,566
Less accumulated depreciation................ (70) (168)
--------- ------------
Property, plant and equipment,
net.............................. $ 775 $2,398
======= ==========
</TABLE>
Machinery and equipment includes capitalized lease assets of $810,000 at
December 31, 1996.
(6) NOTES PAYABLE
During the year ended March 31, 1996, the Company obtained a $15,000,000
revolving credit facility with a bank available through February 1998. The
facility agreement contains provisions, among others, that restrict incurrence
of indebtedness, guarantees, acquisitions, and distributions to shareholders,
and require the Company to meet specified net worth ratios. Borrowings under the
credit facility bear interest at the prime rate (8.25% at December 31, 1996)
plus an applicable margin. As of December 31, 1996, there was $21,000
outstanding on the line of credit. The line of credit was cancelled on March 31,
1997 in connection with the acquisitions and related financing described in note
14.
At December 31, 1996 the Company had a $3 million unsecured demand note
payable to Towers Financial Services bearing interest at 14% per annum. The note
and accrued interest were paid in January 1997.
(7) SHAREHOLDER'S EQUITY
The Company's authorized capitalization consists of 100,000,000 shares of
common stock, par value $.01 per share, and 80,000 issued and outstanding shares
of preferred stock, par value $1.00 per share, cumulative $10 per annum
dividend. Cumulative unpaid preferred stock dividends at December 31, 1996 were
$9,353,000. The preferred stock has a liquidation value of $1.00 per share, plus
cumulative unpaid dividends, and is senior in liquidation preference to the
common equity of the Company. See note 16 for subsequent event change in capital
structure.
F-10
<PAGE> 66
IRI INTERNATIONAL CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(8) INCOME TAXES
Income tax expense (benefit) differs from the amount computed by applying
the statutory rate of 34 percent to income before income taxes as follows (in
thousands):
<TABLE>
<CAPTION>
PERIOD FROM PERIOD FROM NINE MONTHS
APRIL 1, SEPTEMBER 20, ENDED
1994 THROUGH 1994 THROUGH YEAR ENDED DECEMBER
SEPTEMBER 19, MARCH 31, MARCH 31, 31,
1994 1995 1996 1996
------------- ------------- ---------- ------------
(PREDECESSOR)
<S> <C> <C> <C> <C>
Computed "expected" tax expense
(benefit).......................... $(1,501) $ 1,301 $ 2,707 $ 2,882
Change in the valuation allowance.... 1,501 (502) (1,046) (1,504)
Amortization of negative goodwill.... -- (896) (1,825) (1,369)
Other................................ -- 360 164 89
------- ------ -------- --------
$ -- $ 263 $ -- $ 98
======= ======= ======== ========
</TABLE>
The income tax expense for the period from September 20, 1994 through March
31, 1995 consists of current federal alternative minimum tax.
The tax effects of temporary differences that give rise to significant
portions of the deferred federal income tax assets and liabilities as of March
31, 1996 and December 31, 1996, are as follows (in thousands):
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1996 1996
--------- ------------
<S> <C> <C>
Deferred income tax assets:
Basis in inventories................................. $ 1,587 $1,692
Basis in and depreciation of plant, property and
equipment......................................... 1,432 1,345
Employee benefits.................................... 552 509
Net operating loss carryforwards..................... 3,445 1,800
Other................................................ 395 536
------- ------
Total deferred income tax assets............. 7,411 5,882
Less valuation allowance............................. 7,173 5,669
------- ------
Net deferred income tax assets............... 238 213
Deferred income tax liabilities -- prepaid pension
cost................................................. 238 213
------- ------
Net deferred federal income tax liability.... $ -- $ --
======= ======
</TABLE>
Because of the uncertainty of generating future taxable income, the Company
has provided a valuation allowance for deferred tax assets of $7,173,000 and
$5,669,000 at March 31, 1996 and December 31, 1996, respectively. The valuation
allowance decreased $1,504,000 during the nine months ended December 31, 1996.
Under the Internal Revenue Code of 1986, in general, a change of more than
50% in the composition of a company's equity owners during any three years
results in a limitation on such company's ability to utilize its loss
carryforwards in subsequent years. The Company has undergone such an ownership
change as a result of the sale described in note 1; accordingly, the amount of
the Company's preacquisition net operating loss carryforwards that may be
utilized per year is limited to approximately $300,000 (aggregate $3,600,000
available at December 31, 1996) expiring from 2003 through 2009. To the extent
such carryforwards are not utilized in a year, they may be utilized in
subsequent years. In addition, the Company has $1,694,000 of net operating loss
carryforwards, without limitations, expiring from 2010 through 2011.
F-11
<PAGE> 67
IRI INTERNATIONAL CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(9) LEASES
At December 31, 1996, minimum future annual payments required under a
capital lease together with the present value of the net minimum lease payments
and noncancelable operating leases, primarily for repair facilities and offices
and office equipment, were as follows (in thousands):
<TABLE>
<CAPTION>
OPERATING CAPITAL
LEASES LEASES
--------- -------
<S> <C> <C>
1997.............................................. $ 767 $ 200
1998.............................................. 367 200
1999.............................................. 311 200
2000.............................................. 259 200
2001.............................................. 186 50
--------- -------
Total minimum lease payments............ $ 1,890 850
=======
Less amount representing interest................. 184
-------
Present value of minimum lease payments........... $ 666
=====
</TABLE>
Total rental expense was $289,000 for the period April 1, 1994 through
September 19, 1994 (predecessor), $196,000 for the period from September 20,
1994 through March 31, 1995, $546,000 for the year ended March 31, 1996 and
$860,000 for the nine months ended December 31, 1996.
(10) PENSION PLAN
The Company has a noncontributory defined benefit plan, which covers
substantially all employees. Employees with 10 or more years of service are
entitled to pension benefits beginning at normal retirement age (65) based on
years of service and the employees' compensation for the 60 consecutive month
period in which his compensation is the highest. The plan incorporates
provisions for early retirement, the privilege to elect a life annuity,
surviving spouse benefits, and disability benefits.
Employees of the Company who were employees of Ingersoll-Rand Oilfield
Products Company or the Ideco Division of Dresser Industries, Inc., immediately
prior to becoming employees of IRI, are entitled to uninterrupted service tenure
for purposes of retirement benefit calculations. Benefits payable under the IRI
retirement plan are offset by benefits payable under the retirement plans of
Dresser and Ingersoll-Rand Oilfield Products Company.
The Company uses the accrued benefit cost method to compute the annual
contributions to the plan, with minimum and maximum contributions determined on
a cumulative basis and the Company having the flexibility to choose which
contribution to make and which can vary from one period to the next.
The accrued benefit cost includes a normal cost which is computed as the
present value of the pro rata portion for the benefit accrual during the year
being valued and a past service cost which is the present value of that portion
of the projected benefit which has been accrued up to the valuation date. The
unfunded past-service cost may be liquidated over a period of between 10 and 30
years.
F-12
<PAGE> 68
IRI INTERNATIONAL CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The funded status and the amounts recognized in the balance sheets as of
March 31, 1996 and December 31, 1996, the date of the latest actuarial
valuation, are as follows (in thousands):
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1996 1996
--------- ------------
<C> <C>
Actuarial present value of benefit obligations:
Vested............................................. $(6,613) $ (7,231)
Nonvested.......................................... (769) (58)
------- --------
Accumulated benefit obligation ...................... $(7,382) $ (7,289)
======= ========
Projected benefit obligation for service rendered
to date ........................................... (7,382) (7,289)
Plan assets at fair value ........................... 7,433 7,321
------- --------
Projected benefit obligation less than plan assets... 51 32
Unrecognized net gain from past experience
different from that assumed and effects of
changes in assumptions ............................ 649 595
------- --------
Prepaid pension cost ................................ $ 700 $ 627
======= ========
</TABLE>
The Plan assets consist primarily of time share real estate notes and fixed
income time deposits.
Net pension cost includes the following components (in thousands):
<TABLE>
<CAPTION>
PERIOD FROM PERIOD FROM
APRIL 1, 1994 SEPTEMBER 20, NINE MONTHS
THROUGH 1994 THROUGH YEAR ENDED ENDED
SEPTEMBER 19, MARCH 31, MARCH 31, DECEMBER 31,
1994 1995 1996 1996
------------- ------------- ---------- ------------
(PREDECESSOR)
<S> <C> <C> <C> <C>
Service cost............................ $ 381 $ 50 $ 108 $ 81
Interest cost........................... 320 257 556 419
Actual return on plan assets............ (274) (274) (565) (270)
Net amortization and deferral........... 34 -- 154 (157)
------------- ------------- ---------- ------------
Total pension expense
(income).................... $ 461 $ 33 $ 253 $ 73
========== ========== ======== ==========
</TABLE>
As of September 1, 1995, the pension plan was frozen insofar as future
accrual of pension benefits. Because the plan amendment to freeze the plan was
planned in conjunction with the ESI acquisition discussed in note 1, the
resulting curtailment gain was taken into consideration in remeasuring the
Company's projected benefit obligation and the date of the acquisition.
The development of the actuarial present value of the projected benefit
obligation at March 31, 1996 and December 31, 1996 was based upon a weighted
average discount rate of 7.75% and 7.90%, respectively, and an expected
long-term rate of return on assets of 8.0%.
The Pension Benefit Guaranty Corporation provides protection to plan
participants by assuring employees that the fixed commitment of the Company for
funding vested accrued benefits of the plan will be paid up to specified maximum
amounts should the Company be unable to fund the fixed commitment.
The plan is administered by the Pension Committee which is appointed by
IRI's Board of Directors.
(11) POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
In addition to the Company's defined benefit pension plan, the Company
sponsors a defined benefit health care plan that provides postretirement medical
benefits to retirees or full-time employees who retire after attaining age 55
with at least 10 years of service as of September 1, 1996. Current retirees
receive benefits for
F-13
<PAGE> 69
IRI INTERNATIONAL CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
life while full time employees (future retirees) only receive benefits until age
65. The plan is contributory, with retirees contributing 20% of the health care
cost. The Company's contribution is capped at a 5% annual increase in health
care costs, with the remaining increases to be paid by the employee. The
Company's policy is to fund the cost of medical benefits in amounts determined
at the discretion of management.
Summary information on the Company's plan at March 31, 1996 and December
31, 1996 is as follows (in thousands):
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1996 1996
--------- ------------
<S> <C> <C>
Accumulated postretirement benefit obligation:
Actives employees eligible to retire............... $ 572 $ 594
Retired participants............................... 1,240 1,227
Unamortized gain or loss associated with actuarial
assumption changes and plan amendment.............. (188) (323)
--------- ------------
Accrued postretirement benefit costs....... $ 1,624 $1,498
======= ==========
</TABLE>
Net period postretirement benefit cost includes the following components
(in thousands):
<TABLE>
<CAPTION>
PERIOD FROM PERIOD FROM
APRIL 1, 1994 SEPTEMBER 20, NINE MONTHS
THROUGH 1994 THROUGH YEAR ENDED ENDED
SEPTEMBER 19, MARCH 31, MARCH 31, DECEMBER 31,
1994 1995 1996 1996
------------- ------------- ---------- ------------
(PREDECESSOR)
<S> <C> <C> <C> <C>
Service cost..................... $ 247 $ 42 $ 30 $ --
Interest cost.................... 664 138 187 103
Net amortization and deferral.... -- -- -- 2
------ ------ ---------- ------
Net periodic
postretirement
benefit cost
(income)............. $ 911 $ 180 $217 $105
========== ========== ======== ==========
</TABLE>
On August 11, 1995, the plan was amended to terminate all employees from
the plan except those eligible to retire on June 30, 1995 and all current
retirees. In addition under the amended plan, active employees eligible to
retire will, after the age of 65, receive through the retirement plan, 80% of
the cost of medical insurance with a 5% cap over a base year premium of calendar
1996. Because it was expected that the plan would be terminated in conjunction
with the ESI acquisition discussed in note 1, the effects were considered in
measuring the Company's accumulated post retirement benefit obligation as of the
acquisition date.
The discount rate used in determining the accumulated postretirement
benefit obligation was 7.75% at March 31, 1996 and December 31, 1996. The
assumed health care cost trend rate was 10% in 1995 graded down to 5% after 12
years. Because health care cost increases over 5% annually are borne by the
employees, the amounts reported are not affected by increases in the assumed
health care cost trend rate.
(12) RELATED PARTY TRANSACTIONS
ESI charged the Company $450,000 during the nine months ended December 31,
1996 for certain administrative overhead functions performed from September 20,
1994 through December 31, 1996.
The Company has an account receivable from a related party of $158,000 at
December 31, 1996 for services rendered by IRI personnel. The receivable is
expected to be paid during fiscal year 1997.
F-14
<PAGE> 70
IRI INTERNATIONAL CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(13) BUSINESS SEGMENTS
The Company operates through two business segments consisting of Oilfield
Equipment and Specialty Steel. The Oilfield Equipment segment is principally
engaged in the design and manufacture of drilling and well servicing rigs and
components for use on land and on offshore drilling platforms. The Company
specializes in providing small truck-mounted rigs to stationary land deep
drilling rigs to meet the functional requirements of customers drilling in
remote and harsh environments. The Company's Specialty Steel segment
manufactures premium carbon, alloy and specialty steel for use in commercial and
military products as well as for the manufacture of oilfield equipment products.
IRI's steel products are also used in the petroleum, aircraft and power
generation industries.
Financial information by industry segment is summarized below (in
thousands).
<TABLE>
<CAPTION>
OILFIELD SPECIALTY CORPORATE
EQUIPMENT STEEL AND OTHER TOTAL
--------- --------- --------- --------
<S> <C> <C> <C> <C>
Period from April 1, 1994 through
September 19, 1994 (predecessor):
Sales to unaffiliated customers....... $12,545 $ 3,928 $ -- $ 16,473
Operating income (loss)............... (671) 232 (1,406) (1,845)
Identifiable assets................... 34,169 5,184 1,677 41,030
Depreciation.......................... 188 136 17 341
Capital expenditures.................. 24 85 -- 109
Period from September 20, 1994 through
March 31, 1995:
Sales to unaffiliated customers....... $14,399 $ 5,807 $ -- $ 20,206
Operating income...................... 1,269 1,240 1,334 3,843
Identifiable assets................... 28,924 5,804 5,402 40,130
Depreciation.......................... 2 2 2 6
Amortization of negative goodwill..... -- -- (2,684) (2,684)
Capital expenditures.................. 23 13 92 128
Year ended March 31, 1996:
Sales to unaffiliated customers....... $40,176 $ 12,330 $ -- $ 52,506
Operating income...................... 4,141 2,608 890 7,639
Identifiable assets................... 30,979 6,302 9,350 46,631
Depreciation.......................... 40 12 12 64
Amortization of negative goodwill..... -- -- (5,367) (5,367)
Capital expenditures.................. 581 130 6 717
Nine months ended December 31, 1996:
Sales to unaffiliated customers....... $52,029 $ 10,269 $ -- $ 62,298
Operating income (loss)............... 7,399 2,879 (1,168) 9,110
Identifiable assets................... 40,169 6,956 11,546 58,671
Depreciation.......................... 79 10 9 98
Amortization of negative goodwill..... -- -- (4,026) (4,026)
Capital expenditures.................. 545 218 958 1,721
</TABLE>
F-15
<PAGE> 71
IRI INTERNATIONAL CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Export sales by geographic region based upon the ultimate destination in
which equipment or services were sold, shipped or provided to the customer by
the Company were as follows (in thousands):
<TABLE>
<CAPTION>
PERIOD FROM
APRIL 1, 1994 PERIOD FROM NINE MONTHS
THROUGH SEPTEMBER 20, ENDED
SEPTEMBER 19, 1994 THROUGH YEAR ENDED DECEMBER 31,
1994 MARCH 31, 1995 MARCH 31, 1996 1996
------------- -------------- -------------- ------------
<S> <C> <C> <C> <C>
Russia............................. $ 2,287 $ 8,674 $ 26,459 $ 39,717
Europe (excluding Russia).......... 301 1,141 2,068 151
Asia (excluding Russia)............ 2,638 187 128 72
South America...................... 57 -- -- 634
Africa............................. 2,426 -- 391 --
------------- -------------- -------------- ------------
Total export sales....... 7,709 10,002 29,046 40,574
Domestic sales..................... 8,764 10,204 23,460 21,724
------------- -------------- -------------- ------------
Total sales.............. $16,473 $ 20,206 $ 52,506 $ 62,298
========== =========== =========== ==========
</TABLE>
During the period from April 1, 1994 through September 19, 1994
(preacquisition), one customer constituted 11% of total revenues. During the
period from September 20, 1994 through March 31, 1995, two customers each
accounted for revenues of 12%. For the year ended March 31, 1996, one customer
accounted for 36% of revenues and for the nine months ended December 31, 1996,
two customers accounted for 38% and 14% of revenues, respectively.
(14) ACQUISITIONS
On March 31, 1997, the Company acquired certain assets and assumed certain
liabilities of Bowen Tools, Inc. ("Bowen"), a wholly owned subsidiary of the
French chemical concern L'Air Liquide, for a total consideration of $73.1
million. On April 17, 1997, the Company also acquired the stock of Cardwell
International Ltd. ("Cardwell"), a privately owned company, as well as certain
assets held by affiliates of Cardwell for approximately $12 million in cash at
closing and partial payment ($3 million) of a note payable to bank. In addition
the Company incurred approximately $2.4 million ($1.8 million for Bowen and $0.6
million for Cardwell) of transaction costs in connection with the acquisitions.
The acquisitions were financed through a $65 million senior secured term loan
facility and $31 million of interim senior subordinated increasing rate notes.
The term loan is payable in increasing amounts over a five-year period and
bears interest at a base rate (as defined) plus 1.5% or the Eurodollar rate plus
3.25%. The interim notes bear interest at LIBOR plus 6.5%, increasing .5% per
three month period if the notes are not repaid within eight months, to a maximum
of 18%. The interim notes mature one year from issuance and at maturity the
holders of the interim notes shall receive warrants representing 5% of the
common stock of ESI. In addition, holders are required to exchange their interim
notes for rollover notes if no event of default has occurred, the Company pays a
3% rollover fee to the holders, the rollover debt registration is declared
effective by the SEC and the shelf registration statement with respect to the
warrants and warrant shares has been declared effective by the SEC. Proceeds
from any public offering or private placement are to be used, subject to certain
agreed exceptions, to redeem the interim notes.
Bowen, headquartered in Houston, Texas, designs, manufactures and markets
fishing tools and drilling, power and wireline/pressure control equipment used
in the drilling and completion of oil and gas wells. Cardwell, headquartered in
El Dorado, Kansas, manufactures and sells drilling rigs, related oilfield
equipment and supplies predominantly to foreign customers.
F-16
<PAGE> 72
IRI INTERNATIONAL CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The acquisitions have been recorded using the purchase method of accounting
and results of operations of the acquired companies will be included in the
statement of operations of IRI from the date of the respective acquisitions.
(15) COMMITMENTS AND CONTINGENCIES
The Company has contract commitments aggregating $14.8 million at December
31, 1996 for the manufacture and delivery of drilling rigs during fiscal year
1997.
At December 31, 1996, the Company was contingently liable for approximately
$7.3 million in letters of credit which guarantee the Company's performance for
payment to third parties in accordance with specified contractual terms and
conditions. These letters of credit are primarily secured by the Company's cash,
accounts receivable and inventory. Management does not expect any material
losses to result from these off-balance-sheet instruments as it anticipates full
performance on the related contracts.
(16) SUBSEQUENT EVENT
On October 14, 1997, the Company merged into ESI. ESI was the surviving
corporation and changed its name to IRI International Corporation. At the time
of the merger, ESI had 100 common shares issued and outstanding, no liabilities
and its sole asset was its investment in the Company. As a result of the merger,
each share of common stock of ESI was converted into 300,000 shares of the
surviving corporation, each treasury share of common stock was cancelled and
each share of preferred stock of the Company, including accrued and unpaid
dividends thereon, was cancelled. The authorized capital stock of the Company
was increased to 100,000,000 common shares and 25,000,000 preferred shares. The
financial statements, including all references to the number of shares of common
and preferred stock and all per share information, have been adjusted to reflect
the merger and the other changes in capital structure on a retroactive basis.
F-17
<PAGE> 73
IRI INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 1997
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
ASSETS
<TABLE>
<S> <C>
Current assets:
Cash and cash equivalents....................................................... $ 5,584
Accounts receivable, less allowance for doubtful accounts of $554............... 21,866
Inventories (note 2)............................................................ 96,307
Costs and estimated earnings in excess of billings on uncompleted contracts..... 5,652
Other current assets............................................................ 2,803
--------
Total current assets.................................................... 132,212
--------
Property, plant and equipment, net................................................ 41,949
Excess of cost over fair value of net tangible assets of businesses acquired,
net............................................................................. 5,545
Prepaid pension cost.............................................................. 554
Other assets, principally debt issuance costs, net................................ 3,214
--------
$183,474
========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable................................................................ $ 16,081
Accrued liabilities............................................................. 6,731
Customer advances and security deposits......................................... 8,364
Other liabilities............................................................... 1,864
Current installments of long-term debt.......................................... 2,521
Current installments of obligation under capital lease.......................... 174
--------
Total current liabilities............................................... 35,735
Negative goodwill, less accumulated amortization.................................. 10,734
Long-term debt, less current installments......................................... 107,535
Obligation under capital lease, less current installments......................... 500
Accrued postretirement benefits other than pensions............................... 1,116
--------
Total liabilities....................................................... 155,620
--------
Shareholders' equity:
Preferred stock, $1 par value, 25,000,000 shares authorized, 0 shares issued and
outstanding.................................................................. --
Common stock, $.01 par value, 100,000,000 shares authorized, 30,000,000 shares
issued and outstanding....................................................... 300
Additional paid-in capital...................................................... 4,700
Retained earnings............................................................... 22,854
--------
Total shareholders' equity.............................................. 27,854
Commitments and contingencies
--------
Total liabilities and shareholders' equity........................................ $183,474
========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
F-18
<PAGE> 74
IRI INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1997
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
1996 1997
------- --------
<S> <C> <C>
Revenues................................................................ $58,217 $112,130
Cost of goods sold...................................................... 42,397 86,816
------- --------
Gross profit.................................................. 15,820 25,314
Administrative and selling expense...................................... 8,096 15,871
------- --------
Operating income.............................................. 7,724 9,443
------- --------
Other income (expense):
Interest income....................................................... 161 128
Interest expense...................................................... (412) (6,540)
Other, net............................................................ -- 259
------- --------
(251) (6,153)
------- --------
Income before income taxes.................................... 7,473 3,290
Income taxes............................................................ -- 339
------- --------
Net income.................................................... $ 7,473 $ 2,951
======= ========
Net income per common share............................................. $ 0.25 $ 0.10
======= ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
F-19
<PAGE> 75
IRI INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDER'S EQUITY
NINE MONTHS ENDED SEPTEMBER 30, 1997
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONAL TOTAL
COMMON PAID-IN RETAINED SHAREHOLDER'S
STOCK CAPITAL EARNINGS EQUITY
------ ---------- -------- -------------
<S> <C> <C> <C> <C>
Balances at December 31, 1996................... $300 $4,700 $ 19,903 $24,903
Net income...................................... -- -- 2,951 2,951
------ ---------- -------- -------------
Balances at September 30, 1997.................. $300 $4,700 $ 22,854 $27,854
====== ======= ======= ==========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
F-20
<PAGE> 76
IRI INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1997
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
1996 1997
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income........................................................... $ 7,473 $ 2,951
Adjustments to reconcile net income to net cash provided by
operations:
Depreciation and amortization..................................... 185 2,115
Gain on sale of assets............................................ -- (371)
Amortization of negative goodwill................................. (4,026) (4,026)
Change in accrued employee benefits............................... (135) (273)
Changes in assets and liabilities (exclusive of effects of
acquisitions):
Inventory....................................................... (14,250) (16,464)
Accounts receivable............................................. 1,789 (3,508)
Other assets.................................................... (2,071) (5,076)
Accounts payable and accrued expenses, customer advances and
other liabilities.............................................. (7,764) 10,464
-------- --------
Net cash used in operations.................................. (18,799) (14,188)
-------- --------
Cash flows from investing activities:
Purchases of property, plant and equipment........................... (620) (2,520)
Acquisition of Bowen assets, net of liabilities assumed.............. -- (77,264)
Acquisition of Cardwell assets, net of liabilities assumed........... -- (12,574)
-------- --------
Net cash used in investing activities........................ (620) (92,206)
-------- --------
Cash flows from financing activities:
Proceeds from sale of assets......................................... -- 523
Proceeds from notes payable.......................................... 8,217 113,482
Payments on capital lease obligation................................. (110) (157)
Debt issuance costs.................................................. -- (3,852)
Payments on notes payable............................................ -- (6,653)
-------- --------
Net cash flows provided from financing activities.................... 8,107 103,343
-------- --------
Decrease in cash and cash equivalents.................................. (11,312) (3,051)
Cash and cash equivalents at beginning of year......................... 12,393 8,635
-------- --------
Cash and cash equivalents at end of year............................... $ 1,081 $ 5,584
======== ========
Interest paid.......................................................... $ 40 $ 5,846
======== ========
Income taxes paid...................................................... $ -- $ --
======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
F-21
<PAGE> 77
IRI INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(1) GENERAL
The accompanying condensed consolidated financial statements of IRI
International Corporation and subsidiaries (the Company) as of September 30,
1997 and for the nine months ended September 30, 1996 and 1997 are unaudited;
however, they include all adjustments (consisting only of normal recurring
adjustments) which, in the opinion of management, are necessary for a fair
presentation for such periods. Accounting measurements at interim dates
inherently involve greater reliance on estimates than at year end. The results
of operations for the interim periods presented are not necessarily indicative
of the results to be expected for the entire year.
Certain footnote disclosures normally included in annual consolidated
financial statements prepared in accordance with generally accepted accounting
principles have been omitted herein. The interim information should be read in
conjunction with the Company's annual financial statements and notes.
(2) INVENTORIES
Inventories consist of the following at September 30, 1997 (in thousands):
<TABLE>
<S> <C>
Raw materials...................................................... $19,779
Work in process.................................................... 29,941
Finished goods..................................................... 46,587
-------
$96,307
=======
</TABLE>
(3) COMMITMENTS AND CONTINGENCIES
The Company has contract commitments aggregating $62.9 million at September
30, 1997 for the manufacture and delivery of drilling rigs.
At September 30, 1997, the Company was contingently liable for
approximately $12.2 million in letters of credit which guarantee the Company's
performance for payment to third parties in accordance with specified
contractual terms and conditions. These letters of credit are primarily secured
by the Company's cash, accounts receivable and inventory. Management does not
expect any material losses to result from these off-balance-sheet instruments as
it anticipates full performance on the related contracts.
The Company is subject to various claims and legal actions arising in the
ordinary course of business. Management believes that any ultimate liability
resulting from the outcome of such proceedings to the extent not otherwise
provided for in the financial statements will not have a material adverse effect
on the Company's financial condition.
(4) ACQUISITIONS
On March 31, 1997, the Company acquired certain assets and assumed certain
liabilities of Bowen Tools, Inc. ("Bowen"), a wholly owned subsidiary of the
French chemical concern L'Air Liquide, for a total consideration of $74.6
million. On April 17, 1997, the Company also acquired the stock of Cardwell
International Ltd. ("Cardwell"), a privately owned company, as well as certain
assets held by affiliates of Cardwell for approximately $12 million in cash at
closing and partial payment ($3 million) of a note payable to bank. In addition
the Company incurred approximately $3.2 million ($2.6 million for Bowen and $.6
million for Cardwell) of transaction costs in connection with the acquisitions.
The acquisitions were financed through a $65 million senior secured term loan
facility and $31 million of interim senior subordinated increasing rate notes.
The term loan is payable in increasing amounts over a five-year period and bears
interest at a base rate (as defined) plus 1.5% or the Eurodollar rate plus
3.25%. The interim notes bear interest at LIBOR plus 6.5%, increasing .5% per
three month period if the notes are not repaid within eight months, to a maximum
of 18%.
F-22
<PAGE> 78
IRI INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The interim notes mature one year from issuance and at maturity the holders of
the interim notes shall receive warrants representing 5% of the common stock of
the Company. In addition, holders are required to exchange their interim notes
for rollover notes if no event of default has occurred, the Company pays a 3%
rollover fee to the holders, the rollover debt registration is declared
effective by the SEC and the shelf registration statement with respect to the
warrants and warrant shares has been declared effective by the SEC. Proceeds
from any public offering or private placement are to be used, subject to certain
agreed exceptions, to redeem the interim notes.
Bowen, headquartered in Houston, Texas, designs, manufactures and markets
fishing tools and drilling, power and wireline/pressure control equipment used
in the drilling and completion of oil and gas wells. Cardwell, headquartered in
El Dorado, Kansas, manufactures and sells drilling rigs, related oilfield
equipment and supplies predominantly to foreign customers.
The acquisitions have been recorded using the purchase method of accounting
and results of operations of the acquired companies have been included in the
statement of operations of IRI from the date of the respective acquisitions.
Based on management's preliminary estimates, the cost of the Bowen and Cardwell
acquisitions have been allocated to the assets acquired and liabilities assumed
based on their respective fair values as follows (in thousands):
<TABLE>
<S> <C>
Current assets.................................................... $ 56,143
Property, plant and equipment..................................... 39,942
Excess of cost over fair value of net tangible assets of
businesses acquired, net........................................ 6,096
Other assets...................................................... 976
Current liabilities............................................... (13,319)
--------
$ 89,838
========
</TABLE>
The following sets forth selected consolidated financial information for
the Company on a pro forma basis for the nine months ended September 30, 1996
and 1997 assuming the Bowen and Cardwell acquisitions had occurred on January 1,
1996 (in thousands, except per share amounts):
<TABLE>
<CAPTION>
1996 1997
-------- --------
<S> <C> <C>
Revenues.................................................... $141,458 $134,540
======== ========
Gross profit................................................ $ 42,825 $ 34,603
======== ========
Operating income............................................ $ 11,762 $ 10,440
======== ========
Net income.................................................. $ 2,867 $ 1,228
======== ========
Net income per common share................................. $ 0.10 $ 0.04
======== ========
</TABLE>
Pro forma adjustments primarily relate to additional interest expense
resulting from debt to finance the acquisitions, additional depreciation and
amortization expense as a result of the purchase price allocations to property,
plant and equipment and excess of cost over net tangible assets purchased and
the related tax effects of these adjustments.
The pro forma information is not necessarily indicative of the results that
actually would have been achieved had such transactions been consummated as of
January 1, 1996, or that may be achieved in the future.
F-23
<PAGE> 79
IRI INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(5) LONG-TERM DEBT
The Company had debt outstanding at September 30, 1997 as follows (in
thousands):
<TABLE>
<S> <C>
Revolving credit note, due March 31, 2000......................... $ 15,000
Senior subordinated note, due March 31, 1998...................... 31,000
Senior secured term loan, due in increasing quarterly payments
beginning June 30, 1997......................................... 64,000
Other............................................................. 56
--------
110,056
Less current installments......................................... (2,521)
--------
Long-term debt, less current installments......................... $107,535
========
</TABLE>
The senior secured term loan facility contains provisions that requires the
Company to maintain certain financial ratios commencing June 30, 1997 and
achieve consolidated earnings before interest, taxes, depreciation and
amortization of $25 million by December 31, 1997. The senior secured term loan
facility also limits sales of assets, the incurrence of additional indebtedness,
and restricts payments to shareholders.
(6) RELATED PARTY TRANSACTIONS
During the three month period ended March 31, 1997, the Company paid ESI
approximately $450,000 to reimburse ESI for certain administrative services
costs (compensation and related expenses) paid by ESI on behalf of the Company
for services rendered between September 20, 1994 and March 31, 1997.
At December 31, 1996, the Company was owed $158,000 by an affiliate for
services rendered by Company personnel to the affiliate during 1996. Payment was
received in July 1997, and no further services have been rendered.
(7) STOCK OPTIONS
In anticipation of an initial public stock offering, the Company granted
its Directors and certain of its officers and employees an aggregate of
1,955,000 options to purchase shares of common stock. Directors not employed by
the Company received options to purchase an aggregate of 160,000 shares of
common stock having an exercise price that will be equal to the initial public
offering price. The options granted to Directors not employed by the Company
vest as to one-half of the option shares on the effective date of the Offering
and as to a further one-quarter of the option shares on the first and second
anniversaries of the effective date of the Offering. Certain executive officers
and employees received options to purchase an aggregate of 1,795,000 shares of
common stock having an exercise price equal to the greater of the initial public
offering price and the fair market value of the option shares on the date such
options vest. The options granted to certain executive officers and employees
generally vest as to one-third of the option shares upon the effective date of
the Offering and as to a further one-third of the option shares on the first and
second anniversaries of the effective date of the Offering.
F-24
<PAGE> 80
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Bowen Tools, Inc.
We have audited the accompanying consolidated balance sheets of Bowen
Tools, Inc. as of December 31, 1995 and 1996 and the related consolidated
statements of operations, shareholder's equity and cash flows for each of the
years in the three-year period ended December 31, 1996. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Bowen Tools, Inc. as of
December 31, 1995 and 1996 and the results of their operations and their cash
flows for each of the years in the three-year period ended December 31, 1996 in
conformity with generally accepted accounting principles.
KPMG Peat Marwick LLP
Houston, Texas
May 23, 1997
F-25
<PAGE> 81
BOWEN TOOLS, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1995 AND 1996
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
1995 1996
------- -------
<S> <C> <C>
ASSETS
Current assets:
Cash................................................................... $ 1,193 $ 1,656
Accounts receivable, less allowance for doubtful accounts of $155 and
$200 at 1995 and 1996............................................... 10,597 13,035
Inventories............................................................ 20,706 27,125
Receivable from Parent................................................. 7,053 --
Other assets........................................................... 1,647 1,288
------- -------
Total current assets........................................... 41,196 43,104
------- -------
Property, plant and equipment, net....................................... 29,260 32,604
Shop inventories......................................................... 4,456 3,672
Prepaid pension cost..................................................... 2,971 3,333
Other assets............................................................. 240 196
------- -------
Total assets................................................... $78,123 $82,909
======= =======
LIABILITIES AND SHAREHOLDER'S EQUITY
Current liabilities:
Bank overdraft......................................................... $ 622 $ 1,812
Accounts payable....................................................... 2,882 1,514
Accrued liabilities.................................................... 2,462 4,045
Deferred tax liability................................................. 3,183 2,737
Payable to Parent...................................................... -- 897
------- -------
Total current liabilities...................................... 9,149 11,005
------- -------
Deferred tax liability................................................... 7,080 7,316
Other postretirement benefit obligation.................................. 423 457
------- -------
Total liabilities.............................................. 16,652 18,778
------- -------
Shareholder's equity:
Common stock, $1 par value, 1,000 shares authorized, issued and
outstanding......................................................... 1 1
Common stock, $2.50 par value, 10,000 shares authorized, 400 shares
issued and outstanding.............................................. 1 1
Capital in excess of par............................................... 39,189 39,189
Retained earnings...................................................... 23,015 25,819
Accumulative translation adjustment.................................... (735) (879)
------- -------
Total shareholder's equity..................................... 61,471 64,131
Commitments and contingencies
------- -------
Total liabilities and shareholder's equity..................... $78,123 $82,909
======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-26
<PAGE> 82
BOWEN TOOLS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
1994 1995 1996
------- ------- -------
<S> <C> <C> <C>
Net sales..................................................... $46,785 $45,123 $53,445
Rental tool income............................................ 10,775 12,587 13,412
------- ------- -------
Net sales........................................... 57,560 57,710 66,857
------- ------- -------
Cost of goods sold............................................ 32,224 32,282 36,636
------- ------- -------
Gross profit........................................ 25,336 25,428 30,221
------- ------- -------
Operating expenses:
Selling and distribution................................. 15,934 17,492 19,144
General and administrative............................... 4,088 3,476 3,748
Depreciation and amortization............................ 2,360 1,973 2,470
------- ------- -------
Operating income.................................... 2,954 2,487 4,859
Other income (expense):
Gain (loss) on sale of property and equipment............ (931) 1,109 40
Other.................................................... 908 177 (492)
------- ------- -------
Income before taxes................................. 2,931 3,773 4,407
Income taxes.................................................. 1,113 1,352 1,603
------- ------- -------
Net income.......................................... $ 1,818 $ 2,421 $ 2,804
======= ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-27
<PAGE> 83
BOWEN TOOLS, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDER'S EQUITY
YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
CAPITAL IN ACCUMULATIVE TOTAL
COMMON EXCESS OF RETAINED TRANSLATION SHAREHOLDER'S
STOCK PAR VALUE EARNINGS ADJUSTMENT EQUITY
------ ---------- -------- ------------ -------------
<S> <C> <C> <C> <C> <C>
Balances at December 31, 1993.............. $2 $ 39,189 $ 61,409 $ 90 $ 100,690
Net income............................ -- -- 1,818 -- 1,818
Change in accumulative translation
adjustment.......................... -- -- -- (321) (321)
Dividends to Parent................... -- -- (2,633) -- (2,633)
--- ------- -------- ----- --------
Balances at December 31, 1994.............. 2 39,189 60,594 (231) 99,554
Net income............................ -- -- 2,421 -- 2,421
Change in accumulative translation
adjustment.......................... -- -- -- (504) (504)
Dividends to Parent................... -- -- (40,000) -- (40,000)
--- ------- -------- ----- --------
Balances at December 31, 1995.............. 2 39,189 23,015 (735) 61,471
Net income............................ -- -- 2,804 -- 2,804
Change in accumulative translation
adjustment.......................... -- -- -- (144) (144)
--- ------- -------- ----- --------
Balances at December 31, 1996.............. $2 $ 39,189 $ 25,819 $ (879) $ 64,131
=== ======= ======== ===== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-28
<PAGE> 84
BOWEN TOOLS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
1994 1995 1996
------- ------- -------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income.................................................. $ 1,818 $ 2,421 $ 2,804
Adjustments to reconcile net income to net cash provided by
operations:
Depreciation............................................. 2,360 1,973 2,470
Deferred income taxes.................................... 42 504 (210)
(Gain) loss on sales of property and equipment........... 931 (1,109) (40)
Gain on sale of rental tools............................. (536) (833) (1,286)
Foreign currency translation............................. 1,058 (475) 72
Changes in assets and liabilities:
Accounts receivable.................................... (1,368) 793 (2,438)
Inventory.............................................. 5,193 4,779 (5,635)
Receivable from Parent................................. (5,519) (4,736) 7,053
Other current assets................................... (224) (1,117) 359
Other.................................................. (184) (31) 44
Prepaid pension cost................................... (330) (107) (362)
Accounts payable....................................... 449 (118) (1,368)
Other postretirement benefits.......................... 26 30 34
Accrued liabilities.................................... 749 (1,180) 1,583
Payable to Parent...................................... -- -- 897
------ ------- -------
Net cash provided by operations..................... 4,465 794 3,977
------ ------- -------
Cash flows from investing activities:
Purchases of property, plant and equipment.................. (2,993) (3,580) (6,321)
Proceeds on sales of property and equipment................. 842 1,916 1,833
------ ------- -------
Net cash used in investing activities............... (2,151) (1,664) (4,488)
------ ------- -------
Cash flows from financing activities -- change in bank
overdraft................................................... 557 65 1,190
------ ------- -------
Effect of exchange rate changes on cash....................... (1,379) (30) (216)
------ ------- -------
Increase (decrease) in cash................................... 1,492 (835) 463
Cash at beginning of year..................................... 536 2,028 1,193
------ ------- -------
Cash at end of year........................................... $ 2,028 $ 1,193 $ 1,656
====== ======= =======
Income taxes paid to Parent................................... $ 524 $ 681 $ 1,364
====== ======= =======
Noncash item -- dividend of receivable from Parent............ $ 2,633 $40,000 $ --
====== ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-29
<PAGE> 85
BOWEN TOOLS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1994, 1995 AND 1996
(1) ORGANIZATION
(a) General
Bowen Tools, Inc. (the Company) is a wholly-owned subsidiary of Air Liquide
America Corporation (Air Liquide or Parent). The Company was acquired in 1986
and these financial statements reflect Air Liquide's purchase price allocation
to the Company's net assets.
The Company designs, manufactures, and markets fishing tools and drilling,
power, and wireline/pressure control equipment used in the drilling and
completion of oil and gas wells. The Company also rents equipment used in the
drilling and completion of oil and gas wells. The Company has four foreign
locations, which market the Company's products abroad, located in Scotland,
Holland, Singapore, and Canada.
On March 31, 1997, IRI International Corporation, a manufacturer of
drilling rigs and related equipment, acquired virtually all the assets
(excluding the pension asset, cash and cash equivalents and certain fixed
assets) and assumed certain liabilities (excluding intercompany payables and
certain pending litigation) of the Company for approximately $75,000,000.
(b) Risks Associated with the Company's Business
The Company is subject to certain risks inherent in the ownership and
operation of foreign subsidiaries including tax increases, retroactive tax
claims, expropriation, adverse changes in currency values, foreign exchange
controls, import and export regulations, environmental controls and other laws,
regulations or international development that may adversely affect the Company's
subsidiaries. The Company does not maintain political risk insurance.
The availability of a ready market and prices received for the Company's
products depend upon numerous factors beyond the control of the Company
including fluctuating market demand, the price of oil and gas commodities,
competition, governmental regulation and world and economic developments. World
oil and gas markets are highly volatile and shortage or surplus conditions could
substantially affect prices the Company receives for its products.
(2) SIGNIFICANT ACCOUNTING POLICIES
(a) Principles of Consolidation
The consolidated financial statements include the accounts of the Company,
its wholly-owned subsidiaries and its allocable portion of sales from L'Air
Liquide's Foreign Sales Corporation. All significant intercompany balances and
transactions have been eliminated in consolidation.
(b) Inventories
Inventories are stated at the lower of cost or market. Cost is determined
using the first-in, first-out method for all inventories.
(c) Property, Plant, and Equipment
Property, plant, and equipment are stated at cost. Depreciation is
principally provided on the straightline method over the estimated useful lives
of the assets (20 years for buildings and improvements; 5-12 years for machinery
and equipment; and 7-12 years for rental tools). Repairs and maintenance,
including rental tool rework costs, are expensed as incurred while betterments
are capitalized.
F-30
<PAGE> 86
BOWEN TOOLS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(d) Revenue Recognition
The Company recognizes revenue from product sales upon shipment to the
customer. Revenue is recognized from rentals under operating leases in the month
in which they accrue. The sale of rental tools is considered part of the
Company's normal operations and, accordingly, is included in net sales in the
accompanying consolidated statements of operations.
(e) Shop Inventories
Shop inventories of approximately $4,456,000 (net of an allowance of
$5,342,000) and $3,672,000 (net of an allowance of $4,456,000) at December 31,
1995 and 1996, respectively, represent replacement parts for customers and are
stated at estimated net realizable value.
(f) Currency Translation
The assets and liabilities of the Company's Canadian subsidiary are
translated at current exchange rates, and related revenues and expenses are
translated at average exchange rates for the period. Since the functional
currency of this subsidiary is not the U.S. dollar, the resulting translation
adjustments are recorded as a separate component of shareholder's equity. The
assets and liabilities of the other foreign subsidiaries, where the functional
currency is the U.S. dollar, are translated at current exchange rates for
monetary assets and liabilities and historical exchange rates for non-monetary
items, and related revenues and expenses are translated at an average rate for
the period. Translation gains and losses relating to these subsidiaries are
included in determining net income. Gains and losses resulting from foreign
currency transactions are also included in income.
Translation gains (losses) for the years ended December 31, 1994, 1995 and
1996 were $37,000, $220,000 and ($29,000), respectively. Transaction (losses)
for the same periods were ($37,000), ($429,000) and ($175,000), respectively.
(g) Income Taxes
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date. The Company is included in the L'Air Liquide consolidated income
tax return. Income taxes are provided as though the Company files a separate
income tax return. Income taxes payable are included in the payable to Parent in
the accompanying financial statements.
(h) Long-Lived Assets
In March 1995, SFAS No. 121, Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of, was issued which requires
impairment losses to be recorded on long-lived assets used in operations when
indicators of impairment are present and estimated future undiscounted cash
flows indicate the carrying value of those assets may not be recoverable. The
Company implemented SFAS No. 121 on January 1, 1994 and the adoption did not
have a material effect on the financial statements.
(i) Research and Development, and Advertising
Research and development, and advertising costs are expensed in the year in
which such costs are incurred. Research and development costs amounted to
approximately $142,000, $143,000 and $159,000 in
F-31
<PAGE> 87
BOWEN TOOLS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
1994, 1995 and 1996 respectively. Advertising costs amounted to approximately
$234,000, $323,000 and $356,000 in 1994, 1995 and 1996, respectively.
(j) Fair Value of Financial Instruments
The Company defines the fair value of a financial instrument as the amount
at which the instrument could be exchanged in a current transaction between
willing parties. Financial instruments in the accompanying financial statements
include cash, accounts receivable and accounts payable. The carrying value of
financial instruments is considered to approximate fair value due to the short
maturity and characteristics of those instruments.
(k) Earnings Per Share
Earnings per share is not presented for each of the three years ended
December 31, 1996 because it is not meaningful due to the sole ownership of the
Company's stock by Air Liquide.
(l) Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
(3) GEOGRAPHIC AREA INFORMATION
The Company is engaged in the business of manufacturing and distributing
fishing and drilling equipment for the oil and gas industry in the United
States, Scotland, Canada, Singapore, Amsterdam and Mexico. Summarized
information regarding the Company's significant operations in different
geographic areas, including domestic and export operations, as of and for the
years ended December 31, 1994, 1995 and 1996 follows:
<TABLE>
<CAPTION>
UNITED UNITED OTHER ADJUSTMENTS
STATES STATES FOREIGN AND
DOMESTIC EXPORT SCOTLAND CANADA OPERATIONS ELIMINATIONS CONSOLIDATED
-------- ------- -------- ------ ---------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
1994
- ----------------------------
Net sales and rental
tools..................... $ 27,118 $19,176 $4,659 $3,592 $5,040 $ (2,025) $ 57,560
======= ====== ===== ===== ===== ====== =======
Gross profit................ $ 18,244 $ 3,095 $1,805 $2,089 $2,128 $ (2,025) $ 25,336
======= ====== ===== ===== ===== ====== =======
Depreciation and
amortization.............. $ 2,185 $ -- $ 79 $ 41 $ 55 $ -- $ 2,360
======= ====== ===== ===== ===== ====== =======
Selling and distribution.... $ 12,494 $ 1,661 $ 495 $ 472 $ 812 $ -- $ 15,934
======= ====== ===== ===== ===== ====== =======
G & A expense............... $ 888 $ 938 $ 973 $ 176 $1,113 $ -- $ 4,088
======= ====== ===== ===== ===== ====== =======
Net income.................. $ 2,257 $ 323 $ 258 $ 928 $ 77 $ (2,025) $ 1,818
======= ====== ===== ===== ===== ====== =======
Identifiable assets......... $ 92,498 $ 3,855 $5,105 $5,991 $8,862 $ 595 $116,906
======= ====== ===== ===== ===== ====== =======
</TABLE>
F-32
<PAGE> 88
BOWEN TOOLS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
UNITED UNITED OTHER ADJUSTMENTS
STATES STATES FOREIGN AND
DOMESTIC EXPORT SCOTLAND CANADA OPERATIONS ELIMINATIONS CONSOLIDATED
------- ------ ----- ----- ----- ------ -------
<S> <C> <C> <C> <C> <C> <C> <C>
1995
- ----------------------------
Net sales and rental
tools..................... $ 30,069 $17,526 $4,052 $3,223 $4,794 $ (1,954) $ 57,710
======= ====== ===== ===== ===== ====== =======
Gross profit................ $ 18,482 $ 3,835 $1,047 $1,529 $2,489 $ (1,954) $ 25,428
======= ====== ===== ===== ===== ====== =======
Depreciation and
amortization.............. $ 1,801 $ -- $ 74 $ 45 $ 53 $ -- $ 1,973
======= ====== ===== ===== ===== ====== =======
Selling and distribution.... $ 13,731 $ 1,736 $ 604 $ 467 $ 954 $ -- $ 17,492
======= ====== ===== ===== ===== ====== =======
G & A expense............... $ 229 $ 1,026 $ 874 $ 174 $1,173 $ -- $ 3,476
======= ====== ===== ===== ===== ====== =======
Net income.................. $ 1,555 $ 698 $ (506) $ 362 $ 312 $ -- $ 2,421
======= ====== ===== ===== ===== ====== =======
Identifiable assets......... $ 58,867 $ 3,238 $4,386 $2,577 $7,810 $ 1,245 $ 78,123
======= ====== ===== ===== ===== ====== =======
1996
- ----------------------------
Net sales and rental
tools..................... $ 32,832 $23,275 $4,714 $4,228 $4,413 $ (2,605) $ 66,857
======= ====== ===== ===== ===== ====== =======
Gross profit................ $ 23,053 $ 4,173 $1,864 $1,437 $2,299 $ (2,605) $ 30,221
======= ====== ===== ===== ===== ====== =======
Depreciation and
amortization.............. $ 2,077 $ -- $ 121 $ 45 $ 227 $ -- $ 2,470
======= ====== ===== ===== ===== ====== =======
Selling and distribution.... $ 15,469 $ 1,643 $ 594 $ 556 $ 882 $ -- $ 19,144
======= ====== ===== ===== ===== ====== =======
G & A expense............... $ 298 $ 1,093 $1,077 $ 186 $1,094 $ -- $ 3,748
======= ====== ===== ===== ===== ====== =======
Net income.................. $ 3,937 $ 934 $ 72 $ 370 $ 95 $ (2,605) $ 2,803
======= ====== ===== ===== ===== ====== =======
Identifiable assets......... $ 68,028 $ 4,907 $3,475 $3,488 $4,957 $ (1,946) $ 82,909
======= ====== ===== ===== ===== ====== =======
</TABLE>
For the years ending December 31, 1994, 1995 and 1996, three, two and two
customers, respectively, individually accounted for more than 10% of
consolidated sales. Sales to these customers were approximately $19,346,000,
$21,856,000 and $23,011,000 in 1994, 1995, and 1996, respectively. No account
receivable from one customer exceeded 10% of consolidated stockholder's equity
at December 31, 1994, 1995 or 1996.
(4) RELATED PARTY TRANSACTIONS
The Company has a receivable from and a payable to Air Liquide of
approximately $7,053,000 and $897,000 at December 31, 1995 and 1996,
respectively. The amount bears no interest and includes allocations by Air
Liquide for such items as taxes and insurance. Air Liquide does not incur any
general and administrative overhead on behalf of the Company other than certain
insurance which was allocated to the Company.
F-33
<PAGE> 89
BOWEN TOOLS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(5) INVENTORIES
Inventories consist of the following at December 31, 1995 and 1996 (in
thousands):
<TABLE>
<CAPTION>
1995 1996
------- -------
<S> <C> <C>
Raw materials............................................ $ 3,074 $ 3,321
Work-in-progress......................................... 3,374 5,415
Finished goods........................................... 14,258 18,389
------- ------
$20,706 $27,125
======= ======
</TABLE>
(6) PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following at December 31,
1995 and 1996 (in thousands):
<TABLE>
<CAPTION>
1995 1996
------- --------
<S> <C> <C>
Land and land improvements.............................. $ 3,615 $ 3,571
Building and improvements............................... 15,454 15,349
Machinery and equipment................................. 6,696 8,843
Rental tools............................................ 12,446 14,772
Construction in progress................................ 1,671 2,256
------- -------
39,882 44,791
Less accumulated depreciation........................... (10,622) (12,187)
------- -------
Net property, plant and equipment............. $29,260 $ 32,604
======= =======
</TABLE>
(7) INCOME TAXES
The components of income tax expense for the years ended December 31, 1994,
1995 and 1996 are as follows (in thousands):
<TABLE>
<CAPTION>
1994 1995 1996
------ ------ ------
<S> <C> <C> <C>
Current:
Federal...................................... $ 868 $ 459 $1,418
State........................................ 29 13 50
Foreign...................................... 174 376 345
Deferred....................................... 42 504 (210)
------ ----- -----
$1,113 $1,352 $1,603
====== ===== =====
</TABLE>
Income tax expense for the years ended December 31, 1994, 1995 and 1996
differed from the amounts computed by applying the U.S. federal income tax rate
of 35 percent to pretax income from continuing operations as a result of the
following (in thousands):
<TABLE>
<CAPTION>
1994 1995 1996
------ ------ ------
<S> <C> <C> <C>
Computed "expected" tax expense................ $1,026 $1,321 $1,542
State taxes, net of federal benefit............ 10 4 18
Foreign operations differences................. 62 13 1
Nondeductible meals and entertainment
expenses..................................... 22 24 37
Other.......................................... (7) (10) 5
------ ----- -----
$1,113 $1,352 $1,603
====== ===== =====
</TABLE>
F-34
<PAGE> 90
BOWEN TOOLS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at December 31,
1995 and 1996 are presented below (in thousands).
<TABLE>
<CAPTION>
1995 1996
------- -------
<S> <C> <C>
Deferred income tax assets:
Current:
Accounts receivable and other assets principally due to allowance
for doubtful accounts............................................. $ 76 $ 105
Other.............................................................. 190 190
------- ------
Total deferred income tax assets.............................. 266 295
------- ------
Deferred income tax liabilities:
Current:
Inventories, principally due to LIFO cost method used for tax
purposes and reserve for excess and obsolete...................... 3,449 3,032
Noncurrent:
Property, plant and equipment, principally due to differences in
depreciation and capitalized interest............................. 6,040 6,149
Pension asset...................................................... 1,040 1,167
------- ------
Total deferred income tax liabilities......................... 10,529 10,348
------- ------
Net deferred income tax liability....................................... $10,263 $10,053
======= ======
</TABLE>
In assessing the reliability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred tax
assets will not be realized. The ultimate realization of deferred tax assets is
dependent upon the generation of future taxable income during the periods in
which those temporary differences become deductible. Management considers the
scheduled reversal of deferred tax liabilities, projected future taxable income,
and tax planning strategies in making this assessment. Based upon the level of
historical taxable income and projections for future taxable income over the
periods which the deferred tax assets are deductible, management believes it is
more likely than not that the Company will realize the benefits of these
deductible differences. There are no deferred taxes provided on the Company's
foreign investments due to their permanent nature and the determination of the
deferred tax attributable to such foreign investments is not practicable.
(8) LEASES
The Company has several noncancelable operating leases for certain office,
shop and warehouse facilities; automobiles; and equipment, that expire over the
next three years. These leases generally contain renewal options for periods
ranging from three to five years and require the Company to pay all executory
costs such as maintenance and insurance. Rental expense for leases during 1994,
1995 and 1996 were approximately $529,000, $594,000 and $628,000, respectively.
Future minimum lease payments under noncancelable operating leases (with
initial or remaining lease terms in excess of one year) as of December 31, 1996
are as follows (in thousands):
<TABLE>
<S> <C>
1997.......................................................... $ 763
1998.......................................................... 765
1999.......................................................... 721
2000.......................................................... 706
2001.......................................................... 707
</TABLE>
F-35
<PAGE> 91
BOWEN TOOLS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(9) BENEFIT PLANS
The Company participates in a defined benefit pension plan which covers all
domestic full-time employees of the Company who have completed one year of
service and are at least age 21. The defined benefit plan provides for benefits
based primarily on years of service and the employee's compensation near the
time of retirement. It is the policy of the Company to fund the plan currently
based upon actuarial determination and applicable regulations. The Company made
no contributions during 1994, 1995 and 1996, respectively.
The following table presents the defined benefit pension plan's funded
status as of December 31, 1995 and 1996, reconciled with amounts recognized in
the Company's consolidated balance sheets at December 31, 1995 and 1996 (in
thousands):
<TABLE>
<CAPTION>
1995 1996
------- --------
<S> <C> <C>
Actuarial present value of accumulated benefit obligations:
Vested benefit obligation..................................... $10,515 $ 11,015
======= ======
Accumulated benefit obligation................................ $11,118 $ 11,709
======= ======
Actuarial present value of projected benefit obligation......... (13,343) (14,189)
Plan assets at fair value (equity and fixed income
securities)................................................... 20,447 21,669
------- ------
Projected benefit obligation less than plan assets.............. 7,104 7,480
Unrecognized net gain........................................... (3,389) (3,589)
Prior service cost not yet recognized in net periodic pension
cost.......................................................... 316 237
Unrecognized net transition asset............................... (1,060) (795)
------- ------
Prepaid pension cost included in the balance sheet.............. $ 2,971 $ 3,333
======= ======
</TABLE>
Net pension cost for 1994, 1995 and 1996 included the following components
(in thousands):
<TABLE>
<CAPTION>
1994 1995 1996
------- ------- -------
<S> <C> <C> <C>
Service cost -- benefits earned during the period..... $ 368 $ 386 $ 428
Interest cost on projected benefit obligation......... 920 966 1,044
Actual return on plan assets.......................... (1,377) (1,270) (1,511)
Net amortization and deferral......................... (328) (186) (323)
------- ------- -------
Net pension cost...................................... $ (417) $ (104) $ (362)
======= ======= =======
</TABLE>
Assumptions used in accounting for the pension plan as of December 31,
1994, 1995 and 1996 were (in thousands):
<TABLE>
<CAPTION>
1994 1995 1996
---- ---- ----
<S> <C> <C> <C>
Discount rates.................................................. 8.5% 7.0 % 8.0 %
Rates of increase in compensation levels........................ 6.6 6.6 6.6
Expected long-term rate of return on assets..................... 8.0 8.0 7.5
</TABLE>
The assumed rates used above have a significant effect on the amounts
reported. For example, increasing the assumed discount rates by one percentage
point in each year would decrease the projected benefit obligation as of
December 31, 1996 by approximately $2,000,000 and the unrecognized net gain for
the year ended December 31, 1996 by approximately $2,000,000. Increasing the
assumed rate of increase in compensation levels by one percentage point in each
year would increase the projected benefit obligation as of December 31, 1996 by
approximately $1,400,000 and would decrease the unrecognized net gain for the
year ended December 31, 1996 by approximately $1,400,000. Increasing the
expected long-term rate of return on
F-36
<PAGE> 92
BOWEN TOOLS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
assets by one percentage point in each year would decrease the unrecognized net
gain for the year ended December 31, 1996 by $200,000.
The Company also has a defined contribution plan which covers most of its
employees. Participants can contribute a percentage of their annual compensation
and receive a 50% matching employer contribution on up to 6% of their annual
compensation. The Company contributed approximately $382,000 and $452,000 for
the years ended December 31, 1995 and 1996, respectively.
(10) OTHER POSTRETIREMENT BENEFIT PLANS
In addition to the Company's defined benefit pension plan and defined
contribution plan, the Company sponsors a defined benefit health care plan that
provides postretirement medical benefits to full-time employees who meet minimum
age and service requirements. The plan is contributory, with retiree
contributions adjusted annually, and contains other cost-sharing features such
as deductibles and coinsurance. The accounting for the plan anticipates future
cost-sharing changes to the written plan that are consistent with the Company's
expressed intent to increase the retiree contribution rate annually for the
expected general inflation rate for that year. The Company's policy is to fund
the cost of medical benefits in amounts determined at the discretion of
management.
The following table presents the plans' funded status reconciled with
amounts recognized in the Company's consolidated balance sheets at December 31,
1995 and 1996 (in thousands):
<TABLE>
<CAPTION>
1995 1996
---- ----
<S> <C> <C>
Accumulated post-retirement benefit obligation:
Retirees............................................................ $ 52 $ 56
Fully eligible active plan participants............................. 87 94
Other active plan participants...................................... 284 307
---- ----
423 457
Plan assets at fair value............................................. -- --
---- ----
Accumulated postretirement benefit obligation in excess of plan
assets.............................................................. $423 $457
==== ====
</TABLE>
Net postretirement benefit cost for 1994, 1995 and 1996 include the
following components (in thousands):
<TABLE>
<CAPTION>
1994 1995 1996
---- ---- ----
<S> <C> <C> <C>
Service cost.................................................... $22 $24 $26
Interest cost................................................... 29 32 35
--- --- ---
Net periodic postretirement benefit cost........................ $51 $56 $61
=== === ===
</TABLE>
For measurement purposes, 10.5% and 8.0% annual rates of increase in the
per capita cost of covered benefits (i.e., health care cost trend rate) was
assumed for 1996 for pre-65 and post-65 employees, respectively; the rate was
assumed to decrease gradually to 5.25% by the year 2003 and remain at that level
thereafter. The health care cost trend rate assumption has a significant effect
on the amounts reported. For example, increasing the assumed health care cost
trend rates by one percentage point in each year would increase the accumulated
postretirement benefit obligation as of December 31, 1996 by $65,000 and the
aggregate of the service and interest cost components of net periodic
postretirement benefit cost for the year ended December 31, 1996 by $12,000. A
discount rate of 8.0% was used in accounting for the pension plan as of December
31, 1994, 1995 and 1996.
F-37
<PAGE> 93
BOWEN TOOLS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1996 AND 1997
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
1996 1997
------- -------
<S> <C> <C>
Net sales................................................................ $10,400 $12,349
Rental tool income....................................................... 3,862 4,243
------- -------
Net sales...................................................... 14,262 16,592
------- -------
Cost of goods sold....................................................... 6,930 8,141
------- -------
Gross profit................................................... 7,332 8,451
------- -------
Operating expenses:
Selling and distribution............................................... 4,747 5,319
General and administrative............................................. 1,102 1,158
Depreciation and amortization.......................................... 537 780
------- -------
Operating income............................................... 946 1,194
Other income (expense):
Gain (loss) on sale of property and equipment.......................... 37 (32)
Other.................................................................. (199) 156
------- -------
Income before taxes............................................ 784 1,318
Income taxes............................................................. 301 493
------- -------
Net income..................................................... $ 483 $ 825
======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-38
<PAGE> 94
BOWEN TOOLS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 1996 AND 1997
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
1996 1997
------- -------
<S> <C> <C>
Cash flows from operating activities:
Net income............................................................. $ 483 $ 825
Adjustments to reconcile net income to net cash provided by operations:
Depreciation........................................................ 537 780
Deferred income taxes............................................... (50) 157
(Gain) loss on sales of property and equipment...................... 37 (32)
Foreign currency translation........................................ 27 1,750
Changes in assets and liabilities:
Accounts receivable............................................... (2,981) 1,056
Inventory......................................................... (3,395) (3,619)
Other current assets.............................................. 1,118 539
Other............................................................. 46 --
Accounts payable.................................................. (1,499) 667
Accrued liabilities............................................... 592 (475)
Payable to Parent................................................. 3,938 1,292
------- -------
Net cash provided by (used in) operations...................... (1,147) 2,940
------- -------
Cash flows from investing activities:
Purchases of property, plant and equipment............................. (966) (2,748)
Proceeds on sales of property and equipment............................ 1,427 1,521
------- -------
Net cash provided by (used in) investing activities............ 461 (1,227)
------- -------
Cash flows from financing activities -- change in bank overdraft......... 605 (855)
------- -------
Effect of exchange rate changes on cash.................................. (17) (1,658)
------- -------
Decrease in cash......................................................... (98) (800)
Cash at beginning of year................................................ 1,193 1,656
------- -------
Cash at end of period.................................................... $ 1,095 $ 856
======= =======
Income taxes paid to Parent.............................................. $ 122 $ --
======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-39
<PAGE> 95
BOWEN TOOLS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(1) GENERAL
Bowen Tools, Inc. (the Company) is a wholly-owned subsidiary of Air Liquide
America Corporation (Air Liquide or Parent). The Company was acquired in 1986
and these financial statements reflect Air Liquide's purchase price allocation
to the Company's net assets.
The Company designs, manufactures, and markets fishing tools and drilling,
power, and wireline/pressure control equipment used in the drilling and
completion of oil and gas wells. The Company also rents equipment used in the
drilling and completion of oil and gas wells. The Company has four foreign
locations, which market the Company's products abroad, located in Scotland,
Holland, Singapore, and Canada.
The accompanying condensed consolidated financial statements of the Company
as of March 31, 1997 and the three months ended March 31, 1996 and 1997 are
unaudited; however, they include all adjustments (consisting only of normal
recurring adjustments) which, in the opinion of management, are necessary for a
fair presentation for such periods. Accounting measurements at interim dates
inherently involve greater reliance on estimates than at year end. The results
of operations for the interim periods presented are not necessarily indicative
of the results to be expected for the entire year.
Certain footnote disclosures normally included in annual consolidated
financial statements prepared in accordance with generally accepted accounting
principles have been omitted herein. The interim information should be read in
conjunction with the Company's annual consolidated financial statements and
notes.
(2) COMMITMENTS AND CONTINGENCIES
The Company is subject to various claims and legal actions arising in the
ordinary course of business, inclusive of various claims pertaining to the
Company's inactive Sanstorm operations, which previously marketed a line of
blast cleaning equipment and related accessories unrelated to the Company's core
oilfield tool product lines. In the opinion of management, the amount of
liability with respect to these actions and claims is either not material to the
Company's financial statements or, in the case of such claims relating to the
inactive Sanstorm operations, are reasonably provided for by Air Liquide, who
assumed these liabilities upon its acquisition of Bowen and is also a defendant
in such litigation.
(3) ACQUISITION
On March 31, 1997, IRI International Corporation, a manufacturer of
drilling rigs and related equipment, acquired virtually all the assets
(excluding the pension asset, cash and cash equivalents and certain fixed
assets) and assumed certain liabilities (excluding intercompany payables and
certain pending litigation) of the Company for approximately $73,100,000. The
acquisition of the Company by IRI was recorded as a purchase transaction
effective for accounting purposes as of March 31, 1997.
F-40
<PAGE> 96
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Cardwell International Ltd.:
We have audited the accompanying consolidated balance sheet of Cardwell
International Ltd. and subsidiaries as of October 31, 1996, and the related
consolidated statements of operations and shareholder's equity and cash flows
for the ten months then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Cardwell
International Ltd. and subsidiaries as of October 31, 1996, and the results of
their operations and their cash flows for the ten months then ended in
conformity with generally accepted accounting principles.
KPMG Peat Marwick LLP
Dallas, Texas
December 6, 1996, except as to note 10,
which is as of April 17, 1997
F-41
<PAGE> 97
CARDWELL INTERNATIONAL LTD.
CONSOLIDATED BALANCE SHEET
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
OCTOBER 31, 1996
<TABLE>
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents........................................................ $ 432
Letter of credit deposits........................................................ 1,915
Accounts receivable, less allowance for doubtful accounts of $21................. 574
Costs and estimated earnings in excess of billings on uncompleted contracts...... 2,109
Inventories...................................................................... 12,743
Other current assets............................................................. 315
Deferred income taxes............................................................ 77
-------
Total current assets..................................................... 18,165
Property, plant and equipment, net................................................. 1,108
Letter of credit deposits.......................................................... 2,097
Other noncurrent assets............................................................ 57
-------
$21,427
=======
LIABILITIES AND SHAREHOLDER'S EQUITY
Current liabilities:
Accounts payable and accrued liabilities......................................... $ 4,974
Commissions payable.............................................................. 1,194
Customer advances................................................................ 3,047
Income taxes payable............................................................. 468
Notes payable to bank............................................................ 5,935
Current installments of long-term debt........................................... 146
Demand notes payable to related parties.......................................... 1,230
-------
Total current liabilities................................................ 16,994
Long-term debt, less current installments.......................................... 340
Deferred income taxes.............................................................. 51
-------
Total liabilities........................................................ 17,385
-------
Shareholder's equity:
Class A common stock -- $1 par value; 30,000 shares, authorized; 3,000 shares
issued and outstanding........................................................ 3
Retained earnings................................................................ 4,083
-------
4,086
Less treasury stock, 2,000 shares, at cost....................................... 44
-------
Total shareholder's equity............................................... 4,042
-------
Commitments and contingencies
-------
$21,427
=======
</TABLE>
See accompanying notes to consolidated financial statements.
F-42
<PAGE> 98
CARDWELL INTERNATIONAL LTD.
AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE TEN MONTHS ENDED OCTOBER 31, 1996
(IN THOUSANDS)
<TABLE>
<S> <C>
Revenues........................................................................... $40,598
Cost of goods sold................................................................. 31,615
-------
Gross profit............................................................. 8,983
Administrative and selling expense................................................. 6,836
-------
Operating income (loss).................................................. 2,147
-------
Other income (expense):
Interest income.................................................................. 95
Interest expense................................................................. (532)
Other, net....................................................................... 76
-------
(361)
-------
Income before income taxes............................................... 1,786
Income taxes....................................................................... 512
-------
Net income............................................................... $ 1,274
=======
</TABLE>
See accompanying notes to consolidated financial statements.
F-43
<PAGE> 99
CARDWELL INTERNATIONAL LTD.
AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDER'S EQUITY
FOR THE TEN MONTHS ENDED OCTOBER 31, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
TOTAL
COMMON RETAINED TREASURY SHAREHOLDER'S
STOCK EARNINGS STOCK EQUITY
------ -------- -------- -------------
<S> <C> <C> <C> <C>
Balances at December 31, 1995............................ $3 $2,809 $(44) $ 2,768
Net income............................................... -- 1,274 -- 1,274
--- ----- --- -----
Balances at October 31, 1996............................. $3 $4,083 $(44) $ 4,042
=== ===== === =====
</TABLE>
See accompanying notes to consolidated financial statements.
F-44
<PAGE> 100
CARDWELL INTERNATIONAL LTD.
AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE TEN MONTHS ENDED OCTOBER 31, 1996
(IN THOUSANDS)
<TABLE>
<S> <C>
Cash flows from operating activities:
Net income...................................................................... $ 1,274
Adjustments to reconcile net income to net cash used in operating activities:
Depreciation and amortization................................................ 149
Deferred income taxes........................................................ (12)
Loss on sale of property and equipment....................................... 50
Changes in assets and liabilities:
Deposits................................................................... (2,052)
Accounts receivable........................................................ 2
Costs and estimated earnings in excess of billings on uncompleted
contracts................................................................. (306)
Inventories................................................................ (8,377)
Other current assets....................................................... (45)
Accounts payable and accrued liabilities................................... 1,488
Commissions payable........................................................ 1,037
Customer advances.......................................................... 2,909
Income taxes payable....................................................... 536
Other...................................................................... (96)
--------
Net cash used in operating activities................................... (3,443)
--------
Cash flows from investing activities -- purchases of property, plant and
equipment....................................................................... (368)
--------
Cash flows from financing activities:
Payments on long-term debt...................................................... (20)
Proceeds from notes payable to bank............................................. 16,559
Payments on notes payable to bank............................................... (13,568)
Proceeds from demand notes payable to related parties........................... 4,541
Payments on demand notes payable to related parties............................. (3,311)
--------
Net cash provided by financing activities............................... 4,201
--------
Increase in cash and cash equivalents............................................. 390
Cash and cash equivalents at beginning of year.................................... 42
--------
Cash and cash equivalents at end of year.......................................... $ 432
========
Interest paid..................................................................... $ 485
========
Income taxes paid................................................................. $ 98
========
</TABLE>
See accompanying notes to consolidated financial statements.
F-45
<PAGE> 101
CARDWELL INTERNATIONAL LTD.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) GENERAL
Cardwell International, Ltd. and subsidiaries (the Company), incorporated
in 1980, manufactures and sells drilling rigs and related oilfield equipment and
supplies to predominately foreign customers. Raw materials are readily available
and the Company is not dependent upon a single or a few suppliers.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Principles of Consolidation
The Company consolidates the accounts of its wholly-owned subsidiaries,
Cardwell Manufacturing Co., Ltd., a Canadian company, and Cardwell Exports,
Ltd., a foreign sales corporation. All significant intercompany transactions are
eliminated.
(b) Cash and Cash Equivalents
Cash and cash equivalents consist of short-term, highly liquid investments
with original maturities of three months or less. Cash equivalents consist of
money market accounts at October 31, 1996.
(c) Letter of Credit Deposits
Letter of credit deposits consist of certificates of deposit and other
investments placed with financial institutions as collateral to secure letters
of credit on contract performance guarantees and bid bonds. The Company
classifies deposits between current and long-term based on the investment
maturity date. All investments with a maturity date of less than one year are
classified as current. Deposits are to be returned to the Company upon the
expiration of the performance guarantee or bid bond.
(d) Inventories
Inventories are stated at the lower of cost or market. Cost is determined
using the first-in, first-out method.
(e) Property and Equipment
Property and equipment are stated at cost. Depreciation is calculated using
the straight-line method over the following estimated useful lives:
<TABLE>
<S> <C>
Land improvements...................................................... 15 years
Buildings.............................................................. 27-39 years
Machinery and equipment................................................ 7 years
Computer equipment..................................................... 3-7 years
Automotive equipment................................................... 5 years
Furniture, fixtures and other.......................................... 5-7 years
</TABLE>
Maintenance, repairs and renewals which neither materially add to the value
of the property nor appreciably prolong its life are charged to expense as
incurred. Gains or losses on dispositions of property and equipment are included
in operations.
(f) Revenues
Significant contracts (generally valued at $50,000 or greater) are
accounted for by the Company using the percentage-of-completion revenue
recognition method, whereby revenues and profits are recognized throughout the
performance period of the contract. The percentage-of-completion is calculated
based on the
F-46
<PAGE> 102
CARDWELL INTERNATIONAL LTD.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
ratio of contract costs incurred to date to total estimated contract costs after
providing for all known or anticipated costs. Costs include material, direct
labor and engineering and manufacturing overhead. Selling expenses and general
and administrative expenses are charged to operations as incurred. The effect of
changes in estimates of contract costs is recorded currently. All remaining
revenues are generally recorded when the equipment is shipped.
Costs and estimated earnings in excess of billings on uncompleted contracts
represent revenues earned under the percentage of completion revenue recognition
method but not yet billable under the terms of the contract. These amounts are
billable based on the terms of the contract which include shipment of the
products or completion of the contracts. Included in revenues and cost of goods
sold for the ten months ended October 31, 1996 is $9,803,000 and $7,694,000,
respectively, related to uncompleted contracts ($2,109,000 net).
For the ten months ended October 31, 1996, approximately 91% of the
Company's revenues were provided by sales to Russian customers. Additionally, 3
customers, each accounting for more than 10% of total revenues, aggregated 79%
of the Company's gross revenues for the ten months ended October 31, 1996.
(g) Income Taxes
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to operating losses and tax credit carryforwards and
differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.
(h) Financial Instruments
The carrying amounts of the financial instruments in the accompanying
financial statements (cash and cash equivalents, deposits, accounts receivable
and payable) approximate fair value because of the short maturity of these
instruments. Letter of credit deposits approximate fair value because they earn
interest at current market rates. Outstanding borrowings (notes payable to bank,
long-term debt and demand notes payable to related parties) bear interest at
current market rates and thus the carrying amount of debt approximates estimated
fair value.
All of the Company's customers are engaged in the energy industry. This
concentration of customers may impact the Company's overall exposure to credit
risk, either positively or negatively, in that customers may be similarly
affected by changes in economic and industry conditions. The Company performs
ongoing credit evaluations of its customers. The Company maintains reserves for
potential credit losses, and actual losses have historically been within the
Company's expectations. Foreign sales also present various risks, including
risks of war, civil disturbances and governmental activities that may limit or
disrupt markets, restrict the movement of funds or result in the deprivation of
contract rights or the taking of property without fair consideration. Most of
the Company's foreign sales, however, are to larger international companies or
are secured by letters of credit or similar arrangements.
(i) Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the
F-47
<PAGE> 103
CARDWELL INTERNATIONAL LTD.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
(j) Commissions Payable
The Company accrues commissions payable as related revenues are recognized.
(k) Customer Advances
The Company requires customers to make prepayments on certain contracts.
The amount of prepayment varies from contract to contract, but is typically
based on a percentage of the contract price. These prepayments are recorded as
customer advances until the contract has been completed and billed, at which
time the customer advance is offset against accounts receivable.
(3) INVENTORIES
Inventories consist of the following at October 31, 1996 (in thousands):
<TABLE>
<S> <C>
Raw materials.............................................................. $ 783
Work in process............................................................ 7,786
Parts...................................................................... 3,791
Used equipment............................................................. 383
-------
$12,743
=======
</TABLE>
(4) PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following at October 31, 1996
(in thousands):
<TABLE>
<S> <C>
Land and improvements....................................................... $ 70
Buildings................................................................... 569
Machinery and equipment..................................................... 696
Computer equipment.......................................................... 166
Automotive equipment........................................................ 129
Furniture, fixtures and other............................................... 48
------
1,678
Less accumulated depreciation............................................... 570
------
$1,108
======
</TABLE>
(5) NOTE PAYABLE TO BANKS
The Company has a $10,000,000 revolving line of credit with a bank
available for working capital purposes subject to borrowing base limitations.
The net borrowing base was $6,799,000 at October 31, 1996. Notes payable
outstanding under the line of credit as of October 31, 1996 aggregated
$5,935,000. The note is secured by accounts receivable, inventories, property
and equipment and guarantees of the sole stockholder of the Company and a
company wholly-owned by the sole stockholder. The note bears interest at .75%
above prime rate (8.25% at October 31, 1996). Interest is payable monthly and
all unpaid principal and interest are due on October 31, 1997.
F-48
<PAGE> 104
CARDWELL INTERNATIONAL LTD.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The note agreement contains covenants which, among other things, restrict
additional borrowings and payment of dividends, and require that the Company
maintain minimum tangible net worth and other minimum financial ratios.
(6) LONG-TERM DEBT
Long-term debt consists of the following at October 31, 1996 (dollars in
thousands):
<TABLE>
<S> <C>
7.75% (interest rate changes to 1.75% over prime on June 3, 1999 and
is adjusted each April 1 thereafter) note payable to bank, payable
in monthly installments of $12, including interest, to June 2, 2004;
collateralized by certain real property and guarantees of the (1)
sole stockholder of the Company, (2) a company wholly-owned by the
sole stockholder of the Company and (3) 75% by the Small Business
Administration...................................................... $405
10.55% note payable in monthly installments of $1, including interest,
to August 1999; secured by lien on an automobile.................... 24
7% note payable, payable in monthly installments of $2, including
interest, to July 1998 -- July 2000................................. 57
----
486
Less current installments............................................. 146
----
$340
====
</TABLE>
Aggregate installments of long-term debt at October 31, 1996 follow (in
thousands):
<TABLE>
<S> <C>
October 31:
1997................................................................ $146
1998................................................................ 153
1999................................................................ 160
2000................................................................ 27
</TABLE>
(7) INCOME TAXES
Income taxes consist of the following components for the ten-month period
ended October 31, 1996 (in thousands):
<TABLE>
<S> <C>
Current............................................................... $524
Deferred.............................................................. (12)
----
$512
====
</TABLE>
Income tax expense for the ten-month period ended October 31, 1996 differs
from the amount computed by applying the U.S. federal tax rate of 34% to income
before income taxes as a result of the following (in thousands):
<TABLE>
<S> <C>
Computed "expected" tax expense...................................... $ 607
Nondeductible expenses............................................... 10
Foreign sales corporation exclusion.................................. (160)
State taxes, net of federal benefit.................................. 54
Other................................................................ 1
-----
$ 512
=====
</TABLE>
F-49
<PAGE> 105
CARDWELL INTERNATIONAL LTD.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The tax effect (federal and state) of temporary differences that give rise
to significant portions of the deferred tax assets and deferred tax liabilities
at October 31, 1996 are as follows (in thousands):
<TABLE>
<S> <C>
Current deferred tax assets:
Allowance for doubtful accounts.............................................. $ 8
Vacation accrual............................................................. 49
Warranty accrual............................................................. 20
---
$77
===
Noncurrent deferred tax liability -- plant and equipment depreciation.......... $51
===
</TABLE>
No valuation allowance related to the deferred tax asset was necessary for
any of the periods presented as management believes it is more likely than not
that such deferred tax assets will be realized within the next fiscal year.
(8) LEASES
The Company has operating leases for office facilities, machinery and
equipment and certain automotive equipment. Rental expense on operating leases
was $410,000 for the ten-month period ended October 31, 1996. The following is a
yearly schedule of future minimum rental payments under operating leases as of
October 31, 1996 (in thousands):
<TABLE>
<S> <C>
1997.......................................................................... $200
1998.......................................................................... 142
1999.......................................................................... 62
2000.......................................................................... 62
2002.......................................................................... 49
Thereafter.................................................................... 140
</TABLE>
(9) RELATED PARTY TRANSACTIONS
The Company leases certain buildings, equipment and automotive equipment
from related parties including management of the Company, members of their
families and companies related by common ownership. Related party rental expense
was $206,000 for the ten months ended October 31, 1996 and is included in
general and administrative expense in the accompanying consolidated statement of
operations.
The Company has license agreements with certain businesses owned by the
President of the Company. The agreements provide for payments of $11,000 and
$2,000 per month plus 4.5% of spare parts sales for the use of trademarks,
patterns and prints used by the Company. Payments under the license agreements
totaled $430,000 for the ten months ended October 31, 1996 and are included in
general and administrative expense in the accompanying consolidated statement of
operations.
Demand notes payable to related parties are unsecured and bear interest at
8% to 15%. Interest expense on these notes aggregated $83,000 for the ten months
ended October 31, 1996.
On certain of the demand notes payable to related parties, the Company pays
a fee in excess of stated interest for the use of the related party's funds. On
contracts awarded to the Company and for which the related party funded the
related bid bond, the Company is required to pay the related lending party a fee
of approximately .5% of the contract price. No fee is required if the contract
is not awarded to the Company. For the ten months ended October 31, 1996 the
Company paid fees of approximately $151,000. Such fees are included in general
and administrative expense in the accompanying consolidated statement of
operations.
F-50
<PAGE> 106
CARDWELL INTERNATIONAL LTD.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(10) EXPORT SALES
Export sales by geographic region based upon the ultimate destination in
which equipment or services were sold, shipped, or provided to the customer by
the Company were as follows (in thousands):
<TABLE>
<S> <C>
Russia..................................................... $34,014
South America.............................................. 1,404
Europe (excluding Russia).................................. 423
Asia (excluding Russia).................................... 292
Africa..................................................... 416
-------
Total export sales............................... 36,549
Domestic sales............................................. 4,049
-------
Total Sales...................................... $40,598
=======
</TABLE>
(11) CONTINGENCIES
The Company has contract commitments aggregating $8,670,706 at October 31,
1996 for the manufacture and delivery of drilling rigs during fiscal 1997.
At October 31, 1996, the company had outstanding letters of credit for bid
and performance bonds totaling $6,313,000 of which $2,256,000 is secured by the
Company's bank revolving line of credit (see note 6).
(12) SUBSEQUENT EVENT
On April 17, 1997, all of the outstanding common stock of the Company and
certain assets held by affiliates of the Company were purchased by IRI
International Corporation (IRI) for $12,000,000 in cash. In addition, IRI
partially paid ($3,000,000) of Cardwell's notes payable to bank, and Cardwell
liquidated outstanding letters of credit deposits to pay off the remaining notes
payable to bank ($2,119,000) outstanding prior to the close of the purchase. IRI
assumed the underlying obligations on the bid and performance bonds.
F-51
<PAGE> 107
CARDWELL INTERNATIONAL LTD.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE FIVE MONTHS ENDED MARCH 31, 1996 AND 1997
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
1996 1997
------- -------
<S> <C> <C>
Revenues................................................................... $21,794 $11,091
Cost of goods sold......................................................... 16,999 9,005
------- -------
Gross profit..................................................... 4,795 2,086
Administrative and selling expense......................................... 3,303 2,206
------- -------
Operating income (loss).......................................... 1,492 (120)
Other income (expense):
Interest income.......................................................... 5 62
Interest expense......................................................... (222) (246)
Other, net............................................................... 14 70
------- -------
(203) (114)
------- -------
Income (loss) before taxes....................................... 1,289 (234)
Income tax expense (benefit)............................................... 299 (73)
------- -------
Net income (loss)................................................ $ 990 $ (161)
======= =======
</TABLE>
See accompanying notes to condensed consolidated financial statements.
F-52
<PAGE> 108
CARDWELL INTERNATIONAL LTD.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDER'S EQUITY
FOR THE FIVE MONTHS ENDED MARCH 31, 1997
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
TOTAL
COMMON RETAINED TREASURY SHAREHOLDER'S
STOCK EARNINGS STOCK EQUITY
------ -------- -------- -------------
<S> <C> <C> <C> <C>
Balances at October 31, 1996............................. $3 $4,083 $(44) $ 4,042
Net loss................................................. -- (161) -- (161)
--- ----- --- -----
Balances at March 31, 1997............................... $3 $3,922 $(44) $ 3,881
=== ===== === =====
</TABLE>
See accompanying notes to condensed consolidated financial statements.
F-53
<PAGE> 109
CARDWELL INTERNATIONAL LTD.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE FIVE MONTHS ENDED MARCH 31, 1996 AND 1997
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
1996 1997
------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss)..................................................... $ 990 $ (161)
Adjustments to reconcile net income to net cash used in operating
activities:
Depreciation and amortization...................................... 62 70
Deferred income taxes.............................................. 51 (111)
Loss on disposal of property and equipment......................... -- 5
Changes in assets and liabilities:
Letter of credit deposits........................................ 550 997
Accounts receivable.............................................. 3,812 (911)
Costs and estimated earnings in excess of billings on uncompleted
contracts....................................................... (5,748) 1,593
Inventories...................................................... (2,247) 6,510
Other current assets............................................. 95 22
Accounts payable and accrued liabilities......................... 1,063 (1,776)
Commissions payable.............................................. (39) (995)
Customer advances................................................ 2,157 (2,729)
Income taxes payable............................................. 180 (407)
Other............................................................ 72 13
------- --------
Net cash provided by operating activities..................... 998 2,120
------- --------
Cash flows from investing activities -- purchases of property, plant and
equipment............................................................. (162) (18)
------- --------
Cash flows from financing activities:
Payments on long-term debt............................................ (48) (57)
Proceeds from notes payable to bank................................... 7,868 10,665
Payments on notes payable............................................. (8,265) (11,910)
Proceeds from demand notes payable to related parties................. 300 86
Payments on demand notes payable to related parties................... (469) (1,135)
------- --------
Net cash used in financing activities......................... (614) (2,351)
------- --------
Increase in cash and cash equivalents................................... 222 (249)
Cash and cash equivalents at beginning of period........................ 34 432
------- --------
Cash and cash equivalents at end of period.............................. $ 256 $ 183
======= ========
Interest paid........................................................... $ 262 $ 270
======= ========
Income taxes paid....................................................... $ 87 $ 320
======= ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
F-54
<PAGE> 110
CARDWELL INTERNATIONAL LTD.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(1) GENERAL
The accompanying condensed consolidated financial statements of Cardwell
International, Ltd. and subsidiaries (the Company), as of March 31, 1997 and for
the five months ended March 31, 1996 and 1997 are unaudited; however, they
include all adjustments (consisting only of normal recurring adjustments) which,
in the opinion of management, are necessary for a fair presentation for such
periods. Accounting measurements at interim dates inherently involve greater
reliance on estimates than at year end. The results of operations for the
interim periods presented are not necessarily indicative of the results to be
expected for the entire year.
Certain footnote disclosures normally included in annual consolidated
financial statements prepared in accordance with generally accepted accounting
principles have been omitted herein. The interim information should be read in
conjunction with the Company's annual consolidated financial statements and
notes included elsewhere herein.
Summarized results from operations for the three months ended March 31,
1996 and 1997 follows (in thousands):
<TABLE>
<CAPTION>
1996 1997
------- ------
<S> <C> <C>
Revenues.......................................................... $12,948 $5,818
======= ======
Gross profit...................................................... $ 3,196 $1,082
======= ======
Net income (loss)................................................. $ 928 $ (35)
======= ======
</TABLE>
(2) INVENTORIES
Inventories consist of the following at March 31, 1997 (in thousands):
<TABLE>
<S> <C>
Raw materials...................................................... $ 752
Work in process.................................................... 2,614
Parts.............................................................. 2,517
Used equipment..................................................... 350
------
$6,233
======
</TABLE>
(3) COMMITMENTS AND CONTINGENCIES
The Company had contract commitments aggregating $17.9 million at March 31,
1997 for the manufacture and delivery of drilling rigs during the remainder of
fiscal 1997.
At March 31, 1997, the Company had outstanding letters of credit for bid
and performance bonds totaling $3,597,000 of which $3,020,747 is secured by the
Company's bank revolving line of credit.
(4) SUBSEQUENT EVENT
On April 17, 1997, all of the outstanding common stock of the Company and
certain assets held by affiliates of the Company were purchased by IRI
International Corporation (IRI) for $12,000,000 in cash. In addition, IRI
partially paid ($3,000,000) of Cardwell's notes payable to bank, and Cardwell
liquidated outstanding letters of credit deposits to pay off the remaining notes
payable to bank ($2,119,000) outstanding prior to the close of the purchase. IRI
assumed the underlying obligations on the bid and performance bonds secured by
the letters of credit.
F-55
<PAGE> 111
[PHOTOGRAPHS OF COMPANY MANUFACTURING FACILITIES.]
<PAGE> 112
============================================================
NO PERSON IS AUTHORIZED IN CONNECTION WITH ANY OFFERING MADE HEREBY TO GIVE
ANY INFORMATION OR TO MAKE ANY REPRESENTATION OTHER THAN AS CONTAINED IN THIS
PROSPECTUS, AND IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE
RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY, THE SELLING STOCKHOLDERS
OR BY ANY U.S. UNDERWRITER. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL
OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITY OTHER THAN THE SHARES OF
COMMON STOCK OFFERED HEREBY, NOR DOES IT CONSTITUTE AN OFFER TO SELL OR A
SOLICITATION OF AN OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY TO ANY
PERSONS IN ANY JURISDICTION IN WHICH IT IS UNLAWFUL TO MAKE SUCH AN OFFER OR
SOLICITATION TO SUCH PERSON. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY
SALE MADE HEREUNDER SHALL UNDER ANY CIRCUMSTANCE CREATE ANY IMPLICATION THAT THE
INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY DATE SUBSEQUENT TO THE DATE
HEREOF.
---------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary......................... 3
Risk Factors............................... 7
The Company................................ 10
Use of Proceeds............................ 11
Dividend Policy............................ 11
Capitalization............................. 12
Dilution................................... 13
Pro Forma Financial Data................... 14
Selected Financial Data.................... 19
Management's Discussion and Analysis of
Financial Condition and Results of
Operations............................... 20
Business................................... 27
Management................................. 38
Security Ownership of Certain Beneficial
Owners and Management.................... 47
Selling Stockholders....................... 47
Certain Relationships and Related
Transactions............................. 48
Description of Capital Stock............... 49
Shares Eligible for Future Sale............ 50
Underwriting............................... 51
Legal Matters.............................. 55
Experts.................................... 55
Additional Information..................... 55
Index to Financial Statements.............. F-1
</TABLE>
---------------------------
UNTIL DECEMBER 8, 1997 (25 DAYS AFTER THE COMMENCEMENT OF THE OFFERING),
ALL DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS DELIVERY REQUIREMENT IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER
A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD
ALLOTMENTS OR SUBSCRIPTIONS.
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12,000,000 SHARES
[IRI INTERNATIONAL CORPORATION LOGO]
IRI INTERNATIONAL
CORPORATION
COMMON STOCK
------------------------
PROSPECTUS
November 13, 1997
------------------------
LEHMAN BROTHERS
HOWARD, WEIL, LABOUISSE, FRIEDRICHS
INCORPORATED
PRUDENTIAL SECURITIES INCORPORATED
CREDIT LYONNAIS SECURITIES (USA) INC.
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