<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
for the Quarterly Period Ended September 30, 1999
Commission File Number 001-13593
IRI INTERNATIONAL CORPORATION
(Exact Name of Registrant as Specified in Its Charter)
DELAWARE 75-2044681
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
1000 LOUISIANA, SUITE 5900, HOUSTON, TEXAS 77002
(Address of Principal Executive Offices)(Zip Code)
(713) 651-8002
(Registrant's Telephone Number, Including Area Code)
NONE
(Former Name, Former Address and Former Fiscal Year, if Changed Since Last
Report)
Indicate by check X 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
--- ---
Number of shares outstanding of each class of common stock, $0.01 par value per
share, at November 12, 1999:
39,900,000 Common Shares
<PAGE> 2
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
IRI INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
------------- ------------
(unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents......................... $ 39,791 37,475
Marketable securities, at fair value (cost of
$-0- at September 30, 1999 and $3,743 at
December 31, 1998).............................. -- 3,000
Accounts receivable, less allowance for doubtful
accounts of $2,172 at September 30, 1999 and
$960 at December 31, 1998....................... 20,920 29,147
Inventories....................................... 107,601 109,151
Costs and estimated earnings in excess of
billings on uncompleted contracts............... 2,187 4,429
Other current assets.............................. 1,888 2,381
---------- ----------
Total current assets......................... 172,387 185,583
Property, plant and equipment, net.................. 46,859 49,192
Other assets........................................ 3,403 4,391
---------- ----------
Total liabilities............................ $ 222,649 239,166
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities.......... $ 13,259 $ 14,128
Customer advances................................. 1,896 3,303
Other liabilities................................. 1,981 3,906
---------- --------
Total current liabilities..................... 17,136 21,337
Negative goodwill, less accumulated amortization.... -- 4,026
Accrued postretirement benefits..................... 3,054 3,148
Other long-term liabilities......................... 116 396
---------- --------
Total liabilities............................. 20,306 28,907
Commitments and contingencies
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 shares issued
and outstanding................................. 399 399
Additional paid-in capital........................ 168,842 168,514
Retained earnings................................. 34,562 43,308
Accumulated other comprehensive loss.............. (1,460) (1,962)
Total Shareholders' equity.................... 202,343 210,259
---------- --------
$ 222,649 $239,166
========== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
2
<PAGE> 3
IRI INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
---------------------------- ----------------------------
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
1999 1998 1999 1998
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Revenues...................................................... $26,102 40,650 68,522 139,281
Cost of goods sold............................................ 18,882 29,586 58,715 99,900
------------- ------------- ------------- -------------
Gross profit........................................ 7,220 11,064 9,807 39,381
Selling and administrative expense............................ 6,173 6,991 21,132 21,170
Restructuring charge.......................................... 321 429 1,779 429
------------- ------------- ------------- -------------
Operating income (loss)............................. 726 3,644 (13,104) 17,782
Other income (expense)
Interest income.......................................... 343 455 982 1,766
Interest expense......................................... (12) (24) (346) (253)
Other, net............................................... 2,551 (836) (988) (3,813)
------------- ------------- ------------- -------------
2,882 (405) (352) (2,300)
------------- ------------- ------------- -------------
Income (loss) before income taxes................... 3,608 3,239 (13,456) 15,482
Income taxes (benefit)........................................ 1,262 440 (4,710) 2,786
------------- ------------- ------------- -------------
Net income (loss)................................... $ 2,346 2,799 (8,746) 12,696
============= ============= ============= =============
Basic and diluted net income (loss) per common share.......... 0.06 0.07 (0.22) 0.32
============= ============= ============= =============
Weighted average shares outstanding........................... 39,900 39,900 39,900 39,900
============= ============= ============= =============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
<PAGE> 4
IRI INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY AND
COMPREHENSIVE LOSS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
Accumulated shareholders'
-----------------------------------------------
Additional Other Equity and
Common paid-in Retained Comprehensive Comprehensive
stock capital earnings income (loss) income (loss)
------ ---------- -------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Balances at December 31, 1998.................. $ 399 168,514 43,308 (1,962) 210,259
Other.......................................... -- 328 -- -- 328
Comprehensive loss
Net loss.................................. -- -- (8,746) -- (8,746)
Foreign currency translation adjustment... -- -- -- 502 502
----- ------- ------ ------ -------
Total comprehensive loss............. -- -- (8,746) 502 (8,244)
----- ------- ------ ------ -------
Balances at September 30, 1999................. $ 399 168,842 34,562 (1,460) 202,343
===== ======= ====== ====== =======
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
<PAGE> 5
IRI INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
Nine months ended
-------------------------------
September 30, September 30,
1999 1998
------------- -------------
<S> <C> <C>
Cash flows from operating activities
Net income (loss) .......................................................... $(8,746) 12,696
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operations
Depreciation and amortization ........................................ 3,733 3,218
Amortization of goodwill ............................................. 940 941
Amortization of negative goodwill .................................... (4,026) (4,026)
Gain on sale of assets ............................................... (93) --
Change in employee benefit accounts .................................. (94) (228)
Changes in assets and liabilities, net of effects of acquisitions
Marketable securities ............................................. 3,000 8,184
Accounts receivable ............................................... 8,227 4,435
Inventories ....................................................... 1,550 (17,813)
Other current assets .............................................. 2,735 1,443
Other noncurrent assets ........................................... 48 185
Accounts payable and accrued liabilities, customer
advances and other liabilities ................................. (3,770) (9,926)
------- -------
Net cash provided by (used in) operations ................... 3,504 (891)
------- -------
Cash flows from investing activities
Capital expenditures ....................................................... (1,417) (10,558)
Proceeds from sale of assets ............................................... 110 --
------- -------
Net cash used in investing activities ....................... (1,307) (10,558)
------- --------
Cash flows from financing activities
Payments on capital lease obligation ....................................... (209) (158)
Payments on notes payable .................................................. -- (72)
Other ...................................................................... 328 (24)
------- -------
Net cash provided by (used in) financing activities ......... 119 (254)
------- -------
Increase (decrease) in cash and cash equivalents .............................. 2,316 (11,703)
Cash and cash equivalents at beginning of period .............................. 37,475 49,473
------- -------
Cash and cash equivalents at end of period .................................... $39,791 37,770
======= =======
Supplemental cash flow information
Interest paid .............................................................. $ 346 253
======= =======
Income taxes paid .......................................................... $ 277 5,219
======= =======
</TABLE>
See accompanying notes to condensed consolidated financial statements.
5
<PAGE> 6
IRI INTERNATIONAL CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(1) GENERAL
The accompanying condensed consolidated financial statements of IRI
International Corporation and subsidiaries (the Company) as of September
30, 1999 and for the three and nine months ended September 30, 1999 and
1998 have been prepared pursuant to the rules and regulations of the
Securities and Exchange Commission and are unaudited; however, they
include all adjustments (consisting only of normal recurring adjustments)
which, in the opinion of management, are necessary for a fair
presentation for such periods. Accounting measurements at interim dates
inherently involve greater reliance on estimates than at year end. The
results of operations for the interim periods presented are not
necessarily indicative of the results to be expected for the entire year.
Certain footnote disclosures normally included in annual consolidated
financial statements prepared in accordance with generally accepted
accounting principles have been omitted herein. The interim information
should be read in conjunction with the Company's Annual Report on Form
10-K for the year ended December 31, 1998.
(2) INVENTORIES
Inventories consist of the following at September 30, 1999 and December
31, 1998 (in thousands):
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Raw materials $ 40,854 46,743
Work-in-process 19,764 21,241
Finished goods 46,983 41,167
--------- -------
Total $ 107,601 109,151
========= =======
</TABLE>
Concurrent with the implementation and testing of a new integrated
manufacturing software system (the Baan system), the Company has
instituted measures to reduce manufacturing cost of goods through
lowering of purchasing cost, reduced workforce and higher productivity
combined with an increase in the price of its goods and services
initiated since December 1998. In line with these measures, the Company
is also conducting a physical inventory and is reviewing and updating its
standard cost of products. Any adjustments, if necessary, will be
recorded in the fourth quarter of 1999.
(3) COMMITMENTS AND CONTINGENCIES
The Company has contract commitments with customers aggregating $25.8
million at September 30, 1999. At September 30, 1999, the Company was
contingently liable for approximately $4.7 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.
6
<PAGE> 7
IRI INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(4) NET INCOME (LOSS) PER COMMON SHARE
Stock options outstanding at September 30, 1999 of 2,388,500 shares were
not considered in the computation of net income per common share for the
quarter then ended because the exercise price exceeded the average market
price for the quarter. For the nine months ended September 30, 1999,
there was a loss, and inclusion of option shares would be antidilutive.
Stock options outstanding at September 30, 1998 of 3,886,000 shares were
not considered in the computation of net income per common share for the
quarter and nine months then ended because the exercise price exceeded
the average market price for the respective period.
(5) SPECIAL CHARGES AND OTHER ADJUSTMENTS
In the third quarter of 1999, the Company continued its restructuring
program in which the workforce was reduced by 20 employees in addition to
the reduction of 417 employees in the first and second quarter of 1999.
Expenses related to employee severance incurred in connection with the
restructuring program have been reported as a restructuring charge of
$321,000 for the three months ended September 30, 1999 and $1,779,000 for
the nine months ended September 30, 1999.
Included in the results of operations for the nine months ended September
30, 1999 are also second quarter 1999 charges to write off $2.1 million
of pre-contract engineering and design costs incurred for a contract that
did not materialize, a $2.2 million charge for contract adjustments, a
$2.0 million increase in inventory excess and obsolescence reserves, an
increase in trade accounts receivable reserves of $.9 million and
software implementation and other charges of $.9 million.
(6) NEW ACCOUNTING PRONOUNCEMENTS
In April 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-5 (SOP 98-5), Reporting of the Costs of
Start-up Activities, which is effective for financial statements issued
for periods beginning after December 15, 1998. The Company adopted SOP
98-5 in the first quarter of 1999 which did not have a material impact on
its financial statements or accounting policies.
The Company is also assessing the reporting and disclosure requirements
of SFAS No. 133, Accounting for Derivative Instruments and Hedging
Activities. This statement establishes accounting and reporting standards
for derivative instruments and hedging activities. SFAS No. 137 deferred
the effective date of SFAS No. 133 such that the statement is effective
for financial statements for fiscal years beginning after June 15, 2000.
The Company believes SFAS No. 133 will not have a material impact on its
financial statements or accounting policies. The Company will adopt the
provisions of SFAS No. 133 in the first quarter of 2001.
7
<PAGE> 8
IRI INTERNATIONAL CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(7) KEY SEGMENT FINANCIAL INFORMATION
The Company operates through three business segments consisting of
Oilfield Equipment, Downhole Tools and Specialty Steel. Financial
information by segments for the three and nine months ended September 30,
1999 and 1998 is summarized below (in thousands):
<TABLE>
<CAPTION>
OILFIELD DOWNHOLE SPECIALTY CORPORATE
EQUIPMENT PRODUCTS STEEL AND OTHER TOTAL
--------- -------- ----- --------- -----
Quarter ended September 30, 1999:
<S> <C> <C> <C> <C> <C>
Sales to unaffiliated customers 14,326 12,084 917 (1,225) 26,102
Segment operating income (loss) 1,699 2,737 (103) (3,607) 726
Depreciation and amortization 130 94 11 926 1,161
Amortization of negative
goodwill - - - 1,341 1,341
Quarter ended September 30, 1998:
Sales to unaffiliated customers 19,677 17,568 3,427 (22) 40,650
Segment operating income (loss) 3,008 3,062 1,092 (3,518) 3,644
Depreciation and amortization 113 118 10 805 1,046
Amortization of negative
goodwill - - - 1,341 1,341
Nine months ended September 30, 1999:
Sales to unaffiliated customers 33,773 33,222 3,422 (1,895) 68,522
Segment operating income (loss) (3,791) 4,042 65 (13,420) (13,104)
Depreciation and amortization 387 2,273 32 1,041 3,733
Amortization of negative
goodwill - - - 4,025 4,025
Nine months ended September 30, 1998:
Sales to unaffiliated customers 69,857 60,744 9,027 (347) 139,281
Segment operating income (loss) 12,821 11,855 2,347 (9,241) 17,782
Depreciation and amortization 300 1,984 25 909 3,218
Amortization of negative
goodwill - - - 4,025 4,025
</TABLE>
8
<PAGE> 9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis of our financial condition and
results of operations should be read in conjunction with our condensed
consolidated financial statements and the notes thereto.
OVERVIEW
General
We manufacture land-based drilling and well-servicing rigs and rig
component parts for use in the domestic and international markets. The condition
of the oil and gas industry and worldwide levels of exploration, development and
production activity, including the number of oil and gas wells being drilled,
the depth and drilling conditions of such wells, the number of well completions
and the level of workover activity have a substantial impact on our revenues.
Exploration, development and production activity is largely dependent on the
prevailing view of future oil and natural gas prices, which have been
significantly volatile for the last 20 years. Oil and natural gas prices are
influenced by factors affecting the supply of and demand for oil and gas,
including the level of drilling activity, worldwide economic activity, interest
rates and the cost of capital, environmental regulation, tax policies, political
requirements of national governments, coordination by OPEC and the cost of
producing oil and gas. Demand for our products in certain emerging market
countries may be greatly influenced by their need for internal development,
energy self-sufficiency or hard currency earnings rather than the conventional
factors relating to the price of oil and natural gas.
During the latter half of 1998 and the first quarter of 1999, declining
oil prices coupled with the deteriorating economic conditions in Russia and
other emerging markets resulted in a sharp drop in customer spending and a
dramatically lower rig utilization rate worldwide. Our revenues, operating
income and backlog have been adversely affected by these events and the value of
our receivables and inventory may be further affected by these events. As a
result of recent increases in oil prices during the second and third quarters of
1999, consumer spending and rig utilization rates have begun to increase.
Although results of operations for the third quarter of 1999 reflect this
increase in consumer spending, results of operations for the third quarter of
1999 and for the first nine months of 1999 are still substantially reduced from
the results for comparable periods in 1998 and still reflect the adverse market
conditions prevalent during the first six months of 1999. In addition, our gross
margins for the first nine months of 1999 were also adversely affected by
restructuring costs and other special charges of $5.6 million (after-tax) in the
second quarter of 1999.
During the first nine months of this year, we have implemented a
variety of measures to consolidate our manufacturing operations in Pampa and
Houston, Texas and other cost reduction programs. These actions reduced our
workforce during the first nine months of 1999 by a total of 744 employees. On
an ongoing basis, we will continue to consider the possibility of further
consolidation and cost reduction measures but we cannot give any assurance that
these or any other measures will be sufficient to offset the negative impact of
the existing industry conditions.
Foreign Exchange Transactions
We have attempted to limit our exposure to foreign currency
fluctuations. Sales denominated in foreign currencies are made only by the down
hole tools segment. With the exception of our Canadian subsidiary, we maintain
our cash, cash equivalents and investments in U.S. dollar denominated accounts
(except to the extent needed for local operating expenses). We have not engaged
in and do not currently intend to engage in any significant hedging or currency
trading transactions to compensate for adverse currency fluctuations among
foreign currencies.
9
<PAGE> 10
RESULTS OF OPERATIONS
Sales of new rigs manufactured by us can produce large fluctuations in
revenues depending on the size and the timing of the construction of orders.
Individual orders of rig packages range from $1 million to $25 million and cycle
times for the design, engineering and manufacturing of rig packages range from
six to nine months. These fluctuations in the size and timing of orders, may
affect our quarterly revenues and operating income.
Results of Segment Operations
The following discussion of the results of operations of our oil field
equipment, down hole tools and specialty steel segments does not reflect the
allocation of corporate overhead and unallocated administrative expenses and
amortization of goodwill and negative goodwill on an individual segment basis.
Certain information that reconciles the discussion of the results of operations
of the individual segments to our condensed consolidated financial statements is
as follows:
<TABLE>
<CAPTION>
-------------------------------------------------------
THREE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------- -------------
1999 1998 1999 1998
---- ---- ---- ----
Revenues (IN THOUSANDS)
<S> <C> <C> <C> <C>
Oilfield equipment .............................. $ 14,326 $ 19,677 $ 33,773 $ 69,857
Downhole tools .................................. 12,084 17,568 33,222 60,744
Specialty steel ................................. 917 3,427 3,422 9,027
Eliminations .................................... (1,225) (22) (1,895) (347)
--------- --------- --------- ---------
Total ......................................... $ 26,102 $ 40,650 $ 68,522 $ 139,281
========= ========= ========= =========
Segment operating income (loss)
Oilfield equipment .............................. $ 1,699 $ 3,008 $ (3,791) $ 12,821
Downhole tools .................................. 2,737 3,062 4,042 11,855
Specialty steel ................................. (103) 1,092 65 2,347
--------- --------- --------- ---------
Total ......................................... 4,333 7,162 316 27,023
Corporate overhead and unallocated administrative
expenses ...................................... (4,315) (4,117) (14,726) (11,886)
Amortization of negative goodwill ............... 1,341 1,341 4,025 4,025
Amortization of goodwill ....................... (312) (313) (940) (951)
Restructuring costs ............................. (321) (429) (1,779) (429)
--------- --------- --------- ---------
Operating income (loss) ......................... $ 726 $ 3,644 $ (13,104) $ 17,782
========= ========= ========= =========
</TABLE>
Oil Field Equipment
The economic and financial turmoil in Russia and the Asia-Pacific
region together with the downward turn in oil prices during the first quarter of
1999 led to a sharp decrease in the demand for our products. Decreased sales of
rig packages resulted in decreases in revenues and operating income for the
third quarter of 1999 and on a year-to-date basis. Our gross margin was also
lower: 15.8% for the third quarter of 1999 as compared to 19.9% for the third
quarter of 1998, and (4.7%) for the first nine months of 1999, as compared to
22.6% for the first nine months of 1998. Our gross margin for the first nine
months of 1999 was negatively affected by: a $2.1 million write-off for
pre-contract engineering and design costs incurred for a contract that did not
materialize; and a $2.2 million charge for contract adjustments, each of which
occurred during the second quarter of 1999.
10
<PAGE> 11
Down Hole Tools
The downward trends in the oil industries prevailing during the first
quarter of 1999 had a significant negative impact on our customers' demand for
fishing tools and power equipment, particularly in international markets, and,
accordingly, on our revenues and operating income. As a result of decreased
sales volume, our gross margin was significantly lower for the first nine months
of 1999: 24.5% as compared to 29.8% for the first nine months of 1998. Our gross
margin for the first nine months was also adversely affected by an increase in
inventory obsolescence reserves of $2.0 million during the second quarter of
1999. However, our gross margin for the third quarter of 1999 rebounded to 33.0%
as compared to 28.4% for the third quarter of 1998 as a result of decreases in
indirect manufacturing costs, generated by cost-cutting initiatives.
At the same time as the Company implemented its new integrated
manufacturing software system (the Baan system), management took steps to reduce
manufacturing cost of goods by reducing purchasing costs, lowering overhead
through consolidations, reducing manpower and improving productivity. Together
with price increases initiated by the Company as of late last year in connection
with its globally recognized brand name products, these measures were aimed at
improving profit margins even as revenues declined. In conjunction with these
measures, the Company is also conducting a physical inventory and is reviewing
and updating its standard cost of products. Any adjustments, if necessary, will
be recorded in the fourth quarter of 1999.
Specialty Steel
Reduced demand from a major customer and a general recession in
industry-wide demand due to market conditions significantly impacted our
revenues and operating income. Because of the loss of the business that we
transacted with this major customer and the overall reduction in our sales
volume, our gross margin was significantly lower: (7.7)% for the third quarter
of 1999 as compared to 33.0% for the third quarter of 1998 and 4.7% for the
first nine months of 1999 as compared to 27.3% for the first nine months of
1998.
Corporate and Administrative Expenses
The $2.8 million increase for the first nine months of 1999, as
compared to the first nine months of 1998, resulted from: a net increase in the
non-employee stock option accrual of $0.7 million, increased franchise taxes of
$0.3 million, second quarter increases in trade account receivable reserves of
$0.9 million, and incurred software implementation costs and other charges of
$0.9 million. The $0.2 million increase for the third quarter of 1999 as
compared to the third quarter of 1998, resulted primarily from amortization of
non-employee director stock options and new system software amortization,
partially offset by decreased administrative costs.
Other Income (Loss)
The increase in other income for the third quarter of 1999 as compared
to the third quarter of 1998 was primarily the result of increased gains with
respect to marketable securities in 1999 and decreased other expense. Gains on
investments in marketable securities netted $2.7 million during the third
quarter of 1999, as compared to losses of $0.4 million during the third quarter
of 1998. Other expense decreased to $153,000 for the third quarter of 1999, as
compared to $436,000 for the third quarter of 1998.
With respect to the first nine months of 1999, as compared to the first
nine months of 1998, the decrease in other losses was primarily the result of
decreased losses with respect to marketable securities in 1999 and decreased
other expense. Losses on investments in marketable securities netted $551,000
during the first nine months of 1999, as compared to losses of $2.4 million
during the first nine months of 1998. Other expense decreased to $437,000 for
the first nine months of 1999, as compared to $807,000 for the first nine months
of 1998. Also, the Company incurred a special charge of $0.6 million in the
second quarter of 1998 relating to expenses in connection with the Company's
proposed acquisition of Hitec ASA, which terminated on April 28, 1998. There was
no such charge in 1999.
Interest income decreased by $112,000 in the third quarter of 1999 as
compared to the third quarter of 1998 and by $784,000 in the first nine months
of 1999 as compared to the first nine months of 1998, resulting from lower cash
balances during the 1999 periods.
Income Taxes
We recorded a deferred tax asset of $0.8 million for the first nine
months of 1999, which we believe is more likely than not to be realized by
future taxable income.
11
<PAGE> 12
ACCOUNTING POLICIES
In June 1998, the Financial Accounting Standards Board issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS
133"). SFAS No. 137 deferred the effective date for SFAS 133 to all quarters of
fiscal years beginning after June 15, 2000. This statement requires that all
derivatives be recognized on the balance sheet, measured at fair value. Adoption
of this statement is not expected to have a material impact on our consolidated
financial position, results of operations or cash flows.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1999, we had cash and cash equivalents and marketable
securities of $39.8 million, compared to $40.5 million at December 31, 1998. Our
working capital was $155.3 million compared to $164.2 million at December 31,
1998. This decrease in working capital at September 30, 1999 resulted from a
decrease in marketable securities, accounts receivable, inventories, other
current assets and liabilities, partially offset by an increase in cash and cash
equivalents. At September 30, 1999, the ratio of our current assets to current
liabilities was approximately 10.06:1.
At September 30, 1999, approximately $5.0 million was available for
letters of credit under our credit facility. At this time, we have no
outstanding indebtedness other than contingent liabilities in the form of
stand-by letters of credit.
We believe that our balance sheet, significant liquidity and cash flow
from operations will be sufficient to meet our short term and long term
liquidity needs. We believe that any credit facilities that we may need in the
future will be available on commercially acceptable terms, though there can be
no assurances in this regard.
Credit Facility
We have a credit facility that matures on June 30, 2000 and that is
available only for the issuance of letters of credit. After the initial public
offering of our common stock, we reduced the commitment under our credit
facility to $9.7 million.
Our obligations under our credit facility are secured by first priority
security interests in substantially all of our assets, including all personal
property and material real property, the pledge by us of all of the outstanding
capital stock of Cardwell and the pledge by us or Cardwell, as the case may be,
of 66% of the outstanding capital stock of each of our direct and indirect
foreign subsidiaries. These obligations are also guaranteed by Cardwell. Our
credit facility contains certain representations and warranties, covenants and
events of default customary for facilities of this type.
Because of the decrease in our revenues and operating income over the
past three quarters, we failed to comply with certain financial covenants in our
credit facility. We have obtained waivers for the first and second quarters, as
well as the third quarter of 1999, with respect to such financial covenants.
YEAR 2000
Our State of Readiness
This quarter, we completed testing and remediation of our information
technology systems, including our network servers, LANS, WANS, personal
computers, and the domestic Enterprise Resource Planning System ("ERP") for both
the Downhole Tool and Oil Field Equipment divisions. In addition, we performed
requisite testing at two of IRI's international locations. Although no
significant issues were discovered at these international locations, those
systems are being upgraded in the ordinary course of business. These upgrades
will be completed in November.
In addition, we also completed testing and remediation of our key
non-information technology systems, including manufacturing machinery that
potentially contains embedded numerical technology, phones, security systems,
and office equipment.
The testing of these systems occurred from July through October, 1999.
Employees and outside consultants conducted this testing. Although most of our
systems and machinery were already designed, or upgraded in the ordinary course
of business, to be Year 2000 compliant, we performed a series of "date testing"
procedures to determine
12
<PAGE> 13
compliance. We executed business transactions while simulating the change in the
millennium, and examined the results thereof. These tests were conducted with
regard to: accounting (financial statements, accounts payable, accounts
receivable, payroll), logistics (Materials Requirements Planning, manufacturing,
distribution, invoicing), and technical (operating systems, files systems,
downloads) functions. Employees verified the results of testing by (a) using the
systems to see if they performed accurately, and/or (b) employing manufacturers'
testing tools and test procedures.
Although we have tested these systems, we cannot completely assure that
all of our systems are Year 2000 Compliant.
Analysis of Third Party Relationships
This quarter, we also completed an inventory of our key customers and
suppliers, including utility companies, telecom suppliers and financial
institutions, and an analysis of how their respective Year 2000 compliance could
impact our operations. We contacted these customers and suppliers to inquire:
(a) the level of their technology risk; (b) the way in which technology affects
their ability to buy/deliver goods that relate to our business; (c) their
current system platforms and program status; (d) and whether they currently are
performing due diligence testing. Based on the responses we received from such
customers and suppliers, we believe that our key customers and suppliers do not
pose a substantial risk to our operations, although we can give no assurances in
this regard.
Costs to Address Year 2000 Issues
To date, we have incurred expenses of approximately $350,000 that are
directly related to our Year 2000 compliance program. We estimate our expenses
relating to year 2000 issues will be no more than $400,000. This low figure can
be attributed to the fact that: (a) many of our systems were already designed to
be Year 2000 compliant or were upgraded to be Year 2000 compliant in the
ordinary course of business; and (b) maintenance agreements with the vendors of
our ERP systems included the cost of software upgrades required for those
systems. We believe that the costs to complete our Year 2000 compliance program
will not have a material effect on our financial position, results of operations
or cash flows, although we cannot give any assurances in this regard.
Risks Associated with Year 2000 Issues
We do not believe that we face significant Year 2000 risks because a
large portion of our manufacturing equipment does not rely on embedded
technology. Nonetheless, we are presently unable to determine what effect Year
2000 failures could have on us. A significant failure, however, may force us to
curtail production and could prevent us from meeting customer orders on a timely
basis.
Contingency Plans for Year 2000
The Company is in the process of finalizing contingency plans.
Preliminary plans have been developed around the most reasonably likely worst
case scenario. We believe that we will have access to suppliers and
manufacturing outsourcing services that will help overcome disruption of our
services. In addition, we plan to gather data in a non-electronic format at the
close of this year to ensure that data such as customer orders, machinery
specifications, etc., will be available to us regardless of any potential Year
2000 problems.
CAPITAL EXPENDITURES
Capital expenditures for nine months ended September 30, 1999 totaled
approximately $1.4 million, essentially all of which was spent for the
implementation of new software at the down hole tools division. We are funding
capital expenditures with available cash and cash flow from operations.
INFORMATION CONCERNING FORWARD-LOOKING STATEMENTS
With the exception of the historical information contained in this
report, the matters described herein contain forward-looking statements that
involve risk and uncertainties including but not limited to economic and
competitive factors outside of our control. These factors more specifically
include:
13
<PAGE> 14
- - dependence on the oil and gas industry;
- - competition from various entities;
- - the impact of government regulations;
- - the instability of certain foreign economies (including Russia and
countries of the Asia-Pacific region);
- - currency fluctuations;
- - risks of expropriation; and
- - changes in law affecting international trade and investment.
Forward-looking statements are typically identified by the words "believe,"
"expect," "anticipate," "intend," "estimate," and similar expressions. Readers
are cautioned not to place undue reliance on these forward-looking statements,
which speak only as of their dates.
INFLATION
Inflation has not had a material impact on our operating and occupancy
costs.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
This discussion of our exposure to market risks and our risk-management
activities includes forward looking statements. These forward looking statements
involve risks and uncertainties, including economic and competitive factors
outside our control.
Our primary risk exposures come from interest rate risks, foreign
exchange rate risks, and equity price risks. Our exposure to interest rate risks
are minimal with respect to indebtedness. We repaid substantially all our
outstanding indebtedness in November 1997. However, at September 30, 1999, we
had approximately $39.8 million of cash in interest bearing accounts. The rate
of return on these accounts will vary with the prevailing interest rates. We do
not engage in any significant interest rate swaps or other derivative activities
designed to limit our exposure to changes in interest rates.
Our direct exposure to foreign exchange risks is minimal. Except as
discussed above in the "Management Discussion and Analysis of Financial
Condition and Results of Operations" with respect to our down hole tools
division, all of our sales are denominated in U.S. dollars. However, foreign
exchange rate fluctuations may affect our revenues indirectly to the extent that
a stronger U.S. dollar affects our ability to compete on the basis of price. We
do not engage in any significant hedging or currency trading activities to limit
our sensitivity to changes in foreign exchange rates and/or interest rates.
At September 30, 1999, we had no marketable securities. From time to
time, we purchase equitable securities for trading purposes. Fluctuations in
interest rates and equity prices may adversely affect the value of our
marketable securities.
We do not believe there has been any material change in the market
risks faced by us since the end of 1998.
PART II
OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORT ON FORM 8-K
(a) Exhibits
The exhibits listed on the exhibit Index following the signature page
hereof are filed herewith in response to this item.
(b) Reports on Form 8-K
None.
14
<PAGE> 15
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
Date: November 15, 1999 IRI INTERNATIONAL CORPORATION
By: /s/ ROBERT L. HARGRAVE
--------------------------------
Robert L. Hargrave
Chief Financial and Accounting Officer
15
<PAGE> 16
INDEX TO EXHIBITS
EXHIBIT NO. DESCRIPTION
*3.1 Form of Restated Certificate of Incorporation of IRI
International Corporation
*3.2 Amended and Restated Bylaws of the Company
10.3C Waiver dated as of September 7, 1999 to Credit Agreement dated as
of March 31, 1997 among the Company, the several banks and other
financial institutions or entities from time to time parties
thereto, and Credit Lyonnais New York Branch as Administrative
Agent
27.1 Financial Data Schedule (submitted as an exhibit only in the
electronic format of this Quarterly Report on Form 10-Q)
* Exhibit incorporated herein by reference to the Company's registration
statement on Form S-1 (Registration No. 333-31157) dated September 8,
1997, as amended.
16
<PAGE> 1
WAIVER, dated as of September 7, 1999 (this "Waiver"), to the CREDIT
AGREEMENT, dated as of March 31, 1997, (the "Credit Agreement") among IRI
INTERNATIONAL CORPORATION, a Delaware corporation (the "Borrower") as successor
to the merger of ENERGY SERVICES INTERNATIONAL LTD., a Delaware corporation and
former IRI INTERNATIONAL CORPORATION, a Delaware corporation, the several banks
and other financial institutions or entities from time to time parties thereto
(the "Lenders"), and CREDIT LYONNAIS NEW YORK BRANCH, as Administrative Agent
for the Lenders (in such capacity, the "Administrative Agent").
W I T N E S S E T H :
WHEREAS, pursuant to the Credit Agreement the Borrower agreed to
comply with certain covenants contained in section 7.1. therein;
WHEREAS, the Borrower have requested the Administrative Agent to waive
the compliance with certain of such covenants;
WHEREAS, the parties hereto have determined that it is in the best
interest of the parties to agree and consent on the waiver for the periods
established herein;
NOW, THEREFORE, in consideration of the premises and of the mutual
agreements herein contained, the parties hereto agree as follows:
1. Definitions. Unless otherwise defined herein, terms defined in
the Credit Agreement shall be used as so defined.
2. Waiver. The Administrative Agent and the Lenders hereby waive the
compliance by the Borrower with the following:
(a) Section 7.1(b) of the Credit Agreement for the fiscal quarters ending
December 31, 1998 and March 31, 1999; and
(b) Sections 7.1(b), 7.1(c) and 7.1(d) of the Credit Agreement for the
fiscal quarters ending June 30, 1999 and September 30, 1999.
3. No Revolving Credit Loans. From and after the date hereof, the
Revolving Credit Commitments shall be available for the issuance of Letters of
Credit only, and no Loans may be made or be outstanding.
4. Security Interest; Cash Collateral; Guarantee Letter of Credit.
If on the Revolving Credit Termination Date any Letters of Credit are
outstanding, or any amount remains unpaid in respect of any drawings under
Letters of Credit, then at the option of the Borrower:
(i) the security interest of the Administrative Agent on the Collateral
will not be released and the Borrower shall not permit any Lien to be
incurred on any asset
<PAGE> 2
of the Borrower or any Subsidiary, until all amounts owing in respect
of Letters of Credit are paid in full and no Letters of Credit are
outstanding; or
(ii) the Borrower will deposit with the Administrative Agent on the
Revolving Credit Termination Date cash collateral in the amount
equivalent to the undrawn amount of all such outstanding Letters of
Credit, plus the amount of any unreimbursed drawings under such
Letters of Credit, pursuant to a cash collateral agreement
satisfactory to the Administrative Agent and until all amounts
owing in respect of Letters of Credit are paid in full and no Letters
of Credit are outstanding; or
(iii) the Borrower will provide a letter of credit, satisfactory to the
Administrative Agent, on the Revolving Credit Termination Date in the
amount equivalent to the undrawn amount of all such outstanding
Letters of Credit, plus the amount of any unreimbursed drawings under
such Letters of Credit.
5. Effective Date. This Waiver will become effective as of the date
hereof upon its execution by the Borrower, the Lenders and the Administrative
Agent in accordance with the terms of the Credit Agreement.
6. Representative and Warranties. The Borrower represents and
warrants to each Lender that on the date hereof and on the effective date
hereof, prior to and after giving effect to the effectiveness of this Waiver (a)
the representations and warranties made by the Loan Parties in the Loan
Documents are true and correct in all material respects (except to the extent
that such representations and warranties are expressly stated to relate to an
earlier date, in which case such representations and warranties shall have been
true and correct in all material respects on and as of such earlier date) and
(b) no Default or Event of Default has occurred and is continuing.
7. Continuing Effect. Except as expressly waived hereby, the Credit
Agreement shall continue to be and shall remain in full force and effect in
accordance with its terms.
8. GOVERNING LAW. THIS WAIVER SHALL BE GOVERNED BY, AND CONSTRUED
AND INTERPRETED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK.
9. Counterparts. This Waiver may be executed by the parties hereto
in any number of separate counterparts, and all of said counterparts taken
together shall be deemed to constitute one and the same instrument.
10. Payment of Expenses. The Loan Parties agree to pay and reimburse
the Administrative Agent for all of its out-of-pocket costs and reasonable
expenses incurred in connection with this Waiver, including, without
limitation, the reasonable fees and disbursements of counsel to the
Administrative Agent.
<PAGE> 3
IN WITNESS WHEREOF, the parties hereto have caused this Waiver to be
duly executed and delivered by their proper and duly authorized officers as of
the day and year first above written.
IRI INTERNATIONAL CORPORATION
By:__________________________
Title:
CREDIT LYONNAIS NEW YORK BRANCH, as
Administrative Agent, Issuing Lender
and as the sole Lender
By:____________________________
Title:
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