<PAGE> 1
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-K/A
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 333-31157
IRI INTERNATIONAL CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C>
DELAWARE 75-2044681
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
1000 LOUISIANA, SUITE 5900
HOUSTON, TEXAS 77002
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
</TABLE>
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (713) 651-8002
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
<TABLE>
<CAPTION>
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
------------------- ---------------------
<S> <C>
Common Stock, $.01 par value New York Stock Exchange
</TABLE>
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K/A or any amendment to
this Form 10-K/A. [ ]
As of March 17, 1998, the aggregate market value of voting stock held by
non-affiliates of the Registrant was $141,370,217 based on the last reported
sale price of the Registrant's Common Stock on the New York Stock Exchange.
39,900,000 shares of Common Stock were outstanding on March 17, 1998.
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<PAGE> 2
IRI International Corporation ("IRI" or the "Company") hereby amends its
annual report on Form 10-K originally filed with the Securities and Exchange
Commission on March 26, 1998, pursuant to Instruction G(3) to Form 10-K, by
completing Items 10 through 13 appearing in Part III thereof. In its Form 10-K
as originally filed, the Registrant indicated that the information required for
such items would be incorporated by reference from the proxy statement related
to the Registrant's annual stockholders meeting.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
IRI INTERNATIONAL CORPORATION AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditors' Report................................ 3
Consolidated Balance Sheets -- December 31, 1997 and 1996... 4
Consolidated Statements of Operations -- year ended December
31, 1997, nine months ended December 31, 1996 and year
ended March 31, 1996...................................... 5
Consolidated Statements of Cash Flows -- year ended December
31, 1997, nine months ended December 31, 1996 and year
ended March 31, 1996...................................... 6
Consolidated Statements of Shareholders' Equity -- year
ended December 31, 1997, nine months ended December 31,
1996 and year ended March 31, 1996........................ 7
Notes to Consolidated Financial Statements.................. 8
</TABLE>
All schedules are omitted as the required information is inapplicable or
presented in the consolidated financial statements or related notes.
2
<PAGE> 3
INDEPENDENT AUDITORS' REPORT
The Board of Directors
IRI International Corporation:
We have audited the consolidated financial statements of IRI International
Corporation and subsidiaries as listed in the accompanying index. 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 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 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of IRI
International Corporation as of December 31, 1997 and 1996 and the results of
their operations and their cash flows for the year ended December 31, 1997, the
nine months ended December 31, 1996, and the year ended March 31, 1996 in
conformity with generally accepted accounting principles.
KPMG Peat Marwick LLP
Houston, Texas
February 27, 1998
3
<PAGE> 4
IRI INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1997 1996
-------- -------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 49,473 $ 8,635
Marketable securities, at fair value (cost of $7,448)..... 8,218 --
Accounts receivable, less allowance for doubtful accounts
of $455 at December 31, 1997 and $36 at December 31,
1996................................................... 33,130 8,036
Inventories............................................... 100,901 37,995
Costs and estimated earnings in excess of billings on
uncompleted contracts.................................. 8,853 23
Other current assets...................................... 1,444 957
-------- -------
Total current assets................................... 202,019 55,646
Property, plant and equipment, net.......................... 43,219 2,398
Other assets................................................ 5,836 627
-------- -------
$251,074 $58,671
======== =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Notes payable............................................. $ 38 $ 3,157
Accounts payable.......................................... 19,453 6,790
Accrued liabilities....................................... 8,344 3,530
Customer advances......................................... 7,546 2,607
Other liabilities......................................... 4,527 760
Current installments of obligation under capital lease.... 221 144
-------- -------
Total current liabilities.............................. 40,129 16,988
Negative goodwill, less accumulated amortization............ 9,393 14,760
Obligation under capital lease, less current installments... 586 522
Accrued postretirement benefits other than pensions......... 1,481 1,498
Pension liability........................................... 939 --
Other long-term liabilities................................. 140 --
-------- -------
Total liabilities...................................... 52,668 33,768
-------- -------
Shareholders' Equity
Preferred stock, $1.00 par value, 25,000,000 shares
authorized, none issued................................ -- --
Common stock, $0.01 par value, 100,000,000 shares
authorized, 39,900,000, and 30,000,000 shares issued
and outstanding in 1997 and 1996, respectively......... 399 300
Additional paid-in capital................................ 168,538 4,700
Retained earnings......................................... 30,926 19,903
Minimum pension liability adjustment...................... (1,457) --
-------- -------
Total shareholders' equity............................. 198,406 24,903
======== =======
Commitments and contingencies............................... $251,074 $58,671
======== =======
</TABLE>
See accompanying notes to consolidated financial statements
4
<PAGE> 5
IRI INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, MARCH 31,
1997 1996 1996
------------ ------------ ----------
<S> <C> <C> <C>
Revenues............................................... $185,366 $62,298 $52,506
Cost of goods sold..................................... 139,204 44,968 36,877
-------- ------- -------
Gross profit......................................... 46,162 17,330 15,629
-------- ------- -------
Selling and administrative expense..................... 23,543 8,220 7,990
-------- ------- -------
Operating income..................................... 22,619 9,110 7,639
-------- ------- -------
Other income (expense):
Interest income...................................... 746 90 371
Interest expense..................................... (8,762) (615) (47)
Other, net........................................... 718 (110) --
-------- ------- -------
(7,298) (635) 324
-------- ------- -------
Income before income taxes and extraordinary
item............................................ 15,321 8,475 7,963
Income taxes........................................... 2,786 98 --
-------- ------- -------
Income before extraordinary item.................. 12,535 8,377 7,963
Extraordinary item -- extinguishment of debt (net of
tax benefit of $841)................................. (1,512) -- --
-------- ------- -------
Net income........................................... $ 11,023 $ 8,377 $ 7,963
-------- ------- -------
Income per common share:
Income before extraordinary item..................... $ 0.40 $ 0.28 $ 0.27
Extraordinary item................................... (0.05) -- --
-------- ------- -------
Net income per common share............................ $ 0.35 $ 0.28 $ 0.27
======== ======= =======
Weighted average shares outstanding.................... 31,275 30,000 30,000
======== ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE> 6
IRI INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, MARCH 31,
1997 1996 1996
------------ ----------------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income...................................... $ 11,023 $ 8,377 $ 7,963
Adjustments to reconcile net income to net cash
provided by operations:
Extraordinary charge......................... 1,512 -- --
Depreciation and amortization................ 5,751 98 64
Amortization of negative goodwill............ (5,367) (4,026) (5,367)
Change in employee benefit accounts.......... 129 (53) (249)
Gain on sale of assets....................... (372) -- --
Changes in assets and liabilities, net of
effects of acquisitions:
Marketable securities........................ (8,218) -- --
Accounts receivable.......................... (14,772) (2,594) 72
Inventories.................................. (21,058) (6,840) (2,043)
Other current assets......................... (6,918) (125) (201)
Other non current assets..................... (113) -- --
Accounts payable and accrued liabilities..... 17,682 2,728 3,580
Customer advances and other liabilities...... 593 1,264 360
-------- ------- -------
Net cash provided by (used in)
operations............................ (20,128) (1,171) 4,179
-------- ------- -------
Cash flows from investing activities:
Capital expenditures............................ (5,755) (911) (717)
Acquisition of Bowen net assets, net of cash
acquired..................................... (77,693) -- --
Acquisition of Cardwell net assets, net of cash
acquired .................................... (12,574) -- --
-------- ------- -------
Net cash flows used in investing
activities............................ (96,022) (911) (717)
-------- ------- -------
Cash flows from financing activities:
Payments on capital lease obligation............ (312) (144) --
Proceeds from notes payable..................... 113,482 3,157 --
Debt issuance costs............................. (3,971) -- --
Payments on notes payable....................... (116,671) -- --
Issuance of common stock........................ 163,937 -- --
Proceeds from sale of assets.................... 523 -- --
-------- ------- -------
Net cash flows provided by financing
activities............................ 156,988 3,013 --
-------- ------- -------
Increase in cash and cash equivalents............. 40,838 931 3,462
Cash and cash equivalents at beginning of year.... 8,635 7,704 4,242
-------- ------- -------
Cash and cash equivalents at end of year.......... $ 49,473 $ 8,635 $ 7,704
======== ======= =======
Supplemental cash flow information:
Interest paid................................... $ 8,762 $ 303 $ 47
======== ======= =======
Income taxes paid............................... $ 158 $ -- $ 263
======== ======= =======
</TABLE>
See accompanying notes to consolidated financial statements
6
<PAGE> 7
IRI INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
MINIMUM
ADDITIONAL PENSION TOTAL
COMMON PAID-IN RETAINED LIABILITY SHAREHOLDERS
STOCK CAPITAL EARNINGS ADJUSTMENT EQUITY
------ ---------- -------- ---------- ------------
<S> <C> <C> <C> <C> <C>
Balances at April 1, 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
Proceeds from initial public
offering, net of costs......... 99 163,838 163,937 -- 163,838
Change in minimum pension
liability adjustment........... -- -- -- (1,457) (1,457)
Net income........................ -- -- 11,023 -- 11,023
---- -------- -------- ------- --------
Balances at December 31, 1997....... $399 $168,538 $ 30,926 ($1,457) $198,406
==== ======== ======== ======= ========
</TABLE>
See accompanying notes to consolidated financial statements
7
<PAGE> 8
IRI INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED 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.
On November 19, 1997, the Company sold 9.9 million shares of its common stock
through an initial public offering (IPO). Net proceeds totaled approximately
$163.9 million and were used partially to repay debt incurred in connection with
the acquisitions (see Notes 3 and 6). Remaining proceeds are invested primarily
in interest bearing deposit accounts and marketable equity securities.
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). 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.
The excess of the fair value of net assets acquired over consideration 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 of $26.8 million was recorded as
negative goodwill and is being amortized using the straight-line method over 5
years. Negative goodwill amortization of $5.4 million for the year ended
December 31, 1997, $4.0 million for the nine months ended December 31, 1996, and
$5.4 million for the year ended March 31, 1996, is included in cost of goods
sold in the accompanying statements of operations.
IRI was subsequently merged into ESI in October 1997. ESI was the surviving
corporation and changed its name to IRI International Corporation.
During 1996, the Company elected to change its fiscal year end from March
31 to December 31.
(2) SIGNIFICANT ACCOUNTING POLICIES
(a) Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its subsidiaries. All significant intercompany balances and transactions
have been eliminated in consolidation.
(b) Statements of Cash Flows
Cash equivalents of $49,500,000 and $8,600,000 at December 31, 1997 and
1996, respectively, consisted of interest-bearing cash deposits. For purposes of
the statement of cash flows, the Company considers all cash and short-term
highly liquid debt instruments with original maturities of three months or less
to be cash equivalents.
During the year ended December 31, 1997 and the nine months ended December
31, 1996, the Company entered into capital lease obligations of $309,000 and
$810,000, respectively.
(c) Marketable Securities
Marketable securities at December 31, 1997 consist of corporate equity
securities. The Company classifies its equity securities as trading securities.
Trading securities are bought and held principally for the
8
<PAGE> 9
IRI INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
purpose of selling them in the near term and are recorded at fair value.
Unrealized holding gains of approximately $770,000 are included in other income
for the year ended December 31, 1997.
(d) 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 for all inventories excluding oilfield equipment work-in-process, parts
and raw materials, which are recorded at actual cost on a first-in, first-out
basis. Work-in-process inventories related to fixed price contracts are stated
at the accumulated cost of material, labor and manufacturing overhead, less the
estimated costs of units delivered.
(e) 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.
Long-lived assets and certain identifiable intangible assets are reviewed
for impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Recoverability of assets to
be held and used is measured by a comparison of the carrying among of an asset
to future net cash flows expected to be generated by the asset. If such assets
are considered to be impaired, the impairment to be recognized is measured by
the amount by which the carrying amount exceeds the fair value of the assets.
Assets to be disposed of are reported at the lower of the carrying amount or
fair value less costs to sell.
(f) 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.
(g) Revenue Recognition
The Company recognizes construction contract revenues for rigs and
significant components using the percentage-of-completion method. 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. If estimates of costs to complete
contracts indicate a loss, provision is made currently for the total loss
anticipated. All remaining revenue is generally recorded when the equipment is
shipped.
Costs and estimated earnings in excess of billing 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 year ended December 31, 1997 is
$34,842,000 and $25,989,000, respectively, related to uncompleted contracts
($8,853,000, net) at December 31, 1997. Included in revenues
9
<PAGE> 10
IRI INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
(h) Earnings per Common Share
The Company adopted Statement of Financial Accounting Standard ("SFAS") No.
128, "Earnings Per Share" during the fourth quarter of 1997. Under SFAS No. 128,
basic earnings per share (EPS) is computed by dividing income available to
common shareholders by the weighted average number of common shares outstanding
for the period. Diluted EPS reflects the potential dilution that could occur if
securities or other contracts to issue common stock were exercised or converted
into common stock or resulted in the issuance of common stock that then shared
in the earnings of the entity. For the years and quarters presented herein,
basic and diluted earnings per share are the same. Options outstanding at
December 31, 1997 are anti-dilutive as the exercise price is greater than the
market price at December 31, 1997.
(i) 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 capital lease obligation bears
interest at rates that approximate market rates and, thus the carrying amount
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
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.
(j) 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) ACQUISITIONS
On March 31, 1997, the Company acquired certain assets and assumed
liabilities of Bowen Tools, Inc. ("Bowen"), a wholly owned subsidiary of the
French chemical concern L'Air Liquide, for a total consideration of $75.1
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 $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
10
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IRI INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
notes. The notes outstanding under the term loan facility and the senior
subordinated increasing rate notes were repaid with the proceeds from the
Company's equity offering (see note 1).
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 countries.
The acquisitions have been recorded using the purchase method of accounting
and results of operations of the acquired companies have been included in the
consolidated statement of operations of IRI from the dates of the respective
acquisitions. 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.............................................. $ 57,389
Property, plant and equipment............................... 37,647
Excess of cost over fair value of net tangible assets of
businesses acquired, net.................................. 6,096
Other assets................................................ 812
Current liabilities......................................... (11,677)
--------
Total............................................. $ 90,267
========
</TABLE>
The excess of consideration given over the fair value of the net tangible
assets acquired of $6,096,000 is being amortized over five years using the
straight-line method.
The following sets forth selected consolidated financial information for
the Company on a pro forma basis for the years ended December 31, 1997 and 1996,
assuming the Bowen and Cardwell acquisitions had occurred on January 1, 1996 (in
thousands, except per share amounts):
<TABLE>
<CAPTION>
1997 1996
-------- --------
(UNAUDITED)
<S> <C> <C>
Revenues............................................... $207,776 $188,391
======== ========
Gross profit........................................... $ 51,244 $ 61,891
======== ========
Operating income....................................... $ 23,616 $ 17,588
======== ========
Net income............................................. $ 9,300 $ 5,738
======== ========
Net income per common share............................ $ 0.30 $ 0.19
======== ========
</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.
11
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IRI INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(4) INVENTORIES
A summary of inventories follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1997 1996
------------ ------------
<S> <C> <C>
Raw materials and supplies........................ $ 39,087 $29,163
Work in process................................... 28,771 7,645
Finished goods.................................... 33,043 1,187
-------- -------
Total................................... $100,901 $37,995
======== =======
</TABLE>
(5) PROPERTY, PLANT AND EQUIPMENT
A summary of property, plant and equipment follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1997 1996
------------ ------------
<S> <C> <C>
Land and land improvements........................ $ 2,869 $ 13
Buildings......................................... 7,378 277
Machinery and equipment........................... 36,318 2,276
------- ------
46,565 2,566
Less accumulated depreciation..................... (3,346) (168)
------- ------
Property, plant and equipment, net................ $43,219 $2,398
======= ======
</TABLE>
Machinery and equipment includes capitalized lease assets of $1,119,000,
and $810,000 at December 31, 1997 and 1996, respectively.
(6) NOTES PAYABLE
In connection with the acquisitions described in note 3, the Company
entered into a $65 million senior secured term loan facility due in quarterly
installments beginning June 30, 1997 through March 31, 2002 and a $31 million
interim senior subordinated increasing rate note due March 31, 1998. Amounts
outstanding under these notes were repaid with proceeds from the Company's
initial public offering in November 1997. The extinguishment of this debt
resulted in an extraordinary charge of $1,512,000 consisting of unamortized
financing costs of $2,353,000 and income tax benefit of $841,000.
The Company has a $9.7 million revolving credit facility which matures on
March 31, 2000. Amounts outstanding under the revolving credit facility are
secured by substantially all of the assets of the Company and accrue interest at
a rate per annum equal to the one, two, three or six month LIBOR plus 2 3/4%.
Amounts available under the revolving credit facility ($3,605,000 at December
31, 1997) are limited to the excess of the revolving credit commitment over then
outstanding letter of credit obligations. The revolving credit facility
agreement contains provisions, among others, that restrict incurrence of
indebtedness, guarantees, acquisitions, and distributions to shareholders, and
require the Company to meet specified financial maintenance tests.
During the year ended March 31, 1996, the Company obtained a $15 million
revolving credit facility with a bank available through February 1998.
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 canceled on
March 31, 1997 in connection with the acquisitions and related financing
described in note 3.
12
<PAGE> 13
IRI INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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) SHAREHOLDERS' EQUITY
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 canceled and each
share of preferred stock of the Company, including accrued and unpaid dividends
thereon, was canceled. The authorized capital stock of the Company was increased
to 100,000,000 common shares and 25,000,000 preferred shares. The consolidated
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.
(8) STOCK OPTIONS
In anticipation of the initial public stock offering, the Company granted
its Directors and certain of its officers and employees an aggregate of
1,933,000 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 1,773,000 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.
The Company applies APB Opinion 25 in accounting for its plan. Accordingly,
no compensation cost has been recognized for stock options granted to employees.
Compensation expense is recorded for options granted to non-employee directors
based on the estimated fair value of the options on the date of grant. The
compensation cost that has been charged against income for non-employee director
options granted was $499,000 for the year ended December 31, 1997. Had
compensation cost for the Company's stock option plans been determined based on
the fair value at the grant dates for awards to employees under the plan
consistent with the method of SFAS No. 123, the Company's net income and
earnings per share for the year ended December 31, 1997 would have been reduced
to the pro forma amounts indicated below (in thousands except per share data):
<TABLE>
<S> <C>
Net income
As reported............................................... $11,023
=======
Pro forma................................................. $ 7,216
=======
Basic and diluted earnings per share
As reported............................................... $ 0.35
=======
Pro forma................................................. $ 0.23
=======
</TABLE>
13
<PAGE> 14
IRI INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The fair value of each option grant is estimated on the date granted using
the Black-Scholes option-pricing model with the following weighted-average
assumptions:
<TABLE>
<S> <C>
Expected life (years)....................................... 3.3
Risk-free interest rate..................................... 6.2%
Volatility.................................................. 30.0%
Dividend yield.............................................. 0.0%
</TABLE>
A summary of the status of the Company's fixed stock option plan as of
December 31, 1997 and changes during the year ended is presented below:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
FIXED OPTIONS SHARES(000) EXERCISE PRICE
------------- ----------- --------------
<S> <C> <C>
Outstanding at the beginning of the year........... -- $ --
Granted............................................ 1,933 18.00
Exercised.......................................... --
Forfeited.......................................... (2) 18.00
----- ------
Outstanding at end of the year..................... 1,931 $18.00
----- ======
Options exercisable at the year end................ 630 $18.00
Weighted average fair value of options granted
during the year.................................. $ 5.33
------
</TABLE>
Weighted average remaining contractual life of stock options at December
31, 1997 was 9.9 years.
(9) INCOME TAXES
Current income tax expense attributable to income before extraordinary item
consists of the following:
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, MARCH 31,
1997 1996 1996
------------ ------------ ----------
<S> <C> <C> <C>
U.S. Federal.......................... $1,965 $98 $--
State................................. 312 -- --
Foreign............................... $ 509 $-- --
------ --- ---
$2,786 $98 $--
====== === ===
</TABLE>
14
<PAGE> 15
IRI INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Income tax expense differs from the amount computed by applying the
statutory rate of 35 percent at December 31, 1997 (34% at December 31, 1996 and
March 31, 1996) to income before income taxes as follows (in thousands):
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, MARCH 31,
1997 1996 1996
------------ ------------ ----------
<S> <C> <C> <C>
Computed "expected" tax expense....... $ 5,362 $ 2,882 $ 2,707
Change in the valuation allowance..... (1,291) (1,504) (1,046)
Amortization of negative goodwill..... (1,879) (1,369) (1,825)
Amortization of goodwill.............. 308 -- --
State income taxes, net of federal
benefit............................. 203 -- --
Other................................. 83 89 164
------- ------- -------
$ 2,786 $ 98 $ --
======= ======= =======
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of the deferred federal income tax assets and liabilities as of
December 31, 1997 and December 31, 1996, are as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1997 1996
------------ ------------
<S> <C> <C>
Deferred income tax assets:
Basis in inventories............................ $4,744 $1,692
Basis in and depreciation of property, plant and
equipment.................................... -- 277
Employee benefits............................... 823 509
Net operating loss carryforwards................ 1,224 1,800
Alternative minimum tax credit carryover........ 565 256
Other, principally accrued liabilities.......... 909 280
------ ------
Total gross deferred income tax assets....... 8,265 5,882
Less valuation allowance........................ 4,378 5,669
------ ------
Net deferred income tax assets............... 3,887 213
------ ------
Deferred income tax liabilities:
Costs and estimated earnings in access of
billings on uncompleted contracts............ 3,010 --
Unrealized gain on marketable equity
securities................................... 262 --
Basis in and depreciation of property, plant and
equipment.................................... 615 --
Prepaid pension cost............................ -- 213
------ ------
Total gross deferred income tax
liabilities................................ 3,887 213
------ ------
Net deferred 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 $4,378,000 and
$5,669,000 at December 31, 1997 and December 31, 1996, respectively. The
valuation allowance decreased $1,291,000 during the year ended December 31, 1997
and $1,504,000 during the nine months ended December 31, 1996. In assessing the
realizability of deferred tax assets, management considers whether it is more
likely than not that some portion of all of the deferred tax assets will not be
realized. The ultimate realization of deferred tax assets is dependent upon the
generation of
15
<PAGE> 16
IRI INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
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, 1997) expiring from 2003 through 2009. To the extent
such carryforwards are not utilized in a year, they may be utilized in
subsequent years.
(10) LEASES
At December 31, 1997, 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>
1998........................................................ $1,657 $ 314
1999........................................................ 1,542 314
2000........................................................ 1,310 313
2001........................................................ 1,042 --
2002........................................................ 982 --
------ -----
Total minimum lease payments...................... $6,533 941
======
Less amount representing interest........................... (134)
-----
Present value of minimum lease payments..................... $ 807
=====
</TABLE>
Total rental expense was $2,142,000 for the year ended December 31, 1997,
$860,000 for the nine months ended December 31, 1996, and $546,000 for the year
ended March 31, 1996.
(11) PENSION PLAN
The Company has a noncontributory defined benefit pension 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.
16
<PAGE> 17
IRI INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
The funded status and the amounts recognized in the balance sheets as of
December 31, 1997 and December 31, 1996, the date of the latest actuarial
valuation, are as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1997 1996
------------ ------------
<S> <C> <C>
Actuarial present value of benefit
obligations:
Vested..................................... $(7,948) $(7,231)
Nonvested.................................. (113) (58)
------- -------
Accumulated benefit obligation............... $(8,061) $(7,289)
======= =======
Projected benefit obligation for service
rendered to date........................... $(8,061) $(7,289)
Plan assets at fair value.................... 7,122 7,321
------- -------
Projected benefit obligation less than
(greater than) plan assets................. (939) 32
Unrecognized net gain from past experience
different from that assumed and effects of
changes in assumptions..................... 1,457 595
------- -------
Adjustment required to recognize minimum
liability.................................. (1,457) --
------- -------
Prepaid (accrued) pension cost............... $ (939) $ 627
======= =======
</TABLE>
The Plan assets consist primarily of interest bearing demand deposit
accounts at December 31, 1997 and time-share real estate notes and fixed income
time deposits at December 31, 1996.
The provisions of SFAS No. 87, "Employers' Accounting for Pensions",
require the recognition of an additional minimum liability for each defined
benefit plan for which the accumulated benefit obligation exceeds plan assets.
This amount has been recorded as a long-term liability with an offsetting
intangible asset. Because the asset recognized may not exceed the amount of
unrecognized prior service cost and transition obligation on an individual plan
basis, the balance of $1,457,000 is reported as a separate reduction of
shareholders' equity at December 31, 1997.
Net pension cost includes the following components (in thousands):
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, MARCH 31,
1997 1996 1996
------------ ------------ ----------
<S> <C> <C> <C>
Service cost.......................... $ 108 $ 81 $ 108
Interest cost......................... 571 419 556
Actual return on plan assets.......... (499) (270) (565)
Net amortization and deferral......... (71) (157) 154
----- ----- -----
Total pension expense
(income).................. $ 109 $ 73 $ 253
===== ===== =====
</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.
17
<PAGE> 18
IRI INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The development of the actuarial present value of the projected benefit
obligation at December 31, 1997 and December 31, 1996 was based upon a weighted
average discount rate of 7.30% and 7.90%, respectively, and an expected
long-term rate of return on assets of 8.0%.
The Pension 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.
The Company also has a defined contribution plan which covers most of its
employees. The plan provides mandatory contributions from the Company to
eligible employees in the plan equal to 7 1/2% of their annual pay. Plan
participants become fully vested in contributions made by the Company following
three years of credited service. The Company recognized expense associated with
the plan of approximately $1,076,000, $665,000, and $418,000 for the year ended
December 31, 1997, the nine-months ended December 31, 1996 and the year ended
March 31, 1996, respectively.
(12) 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 life while full time employees (future retirees) only
receive benefits until age 65. The plan is a contributory, with retirees
contributing 20% of the health care costs. 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 December 31, 1997 and December
31, 1996 is as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1997 1996
------------ ------------
<S> <C> <C>
Accumulated post retirement benefit obligation:
Active employees eligible to retire............. $ 579 $ 594
Retired participants............................ 1,262 1,227
Unamortized gain or loss associated with actuarial
assumption changes and plan amendment........... (360) (323)
------ ------
Accrued postretirement benefit costs............ $1,481 $1,498
====== ======
</TABLE>
Net period postretirement benefit cost includes the following components
(in thousands):
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, MARCH 31,
1997 1996 1996
------------ ------------ -----------
<S> <C> <C> <C>
Service cost......................... $ -- $ -- $ 30
Interest cost........................ 144 103 187
Net amortization and deferral........ 7 2 --
---- ---- ----
Net periodic postretirement benefit
cost (income)...................... $151 $105 $217
==== ==== ====
</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
18
<PAGE> 19
IRI INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 rates used in determining the accumulated postretirement
benefit obligation were 7.30% and 7.75% at December 31, 1997 and December 31,
1996, respectively. 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.
(13) BUSINESS SEGMENTS
The Company operates through three business segments consisting of Oilfield
Equipment, Downhole Tools, 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 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 Downhole Products segment designs,
manufactures, sells and rents fishing and drilling tools. 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>
CORPORATE
OILFIELD DOWNHOLE SPECIALTY AND
EQUIPMENT PRODUCTS STEEL OTHER ELIMINATIONS TOTAL
--------- -------- --------- --------- ------------ --------
<S> <C> <C> <C> <C> <C> <C>
Year ended December 31, 1997
Sales to unaffiliated customers... $106,529 $67,166 $13,501 $ -- $(1,830) $185,366
Operating income (loss)........... 15,617 11,869 4,503 (9,370) -- 22,619
Identifiable assets............... 94,011 51,258 9,457 96,348 -- 251,074
Depreciation...................... 248 1,796 30 1,100 -- 3,174
Amortization of negative
goodwill....................... -- -- -- (5,367) -- (5,367)
Capital expenditures.............. 2,216 1,649 314 1,885 -- 6,064
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
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
</TABLE>
19
<PAGE> 20
IRI INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED 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>
NINE MONTHS YEAR
YEAR ENDED ENDED ENDED
DECEMBER 31, DECEMBER 31, MARCH 31,
1997 1996 1996
------------ ------------ ----------
<S> <C> <C> <C>
Russia................................................. $ 47,375 $39,717 $26,459
Europe (excluding Russia).............................. 12,783 151 2,068
Asia (excluding Russia)................................ 11,113 72 128
South America.......................................... 9,166 634 --
Africa................................................. 14,432 -- 391
Other.................................................. 6,665 -- --
-------- ------- -------
Total export sales........................... 101,534 40,574 29,046
Domestic sales......................................... 83,832 21,724 23,460
-------- ------- -------
Total sales.................................. $185,366 $62,298 $52,506
======== ======= =======
</TABLE>
For the year ended December 31, 1997, one customer accounted for 12.9% of
revenues. For the nine months ended December 31, 1996, two customers accounted
for 38% and 14% of revenues, respectively, and for the year ended March 31,
1996, one customer accounted for 36% of revenues.
(14) COMMITMENTS AND CONTINGENCIES
The Company has contract commitments aggregating $69.4 million at December
31, 1997 for the manufacture and delivery of drilling and workover rigs during
fiscal year 1998.
At December 31, 1997, the Company was contingently liable for approximately
$6.6 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.
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 America
Corporation ("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
20
<PAGE> 21
IRI INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 conditions 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.
The Company is involved in various other claims and legal actions arising
in the ordinary course of business. In the opinion of management, the ultimate
disposition of these matters will not have a material adverse effect on the
Company's consolidated financial position, results of operations or liquidity.
(15) SUBSEQUENT EVENT
On March 8, 1998, the Board of Directors of the Company and of Hitec ASA, a
Norwegian Corporation ("Hitec") approved a transaction (the "Hitec Transaction")
whereby the businesses of the Company and Hitec will be combined and the
resulting company will be named "IRI Hitec, Inc." Pursuant to the Hitec
Transaction, Hitec shareholders will receive 0.5748 of a newly issued share of
IRI Common Stock for each common share of Hitec. The Hitec Transaction is
subject to, among other things, the approval of the Company's stockholders and
the tender of at least 90% of Hitec's outstanding common shares.
Hitec is engaged primarily in the design and engineering of advanced
technology for the offshore oil and gas industry.
(16) QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
QUARTER QUARTER QUARTER QUARTER
ENDED ENDED ENDED ENDED
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
--------- --------- ------------- ------------
<S> <C> <C> <C> <C>
1997
Sales and other operating revenues......... $16,594 $41,191 $54,345 $73,236
Gross profit............................... 4,142 8,519 12,653 20,848
Net earnings............................... 1,657 (1,236) 2,530 8,072
Basic and diluted earnings per common
share.................................... 0.06 (0.04) 0.08 0.23
1996
Sales and other operating revenues......... $13,365 $15,982 $28,870 $17,446
Gross profit............................... 5,303 2,895 7,622 6,813
Net earnings............................... 2,827 82 4,564 3,731
Basic and diluted earnings per common
share.................................... 0.10 0.00 0.15 0.12
</TABLE>
The Company acquired the business and operations of the Bowen Tools
Division on March 31, 1997 and Cardwell International, Ltd. on April 17, 1997
(see note 3).
21
<PAGE> 22
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The directors and executive officers of IRI International Corporation (the
"Company"), and their ages and positions with the Company as of the date of
March 17, 1998 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............. 41 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
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........ 42 Director, President and Chief Operating Officer -- Cardwell
International Ltd.
Alexander B. Trowbridge....... 68 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 Company's Board
of Directors (the "IRI Board"). 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 Restated Certificate of Incorporation and the
Company's Amended and Restated Bylaws (the "Company 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.
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:
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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 its acquisition by Company, Mr. Higginbotham served as
President of Bowen Tools, Inc. 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.
ARTHUR C. TEICHGRAEBER has been a director of the Company and President and
Chief Operating Officer of the Company's wholly-owned subsidiary, Cardwell
International, Ltd., since April 1997. Prior to its acquisition by the Company,
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
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<PAGE> 24
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.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Based solely upon a review of Forms 3 and 4 and amendments thereto
furnished to the Company pursuant to Rule 16a-3 under the Exchange Act during
its most recent fiscal year and Form 5 and amendments thereto pursuant to the
Company with respect to its most recent fiscal year, the Company believes that
during such fiscal year no director, officer, beneficial owner of more than ten
percent of any class of equity securities of the Company failed to file on a
timely basis, as disclosed in the above Forms, reports required by Section 16(a)
of the Exchange Act during the most recent fiscal year or prior fiscal years.
COMMITTEES
The following are the standing committees of the IRI Board:
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 IRI Board in the management of the business except the power to fill
vacancies on the IRI Board and the power to amend the Company 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.
ITEM 11. EXECUTIVE COMPENSATION.
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 IRI Board meeting (but not
committee meeting) attended. Prior to the Company's initial public offering in
November 1997, Mr Ansary, Mr. Moriarty and Mr. Hidayatallah were each paid
$17,000 and $39,000 in directors' fees for 1997 and 1996, respectively, and Mr.
Higginbotham, Mr. Stratulate and Mr. Teichgraeber were each paid $8,500 in
directors' fees for 1997. None of the aforementioned directors received any
directors' fees subsequent to November 1997.
EXECUTIVE COMPENSATION
The following table sets forth certain information regarding the
compensation paid by the Company to Hushang Ansary, Chairman and Chief Executive
Officer, and each of the five other most highly compensated
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<PAGE> 25
executive officers of the Company for the 12 months ended December 31, 1997
(collectively, the "Named Executive Officers"):
SUMMARY COMPENSATION TABLE(1)
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
-----------------------------------
OTHER ANNUAL ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION(2) COMPENSATION
- --------------------------- ---- -------- -------- --------------- ------------
<S> <C> <C> <C> <C> <C>
Hushang Ansary........................ 1997 -- -- $17,000 --
Chairman and Chief Executive Officer 1996 -- -- 39,000 --
Daniel G. Moriarty.................... 1997 $202,516 $ 25,000 $17,000 --
Vice-Chairman of the Board 1996 145,254 106,504 39,000 --
Munawar H. Hidayatallah............... 1997 $316,088 $100,000 $17,000 --
Executive Vice President and Chief 1996 186,750 121,324 $39,000 --
Financial Officer
Richard D. Higginbotham............... 1997 $224,559 $ 25,000 $ 8,500 --
President and Chief Operating 1996 135,000 60,000 -- --
Officer of Bowen Tools Division
Gary W. Stratulate.................... 1997 $246,087 $125,000 $ 8,500 --
President and Chief Operating 1996 186,750 137,500 -- --
Officer of IRI Division
Arthur C. Teichgraeber................ 1997 $207,564 $ 50,000 $ 8,500 --
President and Chief Operating 1996 102,870 -- -- $498,110(3)
Officer of Cardwell
</TABLE>
- ---------------
(1) Under rules promulgated by the Securities and Exchange Commission, since the
Company has not been a reporting company during the three immediately
preceding fiscal years, only the information with respect to the two most
recently completed fiscal years is required to be presented in the Summary
Compensation Table.
(2) Consists of directors' fees received by the Named Executive Officers prior
to the Company's initial public offering in November 1997.
(3) Consists of license fees paid by Cardwell to Mr. Teichgraeber and to certain
entities directly or indirectly owned by Mr. Teichgraeber.
Shown below is further information with respect to grants of stock options
during 1997 to the Named Executive Officers:
OPTION GRANTS IN 1997
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE VALUE
AT ASSUMED ANNUAL RATES OF
NUMBER OF % OF TOTAL STOCK PRICE APPRECIATION FOR
SECURITIES OPTIONS GRANTED EXERCISE PRICE OPTION TERM
UNDERLYING TO EMPLOYEES OR BASE ----------------------------
NAME OPTIONS GRANTED IN 1997(1) PRICE(2)(3) EXPIRATION DATE 5% 10%
- ---- --------------- --------------- -------------- ----------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Hushang Ansary....... 1,000,000 56.40% $18.00 November 13, 2007 $11,320,103 $28,687,364
Daniel G. Moriatry... 50,000 2.82 18.00 November 13, 2007 566,005 1,434,368
Munawar H.
Hidayatallah....... 45,000 2.54 18.00 November 13, 2007 509,405 1,290,931
Richard D.
Higginbotham....... 35,000 1.97 18.00 November 13, 2007 396,204 1,004,058
Gary W. Stratulate... 40,000 2.26 18.00 November 13, 2007 452,804 1,147,495
Arthur C.
Teichgraeber....... 35,000 1.97 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 568,000 shares of the
Company's common stock, par value $0.01 per share ("IRI Common Stock").
(2) As described below, the exercise price as to one-third of the shares covered
by the options is the offering price of the IRI Common Stock pursuant to the
Company's initial public offering (the "IPO Price"), the exercise price as
to the second one-third of the shares covered by the options is the greater
of the IPO Price and the fair market value per share on November 13, 1998,
and the exercise price as to the final
25
<PAGE> 26
one-third of the shares covered by the options is the greater of the IPO
Price and the fair market value per share on November 13, 1999.
(3) Market price has been assumed to equal the IPO Price.
The following table sets forth information regarding the value of the stock
options granted on October 14, 1997 to the Named Executive Officers (no options
were exercised by any of the Named Executive Officers in 1997):
OPTION VALUES AT DECEMBER 31, 1997
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF
UNDERLYING UNEXERCISED
UNEXERCISED OPTIONS AT IN-THE-MONEY OPTIONS
NAME DECEMBER 31, 1997 AT DECEMBER 31, 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 be equal to the IPO Price.
STOCK OPTIONS
Pursuant to the Incentive Plan (described below under "-- Compensation
Plans and Arrangements -- The Incentive Plan"), the Company has granted to its
directors and certain of its officers and employees an aggregate of 1,933,000
options to purchase shares of IRI Common Stock. Such options and the terms
thereof are described in the following paragraphs.
On June 17, 1997, the Company granted options to purchase 20,000 shares of
IRI Common Stock to each of the directors not employed by the Company (the
"Outside Directors"). 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 IPO
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 November 13, 1997
and (ii) cumulatively to the extent of one-quarter of the shares after each of
November 13, 1998 and 1999 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.
On October 14, 1997, the Compensation Committee granted certain stock
options to the Named Executive Officers as described in the preceding tables and
the following discussion.
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 IRI Common
Stock covered thereby on November 13, 1997 ("Tranche A Shares"), one-third of
the shares of IRI Common Stock covered thereby on November 13, 1998 ("Tranche B
Shares"), and one-third of the shares of IRI Common Stock covered thereby on
November 13, 1999 ("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 IPO Price; Tranche B
Shares -- the greater of the IPO Price and the fair market
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<PAGE> 27
value per share on November 13, 1998; Tranche C Shares -- the greater of the IPO
Price and the fair market value per share on November 13, 1999.
On October 14, 1997, the Compensation Committee granted a total of 258,000
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 14, 1997, the Compensation Committee granted a total of 310,000
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 IRI Common Stock on November 13, 1997 ("Tranche 1
Shares"), 100 shares of IRI Common Stock on November 13, 1998 ("Tranche 2
Shares"), 100 shares of IRI Common Stock on November 13, 1999 ("Tranche 3
Shares"), 100 shares of IRI Common Stock on November 13, 2000 ("Tranche 4
Shares") and 100 shares of IRI Common Stock on November 13, 2001 ("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 IPO Price;
Tranche 2 Shares -- the greater of the IPO Price and the fair market value per
share on November 13, 1998; Tranche 3 Shares -- the greater of the IPO Price and
the fair market value per share on November 13, 1999; Tranche 4 Shares -- the
greater of the IPO Price and the fair market value per share on November 13,
2000; and Tranche 5 Shares -- the greater of the IPO Price and the fair market
value per share on November 13, 2001.
COMPENSATION PLANS AND ARRANGEMENTS
Compensation of Named Executive Officers -- In General
The compensation of the Named Executive Officers is 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
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 IRI 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 IRI 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 IRI 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 IRI Common Stock to which the exercise relates if there is then a
public market for the IRI Common Stock. A grant may provide for automatic grant
of reload option rights upon the exercise of Option Rights, including reload
option
27
<PAGE> 28
rights, for shares of IRI 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 IRI 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 IRI 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 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 ten 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 IRI 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 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 Compensation 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"). 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.
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<PAGE> 29
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 the
Company's initial public offering. 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 IRI 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 IRI 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
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
29
<PAGE> 30
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.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.
The following table sets forth certain information regarding the beneficial
ownership of IRI Common Stock as of March 17, 1998 by (i) each person that owns
beneficially more than 5% of the IRI 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 on which such person has the right to acquire such shares within 60 days
after such given date.
<TABLE>
<CAPTION>
DIRECTORS AND NUMBER OF PERCENTAGE OF
EXECUTIVE OFFICERS SHARES OWNED(1) SHARES OWNED(1)
- ------------------ --------------- ---------------
<S> <C> <C>
Hushang Ansary.............................................. 24,094,333(2)(3) 59.4%
Daniel G. Moriarty.......................................... 22,167(3) *
Abdallah Andrawos........................................... 13,333(3) *
Nina Ansary................................................. 3,010,000(3) 7.4%
Frank C. Carlucci........................................... 1,090,000(3) 2.7%
Dr. Philip David............................................ 1,360,000(3) 3.4%
Munawar H. Hidayatallah..................................... 47,500(3) *
Richard D. Higginbotham..................................... 13,667(3) *
John D. Macomber............................................ 10,000(3) *
Edward L. Palmer............................................ 10,000(3) *
Stephen J. Solarz........................................... 10,000(3) *
Gary W. Stratulate.......................................... 38,333(3) *
Arthur C. Teichgraeber...................................... 39,622(3) *
Alexander B. Trowbridge..................................... 10,000(3) *
J. Robinson West............................................ 10,000(3) *
All directors and executive officers as a group (15
persons).................................................. 29,778,955(2)(3) 73.5%
CERTAIN OTHER HOLDERS
Nader Ansary................................................ 3,000,000 7.4%
The Ansary Family Trust..................................... 2,850,000(2) 7.0%
</TABLE>
- ---------------
* Less than 1%.
(1) Assumes exercise of vested options.
30
<PAGE> 31
(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
17,751,000 shares of IRI Common Stock. Includes 6,010,000 shares of IRI
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 IRI Common
Stock granted pursuant to the Incentive Plan.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
CORPORATE CONSOLIDATION
On October 14, 1997, 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 IRI 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 canceled.
OTHER TRANSACTIONS
During the three month period ended March 31, 1997, the Company paid ESI
approximately $450,000 to reimburse ESI for certain administrative service 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 November 1997, the Company entered into a registration rights agreement
with each of the stockholders who held IRI Common Stock prior to the Company's
initial public offering (the "Registration Rights Agreement"). The Registration
Rights Agreement provides 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 IRI 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 IRI Common Stock in an underwritten
offering. The Registration Rights conferred by the Registration Rights Agreement
are 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 November 1997, the Company entered into an indemnification agreement
(each, an "Indemnification Agreement") with each of its directors and executive
officers (each, an "Indemnitee"). Each Indemnification
31
<PAGE> 32
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 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 has agreed 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.
32
<PAGE> 33
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.
IRI INTERNATIONAL CORPORATION
By: /s/ MUNAWAR H. HIDAYATALLAH
------------------------------------
Munawar H. Hidayatallah,
Executive Vice President and
Chief Financial Officer, Director
Date: April 27, 1998
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this report has been signed below by the following persons on behalf of
the registrant and in the capacities and on the dates indicated.
SIGNATURES
<TABLE>
<S> <C> <C>
* Chairman of the Board and Chief Date: April 27, 1998
- ------------------------------------------ Executive Officer
Hushang Ansary
* Vice-Chairman of the Board Date: April 27, 1998
- ------------------------------------------
Daniel G. Moriarty
/s/ MUNAWAR H. HIDAYATALLAH Executive Vice President, Chief Date: April 27, 1998
- ------------------------------------------ Financial and Accounting Officer
Munawar H. Hidayatallah and Director
* Secretary and Director Date: April 27, 1998
- ------------------------------------------
Abdallah Andrawos
* President and Chief Operating Date: April 27, 1998
- ------------------------------------------ Officer of the
Gary W. Stratulate IRI Division and Director
* President and Chief Operating Date: April 27, 1998
- ------------------------------------------ Officer of the
Richard D. Higginbotham Bowen Tools Division and
Director
* President and Chief Operating Date: April 27, 1998
- ------------------------------------------ Officer of Cardwell International,
Arthur C. Teichgraeber Ltd. and Director
* Director Date: April 27, 1998
- ------------------------------------------
Nina Ansary
* Director Date: April 27, 1998
- ------------------------------------------
Frank C. Carlucci
* Director Date: April 27, 1998
- ------------------------------------------
Dr. Philip David
</TABLE>
33
<PAGE> 34
<TABLE>
<S> <C> <C>
* Director Date: April 27, 1998
- ------------------------------------------
John D. Macomber
* Director Date: April 27, 1998
- ------------------------------------------
Edward L. Palmer
* Director Date: April 27, 1998
- ------------------------------------------
Stephen J. Solarz
* Director Date: April 27, 1998
- ------------------------------------------
Alexander B. Trowbridge
* Director Date: April 27, 1998
- ------------------------------------------
J. Robinson West
</TABLE>
- ---------------
* By Munawar H. Hidayatallah, Attorney-In-Fact
34
<PAGE> 35
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
<C> <S> <C>
*3.1 -- Form of Restated Certificate of Incorporation of IRI
International Corporation.
*3.2 -- Certificate of Ownership and Merger of ESI with the Company
filed on October 14, 1997.
*3.3 -- Amended and Restated Bylaws of the Company.
*4.2 -- Form of Registration Rights Agreement between the Company
and its current stockholders.
*10.1 -- Form of Indemnification Agreement among the Company and its
officers and directors.
*10.2 -- Employment Agreement, dated as of April 17, 1997, between
Cardwell and A.C. Teichgraeber and joined by the Company.
*10.3 -- Credit Agreement, dated as of March 31, 1997, among ESI, the
Company, the several lenders from time to time parties
thereto, Credit Lyonnais New York Branch and Lehman
Commercial Paper Inc. (the "Credit Agreement").
*10.3A -- Amendment No. 1 to the Credit Agreement.
*10.3B -- Form of Agreement and Consent to the Credit Agreement.
*10.4 -- Senior Subordinated Increasing Rate Note Purchase Agreement,
dated as of March 31, 1997, by and among the Company, Energy
Services International Limited and Strategic Resource
Partners Fund ("Senior Note Purchase Agreement").
*10.4A -- Form of Agreement and Consent to the Senior Note Purchase
Agreement.
*10.5 -- Asset Purchase Agreement, dated as of January 20, 1997, by
and among Bowen Tools, Inc.-- Delaware, Bowen, Air Liquide
and the Company.
*10.6 -- Acquisition Agreement, dated as of March 20, 1997, by and
among A.C. Teichgraeber, Teichgraeber Family Limited
Partnership, L.P., Arthur C. Teichgraeber Charitable
Remainder Trust, Greenwood Pipe and Threading Company, EDCO
Drilling Company Inc. and the Company.
*10.7 -- Equity Incentive Plan of the Company.
*10.8 -- Form of Nonqualified Stock Option Agreement.
*10.9 -- Collective Bargaining Agreement dated as of July 8, 1997
between Bowen and General Drivers, Warehousemen, Helpers,
Production Maintenance and Service Employees, Local Union
No. 968.
*21 -- List of Subsidiaries of the Company.
23.1 -- Consent of KPMG Peat Marwick LLP.
</TABLE>
- ---------------
* Exhibit incorporated herein by reference to the Registrant's registration
statement on Form S-1 (Registration No. 333-31157) dated September 8, 1997, as
amended.
35
<PAGE> 1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
The Board of Directors
IRI International Corporation:
We consent to incorporation by reference in the registration statement on
Form S-8 of IRI International Corporation of our report dated February 27, 1998,
relating to the consolidated balance sheets of IRI International Corporation and
subsidiaries as of December 31, 1997, and 1996, and the related consolidated
statements of operations, shareholders' equity, and cash flows for year ended
December 31, 1997, the nine-months ended December 31, 1996 and the year ended
March 31, 1996, which report appears in the December 31, 1997 annual report on
Form 10-K/A of IRI International Corporation.
KPMG PEAT MARWICK LLP
Houston, Texas
April 28, 1998
36
