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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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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, 1998
/ / 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 1-13593
IRI INTERNATIONAL CORPORATION
(Exact Name of Registrant as Specified In Its Charter)
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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 office) (Zip Code)
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REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (713) 651-8002
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
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Name of Each Exchange
Title of Each Class on Which Registered
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COMMON STOCK, $.01 PAR VALUE NEW YORK STOCK EXCHANGE
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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 April 22, 1999, the aggregate market value of voting stock held
by non-affiliates of the Registrant was $64,993,300 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 April 22, 1999.
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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 31, 1999, pursuant to Instruction G(3) to Form 10-K, by
completing Items 7 and 8 appearing in Part II thereof and 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 Items 10 through 13 would
be incorporated by reference from the proxy statement related to the
Registrant's annual stockholders meeting.
ITEM 7. 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 "Selected Consolidated
Financial Information," the Consolidated Financial Statements and Notes thereto
and the other information included elsewhere in this Annual Report on Form 10-K.
Our fiscal year was changed from the twelve-month period ending March 31 to
the calendar year, effective December 31, 1996.
OVERVIEW
General
We manufacture land-based drilling and well-servicing rigs and rig
component parts for use in the domestic and international markets. Our revenues
are substantially dependent upon the condition of the oil and gas industry and
worldwide levels of exploration, development and production activity, including
the number of oil and gas wells being drilled, the depth and drilling conditions
of such wells, the number of well completions and the level of workover
activity. Exploration, development and production activity is largely dependent
on the prevailing view of future oil and natural gas prices which have been
characterized by significant volatility over the last 20 years. Oil and natural
gas prices are influenced by numerous factors affecting the supply of and demand
for oil and gas, including the level of drilling activity, worldwide economic
activity, interest rates and the cost of capital, environmental regulation, tax
policies, political requirements of national governments, coordination by OPEC
and the cost of producing oil and gas. Demand for our products in certain
emerging market countries may depend somewhat less on the prevailing view of
future oil and natural gas prices as such countries may generally place greater
emphasis on their need for internal development, energy self-sufficiency or hard
currency earnings.
As a result of the continued decline in oil prices and the deteriorating
economic conditions in Russia and other emerging markets, the oil and gas
industry has dramatically reduced its capital expenditures for exploration,
development and production activities. Our revenues, operating income and
backlog have been adversely affected by these events. We believe that these
industry conditions may further deteriorate and negatively impact our future
results of operations.
Accordingly, we have assessed and begun to implement a variety of measures
to minimize the adverse effects of industry conditions on the our business and
financial performance. We consolidated our manufacturing operations in Pampa and
Houston, Texas and implemented other cost reduction measures. These measures
reduced our workforce by a total of 690 employees through March 1999. We are
considering further consolidation and cost reduction measures but we cannot
assure that these or any other measures will be sufficient to offset the
negative effects of prevailing industry conditions on the our business and
financial performance.
Foreign Exchange Transactions
Sales denominated in currencies other than U.S. dollars are made only by
the Bowen Tools Division. We attempt to limit our exposure to foreign currency
fluctuations by limiting the amount of sales denominated in currencies other
than U.S. dollars and by, with the exception of our Canadian subsidiary,
maintaining our cash and cash equivalents in U.S. dollar denominated accounts
and investments (except to the extent needed for local operating expenses). For
the twelve month period December 31, 1996 and the fiscal years ended December
31, 1997 and 1998, Bowen's Canadian sales (expressed in U.S. dollars) were $4.2
million, $4.4 million and $3.9 million, respectively, and all other non-U.S.
dollar denominated sales (expressed in U.S. dollars) were $9.1 million, $7.4
million and $9.5 million, respectively. We have not engaged in and do not
currently intend to engage in any significant hedging or currency trading
transactions designed to compensate for adverse currency fluctuations among
foreign currencies.
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Negative Goodwill
On September 20, 1994, all of our outstanding capital stock was acquired by
an affiliate of certain of our stockholders for $5.0 million in cash (the
"Company Acquisition"). The Company Acquisition was recorded using the purchase
method of accounting and the purchase price allocated to the assets acquired and
liabilities assumed based upon their estimated fair values at the date of the
Company Acquisition. The excess of the fair value of net assets acquired over
the consideration paid was applied against non-monetary assets (property, plant
and equipment), reducing the balances of these assets at the date of the Company
Acquisition to zero, and the remaining excess of the fair value of net assets
acquired over consideration paid was recorded as negative goodwill. The purchase
price has been allocated to the assets acquired and liabilities assumed based up
on their fair values at the date of the acquisition as follows (in thousands):
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Inventories................................................. $ 33,287
Other current assets........................................ 7,743
Current liabilities......................................... (7,372)
Accrued retirement benefits................................. (1,821)
Negative goodwill........................................... (26,837)
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$ 5,000
========
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Negative goodwill is being amortized using the straight-line method over
five years ending September 19, 1999. The comparability of the results of
operations between the years ended March 31, 1995 (which included the results of
operations of our predecessor from April 1, 1994 to September 19, 1994) and
March 31, 1996 is affected by, in addition to the amortization of negative
goodwill (which reduces the post-Company Acquisition cost of sales), the
exclusion of depreciation expense related to fixed assets written down to zero
on the Company Acquisition date, both of which have a positive effect on
earnings. See Note 1 to the Consolidated Financial Statements. Amortization of
negative goodwill decreased cost of goods sold by $5.4 million in each of the
fiscal years ended December 31, 1998 and 1997 and the twelve month period ended
December 31, 1996 and the year ended March 31, 1996 and $2.7 million for the
period from September 20, 1994 through March 31, 1995.
RESULTS OF OPERATIONS
In June 1997, we changed our fiscal year from a March 31 year-end to a
December 31 year-end, effective with the period ended December 31, 1996, in
order to harmonize the fiscal years of IRI, Cardwell and Bowen. The following
discussion of the results of operations of our business units does not reflect
allocation of corporate overhead expense, unallocated administrative expense or
amortization of goodwill and negative goodwill. See Note 13 to our Financial
Statements for a presentation of segment information.
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 or rig packages range from
six to nine months. These fluctuations may affect our quarterly revenues and
operating income.
The lack of material tax provisions for the historical periods discussed
below results primarily from (i) the amortization of negative goodwill which
does not give rise to taxable income and (ii) the availability of net operating
loss carry forwards. As discussed above, negative goodwill is being amortized
over five years ending September 19, 1999. See "-- Negative Goodwill." See Note
9 to our Consolidated Financial Statements for a discussion of our net operating
loss carry forwards.
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 and unallocated administrative expenses, amortization of
negative goodwill and amortization of goodwill on an individual segment basis.
Certain
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information that reconciles the discussion of the results of operations of the
individual segments to the our Consolidated Financial Statements is as follows:
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THE COMPANY PREDECESSOR
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PERIOD FROM
TWELVE MONTHS NINE MONTHS SEPTEMBER 20, PERIOD FROM
ENDED ENDED 1994 APRIL 1, 1994
DECEMBER 31, DECEMBER 31, YEAR ENDED THROUGH THROUGH
----------------------------- ----------------- MARCH 31, MARCH 31, SEPTEMBER 19,
1998 1997 1996 1996 1995 1996 1995 1994
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Revenues
Oil field equipment...... $ 88,395 $106,529 $61,537 $52,029 $30,668 $40,176 $14,399 $12,545
Down hole tools.......... 76,249 65,336 -- -- -- -- -- --
Specialty steel.......... 10,401 13,501 14,126 10,269 8,473 12,330 5,807 3,928
-------- -------- ------- ------- ------- ------- ------- -------
Total.............. $175,045 $185,366 $75,663 $62,298 $39,141 $52,506 $20,206 $16,473
======== ======== ======= ======= ======= ======= ======= =======
Segment operating income
(loss)
Oil field equipment...... $ 13,533 $ 15,617 $ 9,889 $ 7,399 $ 1,607 $ 4,141 $ 1,269 $ (671)
Down hole tools.......... 17,186 11,869 -- -- -- -- -- --
Specialty steel.......... 1,668 4,503 3,528 2,879 2,003 2,608 1,240 232
-------- -------- ------- ------- ------- ------- ------- -------
Total.............. 32,387 31,989 13,417 10,278 3,610 6,749 2,509 $ (439)
Corporate overhead and
unallocated
administrative
expenses............... (18,596) (13,862) (6,961) (5,194) (2,710) (4,477) (1,350) (1,406)
Restructuring charge..... (590) -- -- -- -- -- -- --
Amortization of negative
goodwill............... 5,367 5,370 5,367 4,026 4,026 5,367 2,684 --
Amortization of
goodwill............... (1,265) (878) -- -- -- -- -- --
-------- -------- ------- ------- ------- ------- ------- -------
Operating income
(loss)................. $ 17,303 $ 22,619 $11,823 $ 9,110 $ 4,926 $ 7,639 $ 3,843 $(1,845)
======== ======== ======= ======= ======= ======= ======= =======
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FISCAL YEAR ENDED DECEMBER 31, 1998 COMPARED TO FISCAL YEAR ENDED DECEMBER 31,
1997
Oil Field Equipment
Revenues and operating income for the oil field equipment unit were $88.4
million and $13.5 million, respectively, for the fiscal year ended December 31,
1998, as compared to $106.5 million and $15.6 million, respectively, for the
fiscal year ended December 31, 1997. Decreased operating income resulted from
the economic and financial turmoil in Russia and the Asia-Pacific region and the
downward turn in oil prices, both of which resulted in a decreased demand for
our products. Gross Margin for the fiscal year ended December 31, 1998 was
19.5%, as compared to 17.8% for the fiscal year ended December 31, 1997. This
increase resulted principally from an extensive cost restructuring program and a
favorable mix between manufactured equipment and buy-outs.
Down Hole Tools
Revenues and operating income for the down hole tools unit were $76.2
million (or $6.4 million per month) and $17.2 million (or $1.4 million per
month), respectively, for the fiscal year ended December 31, 1998, as compared
to $65.3 million (or $7.3 million per month) and $11.9 million (or $1.3 million
per month), respectively, for the nine months ended December 31, 1997. Decreased
monthly revenues at the down hole tools unit were primarily attributable to the
downward trends in the oil industries. Gross margin for the fiscal year ended
December 31, 1998 was 33.0%, as compared to 26.5% for the fiscal year ended
December 31, 1997. The increase in monthly operating income and gross margin was
primarily due to the full impact of price increases in the last two quarters of
1997, an increase in the amount of manufacturing overhead absorbed into
inventory and management's cost-cutting initiatives.
Specialty Steel
Revenues and operating income for the specialty steel unit were $10.4
million and $1.7 million, respectively, for the fiscal year ended December 31,
1998, as compared to $13.5 million and $4.5 million,
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respectively, for the fiscal year ended December 31, 1997. The decrease in
revenues was primarily the result of reduced demand from a major customer.
Because of the loss of the high margin business that we transacted with this
major customer, our gross margins also decreased from 34.6% for the fiscal year
ended December 31, 1997 to 17.5% for the fiscal year ended December 31, 1998.
Corporate Administrative and Interest Expenses
Corporate administrative expenses were $18.6 million for the fiscal year
ended December 31, 1998, as compared to $13.9 million for the fiscal year ended
December 31, 1997. The increase was due primarily to the inclusion of corporate
administrative expenses for our Bowen Tools Division and Cardwell operations for
the full year in 1998 as compared to only nine months for 1997. In addition,
corporate administrative expenses increased as a result of the higher
professional fees associated with being a public company and the implementation
of new software systems.
Interest expense decreased from $8.8 million for the fiscal year ended
December 31, 1997 to $0.4 million for the fiscal year ended December 31, 1998.
Interest expense decreased mainly because we repaid our debt with the proceeds
from the initial public offering of our Common Stock.
Restructuring Charge
The Company incurred a restructuring charge of $590,000 in 1998 in
connection with its restructuring program.
Other Income (Expense)
Other expenses were $1.3 million for the fiscal year ended December 31,
1998, as compared to $1.5 million for the fiscal year ended December 31, 1997.
Other expense for 1998 includes:
- $2.2 million of interest income (due to higher cash balances in 1998);
- $2.7 million of losses on trading securities (as compared to a gain of
$0.8 million for 1997);
- $0.6 million of special charges (relating to expenses incurred in
connection with the proposed acquisition of Hitec ASA, which was
terminated on April 28, 1998); and
- $0.2 million of miscellaneous other expenses.
FISCAL YEAR ENDED DECEMBER 31, 1997 COMPARED TO TWELVE MONTHS ENDED DECEMBER 31,
1996
Oil Field Equipment
Revenues and operating income for the oil field equipment unit were $106.5
million and $15.6 million, respectively, for the fiscal year ended December 31,
1997, as compared to $61.5 million and $9.9 million, respectively, for the
twelve month period ended December 31, 1996. For the fiscal year ended December
31, 1997, revenues and operating income reflect contributions thereto by
Cardwell of $30.0 million and $4.5 million. The increase in revenues resulted
from the Cardwell Acquisition and increased sales of rig packages by the IRI
Division. Increased operating income resulted from the IRI Division's increased
sales in the period. Gross Margin for the fiscal year ended December 31, 1997
was 18.4%, as compared to 22.1% for the twelve month period ended December 31,
1996. This decrease resulted principally from the inclusion of Cardwell's
operations (gross margin of 15% in the results for the twelve month period ended
December 31, 1997). Cardwell's comparatively lower gross margin resulted from
lower margin rig manufacturing contracts entered into prior to the date of the
Cardwell Acquisition, the pricing terms of which reflected Cardwell's lower
fixed overhead cost structure. We have implemented a uniform pricing policy that
we believe will result in higher overall gross margins.
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Down Hole Tools
We acquired the Bowen Tools Division on March 31, 1997 and prior to such
date we had no down hole tools unit. Revenues and operating income for the down
hole tools unit were $65.3 million and $11.9 million, respectively, for the nine
months ended December 31, 1997, as compared to $52.3 million and $5.7 million,
respectively, for the nine months ended December 31, 1996. Increased revenues
and operating income at the Bowen Tools Division were primarily attributable to
increased drilling activity in the U.S. Gross margin for the nine months ended
December 31, 1997 was 26.5%, as compared to 24.0% for the nine months period
ended December 31, 1996. The increase in gross margin was primarily due to
improved pricing, increased volume and more efficient capacity utilization.
Specialty Steel
Revenues and operating income for the specialty steel unit were $13.5
million and $4.5 million, respectively, for the fiscal year ended December 31,
1997, as compared to $14.1 million and $3.5 million, respectively, for the
twelve month period ended December 31, 1996. The decrease in revenues was
primarily the result of reduced demand from a major customer. Gross margin for
the fiscal year ended December 31, 1997 was 33.4%, as compared to 26.2% for the
twelve month period ended December 31, 1996.
Corporate Administrative and Interest Expenses
Corporate administrative expenses were $13.9 million for the fiscal year
ended December 31, 1997, as compared to $7.0 million for the twelve month period
ended December 31, 1996. The increase was due primarily to the inclusion of
Bowen and Cardwell's administrative expenses of $3.2 million and $1.2 million,
respectively, for the 1997 period.
Interest expense increased from $0.7 million for the twelve month period
ended December 31, 1996 to $8.8 million for the fiscal year ended December 31,
1997. The increase in interest expense is a result of (i) borrowings on March
31, 1997 under a $65.0 million five-year term loan (the "Term Loan") provided to
us by certain financial institutions, as lenders, Credit Lyonnais New York
Branch, as a lender and as administrative agent, and Lehman Commercial Paper
Inc., as a lender and as advisor, manager and syndication agent (collectively,
the "Lenders"), and the issuance of $31.0 million aggregate principal amount of
Senior Subordinated Increasing Rate Notes (the "Senior Notes") on such date to
fund the Acquisitions and (ii) borrowings under a $25.0 million three-year
revolving credit facility between us and the Lenders with a $20 million sublimit
for the issuance of letters of credit (the "Revolving Credit Facility") during
the period to fund working capital requirements of Cardwell. On November 19,
1997, we used the gross proceeds of the initial public offering of the Common
Stock to repay in full the Term Loan and fully redeem the Senior Notes.
NINE MONTHS ENDED DECEMBER 31, 1996 COMPARED TO NINE MONTHS ENDED DECEMBER 31,
1995
Oil Field Equipment
Revenues and operating income for the oil field equipment unit were $52.0
million and $7.4 million, respectively, for the nine month period ended December
31, 1996, as compared to $30.7 million and $1.6 million, respectively, for the
nine month period ended December 31, 1995. The increases in revenues and
operating income were primarily attributable to an increase in sales of our oil
field equipment products to exploration and production companies and contract
drillers. The elevated levels of sales of our products reflected the increased
oil and gas exploration and production activity worldwide. Gross margin for the
nine month period ended December 31, 1996 was 19.7% compared to 13.7% for the
nine month period ended December 31, 1995, as a result of price increases,
greater fixed overhead absorption and more efficient capacity utilization due to
increased manufacturing volume.
Specialty Steel
Revenues and operating income for the specialty steel unit were $10.3
million and $2.9 million respectively, for the nine month period ended December
31, 1996, as compared to $8.5 million and
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$2.0 million, respectively, for the nine month period ended December 31, 1995.
The increases in revenues and operating income were primarily the result of
increased sales to steel service centers and a major customer. Gross margin for
the nine month period ended December 31, 1996 was 29.9%, as compared to 24.8%
for the nine month period ended December 31, 1995, as a result of more efficient
capacity utilization.
Corporate Administrative and Interest Expenses
Corporate administrative expenses were $5.2 million, representing 8.3% of
revenues, for the nine month period ended December 31, 1996 and $2.7 million,
representing 6.9% of revenues, for the nine month period ended December 31,
1995. The higher levels of expense were a consequence of establishing a
corporate headquarters in Houston, Texas, and expanding our management team and
related support personnel.
Interest expense was $0.6 million for the nine month period ended December
31, 1996, compared to $0.2 million of interest income for the nine month period
ended December 31, 1995, due to borrowings by us under a former credit facility
established in April 1996. The funds borrowed were used by us to fund increased
working capital needs necessitated by the increases in the orders for its oil
field equipment products during the nine month period ended December 31, 1996.
ACCOUNTING POLICIES
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"),
which is effective for all quarters of fiscal years beginning after June 15,
1999. 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 December 31, 1998, we had cash, cash equivalents and marketable
securities of $40.5 million, compared to $57.7 million at December 31, 1997. At
December 31, 1998, our working capital was $164.3 million, compared to $161.9
million at December 31, 1997. This increase in working capital at December 31,
1998 was attributable to the increase in manufactured inventories. At December
31, 1998, our current assets to current liabilities ratio was approximately
8.7:1.
At December 31, 1998, approximately $6.7 million was available for
additional borrowings under the Revolving Credit Facility.
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 which we may need in the future
would be on commercially reasonable terms, although there can be no assurance in
this regard.
The Revolving Credit Facility
The Revolving Credit Facility matures on March 31, 2000, and prior thereto
amounts repaid may be reborrowed. After the initial public offering of our
common stock, we reduced the commitment under the Revolving Credit Facility to
$9.7 million.
Our obligations under the Revolving 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. The Revolving Credit Facility contains certain representations and
warranties, covenants and events of default customary for facilities of this
type.
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YEAR 2000
Our Year 2000 Compliance Program
We have initiated a three-phase Year 2000 compliance program:
1. We will identify non-Year 2000 compliant hardware and software
systems and other technology, and contact key suppliers and customers;
2. We will ascertain the extent to which our systems and technologies
and those of our key suppliers and customers are non-Year 2000 compliant
and will prioritize our Year 2000 response accordingly; and
3. We will replace or remediate our non-Year 2000 compliant systems
and technologies and develop contingency plans with respect to systems and
other technology that cannot be replaced or remediated in time and with
respect to key suppliers and customers that have not become Year 2000
compliant.
Our State of Readiness
The first phase is currently in progress and should be complete by the end
of the second quarter. Of the inventory taken thus far, we have identified
issues with some of our information technology systems that support our most
significant business operations. The Enterprise Resource Planning ("ERP") system
that supports the down hole tools unit requires a software upgrade that is
planned for installation by the end of the second quarter of 1999. The ERP
system that supports the oil field equipment and specialty steel units also
requires a software upgrade that is planned for installation in the third
quarter of 1999. The installation of these software upgrades will require the
allocation of significant internal resources to test the upgraded ERP systems
prior to their implementation. Other significant information technology systems
that may not be compliant are:
- the accounting software system currently used in the Canadian operations;
- our payroll system; and
- the design engineering software system.
We will have a better understanding of these systems and their respective Year
2000 compliance once we have completed the first phase of our Year 2000
compliance program.
We have inventoried some of the more critical non-information technology
systems of the down hole tools unit. Approximately 85% of our production
machines for the down hole tools unit are manual or "numerical control"
equipment not affected by Year 2000 issues. The balance of our production
machines are "computer numerical control" machines; these machines produce about
30% to 40% of our production output. Although we have been notified by the
manufacturer of these machines that the controls on these machines are Year 2000
compliant, we have not yet verified whether or not these machines are indeed
Year 2000 compliant. We have not completed our inventory of the production
machines for our other units or other non-information technology systems.
We have also initiated the inventorying of key third party relationships
for Year 2000 compliance. Although we have begun to contact some of the key
suppliers of the down hole tools unit, we have not yet assessed the extent and
content of the responses received from those suppliers. We have not begun to
inventory the key customers for any of the business units and the key suppliers
for the oil field equipment unit and the specialty steel unit but we believe
that the loss of any of our suppliers would not have a material adverse effect
on our operations. We plan to complete the inventory of key third party
relationships by the end of the second quarter of 1999.
We have retained outside consultants to help evaluate our Year 2000
readiness and our comprehensive project plan detailing the steps necessary for
us to become Year 2000 compliant. We expect the report and project plan to be
ready by the middle of the second quarter of 1999. We intend to complete our
inventory of all information technology and non-information technology related
systems by the end of the second quarter of
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1999. We also expect to engage outside consultants to assist us in the testing
of our systems and the remediation of any Year 2000 issues.
Costs to Address Year 2000 Issues
To date, the costs incurred by our Year 2000 compliance program have been
minimal. We estimate our expenses relating to Year 2000 issues will be
approximately $1.3 million, but they could be as high as $2.0 million. We also
expect to allocate significant internal resources to the inventorying, testing
and remediation of Year 2000 issues, though we have not quantified the costs of
allocating these internal resources. The replacement and upgrade of several of
our software and hardware systems in the ordinary course of business have had
the added benefit of resolving Year 2000 issues with respect to those systems.
In addition, our maintenance agreements with vendors of our ERP systems for our
three business units already include the cost of the 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, though we cannot give any assurances in
this regard.
Risks Associated with Year 2000 Issues
We believe that much of the risk associated with Year 2000 will be
mitigated by the installation of the minor software patches on our ERP systems.
However, we are presently unable to fully determine the risk of any other
non-compliant Year 2000 software, hardware, and other technologies and the
material impact it represents to our business. We will have a better
understanding of these risks once the inventory has been completed and the
systems have been analyzed and prioritized with respect to their importance to
our business. We are unable to determine what effect the failure of us, our
suppliers or our customers to become Year 2000 compliant will have on our
business, but any significant failures could have an material adverse effect on
our results of operations and financial condition. At the very least, any
significant failures may force us to curtail production, prevent us from meeting
customers demands on a timely basis, and/or impede our ability to monitor
customer orders and inventory.
Contingency Plans for Year 2000
We have not yet been able to determine the extent to which we need
contingency plans because our Year 2000 inventory is not yet complete. It is our
intention to develop contingency plans by the end of the third quarter of 1999
for all those systems and relationships that are critical to our business. All
non-critical systems and relationships will be assessed for contingency plans in
the fourth quarter of 1999.
CAPITAL EXPENDITURES
For the fiscal year ended December 31, 1998, we used cash flow from
operations of $1.7 million primarily to increase inventory levels to support
anticipated increases in sales. We believe that cash generated from operations
and amounts available under the Revolving Credit Facility will be sufficient to
fund operations, working capital needs, capital expenditure requirements and
financing obligations.
Capital expenditures for 1998 totaled $10.0 million, including $1.2 million
for the oilfield equipment and specialty steel segments, of which $0.6 million
was for data processing equipment and $0.5 million was for machinery and
equipment. $8.8 million in capital expenditures was expended for rental tools
and equipment and new machinery at our down hole tools segment. For 1999, we
have budgeted capital expenditures of $4.5 million, including $1.0 million for
maintenance capital expenditures, $2.0 million for rental tools and $1.5 million
for software upgrades and related expenditures. Capital expenditures are
expected to be funded with available cash and cash flow generated from
operations.
9
<PAGE> 10
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:
- 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.
10
<PAGE> 11
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Index to Financial Statements and Exhibits, which appears on Page
F-1 hereof.
PART III
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
April 15, 1999 are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Hushang Ansary........................ 71 Chairman of the Board and Chief Executive Officer
Daniel G. Moriarty.................... 64 Vice-Chairman of the Board
Abdallah Andrawos..................... 43 Director and Secretary
Nina Ansary........................... 32 Director
Frank C. Carlucci..................... 68 Director
Dr. Philip David...................... 67 Director
Munawar H. Hidayatallah............... 54 Director, Executive Vice President and Chief Financial Officer
Richard D. Higginbotham............... 61 Director
John D. Macomber...................... 71 Director
Edward L. Palmer...................... 81 Director
Stephen J. Solarz..................... 58 Director
Gary W. Stratulate.................... 42 Director, Executive Vice President-- President of the Downhole
Products Group
Arthur C. Teichgraeber................ 43 Director, Executive Vice President-- President of the Oilfield
Equipment Group
Alexander B. Trowbridge............... 69 Director
J. Robinson West...................... 52 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.
11
<PAGE> 12
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.
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 and Principal 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. Mr. Carlucci serves on the following
corporate boards: Mass Mutual Life Insurance Company, Quaker Oats, Kaman
Corporation, Neurogen Corporation, Northern Telecom Ltd., Quaker Oats Company,
SunResorts, Ltd. N.V., Texas Biotechnology Corporation, Pharmacia & Upjohn Inc.,
and Ashland Inc. 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 since April
1997. Since September 1998 he has served as a consultant to the Company's
Downhole Products Group. He also served as Executive Vice President -- President
of the Downhole Products Group of the Company from April 1997 to September 1998.
From 1988 until its acquisition by the Company, Mr. Higginbotham served as
President of Bowen Tools, Inc.
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. He is also a director of The Brown Group, Lehman Brothers
Holdings Inc., Pilkington Ltd., Textron Inc. and Mettler Toledo International,
Inc. 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. He is also a director of Commodore Applied
Technologies, 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. He is also a director of Samsonite Corp., Geophone Company,
L.L.C. and First Philippine Fund Inc.
GARY W. STRATULATE has been a director since April 1997. He has served
as Executive Vice President -- President of its Downhole Products Group since
September 1998. From December 1994 to April 1997, he served as the Executive
Vice President of the International Division of the Company and from April 1997
to September 1998 as President of its Oilfield Equipment Group. From June 1991
to May 1994, Mr. Stratulate was the Chief Operating Officer of Dreco Energy
Services Ltd., a manufacturer of oilfield equipment.
12
<PAGE> 13
ARTHUR C. TEICHGRAEBER has been a director of the Company since April
1997 and Executive Vice President of its Oilfield Equipment Group since
September 1998. Prior to its acquisition by the Company, Mr. Teichgraeber held
various positions at Cardwell International Ltd., rising from sales engineer to
President. Mr. Teichgraeber is also a director of Trinity Energy Resources, Inc.
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 is also a director of The Gillette Company, New
England Life Insurance Company, E.M. Warburg-Pincus Counsellors Fund, Rouse
Company, Sun Company, Harris Corporation, ICOS Corporation, Sunoco, Inc., 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 furnished to the
Company with respect to its most recent fiscal year, the Company believes that
the following directors and officers failed to file in a timely manner one of
their reports required under Section 16(a):
- Hushang Ansary filed a Form 4 on October 15, 1998 reporting
transactions that occurred on September 30, 1998 and June 26,
1998 and filed his Form 5 for 1998 on March 4, 1999;
- Philip David filed a Form 4 on October 19, 1998 for a
transaction that occurred on September 30, 1998;
- Arthur C. Teichgraeber filed a Form 4 on January 13, 1999 for
transactions that occurred on December 31, 1998 and July 17,
1998;
- Gary Stratulate disclosed on his Form 5 a transaction that
occurred on December 30, 1998.
- Daniel Moriarty disclosed on his Form 5 a transaction that
occurred on December 21, 1998.
Other than as noted above, the Company believes that during such fiscal year no
other 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.
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.
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 executive officers
of the Company for the 12 months ended December 31, 1998 (collectively, the
"Named Executive Officers"):
13
<PAGE> 14
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION
----------------------------------------------------------
OTHER
ANNUAL ALL OTHER
COMPEN- COMPEN-
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS SATION (1) SATION
- --------------------------- ---- ------ ----- ------------ ---------
<S> <C> <C> <C> <C> <C>
Hushang Ansary ....................... 1998 $900,000 -- -- --
Chairman and Chief Executive Officer 1997 -- -- $ 17,000 --
1996 -- -- 39,000 --
Daniel G. Moriarty ................... 1998 $204,346 $100,000 -- --
Vice-Chairman of the Board ......... 1997 202,516 25,000 $ 17,000 --
1996 145,254 106,504 39,000 --
Munawar H. Hidayatallah .............. 1998 $318,450 $200,000 -- --
Executive Vice President and Chief . 1997 316,088 100,000 $ 17,000 --
Financial Officer .................. 1996 186,750 121,324 39,000 --
Richard D. Higginbotham .............. 1998 $232,535 $ 75,000 $ 17,000 --
Executive Vice President-- President 1997 224,559 25,000 8,500 --
of Downhole Products Group (2) ..... 1996 135,000 60,000 -- --
Gary W. Stratulate ................... 1998 $248,442 $200,000 -- --
Executive Vice President-- President 1997 246,087 125,000 $ 8,500 --
of Downhole Products Group ......... 1996 186,750 137,500 -- --
Arthur C. Teichgraeber ............... 1998 $272,759 $100,000 $ 45,750 --
Executive Vice President-- President 1997 207,564 50,000 8,500 --
of Oilfield Equipment Group ........ 1996 102,870 -- -- $498,110(3)
</TABLE>
- ------------
(1) Consists of directors' fees received by the Named Executive Officers
prior to the Company's initial public offering in November 1997.
(2) Richard Higginbotham retired from this position in September 1998.
(3) Consists of license fees paid by Cardwell to Mr. Teichgraeber and to
certain entities directly or indirectly owned by Mr. Teichgraeber.
Shown below is further information with respect to grants of stock
options during 1998 to the Named Executive Officers: OPTION GRANTS IN 1998
<TABLE>
<CAPTION>
OPTION GRANTS IN 1998
% OF TOTAL
NUMBER OF OPTIONS
SECURITIES GRANTED POTENTIAL REALIZABLE VALUE AT
UNDERLYING TO EXERCISE ASSUMED ANNUAL RATES OF
OPTIONS EMPLOYEES PRICE OR STOCK PRICE APPRECIATION FOR
NAME GRANTED(1) IN 1998 (2) BASE PRICE EXPIRATION OPTION TERM
---- ---------- ----------- ---------- ---------- -----------
5% ($) 10% ($)
------ -------
<S> <C> <C> <C> <C> <C> <C>
Hushang Ansary............. 1,200,000 72.95 $3.5625 Dec. 14, 2008 $2,688,525 $6,813,249
Daniel G. Moriarty......... 60,000 3.65 $3.5625 Dec. 14, 2008 134,426 340,662
Munawar H. Hidayatallah....
50,000 3.04 $3.5625 Dec. 14, 2008 112,022 283,885
Richard D. Higginbotham....
20,000 1.22 $3.5625 Dec. 14, 2008 44,809 113,554
Gary W. Stratulate......... 45,000 2.74 $3.5625 Dec. 14, 2008 100,820 255,497
Arthur C. Teichgraeber..... 45,000 2.74 $3.5625 Dec. 14, 2008 100,820 255,497
</TABLE>
- --------------------
(1) Options are exercisable in three equal annual installments beginning on
December 14, 1998.
14
<PAGE> 15
(2) Calculated on the basis of an aggregate grant of 1,645,000 options to
purchase shares of the Company's common stock, par value of $0.01 per
share ("IRI Common Stock") to Executive Officers, Directors and other
employees of the Company.
The following table sets forth information regarding the value of the
stock options granted on December 14, 1998 to the Named Executive Officers (no
options were exercised by any of the Named Executive Officers in 1998):
<TABLE>
<CAPTION>
OPTION VALUES AT DECEMBER 31, 1998
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING IN-THE-MONEY
UNEXERCISED OPTIONS AT OPTIONS AT
NAME DECEMBER 31, 1998 DECEMBER 31, 1998 (1)
---- ---------------------- ---------------------
<S> <C> <C>
Hushang Ansary ......................... 1,200,000 525,000
Daniel G. Moriarty ..................... 60,000 26,250
Munawar H. Hidayatallah ................ 50,000 21,875
Richard D. Higginbotham ................ 20,000 8,750
Gary W. Stratulate ..................... 45,000 19,688
Arthur C. Teichgraeber ................. 45,000 19,688
</TABLE>
- -----------
(1) Market price has been assumed to be equal to the closing price on
December 31, 1998.
STOCK OPTIONS
Pursuant to an equity incentive plan (the "Equity Incentive Plan"), the
Company has granted to its directors and certain of its officers and employees
an aggregate of 1,645,000 options to purchase shares of IRI Common Stock. Such
options and the terms thereof are described in the following paragraphs.
On October 17, 1998, the Company canceled all options then outstanding.
On December 14, 1998, the Company granted options to purchase 25,000
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 Equity
Incentive Plan and are not intended to qualify as "incentive stock options". The
options have an exercise price per share equal to the closing price of the stock
on December 14, 1998 and generally have a ten year term. The options are
exercisable (i) cumulatively to the extent of one-third of the shares on
December 14, 1998 and (ii) cumulatively to the extent of one-third of the shares
after each of December 14, 1999 and 2000 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 December 14, 1998, the Compensation Committee also 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
1998 were granted pursuant to the Equity Incentive Plan. The stock options have
a ten-year term and are not intended to qualify as "incentive stock options".
The stock options granted to each Named Executive Officer are exercisable (i)
cumulatively to the extent of one-third of the shares on December 14, 1998 and
(ii) cumulatively to the extent of one-third of the shares after each of
December 14, 1999 and 2000, 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 an exercise price equal
to the closing price of the Common Stock on December 14, 1998 and generally have
a ten year term.
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 401(k) plans and the
grant of options for common stock as described above.
15
<PAGE> 16
EMPLOYMENT AGREEMENTS, SEVERANCE AGREEMENTS AND CHANGE-IN-CONTROL AGREEMENTS
No Named Executive Officer has an employment agreement, severance
agreement or change-in-control agreement with the Company or any affiliate.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
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 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 31, 1999 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 this 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
EXECUTIVE OFFICERS* SHARES OWNED (1) PERCENT OF CLASS
- ------------------- ---------------- ----------------
<S> <C> <C>
Hushang Ansary.............................................. 23,659,333 (2)(3) 58.13%
Daniel G. Moriarty.......................................... 78,700 (3)(4) **
Abdallah Andrawos........................................... 43,333 (3)(4) **
Nina Ansary................................................. 3,008,333 (3)(5) 7.39%
Frank C. Carlucci........................................... 1,052,333 (3) 2.59%
Dr. Philip David............................................ 1,858,333 (3)(6) 4.57%
Munawar H. Hidayatallah..................................... 175,166 (3)(4) **
Richard D. Higginbotham..................................... 8,666 (3) **
John D. Macomber............................................ 8,333 (3) **
Edward L. Palmer............................................ 8,333 (3) **
Stephen J. Solarz........................................... 8,333 (3) **
Gary W. Stratulate.......................................... 84,000 (3)(4) **
Arthur C. Teichgraeber...................................... 15,000 (3) **
Alexander B. Trowbridge..................................... 8,333 (3) **
J. Robinson West............................................ 8,333 (3) **
All directors and executive officers as a group
(15 persons)............................................. 27,016,529 (2) (3) 66.38%
CERTAIN OTHER HOLDERS
Nader Ansary................................................ 3,000,000 (2)(5) 7.37%
The Ansary Family Trust..................................... 1,702,000 (5)(2) 4.18%
</TABLE>
- ---------------
* The address for each of the beneficial owners of more than 5% of the
Company's Common Stock is 1000 Louisiana, Suite 5900, Houston, Texas,
77002.
** Less than 1%
(1) Assumes exercise of vested options.
(2) Mr. Ansary, The Ansary Family Trust, a trust controlled by Mr. Ansary
for the benefit, inter alia, of members of his immediately family, and
a private charitable foundation controlled by Mr. Ansary directly own
in the aggregate 17,251,000 shares of IRI Common Stock. Includes
6,008,333 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, Mr.
David, Mr. Hidayatallah, Mr. Higginbotham, Mr. Moriarty and Mr.
Stratulate, and otherwise consisting of, options to purchase shares of
IRI Common Stock granted pursuant to the Incentive Plan.
16
<PAGE> 17
(4) Includes options granted to certain executive officers on March 17,
1999.
(5) Also reported under Hushang Ansary. See Note (2). (6) Includes 500,000
shares of IRI Common Stock owned by Dr. Philip David's wife, of which
he disclaims beneficial ownership.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None.
17
<PAGE> 18
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, 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
Executive Vice President,
Chief Financial Officer and Director
Date: April 29, 1998
Pursuant to the requirements of the Securities Exchange Act of 1934,
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>
<CAPTION>
NAME TITLE DATE
---- ----- ----
<S> <C> <C>
* Chairman of the Board and April 29, 1999
Chief Executive Officer
Hushang Ansary
* Vice-Chairman of the Board April 29, 1999
Daniel G. Moriarty
/s/ Executive Vice President, Chief April 29, 1999
Financial Officer and Director
Munawar H. Hidayatallah
* Secretary and Director April 29, 1999
Abdallah Andrawos
* Executive Vice President-- April 29, 1999
President of Downhole Products
Gary W. Stratulate Group and Director
</TABLE>
18
<PAGE> 19
<TABLE>
<S> <C> <C>
* Director April 29, 1999
Richard D. Higginbotham
* Executive Vice President-- April 29, 1999
President of Oilfield Equipment
Arthur C. Teichgraeber Group and Director
* Director April 29, 1999
Nina Ansary
* Director April 29, 1999
Frank C. Carlucci
* Director April 29, 1999
Dr. Philip David
* Director April 29, 1999
John D. Macomber
* Director April 29, 1999
Edward L. Palmer
* Director April 29, 1999
Stephen J. Solarz
* Director April 29, 1999
Alexander B. Trowbridge
* Director April 29, 1999
J. Robinson West
*By: /s/
Munawar H. Hidayatallah
Attorney-In-Fact
</TABLE>
19
<PAGE> 20
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................................ F-2
Consolidated Balance Sheet -- December 31, 1998 and 1997.... F-3
Consolidated Statement of Operations -- Years ended December
31, 1998 and 1997, and nine months ended December 31,
1996...................................................... F-4
Consolidated Statement of Shareholders' Equity -- Years
ended December 31, 1998 and 1997, and nine months ended
December 31, 1996......................................... F-5
Consolidated Statement of Cash Flows -- Years ended December
31, 1998 and 1997, and nine months ended December 31,
1996...................................................... F-6
Notes to Consolidated Financial Statements.................. F-7
</TABLE>
All schedules are omitted as the required information is inapplicable or
presented in the consolidated financial statements or related notes.
F-1
<PAGE> 21
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, 1998 and 1997 and the results of
their operations and their cash flows for the years ended December 31, 1998 and
1997, and the nine months ended December 31, 1996 in conformity with generally
accepted accounting principles.
KPMG LLP
Houston, Texas
March 18, 1999
F-2
<PAGE> 22
IRI INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1998 1997
-------- --------
<S> <C> <C>
Current assets:
Cash and cash equivalents................................. $ 37,475 $ 49,473
Marketable securities, at fair value (cost of $3,743 at
December 31, 1998 and $7,448 at December 31, 1997)..... 3,000 8,218
Accounts receivable, less allowance for doubtful accounts
of $960 at December 31, 1998 and $455 at December 31,
1997................................................... 29,147 33,130
Inventories............................................... 109,151 100,901
Costs and estimated earnings in excess of billings on
uncompleted contracts.................................. 4,429 8,853
Other current assets...................................... 2,381 1,444
-------- --------
Total current assets.............................. 185,583 202,019
Property, plant and equipment, net........................ 49,192 43,219
Other assets.............................................. 4,391 5,836
-------- --------
$239,166 $251,074
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Notes payable............................................. $ 16 $ 38
Accounts payable.......................................... 8,094 19,453
Accrued liabilities....................................... 6,018 8,344
Customer advances......................................... 3,303 7,546
Other liabilities......................................... 3,644 4,527
Current installments of obligation under capital lease.... 262 221
-------- --------
Total current liabilities......................... 21,337 40,129
Negative goodwill, less accumulated amortization............ 4,026 9,393
Obligation under capital lease, less current installments... 319 586
Accrued postretirement benefits other than pensions......... 1,562 1,481
Pension liability........................................... 1,586 939
Other long term liabilities................................. 77 140
-------- --------
Total liabilities................................. 28,907 52,668
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 in
1998 and 1997.......................................... 399 399
Additional paid-in capital................................ 168,514 168,538
Retained earnings......................................... 43,308 30,926
Accumulated other comprehensive income.................... (1,962) (1,457)
-------- --------
Total shareholders' equity........................ 210,259 198,406
-------- --------
Commitments and contingencies..................... $239,166 $251,074
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE> 23
IRI INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED DECEMBER 31, ENDED
------------------------ DECEMBER 31,
1998 1997 1996
------------ -------- ------------
<S> <C> <C> <C>
Revenues................................................ $175,045 $185,366 $62,298
Cost of goods sold...................................... 126,626 139,204 44,968
-------- -------- -------
Gross profit.......................................... 48,419 46,162 17,330
Selling and administrative expense...................... 30,526 23,543 8,220
Restructuring charge.................................... 590 -- --
-------- -------- -------
Operating income...................................... 17,303 22,619 9,110
-------- -------- -------
Other income (expense):
Interest income....................................... 2,213 746 90
Interest expense...................................... (360) (8,762) (615)
Other, net............................................ (3,491) 718 (110)
-------- -------- -------
(1,638) (7,298) (635)
-------- -------- -------
Income before income taxes and extraordinary
item............................................. 15,665 15,321 8,475
Income taxes............................................ 3,283 2,786 98
-------- -------- -------
Income before extraordinary item...................... 12,382 12,535 8,377
Extraordinary item -- extinguishment of debt (net of tax
benefit of $841)...................................... -- (1,512) --
-------- -------- -------
Net income.................................... $ 12,382 $ 11,023 $ 8,377
======== ======== =======
Basic earnings (loss) per share
Income before extraordinary item...................... $ 0.31 $ 0.40 $ 0.28
Extraordinary item.................................... -- (0.05) --
-------- -------- -------
Net income per common share............................. $ 0.31 $ 0.35 $ 0.28
======== ======== =======
Weighted average shares outstanding..................... 39,900 31,275 30,000
======== ======== =======
Diluted earnings (loss) per share
Income before extraordinary item...................... $ 0.31 $ 0.40 $ 0.28
Extraordinary item.................................... -- (0.05) --
-------- -------- -------
Net income per common share............................. $ 0.31 $ 0.35 $ 0.28
======== ======== =======
Weighted average shares outstanding..................... 39,905 31,295 30,000
======== ======== =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE> 24
IRI INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
ACCUMULATED
ADDITIONAL OTHER TOTAL
COMMON PAID-IN RETAINED COMPREHENSIVE SHAREHOLDERS'
STOCK CAPITAL EARNINGS INCOME EQUITY
------ ---------- -------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Balances at March 31, 1996............. $300 $ 4,700 $11,526 $ -- $ 16,526
Comprehensive income:
Net income........................ -- -- 8,377 -- 8,377
Other comprehensive income........ -- -- -- -- --
--------
Total comprehensive income... 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
Comprehensive income:
Net income........................ -- -- 11,023 -- 11,023
Change in minimum pension
liability adjustment............ -- -- -- (1,457) (1,457)
--------
Total comprehensive income... 9,566
---- -------- ------- ------- --------
Balances at December 31, 1997.......... 399 168,538 30,926 (1,457) 198,406
---- -------- ------- ------- --------
Other................................ -- (24) -- -- (24)
Comprehensive income:
Net income........................ -- -- 12,382 -- 12,382
Change in minimum pension
liability adjustment............ -- -- -- (531) (531)
Foreign currency translation
adjustment...................... -- -- -- 26 26
--------
Total comprehensive income... 11,877
---- -------- ------- ------- --------
Balance at December 31, 1998........... $399 $168,514 $43,308 $(1,962) $210,259
==== ======== ======= ======= ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE> 25
IRI INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED YEAR ENDED ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income............................................ $ 12,382 $ 11,023 $ 8,377
Adjustments to reconcile net income to net cash
provided by operations:
Extraordinary charge............................... -- 1,512 --
Depreciation and amortization...................... 4,032 4,871 98
Amortization of goodwill........................... 1,255 880 --
Amortization of negative goodwill.................. (5,367) (5,367) (4,026)
Change in employee benefit accounts................ 728 129 (53)
Loss on sale of assets............................. -- (372) --
Changes in assets and liabilities, net of effects
of acquisitions:
Marketable securities............................ 5,218 (8,218) --
Accounts receivable.............................. 3,983 (14,772) (2,594)
Inventories...................................... (8,250) (21,058) (6,840)
Other current assets............................. 3,487 (6,918) (125)
Other non current assets......................... 190 (113) --
Accounts payable and accrued liabilities......... (13,685) 17,682 2,728
Customer advances and other liabilities.......... (5,631) 593 1,264
-------- --------- -------
Net cash used in operations................... (1,658) (20,128) (1,171)
-------- --------- -------
Cash flows from investing activities:
Capital expenditures.................................. (10,005) (5,755) (911)
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... (10,005) (96,022) (911)
Cash flows from financing activities:
Payments on capital lease obligation.................. (226) (312) (144)
Proceeds from notes payable........................... -- 113,482 3,157
Debt issuance costs................................... -- (3,971) --
Payments on notes payable............................. (85) (116,671) --
Issuance of common stock.............................. -- 163,937 --
Proceeds from sale of assets.......................... -- 523 --
Other................................................. (24) -- --
-------- --------- -------
Net cash flows provided by (used in) financing
activities.................................. (335) 156,988 3,013
-------- --------- -------
Increase (decrease) in cash and cash equivalents........ (11,998) 40,838 931
Cash and cash equivalents at beginning of year.......... 49,473 8,635 7,704
-------- --------- -------
Cash and cash equivalents at end of year...... $ 37,475 $ 49,473 $ 8,635
======== ========= =======
Supplemental cash flow information:
Interest paid......................................... $ 360 $ 8,762 $ 303
======== ========= =======
Income taxes paid..................................... $ 5,219 $ 158 $ --
======== ========= =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE> 26
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).
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 each of the years
ended December 31, 1998 and 1997, and $4.0 million for the nine months ended
December 31, 1996, is included in cost of goods sold in the accompanying
statements of operations.
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 $37,500,000 and $49,500,000 at December 31, 1998 and
1997, 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 years ended December 31, 1997 and 1996, the Company entered into
capital lease obligations of $309,000 and $810,000, respectively.
(c) Marketable Securities
Marketable securities at December 31, 1998 and 1997 consist of corporate
equity securities. The Company classifies its equity securities as trading
securities. Trading securities are bought and held principally for the purpose
of selling them in the near term and are recorded at fair value. Unrealized
holding losses of $743,000 and gains of approximately $770,000 are included in
other income for the years ended December 31, 1998 and 1997, respectively.
F-7
<PAGE> 27
IRI INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(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. During 1998, the Company revised certain
estimates resulting in approximately $4 million in additional costs being
absorbed in the manufacturing process, which was previously expensed directly to
cost of sales. A portion of the incremental manufacturing overhead is
capitalized into inventory at December 31, 1998.
(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, 1998 is
$14,218,000 and $9,789,000, respectively, related to uncompleted contracts
($4,429,000, net) at December 31, 1998. Included in revenues
F-8
<PAGE> 28
IRI INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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.
(h) Earnings per Common Share
Weighted average shares for each of the periods presented were as follows
(in thousands):
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED YEAR ENDED ENDED
DECEMBER 31, 1998 DECEMBER 31, 1997 DECEMBER 31, 1998
----------------- ----------------- -----------------
<S> <C> <C> <C>
Weighted average shares
outstanding -- basic............... 39,900 31,275 30,000
Incremental effect of options
outstanding........................ 5 -- --
Weighted average shares
outstanding -- diluted............. 39,905 31,275 30,000
</TABLE>
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 except for the year and
quarter ending December 31, 1998. Options outstanding at December 31, 1997 are
anti-dilutive as the exercise price is greater than the market price at December
31, 1997. Options issued in December 1998 and outstanding at December 31, 1998
are dilutive and are included in Diluted EPS, but had no impact on EPS.
(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
be similarly affected by changes in economic and industry conditions. The
Company performs ongoing credit evaluations of its customers. The Company
maintains reserves for potential credit losses, and actual losses have
historically been within the Company's expectations. Foreign sales also present
various risks, including risks of war, civil disturbances and governmental
activities that may limit or disrupt markets, restrict the movement of funds or
result in the deprivation of contract rights or the taking of property without
fair consideration. Most of the Company's foreign sales, however, are to large
international companies or are secured by letters of credit or similar
arrangements.
(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
F-9
<PAGE> 29
IRI INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
(k) Comprehensive Income
On January 1, 1998, the Company adopted SFAS No. 130, Reporting
Comprehensive Income. SFAS No. 130 establishes standards for reporting and
presentation of comprehensive income and its components in a full set of
financial statements. Comprehensive income consists of net income and net
unrealized gains (losses) on securities, minimum pension liabilities, and
foreign currency exchange gains and losses, and is presented in the consolidated
statements of stockholder's equity and comprehensive income. The Statement
requires only additional disclosures in the consolidated financial statements;
it does not affect the Company's financial position or results of operations.
Prior year financial statements have been reclassified to conform to the
requirements of SFAS No. 130.
(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 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.
F-10
<PAGE> 30
IRI INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following sets forth selected consolidated financial information for
the Company on a pro forma basis for the year ended December 31, 1997, assuming
the Bowen and Cardwell acquisitions had occurred on January 1, 1997 (in
thousands, except per share amounts):
<TABLE>
<CAPTION>
1997
-----------
(UNAUDITED)
<S> <C>
Revenues.................................................... $207,776
========
Gross profit................................................ $ 51,244
========
Operating income............................................ $ 23,616
========
Net income.................................................. $ 9,300
========
Net income per common share................................. $ 0.30
========
</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, 1997, or that may be achieved in the future.
(4) INVENTORIES
A summary of inventories follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1998 1997
-------- --------
<S> <C> <C>
Raw materials and supplies............................. $ 46,743 $ 39,087
Work in process........................................ 21,241 28,771
Finished goods......................................... 41,167 33,043
-------- --------
Total........................................ $109,151 $100,901
======== ========
</TABLE>
(5) PROPERTY, PLANT AND EQUIPMENT
A summary of property, plant and equipment follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1998 1997
------- -------
<S> <C> <C>
Land and land improvements............................... $ 2,910 $ 2,869
Buildings................................................ 7,731 7,378
Machinery and equipment.................................. 46,965 36,318
------- -------
57,606 46,565
Less accumulated depreciation............................ (8,414) (3,346)
------- -------
Property, plant and equipment, net............. $49,192 $43,219
======= =======
</TABLE>
Machinery and equipment includes capitalized lease assets of $1,119,000 at
December 31, 1998 and 1997.
F-11
<PAGE> 31
IRI INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(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 ($6.7 million at December
31, 1998) 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.
(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) COMPREHENSIVE INCOME
The accumulated balances for each classification of comprehensive income
are as follows:
<TABLE>
<CAPTION>
ACCUMULATED
FOREIGN MINIMUM OTHER
CURRENCY PENSION COMPREHENSIVE
ITEMS LIABILITY INCOME
-------- --------- -------------
<S> <C> <C> <C>
Beginning balance............................ $-- (1,457) (1,457)
Current period change........................ 26 (531) (505)
--- ------ ------
Ending balance............................... $26 (1,988) (1,962)
=== ====== ======
</TABLE>
There are no related tax effects allocated to each component of other
comprehensive income as deferred income tax expenses and benefits are offset by
changes in the valuation allowance.
(9) 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
F-12
<PAGE> 32
IRI INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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. During 1998, the
Company cancelled 1,931,000 outstanding stock options and granted 1,645,000 new
options.
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. The $499,000
was recognized in income in 1998 when the options were forfeited and cancelled.
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>
<CAPTION>
1998 1997
------- -------
<S> <C> <C>
Net income
As reported............................................. $12,382 $11,023
======= =======
Pro forma............................................... $11,199 $ 7,216
======= =======
Basic and diluted earnings per share
As reported............................................. $ 0.31 $ 0.35
======= =======
Pro forma............................................... $ 0.28 $ 0.23
======= =======
</TABLE>
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>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Expected life (years)....................................... 5 3.3
Risk-free interest rate..................................... 4.42 6.2%
Volatility.................................................. 70.0% 30.0%
Dividend yield.............................................. 0.0% 0.0%
</TABLE>
F-13
<PAGE> 33
IRI INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
A summary of the status of the Company's fixed stock option plan as of
December 31, 1998 and 1997 and changes during the years then 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 December 31, 1997.................... 1,931 18.00
------ -------
Forfeited........................................... (1,931) (18.00)
Granted............................................. 1,645 3.56
Exercised........................................... -- --
------ -------
Outstanding at December 31, 1998.................... 1,645 3.56
====== =======
Options exercisable at December 31, 1998............ 548 $ 3.56
====== =======
Weighted average fair value of options granted
during 1998....................................... 3.56
=======
</TABLE>
Weighted average remaining contracted life of stock options at December 31,
1998 was 9.9 years.
(10) INCOME TAXES
Current income tax expense attributable to income before extraordinary item
consists of the following:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, NINE MONTHS ENDED
---------------- DECEMBER 31,
1998 1997 1996
------ ------ -----------------
<S> <C> <C> <C>
U. S. Federal............................ $2,609 $1,965 $98
State.................................... 425 312 --
Foreign.................................. 249 509 --
------ ------ ---
$3,283 $2,786 $98
====== ====== ===
</TABLE>
Income tax expense differs from the amount computed by applying the
statutory rate of 35 percent at December 31, 1998 and 1997 (34% at December 31,
1996) to income before income taxes as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, NINE MONTHS ENDED
------------------ DECEMBER 31,
1998 1997 1996
------- ------- -----------------
<S> <C> <C> <C>
Computed "expected" tax expense........ $ 5,483 $ 5,362 $ 2,882
Change in the valuation allowance...... (998) (1,291) (1,504)
Amortization of negative goodwill...... (1,879) (1,879) (1,369)
Amortization of goodwill............... 442 308 --
State income taxes, net of federal
benefit.............................. 276 203 --
Other.................................. (41) 83 89
------- ------- -------
$ 3,283 $ 2,786 $ 98
======= ======= =======
</TABLE>
F-14
<PAGE> 34
IRI INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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, 1998 and December 31, 1997, are as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
----------------
1998 1997
------ ------
<S> <C> <C>
Deferred income tax assets:
Capital loss carryforward................................ $ 690 $ --
Basis in inventories..................................... 4,201 4,744
Unrealized loss on marketable equity securities.......... 260 --
Employee benefits........................................ 1,102 823
Net operating loss carryforwards......................... 1,050 1,224
Alternative minimum tax credit carryover................. -- 565
Other, principally accrued liabilities................... 378 909
------ ------
Total gross deferred income tax assets........... 7,681 8,265
Less valuation allowance................................. 3,380 4,378
------ ------
Net deferred income tax assets................... 4,301 3,887
------ ------
Deferred income tax liabilities:
Costs and estimated earnings in access of billings on
uncompleted contracts................................. 1,917 3,010
Unrealized gain on marketable equity securities.......... -- 262
Basis in and depreciation of property, plant and
equipment............................................. 2,384 615
Prepaid pension cost..................................... -- --
------ ------
Total gross deferred income tax liabilities...... 4,301 3,887
------ ------
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 $3,380,000 and
$4,378,000 at December 31, 1998 and December 31, 1997, respectively. The
valuation allowance decreased $998,000 during the year ended December 31, 1998
and $1,291,000 during the year ended December 31, 1997. 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 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 $3,300,000
available at December 31, 1998) expiring from 2003 through 2009. To the extent
such carryforwards are not utilized in a year, they may be utilized in
subsequent years.
F-15
<PAGE> 35
IRI INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(11) LEASES
At December 31, 1998, 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>
1999....................................................... $1,228 $314
2000....................................................... 860 313
2001....................................................... 303 --
2002....................................................... 42 --
2003....................................................... 17 --
------ ----
Total minimum lease payments..................... $2,450 627
====== ----
Less amount representing interest.......................... (46)
Present value of minimum lease payments.................... $581
====
</TABLE>
Total rental expense was $2,751,000 and $2,142,000 for the years ended
December 31, 1998 and 1997, respectively, and $860,000 for the nine months ended
December 31, 1996.
(12) PENSION AND OTHER POSTRETIREMENT PLANS
In 1998, the Company adopted SFAS No. 132, "Employers' Disclosures about
Pension and Other Post Retirement Benefits." This statement revises required
disclosures for pension and other post retirement benefits, but does not change
the method of accounting for such plans.
The Company has a noncontributory defined pension benefit plan, which
covers substantially all employees. Employees with 10 or more years of service
are entitled to pension benefits beginning at normal retirement age (65) based
on years of service and the employees' compensation for the 60 consecutive month
period in which his compensation is the highest. The plan incorporates
provisions for early retirement, the privilege to elect a life annuity,
surviving spouse benefits, and disability benefits.
Employees of the Company who were employees of Ingersoll-Rand Oilfield
Products Company or the Ideco Division of Dresser Industries, Inc., immediately
prior to becoming employees of IRI, are entitled to uninterrupted service tenure
for purposes of retirement benefit calculations. Benefits payable under the IRI
retirement plan are offset by benefits payable under the retirement plans of
Dresser and Ingersoll-Rand Oilfield Products Company.
The Company uses the accrued benefit cost method to compute the annual
contributions to the plan, with minimum and maximum contributions determined on
a cumulative basis and the Company having the flexibility to choose which
contribution to make and which can vary from one period to the next.
The accrued benefit cost includes a normal cost which is computed as the
present value of the pro rata portion for the benefit accrual during the year
being valued and a past service cost which is the present value of that portion
of the projected benefit which has been accrued up to the valuation date. The
unfunded past-service cost may be liquidated over a period of between 10 and 30
years.
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 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. This plan is a contributory, with retirees contributing
20% of the health care costs. The Company's contribution is capped at a 5%
annual
F-16
<PAGE> 36
IRI INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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.
The funded status and the amounts recognized in the balance sheets as of
December 31, 1998, 1997 and 1996, the date of the last actuarial valuation are
as follows (in thousands):
<TABLE>
<CAPTION>
PENSION BENEFITS OTHER BENEFITS
------------------------- ---------------------------
1998 1997 1996 1998 1997 1996
------- ------ ------ ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
CHANGE IN BENEFIT OBLIGATION:
Benefit obligation at beginning of year... $ 8,061 7,289 7,382 1,841 1,821 1,624
Service cost.............................. 106 108 81 -- -- --
Interest cost............................. 520 571 419 134 144 103
Plan participants' contributions.......... -- -- -- 27 30 22
Actuarial (gain) loss..................... 322 691 (211) (28) 44 325
Benefits paid............................. (574) (598) (382) (145) (198) (253)
------- ------ ------ ------- ------- -------
Benefit obligation at end of
year............................ 8,435 8,061 7,289 1,829 1,841 1,821
------- ------ ------ ------- ------- -------
CHANGE IN PLAN ASSETS:
Fair value of plan assets at beginning of
year................................... 7,122 7,321 7,433 -- -- --
Actual return on plan assets.............. 301 499 270 -- -- --
Employer contribution..................... -- -- -- 118 168 231
Plan participants' contributions.......... -- -- -- 27 30 22
Benefits paid............................. (574) (598) (382) (145) (198) (253)
------- ------ ------ ------- ------- -------
Fair value of plan assets at end
of year......................... 6,849 7,122 7,321 -- -- --
------- ------ ------ ------- ------- -------
Funded status............................. (1,586) (939) 32 (1,829) (1,841) (1,821)
Unrecognized actuarial loss............... 1,988 1,457 595 323 360 323
------- ------ ------ ------- ------- -------
Net amount recognized............. $ 402 518 627 (1,506) (1,481) (1,498)
======= ====== ====== ======= ======= =======
Amounts recognized in the statement of
financial position consist of:
Prepaid benefit cost................... $ -- -- 627 -- -- --
Accrued benefit liability.............. (1,586) (939) -- (1,506) (1,481) (1,498)
Accumulated other comprehensive loss... 1,988 1,457 -- -- -- --
------- ------ ------ ------- ------- -------
Net amount recognized............. $ 402 518 627 (1,506) (1,481) (1,498)
======= ====== ====== ======= ======= =======
WEIGHTED-AVERAGE ASSUMPTIONS AS OF DECEMBER
31:
Discount rate............................. 6.75% 7.30% 7.90% 6.75% 7.30% 7.75%
Expected return on plan assets............ 8.00% 8.00% 8.00% N/A N/A N/A
Rate of compensation increase............. N/A N/A N/A N/A N/A N/A
</TABLE>
F-17
<PAGE> 37
IRI INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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.
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
COMPONENTS OF NET PERIODIC BENEFIT COST:
Service cost................................... $106 $ 108 $ 81 -- -- --
Interest cost.................................. 520 571 419 134 144 103
Expected return on plan assets................. (557) (570) (427) -- -- --
Recognized net actuarial loss.................. 9 7 2 45 -- --
---- ----- ----- ---- ---- ----
$ 69 69 73 179 144 103
==== ===== ===== ==== ==== ====
</TABLE>
The projected benefit obligation, accumulated benefit obligation, and fair value
of plan assets for the pension plan with accumulated benefit obligations in
excess of plan assets were $8,435,000, $8,435,000, and $6,849,000, respectively,
as of December 31, 1998; $8,061,000, $8,061,000 and $7,122,000, respectively, as
of December 31, 1997 and $7,289,000, $7,289,000, and $7,321,000, respectively,
as of December 31, 1996.
As of September 1, 1995, the pension plan was frozen insofar as future
accrual of pension benefits. Because the plan amendment to freeze the plan was
planned in conjunction with the ESI acquisition discussed in note 1, the
resulting curtailment gain was taken into consideration in remeasuring the
Company's projected benefit obligation and the date of the acquisition.
The 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 pension plan is administered by the Pension Committee which is
appointed by IRI's Board of Directors.
On August 11, 1995, the defined benefit health care plan was amended to
terminate all employees from the plan except those eligible to retire on June
30, 1995 and all current retirees. In addition under the amended plan, active
employees eligible to retire will, after the age of 65, receive through the
retirement plan, 80% of the cost of medical insurance with a 5% cap over a base
year premium of calendar 1996. Because it was expected that the plan would be
terminated in conjunction with the ESI acquisition discussed in note 1, the
effects were considered in measuring the Company's accumulated post retirement
benefit obligation as of the acquisition date.
The Company also has a defined contribution plan which covers most of its
employees. The plan provides mandatory minimum 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 $1,289,000, $1,076,000 and $665,00 for the years ended
December 31, 1998 and 1997, and the nine-months ended December 31, 1996,
respectively.
(13) RESTRUCTURING CHARGE
On October 8, 1998, the Company announced a restructuring program in which
the workforce would be reduced by up to 315 employees. Severance expenses
incurred in connection with the restructuring program have been reported as a
restructuring charge of $590,000. Substantially all amounts were paid as of
December 31, 1998. Subsequent to year end the Company consolidated manufacturing
operations in Pampa and Houston, closing two plants, and implemented other cost
reduction measures.
F-18
<PAGE> 38
IRI INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(14) BUSINESS SEGMENTS
In the fourth quarter, the Company adopted SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information," issued for fiscal years
ending December 15, 1998.
The Company's reportable segments are strategic business units that offer
different products and services. They are managed separately because each
business requires different technology and marketing strategies. Financial data
for periods reported prior to the year ended 1998 have been restated to conform
to the presentation according to SFAS No. 131.
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.
The accounting policies of the segments are the same as those described in
the summary of significant accounting policies. The Company evaluates
performance based on operating income or loss before income taxes excluding
nonrecurring gains and losses and foreign exchange gains and losses.
Financial information by industry segment is summarized below (in
thousands):
<TABLE>
<CAPTION>
OILFIELD DOWNHOLE SPECIALTY CORPORATE
EQUIPMENT PRODUCTS STEEL AND OTHER ELIMINATIONS TOTAL
--------- -------- --------- --------- ------------ --------
<S> <C> <C> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1998
Sales to unaffiliated
customers..................... $ 88,395 $76,249 $10,401 $ -- -- $175,045
Operating income (loss).......... 13,533 17,186 1,668 (15,084) -- 17,303
Identifiable assets.............. 72,237 108,277 8,047 50,605 -- 239,166
Depreciation and amortization.... 379 3,283 69 301 -- 4,032
Amortization of negative
goodwill...................... -- -- -- 5,367 -- 5,367
Capital expenditures............. 745 8,836 214 210 -- 10,005
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 86,030 9,457 61,576 -- 251,074
Depreciation and amortization.... 248 3,493 30 1,100 -- 4,871
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 and amortization.... 79 -- 10 9 -- 98
Amortization of negative
goodwill...................... -- -- -- 4,026 -- 4,026
Capital expenditures............. 545 -- 218 958 -- 1,721
</TABLE>
F-19
<PAGE> 39
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 ENDED DECEMBER 31, ENDED
----------------------- DECEMBER 31,
1998 1997 1996
---------- ---------- ------------
<S> <C> <C> <C>
Russia..................................... $ 22,137 $ 47,375 $39,717
Europe (excluding Russia).................. 12,649 12,783 151
Asia (excluding Russia).................... 17,831 11,113 72
South America.............................. 15,829 9,166 634
Africa..................................... 17,469 14,432 --
Other...................................... 1,869 6,665 --
-------- -------- -------
Total export sales............... 87,784 101,534 40,574
Domestic sales............................. 87,261 83,832 21,724
-------- -------- -------
Total sales...................... $175,045 $185,366 $62,298
======== ======== =======
</TABLE>
In 1998, no one customer accounted for more than 10% of revenues. For the
year ended December 31, 1997, one customer accounted for 12.9% of revenue. For
the nine months ended December 31, 1996, two customers accounted for 38% and 14%
of revenues, respectively.
(15) COMMITMENTS AND CONTINGENCIES
The Company has contract commitments aggregating $21.3 million at December
31, 1998 for the manufacture and delivery of drilling and workover rigs during
fiscal year 1999.
At December 31, 1998, the Company was contingently liable for approximately
$3.0 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
F-20
<PAGE> 40
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 disposition, results of operations or
liquidity.
(16) QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
QUARTER ENDED QUARTER ENDED QUARTER ENDED QUARTER ENDED
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
1998
Sales and other operating revenues........... $47,232 $51,399 $40,650 $35,764
Gross profit................................. 12,849 15,468 11,064 9,038
Net earnings (loss).......................... 4,372 5,525 2,799 (314)
Basic and diluted earnings (loss) common
share...................................... 0.11 0.14 0.07 (0.01)
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 (loss).......................... 1,657 (1,236) 2,530 8,072
Basic and diluted earnings (loss) 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).
F-21
