<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
OR
[ ] 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)
<TABLE>
<S> <C>
DELAWARE 75-2044681
------------------------------- ----------------------
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
</TABLE>
<TABLE>
<S> <C>
1000 LOUISIANA, SUITE 5900
HOUSTON, TEXAS 77002
--------------------------------------- ----------
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
</TABLE>
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (713) 651-8002
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
<TABLE>
<S> <C>
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
---------------------------- -----------------------------------------
COMMON STOCK, $.01 PAR VALUE NEW YORK STOCK EXCHANGE
</TABLE>
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL
REPORTS REQUIRED TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE
REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH
FILING REQUIREMENTS FOR THE PAST 90 DAYS.
YES X NO __
INDICATE BY CHECK MARK IF DISCLOSURE OF DELINQUENT FILERS PURSUANT TO
ITEM 405 OF REGULATION S-K IS NOT CONTAINED HEREIN, AND WILL NOT BE CONTAINED,
TO THE BEST OF REGISTRANT'S KNOWLEDGE, IN DEFINITIVE PROXY OR INFORMATION
STATEMENTS INCORPORATED BY REFERENCE IN PART III OF THIS FORM 10-K OR ANY
AMENDMENT TO THIS FORM 10-K.[ ]
APPLICABLE ONLY TO REGISTRANTS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
INDICATE BY CHECK MARK WHETHER THE REGISTRANT HAS FILED ALL DOCUMENTS
AND REPORTS REQUIRED TO BE FILED BY SECTION 12, 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 SUBSEQUENT TO THE DISTRIBUTION OF SECURITIES UNDER A PLAN
CONFIRMED BY A COURT.
YES __ NO __
AS OF MARCH 24, 2000, THE AGGREGATE MARKET VALUE OF VOTING STOCK HELD
BY NON-AFFILIATES OF THE REGISTRANT WAS $125,001,772 BASED ON THE LAST
REPORTED SALE PRICE OF THE REGISTRANT'S COMMON STOCK ON THE NEW YORK STOCK
EXCHANGE.
39,900,000 SHARES OF COMMON STOCK WERE OUTSTANDING ON MARCH 24, 2000.
DOCUMENTS INCORPORATED BY REFERENCE
-----------------------------------
NONE
<PAGE> 2
ITEM 1. BUSINESS
IRI International Corporation (the "Company" or "we" or "us") is one
of the world's largest manufacturers of land-based drilling, well-servicing
rigs and rig component parts for use in the global oil and gas industry. We are
principally engaged in the design, manufacture, service, sale and rental of
on-shore and off-shore oil field equipment for the domestic and international
markets. Our Oilfield Equipment Division designs and produces rigs to meet the
special requirements of our global clientele for service in remote areas and
harsh climatic conditions. Our Downhole Products Division is a major
manufacturer of down hole fishing and drilling tools. It offers a complete line
of oil field power equipment, including top drives, power swivels, wireline
pressure control equipment and coiled tubing systems, which complement our
drilling and well-servicing rigs. We also manufacture and maintain a
significant inventory of replacement parts for rigs produced by us and others,
enabling us to meet the needs of our customers on a timely basis. Our Specialty
Steel Division produces premium alloy steel for commercial and military use and
for use in manufacturing oil field equipment products.
We market our oil field equipment primarily through our own sales
force and through designated agents and distributors in every major oil and gas
producing region in the world. We maintain 25 domestic and 7 international
sales, parts and service centers in areas of significant drilling and
production operations. Our network of service centers in the United States
provides our customers with refurbishment or repair services as well as ready
access to replacement parts for equipment in the field. Our worldwide sales and
marketing activities are closely coordinated with and supported by a staff of
engineers and design technicians. This network allows us to provide our
customers with products meeting their customized design specifications.
Our predecessor was founded in 1985 through the combination of
Ingersoll-Rand Oilfield Products Company and the Ideco Division of Dresser
Industries, Inc., and was later acquired by Energy Services International Ltd.
in 1994 ("ESI"). We acquired the business and operations of the Bowen Tools
Division (the "Bowen Acquisition") on March 31, 1997 and Cardwell
International, Ltd. (the "Cardwell Acquisition") on April 17, 1997 (together,
the "Acquisitions"). In October 1997, we merged with ESI, and ESI, as the
surviving entity, changed its name to IRI International Corporation. In
November 1997, we consummated the initial public offering of 13,800,000 shares
(which included 3,900,000 shares sold by certain stockholders) of our Common
Stock.
On March 16, 2000, we announced the signing of a definitive merger
agreement with National-Oilwell, Inc., (the "NOI Merger") a worldwide leader in
the design, manufacture and sale of comprehensive systems and components used
in oil and gas drilling and production, as well as in the provision of supply
chain integration services to the upstream oil and gas industry.
The merger agreement, unanimously approved by each company's board of
directors, calls for our stockholders to receive .3385 share of National Oilwell
common stock for each common share of the Company. National-Oilwell will issue
approximately 14.4 million shares of its common stock for all common shares of
the Company issued and outstanding and all options to purchase common shares of
the Company, which options will become fully vested at closing. This transaction
is expected to be accounted for as a pooling of interests and be tax-free to
both companies and our stockholders.
Holders of the majority of our outstanding shares as well as
National-Oilwell's largest stockholder and its CEO have entered into voting
agreements in support of the transaction. The voting agreements do not prohibit
any of the shareholders from selling shares in accordance with applicable law,
including SEC Rule 144, unless such sale would affect adversely the accounting
and regulatory treatment of the NOI Merger as a "pooling of interests." Subject
to shareholder approval, the closing of the transaction is expected to occur
during the second quarter of this year.
DRILLING AND WELL-SERVICING RIGS
Products
We design, construct and sell a total of 48 standard models of
drilling and well-servicing rigs under the IDECO(R), FRANKS(R), CARDWELL(TM)
and IRI(TM) brand names. Our products include:
- land-based skid mounted rigs;
- off-shore drilling and well-servicing rigs;
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- self-propelled drilling and well-servicing rigs;
- slant hole drilling rigs; and
- heli-rigs.
In addition to our standard models, we manufacture customized drilling and
well-servicing rigs to customer specifications to accommodate, among other
things, extreme weather conditions, moving systems or hook load capacities. We
also design, manufacture and sell component products used in the original
construction, modernization or repair of land and off-shore rigs, including
masts, derricks, substructures and other components used in hoisting, power
transmission, pumping and mud systems. The sale of drilling and well-servicing
rigs and component parts accounted for $27.3 million (or 29.6%), $55.8 million
(or 31.8%) and $74.2 million (or 40.0%) of our revenues for 1999, 1998 and 1997,
respectively.
Competition
Our competitors in our diverse areas of manufacturing are
National-Oilwell, Inc., Tulsa Industries, Inc., Hydralift A.S.A., Maritime
Hydraulics U.S., Inc., Bentec GMBH, and Crown Industries Inc. We compete on the
basis of price, quality, the ability to introduce new and improved products and
the ability to supply and deliver products in a timely and cost effective
manner.
Backlog
Sales of our drilling and well-servicing rigs are made almost
exclusively on the basis of written purchase orders or contracts. We include in
our rig backlog those orders or purchase commitments that we are reasonably
certain will be consummated based on industry practice, the historical
relationship between us and the customer or the financial terms of the sale,
including cash advances, letters of credit or similar credit support
arrangements. The total value of our rig backlog as of December 31, 1999 and
1998 was $41.0 million and $21.3 million, respectively. We cannot assure that
the contracts included in our backlog will ultimately generate anticipated
revenues in the period expected or otherwise.
We attempt to mitigate the financial risks in sales to our
international customers by requiring, where commercially feasible, cash
advances, irrevocable letters of credit or similar credit support arrangements.
As of December 31, 1999, we had received approximately $1.9 million in cash down
payments and approximately $40.8 million in letters of credit or assignments of
letters of credit to support customer orders.
Customers
Sales of drilling and well-servicing rigs are made to various
customers, which change from year to year depending on the size and timing of
rig purchase orders. During 1999, our largest revenue customer accounted for
33.5% of the revenues of our oil field equipment segment and our second largest
revenue customer accounted for 11.5 % of the revenues of our oil field equipment
segment. In 1999, we received a significant order from Surgutneftgaz, a customer
based in the former Soviet Union, the majority of which order we expect to
fulfill in 2000.
FISHING AND DRILLING TOOLS
Our Downhole Products Division designs, manufactures, sells and rents
fishing and drilling tools under the BOWEN(R) brand name. These include:
- external and internal catch fishing tools;
- junk catch fishing tools;
- milling and cutting tools;
- accessory tools such as jars, jar intensifiers and bumper
subs; and
- repair and remedial tools.
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<PAGE> 4
Fishing and drilling tool sales and rentals accounted for $36.3 million (or
39.4%), $56.7 million (or 32.4%) and $47.8 (or 25.8%) of our revenues for 1999,
1998 and 1997, respectively.
Competition
In the fishing and drilling tool business, like the rig manufacturing
business, we compete on the basis of price, quality, the ability to introduce
new and improved products and the ability to supply and deliver products in a
timely and cost effective manner. Our primary competitors are Smith
International, Inc. and Spring Engineers, Inc. in the manufacture of fishing
tools, and Weatherford International, Inc., National-Oilwell, Inc., and Smith
International, Inc. in the manufacture of drilling tools. We are the leading
provider of fishing tools. We are a minor player in the drilling tool market,
but we have plans to expand this part of our business.
POWER AND WIRELINE/PRESSURE CONTROL EQUIPMENT
Power Equipment
In addition to fishing and drilling tools, our Downhole Products
Division also manufactures products for the power equipment market, including:
- power-swivel systems used in well-servicing and drilling
applications;
- top drives;
- power subs;
- bucking units;
- power tongs; and
- coiled tubing systems.
The market for power equipment is very competitive. Our competitive
position varies by product. We compete on the basis of product design, quality,
ability to meet delivery requirements and price. Our competitors in this segment
are Tesco Corporation, Canadian Rig Ltd., Maritime Hydraulics US, Inc., Varco
International, Inc., King Oil Tools Inc., Stewart & Stevenson Services, Inc.,
and Hydra Rig.
Wireline/Pressure Control Equipment
We also manufacture wire line and pressure control equipment under the
BOWEN(R) brand name. These products include:
- small blowout preventers;
- unions;
- tool traps;
- tool catchers;
- lubricator risers;
- control heads;
- stuffing boxes; and
- wellhead adapters.
Like the market for power equipment, the market for pressure control
equipment is very competitive. Similarly, our competitive position varies by
product. We compete on the basis of product design, quality, ability to meet
delivery requirements and price. Our competitors in the market include Elmar
Services Ltd. and Tuboscope Inc.
Sales and rentals of power and wireline/pressure control equipment
products accounted for $6.6 million (or 7.2%), $19.5 million (or 11.1%) and
$17.5 million (or 9.4%) of our revenues for 1999, 1998 and 1997, respectively.
4
<PAGE> 5
SPECIALTY STEEL PRODUCTS
Our Specialty Steel Division manufactures premium specialty steel
forgings for commercial and military use and for use in manufacturing oil field
equipment products. Specialty steel products accounted for $4.9 million (or 5.4
%), $10.4 million (or 5.9%) and $13.5 million (or 7.3%) of our revenues for
1999, 1998 and 1997, respectively.
We manufacture over 100 different alloys to form forged products in
round, square and rectangular solid, trepanned, counter bored and stepped forms
to meet customer specifications. We sell our specialty steel products primarily
to customers in the heavy equipment, aircraft, petroleum and power generation
industries in North America and to the United States military. We also sell our
specialty steel products as feedstock directly to forgers and extruders.
Competition
The U.S. specialty steel market is highly competitive due primarily to
the high cost of freight associated with moving small amounts of high tonnage
finished goods. Competitive factors include price, delivery, quality and
service. Steel ingots and billets are commodities and are extremely price
competitive. Our major competitors in the specialty steel market are National
Forge Company, Ellwood Group, Inc., Scot Forge Co., Erie Forge and Steel,
Inc. and FirstMiss Steel Inc.
Customers
The Specialty Steel Division sold 31.3% of its production for 1999 to
the governmental and military sectors. Besides the governmental and military
sectors, its two largest customers accounted for 20.0% and 10.3%, respectively,
of its revenues for 1999. The loss of any of these customer may materially
adversely affect the revenues and operating results of the Specialty Steel
Division, though it will not materially adversely affect our revenues and
operating results taken as a whole.
REPLACEMENT PARTS AND REFURBISHMENT
We manufacture and maintain a significant inventory of replacement
parts and replacement components. We also refurbish older rigs for our
customers. We believe that these businesses will grow over the next several
years because of increased worldwide rig utilization and the age of the
international rig fleet, most of which were constructed prior to 1982. We
believe we are well positioned to provide replacement parts and refurbishment
services as a result of the large number of operating rigs manufactured under
our brand names and the preference of equipment owners to obtain replacement
parts and refurbishment services from the original manufacturer. Replacement
parts and refurbishment services accounted for $17.0 million (or 18.5 %), $32.6
million (or 18.6%) and $32.3 million (or 17.4%) of our revenues for 1999, 1998
and 1997, respectively.
ENGINEERING AND PRODUCT DEVELOPMENT
We maintain a staff of engineers and design technicians to:
- design and test new products, components and systems for use
in manufacturing and drilling applications;
- enhance the capabilities of existing products; and
- assist our sales organization and customers with special
requirements and products.
We intend to continue our research, engineering and product development programs
to develop safer and more environmentally-friendly and efficient products that
are complementary to our existing products and equipment. Our total engineering
and product development expenses for 1999, 1998 and 1997 were $2.7 million, $3.4
million and $4.3 million, respectively. We have budgeted $3.4 million for
engineering and product development expenses for 2000.
5
<PAGE> 6
MARKETING, SALES AND DISTRIBUTION
We market our oil field products primarily through our own sales force
and through designated agents and distributors in every major oil and gas
producing region in the world. Our customers include international and domestic
drilling contractors and international and domestic oil and gas exploration and
production companies, including foreign state-owned oil and gas enterprises. We
maintain 25 domestic and 7 international sales, parts and service centers in
areas of significant drilling and production operations.
See Note 14 to the Consolidated Financial Statements for financial
information related to our revenues by geographic region.
RAW MATERIALS
We purchase our components, parts and raw materials from several
commercial sources. These materials are readily available from suppliers and
based on past experience, we anticipate that such materials will continue to be
available, although we can give no assurances in this regard. We believe that
the loss of any of our suppliers would not have a material adverse effect on our
operations.
WORKING CAPITAL ITEMS
Consistent with industry practice, we maintain significant amounts of
inventory, which enables us to readily meet the demands of our customers.
INTELLECTUAL PROPERTY
We own or have licenses to use a number of U.S. and foreign patents
covering a variety of products. Although on the whole the patents are important
to us, no single patent is essential to our business. In general, we depend upon
product name recognition, manufacturing quality control and application of our
expertise rather than patented technology in the conduct of our business. We
enjoy product brand name recognition, principally through our BOWEN(R),
IDECO(R), FRANKS(R), CARDWELL(TM), and IRI(TM) trademarks, and consider such
trademarks to be important to our business.
EMPLOYEES
Generally, we consider our relations with our employees to be good. As
of December 31, 1999, we employed a total of 775 persons, of whom 27 were
employed outside the United States. Approximately 35% of these employees were
salaried and the balance were compensated on an hourly basis.
Approximately 33% of our employees are represented by a union or are
parties to a collective bargaining agreement. The collective bargaining
agreement between us and our employees is effective for the period from July
1997 until July 2000, covers approximately 250 employees and contains customary
provisions with respect to wages, hours and working conditions for certain
production and maintenance employees in the Downhole Products Division. The
collective bargaining agreement required a 4.5% wage increase in its first year,
and 3% increases in its second and third years.
Unless one of the parties to the collective bargaining agreement
notifies the other party in writing, not less than 60 days prior to the
expiration of the term of the agreement, of an intention to modify or terminate
the agreement, the current collective bargaining agreement will be renewed in
July 2000.
RISKS AND INSURANCE
Our operations are subject to the usual hazards inherent in
manufacturing products and providing services for the oil and gas industry.
These hazards include:
- personal injury and loss of life;
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- business interruptions;
- property and equipment damage; and
- pollution or environmental damage.
We maintain comprehensive insurance covering our assets and insuring against
risks at levels that we believe are appropriate and in accordance with industry
practice. We cannot assure, however, that our insurance coverage will be
adequate in all circumstances or against all hazards or risks, or that we will
be able to maintain adequate insurance coverage in the future at commercially
reasonable rates or on acceptable terms.
Our services and products are used in drilling, production and
well-servicing operations. These types of operations are subject to inherent
risks, including:
- property damage;
- personal injury;
- suspension of operations; and
- loss of production.
We maintain product liability and worker's compensation insurance. Although the
limits of our insurance coverage against an accident are generally in accordance
with industry practice, such insurance may not be adequate to protect us against
liability or losses accruing from the consequences of such an incident.
ENVIRONMENTAL MATTERS
Our manufacturing operations are subject to a broad range of federal,
state and local environmental laws, both in the United States and in foreign
jurisdictions, including those governing:
- discharges into the air and water;
- handling and disposal of solid and hazardous wastes; and
- remediation of contaminated soil and groundwater.
Our policy is to eliminate and minimize generation of wastes at our facilities
through plant operations, process design and maintenance. We continually strive
to reduce wastes by sending these materials off-site for recycling and/or
re-use.
The Comprehensive Environmental Response, Compensation and Liability
Act ("CERCLA") imposes liability without regard to fault, on certain classes of
persons for the release of a hazardous substance into the environment. These
persons include the owner and operator of the disposal site or sites where the
release occurred and companies that sent hazardous substances to such sites.
Persons who are responsible for releases of hazardous substances under CERCLA
may be subject to joint and several liability for the costs of cleaning up
hazardous substances that have been released into the environment.
We currently own or lease, and have in the past owned or leased,
numerous properties that have been used for the manufacture and storage of
products and equipment containing or requiring oil and/or other hazardous
substances. Although we have used standard operating and disposal practices,
hazardous substances may have been disposed of or released on or under the
properties owned or leased by us or on or under other locations where such
wastes have been taken for disposal. In addition, many of these properties have
been operated by third parties whose treatment and disposal or release of
hydrocarbons or other wastes was not under our control. These properties and the
wastes disposed thereon may be subject to CERCLA, the Resource Conservation and
Recovery Act and analogous state laws. Under such laws, we could be required to
remediate any hazardous substances or wastes discovered on or under these
properties.
Various federal, state and local laws, regulations and ordinances
govern the removal, encapsulation or disturbance of asbestos containing
materials ("ACM"). These laws and regulations may impose liability for the
release of ACM. We are aware of the presence of ACM at our facilities, but we
believe that such material is in
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acceptable condition at this time. Although we cannot give any assurances, we
believe that any future costs related to remediation of ACM at these sites will
not be material, either on an annual basis or in the aggregate.
We have tried to reduce the impact of costs related to actual or
potential environmental conditions at the Downhole Products Division facilities
through our contractual arrangements with Air Liquide America Corporation ("Air
Liquide"). Air Liquide and Bowen agreed to indemnify us for costs relating to
environmental conditions existing at these facilities prior to our purchase of
the Bowen Tools Division. We cannot assure that Air Liquide or Bowen will meet
its obligations under the indemnification arrangements or that there will not be
future contamination for which we might be fully liable and that may require us
to incur significant costs that could have a material adverse effect on our
financial condition and results of operations.
Although we believe we are currently in substantial compliance with
environmental laws and regulations, as is the case with most industrial
manufacturers, we could incur significant costs related to environmental
compliance in the future. Future environmental compliance may involve
remediating existing conditions at our facilities or modifying our operations.
These potential costs may have a material adverse effect on our financial
condition and results of operations. Moreover, other developments, such as
stricter environmental laws, regulations and enforcement policies thereunder,
could result in additional, presently unquantifiable, costs or liabilities to
us.
ITEM 2. PROPERTIES
The principal offices and facilities owned or leased by us and their
current uses are described in the following table:
<TABLE>
<CAPTION>
FACILITY SIZE PROPERTY SIZE
LOCATION (SQ. FT.) (ACRES) TENANCY USE
<S> <C> <C> <C> <C>
Pampa, TX 1,000,000 499 Owned Rig and specialty
steel manufacturing,
administration and
warehousing
Houston, TX 539,700 19 Owned Drilling tool
manufacturing,
administration and
warehousing
Beaumont, TX(1) 350,000 10 Owned Rig parts sales and
warehousing
El Dorado, KS(2) 139,912 23 Owned Rig parts sales and
warehousing
Houston, TX 16,249 N/A Leased Executive Offices
Houston, TX 50,154 2 Owned Administration
</TABLE>
- -------------
(1) Rig manufacturing was ceased at this facility in early 1999.
(2) Rig manufacturing was ceased at this facility in December 1998.
We also own or lease facilities at 32 domestic and international
locations, substantially all of which are sales, service or warehouse locations.
ITEM 3. LEGAL PROCEEDINGS
There are pending or threatened against us various claims, lawsuits and
administrative proceedings all arising from the ordinary course of business with
respect to commercial product liability and employee matters. Although no
assurance can be given with respect to the outcome of these or any other pending
legal and administrative proceedings and the effects such outcomes may have on
us, we believe that any ultimate liability resulting from the outcome of such
proceedings to the extent not otherwise provided for will not have a material
adverse effect on our consolidated financial statements.
We maintain comprehensive liability insurance. We believe such coverage
to be of a nature and amount sufficient to ensure that we are adequately
protected from any material financial loss as a result of such claims. We
currently are not the subject of any legal actions for which we are neither
insured nor indemnified and which we
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believe will individually or in the aggregate have a material adverse effect on
our financial condition, results of operations or liquidity, nor to our
knowledge is any such litigation threatened.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock, par value $0.01 per share (the "Common Stock") became
listed on the New York Stock Exchange on November 14, 1997 under the symbol
"IIR". Prior to that time there was no public market for our common stock. Our
common stock closed at $9 1/16 on March 24, 2000. The following table sets forth
(as reported by New York Stock Exchange) for the periods indicated the prices of
the Common Stock.
FISCAL 2000 HIGH LOW
- ----------- ---- ---
1st Quarter (through March 24, 2000) 9 7/16 3 3/8
FISCAL 1999 HIGH LOW
- ----------- ---- ---
1st Quarter 4 3/8 2 7/8
2nd Quarter 6 3/16 3 5/8
3rd Quarter 5 5/8 4 1/4
4th Quarter 4 7/8 2 15/16
FISCAL 1998 HIGH LOW
- ----------- ---- ---
1st Quarter 14 1/2 10
2nd Quarter 14 15/16 10 3/4
3rd Quarter 12 1/4 4 3/8
4th Quarter 6 3/4 2 1/2
The number of record holders of the Common Stock as of March 24, 2000
was 90. Pursuant to our Incentive Plan, 2,586,000 shares of Common Stock are
subject to outstanding options at March 24, 2000.
We have never declared or paid cash dividends on our capital stock. We
currently expect to retain future earnings to provide for the continual growth
and development of our business.
During 1999, we made no sales of equity securities not registered under
the Securities Act of 1933.
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ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth selected historical financial
information for the Company. The information presented for the years ended
December 31, 1999, 1998 and 1997, and the year ended March 31, 1996, as well as
the nine month period ended December 31, 1996, is derived from our audited
consolidated financial statements. The information for the nine month period
ended December 31, 1995 is derived from our unaudited consolidated financial
statements. The following information should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Consolidated Financial Statements of the Company, including
the notes thereto, included elsewhere in this annual report.
<TABLE>
<CAPTION>
NINE MONTHS
TWELVE MONTHS ENDED YEAR ENDED
ENDED DECEMBER 31, DECEMBER 31, MARCH 31,
--------------------------------- ---------------------- ----------------
(UNAUDITED)
1999 1998 1997(1) 1996 1995 1996
--------- --------- --------- --------- ---------- ----------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C>
OPERATING DATA:
Revenue $ 92,190 $ 175,045 $ 185,366 $ 62,298 $ 39,141 $ 52,506
Cost of goods sold (2) 83,156 126,626 139,204 44,968 28,815 36,877
--------- --------- --------- --------- --------- ---------
Gross profit 9,034 48,419 46,162 17,330 10,326 15,629
Selling, general and
administrative expense 27,831 30,526 23,543 8,220 5,400 7,990
Restructuring charge 1,779 590 -- -- -- --
--------- --------- --------- -------- --------- ---------
Operating income (loss) (20,576) 17,303 22,619 9,110 4,926 7,639
Interest expense (363) (360) (8,762) (615) -- (47)
Other income (expense) - net 1,562 (1,278) 1,464 (20) 210 371
Income taxes 8,472 (3,283) (2,786) (98) -- --
--------- --------- --------- --------- --------- ---------
Income (loss) before
extraordinary item (10,905) 12,382 12,535 8,377 5,136 7,963
Extraordinary charge on early
extinguishment of debt,
net of tax benefit -- -- (1,512) -- -- --
--------- --------- --------- --------- --------- ---------
Net income (loss) (10,905) 12,382 11,023 8,377 5,136 7,963
Weighted average shares
outstanding 39,900 39,900 31,275 30,000 30,000 30,000
--------- --------- --------- --------- --------- ---------
Income (loss) per common share $ (0.27) $ 0.31 $ 0.35 $ 0.28 $ 0.17 $ 0.27
========= ========= ========= ========= ========= =========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
----------------------------------------------- ----------
1999 1998 1997 1996 1996
----------------------------------------------- ----------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital $ 149,849 $ 164,246 $ 161,890 $ 38,658 $ 35,461
Total assets 217,093 239,166 251,074 58,671 46,631
Long-term debt and obligation
under capital lease less
current installments -- 319 586 522 --
Shareholder's equity 201,300 210,259 198,406 24,903 16,526
</TABLE>
(1) The Company acquired the business and operations of the Downhole
Products Division on March 31, 1997 and Cardwell International, Ltd. on
April 17, 1997.
(2) Amortization of negative goodwill decreased cost of goods sold in all
periods. Negative goodwill was fully amortized as of September 30,
1999. See Notes to our Consolidated Financial Statements and
"Management's Discussion and Analysis of Financial Condition and
Results of Operations - Overview"
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.
10
<PAGE> 11
OVERVIEW
General
We manufacture land-based drilling and well-servicing rigs and rig
component parts for use in the domestic and international markets. The condition
of the oil and gas industry and worldwide levels of exploration, development and
production activity, including the number of oil and gas wells being drilled,
the depth and drilling conditions of such wells, the number of well completions
and the level of workover activity have a substantial impact on our revenues.
Exploration, development and production activity is largely dependent on the
prevailing view of future oil and natural gas prices, which have been
significantly volatile for the last 20 years. Oil and natural gas prices are
influenced by factors affecting the supply of and demand for oil and gas,
including the level of drilling activity, worldwide economic activity, interest
rates and the cost of capital, environmental regulation, tax policies, political
requirements of national governments, coordination by OPEC and the cost of
producing oil and gas. Demand for our products in certain emerging market
countries may be greatly influenced by their need for internal development,
energy self-sufficiency or hard currency earnings rather than the conventional
factors relating to the price of oil and natural gas.
During the latter half of 1998 and the first quarter of 1999, declining
oil prices coupled with the deteriorating economic conditions in Russia and
other emerging markets resulted in a sharp drop in customer spending and a
dramatically lower rig utilization rate worldwide. Our revenues, operating
income and backlog have been adversely affected by these events and the value of
our receivables and inventory may be further affected by these events. As a
result of recent increases in oil prices during the second, third and fourth
quarters of 1999, consumer spending and rig utilization rates have begun to
increase. Although results of operations for the latter half of 1999 reflect
this increase in consumer spending, results of operations for 1999 are still
substantially reduced from the results for 1998 and still reflect the adverse
market conditions prevalent during the first six months of 1999. In addition,
our gross margins for 1999 were also adversely affected by restructuring costs
and other special charges of $5.6 million (after-tax) in the second quarter of
1999, and an inventory valuation adjustment of $5.9 million in the fourth
quarter of 1999.
During 1999, we have implemented a variety of measures to consolidate
our manufacturing operations in Pampa and Houston, Texas and other cost
reduction programs. These actions reduced our workforce during 1999 by a total
of 744 employees. On an ongoing basis, we will continue to consider the
possibility of further consolidation and cost reduction measures but we cannot
give any assurance that these or any other measures will be sufficient to offset
the negative impact of the existing industry conditions.
Foreign Exchange Transactions
We have attempted to limit our exposure to foreign currency
fluctuations. Sales denominated in foreign currencies are made only by the
Downhole Products segment. With the exception of our Canadian subsidiary, we
maintain our cash, cash equivalents and investments in U.S. dollar denominated
accounts (except to the extent needed for local operating expenses). We have not
engaged in and do not currently intend to engage in any significant hedging or
currency trading transactions to compensate for adverse currency fluctuations
among foreign currencies.
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 upon their fair values at the date of the acquisition
as follows (in thousands):
11
<PAGE> 12
<TABLE>
<S> <C>
Inventories.............................................................. $ 33,287
Other current assets..................................................... 7,743
Current liabilities...................................................... (7,372)
Accrued retirement benefits.............................................. (1,821)
Negative goodwill........................................................ (26,837)
----------
$ 5,000
==========
</TABLE>
Negative goodwill was being amortized using the straight-line method
over five years ended September 19, 1999. See Note 1 to the Consolidated
Financial Statements. Amortization of negative goodwill decreased cost of goods
sold by $4.0 million in fiscal year ended December 31, 1999 and by $5.4 million
in each of the fiscal years ended December 31, 1998 and 1997 and the year ended
March 31, 1996.
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 14 to our Consolidated
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.
Results of Segment Operations
The following discussion of the results of operations of our oil field
equipment, downhole products 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 information that reconciles the discussion of the results of operations
of the individual segments to our Consolidated Financial Statements is as
follows:
12
<PAGE> 13
<TABLE>
<CAPTION>
THE COMPANY
- -----------------------------------------------------------------------------------
TWELVE MONTHS
ENDED
DECEMBER 31,
- -----------------------------------------------------------------------------------
1999 1998 1997
-------- -------- ---------
<S> <C> <C> <C>
Revenues
Oil field equipment........... $ 44,365 $ 88,395 $106,529
Downhole Products............. 42,892 76,249 65,336
Specialty steel............... 4,933 10,401 13,501
-------- -------- --------
Total....................... $ 92,190 $175,045 $185,366
======== ======== ========
Segment operating income (loss)
Oil field
equipment.................... $ (5,850) $ 13,533 $ 15,617
Downhole Products............ 2,543 17,186 11,869
Specialty steel.............. 722 1,668 4,503
-------- -------- --------
Total...................... (2,585) 32,387 31,989
Corporate overhead
and unallocated
administrative
expenses..................... (18,982) (18,606) (13,862)
Restructuring Charge............ (1,779) (590) --
Amortization of negative
goodwill................... 4,026 5,367 5,370
Amortization of goodwill..... (1,254) (1,255) 878
--------- --------- --------
Operating income (loss)...... $(20,576) $ 17,303 $ 22,619
========= ======== ========
</TABLE>
FISCAL YEAR ENDED DECEMBER 31, 1999 COMPARED TO FISCAL YEAR ENDED DECEMBER 31,
1998
Oil Field Equipment
The economic and financial turmoil in Russia and the Asia-Pacific
region together with the downward turn in oil prices during the latter half of
1998 and the beginning of 1999 led to a sharp decrease in the demand for our
products. Decreased sales of rig packages resulted in decreases in revenues and
operating income for 1999. As a result of decreased revenue, our gross margin
was: (6.1)% for 1999 as compared to 19.5% for 1998. In addition, our gross
margin for 1999 was negatively affected by: a $3.0 million write-off for
pre-contract engineering and design costs and a $1.3 million charge for contract
adjustments, each of which occurred during the second quarter of 1999.
Downhole Products
As a result of decreased sales volume, our gross margin was
significantly lower for 1999: 18.0% as compared to 33.0% for 1998. In addition,
our gross margin for 1999 was adversely affected by an inventory valuation
adjustment of $2.0 million during the second quarter of 1999 and $5.9 million in
the fourth quarter of 1999.
Specialty Steel
Reduced demand caused by an industry-wide recession significantly
impacted our revenues and operating income. However, our gross margins remained
almost unchanged at 17.4% for 1999 versus 17.5% for 1998.
Corporate and Administrative Expenses
The $0.4 million increase in corporate and administrative expenses for
1999, as compared to 1998, occurred as a result of a $3.5 million increase in
corporate costs offset by a $3.1 million decrease in administrative expenses.
Corporate expenses increased in 1999 in the areas of professional services,
promotion, and employee-related costs. The Oilfield Equipment Division
experienced a net decrease in administrative expenses of $2.6 million as a
result of a reduction of salaries and related expenses of $1.8 million and the
reduction of other costs by $0.8 million. The Downhole Products Division
decreased its expenses by $1.7 million, which resulted primarily from a
reduction of its administrative staff. This decrease was offset by a $1.2
million provision for doubtful accounts recorded in the second quarter of 1999.
Restructuring Charge
The Company incurred a restructuring charge of $1.8 million in 1999,
and $0.6 million in 1998 in connection with its restructuring program.
Accordingly, the Company consolidated manufacturing operations, closing two
plants in 1999, and reduced its workforce.
13
<PAGE> 14
Other Income (Expense)
Other income for 1999 reflected a gain of $1.6 million compared to a
loss of $1.3 million in 1998, which reflected a $0.7 million gain on
investments in marketable securities in 1999, compared to a loss of $2.7 million
in 1998.
Income Taxes
The change in the effective income tax rate to (43.7)% for 1999 from
21.0% for 1998 is attributable primarily to the 1999 net operating loss and the
recognition of a deferred tax benefit of $5.3 million in 1999.
FISCAL YEAR ENDED DECEMBER 31, 1998 COMPARED TO FISCAL YEAR ENDED DECEMBER 31,
1997
Oil Field Equipment
The economic and financial turmoil in Russia and the Asia-Pacific
region together with the downward turn in oil prices 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.
Downhole Products
The downward trend in the oil industry prevailing in the latter half of
1998 had a negative impact on our customers' demands for fishing tools and power
equipment. Accordingly, our revenues for 1998 decreased compared to 1997. 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
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.
14
<PAGE> 15
Corporate Administrative and Interest Expenses
The increase in corporate administrative expenses was due primarily to
the inclusion of corporate administrative expenses for our Downhole Products
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 mainly because we repaid our debt with the proceeds from the initial
public offering of our Common Stock.
Restucturing Charge
The Company incurred a restructuring charge of $0.6 million in 1998 in
connection with its restructuring program.
Other Income (Expense)
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.
Income Taxes
The increase in the effective income tax rate to 21.0% for 1998 from
18.2% for 1997 is attributable primarily to an increase in non-deductible
goodwill amortization and the change in the valuation allowance for deferred tax
assets.
RECENT ACCOUNTING PRONOUNCEMENTS
Statement of Financial Accounting Standards No. 133, Accounting for
Derivative Instruments and Hedging Activities, was issued by the Financial
Accounting Standards Board in June 1998. SFAS 133 standardizes the accounting
for derivative instruments, including derivative instruments embedded in other
contracts. Under the standard, entities are required to carry all derivative
instruments in the statement of financial position at fair value. The accounting
for changes in the fair value (i.e., gains or losses) of a derivative instrument
depends on whether it has been designated and qualifies as part of a hedging
relationship and, if so, on the reason for holding it. If specified conditions
are met, entities may elect to designate a derivative instrument as a hedge of
exposures to changes in fair values, cash flows, or foreign currencies. If the
hedged exposure is a fair value exposure, the gain or loss on the derivative
instrument is recognized in earnings in the period of change together with the
offsetting loss or gain on the hedged item attributable to the risk being
hedged. If the hedged exposure is a cash flow exposure the effective portion of
the gain or loss on the derivative instrument is reported initially as a
component of other comprehensive income (outside earnings) and subsequently
reclassified into earnings when the forecasted transaction affects earnings. Any
amounts excluded from the assessment of hedge effectiveness, as well as the
ineffective portion of the gain or loss, is reported in earnings immediately.
Accounting for foreign currency hedges is similar to the accounting for fair
value and cash flow hedges. If the derivative instrument is not designated as a
hedge, the gain or loss is recognized in earnings in the period of change.
The Company will adopt SFAS 133 beginning January 1, 2001. The Company
has not yet determined the impact that SFAS 133 will have on consolidated
financial statements. Management believes that the determination will not be
meaningful until closer to the date of initial adoption.
15
<PAGE> 16
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1999, we had cash and cash equivalents and marketable
securities of $50.4 million, compared to $40.5 million at December 31, 1998. Our
working capital was $149.8 million compared to $164.2 million at December 31,
1998. This decrease in working capital resulted from a decrease in accounts
receivable, inventories, and other current assets, partially offset by an
increase in cash and cash equivalents and marketable securities and income taxes
receivable and a decrease in current liabilities.
We believe that our balance sheet, significant liquidity and cash flow
from operations will be sufficient to meet our short term and long term
liquidity needs. We believe that any credit facilities that we may need in the
future will be available on commercially acceptable terms, though there can be
no assurances in this regard.
Credit Facility
The Company had a $9.7 million revolving credit facility with a
maturity date of March 31, 2000. Amounts outstanding under the revolving credit
facility were secured by substantially all of the assets of the Company and
accrued interest at a rate per annum equal to the one, two, three or six-month
LIBOR plus 2-3/4%. The revolving credit facility agreement contained provisions
that restricted incurrence of indebtedness, guarantees, acquisitions, and
distributions to shareholders, and required the Company to meet specified
financial maintenance tests.
On December 29, 1999, the revolving credit facility was replaced with a
new $10.0 million revolving credit facility, which matures on December 28, 2000
and provides exclusively for bank guarantees and commercial and standby letters
of credit. The new revolving credit facility agreement contains provisions that
limit liens on accounts receivables, inventory and related general intangibles
and that require the Company to meet specified financial maintenance tests. At
December 31, 1999, approximately $5.9 million was available for bank guarantees
and letters of credit under the new revolving credit facility. The Company had
no outstanding indebtedness at December 31, 1999.
YEAR 2000
We did not experience any significant malfunctions or errors in our
operating or business systems when the date changed from 1999 to 2000. Based on
operations since January 1, 2000, we do not expect any significant impact to our
ongoing business as a result of the "Year 2000 issue." However, it is possible
that the full impact of the date change, which was of concern due to computer
programs that use two digits instead of four digits to define years, has not
been fully recognized. For example, it is possible that Year 2000 or similar
issues may occur with billing, payroll, or financial closings at month,
quarterly, or year end. We believe that any such problems are likely to be minor
and correctable. In addition, we could still be negatively affected if our
customers or suppliers are adversely affected by the Year 2000 or similar
issues. We currently are not aware of any significant Year 2000 or similar
problems that have arisen for our customers or suppliers.
We expended approximately $0.5 million on Year 2000 readiness efforts
from 1997 to 1999. These efforts included replacing some outdated, noncompliant
hardware and noncompliant software as well as identifying and remediating Year
2000 problems. These efforts did not include, however, certain ERP systems
upgrades, which were done in the ordinary course of business during 1998 and
1999 and which had the added benefit of resolving Year 2000 issues with respect
to those systems.
CAPITAL EXPENDITURES
Capital expenditures for 1999 totaled approximately $2.2 million,
essentially all of which was spent on additions to our rental tool fleet and
implementation of new software at the Downhole Products Division.
For 2000, we have budgeted capital expenditures of $3.5 million,
including amounts primarily to be used for the purchase of rental tools for the
Downhole Products Division and manufacturing equipment for the Oilfield
16
<PAGE> 17
Equipment Division. Capital expenditures are expected to be funded with
available cash and cash flow from operations.
INFORMATION CONCERNING FORWARD-LOOKING STATEMENTS
With the exception of the historical information contained in this
report, the matters described herein contain forward-looking statements that
involve risk and uncertainties including but not limited to economic and
competitive factors outside of our control. These factors more specifically
include:
- dependence on the oil and gas industry;
- competition from various entities;
- the impact of government regulations;
- the instability of certain foreign economies (including Russia
and countries of the Asia-Pacific region);
- currency fluctuations;
- risks of expropriation; and
- changes in law affecting international trade and investment.
Forward-looking statements are typically identified by the words "believe,"
"expect," "anticipate" "intend," "estimate," and similar expressions. Readers
are cautioned not to place undue reliance on these forward-looking statements,
which speak only as of their dates.
INFLATION
Inflation has not had a material impact on our operating and occupancy
costs.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
This discussion of our exposure to market risks and our risk-management
activities includes forward looking statements. These forward looking statements
involve risks and uncertainties, including economic and competitive factors
outside our control.
Our primary risk exposures come from interest rate risks, foreign
exchange rate risks, and equity price risks. Our exposure to interest rate risks
are minimal with respect to indebtedness. We repaid substantially all our
outstanding indebtedness in November 1997. However, at December 31, 1999, we had
approximately $35.7 million of cash in interest bearing accounts. The rate of
return on these accounts will vary with the prevailing interest rates. We do not
engage in any significant interest rate swaps or other derivative activities
designed to limit our exposure to changes in interest rates.
Our direct exposure to foreign exchange risks is minimal. Except as
discussed above in the "Management Discussion and Analysis of Financial
Condition and Results of Operations" with respect to our Downhole Products
Division, all of our sales are denominated in U.S. dollars. However, foreign
exchange rate fluctuations may affect our revenues indirectly to the extent that
a stronger U.S. dollar affects our ability to compete on the basis of price. We
do not engage in any significant hedging or currency trading activities to limit
our sensitivity to changes in foreign exchange rates and/or interest rates.
At December 31, 1999, we had marketable securities of $14.7 million.
From time to time, we purchase equitable securities for trading purposes.
Fluctuations in interest rates and equity prices may adversely affect the value
of our marketable securities.
We do not believe there has been any material change in the market
risks faced by us since the end of 1999.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Index to Consolidated Financial Statements and Exhibits, which
appears on Page F-1 hereof.
17
<PAGE> 18
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The directors and executive officers of the Company, and their ages and
positions with the Company as of March 30, 2000, are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Hushang Ansary 72 Chairman of the Board and Chief Executive Officer
Daniel G. Moriarty 65 Director
Abdallah A. Andrawos 44 Director and Secretary
Nina Ansary 33 Director
Frank C. Carlucci 69 Director
Dr. Philip David 68 Director
Robert L. Hargrave 58 Director, Vice-Chairman of the Board of Directors, Chief
Accounting and Financial Officer
Richard D. Higginbotham 62 Director
John D. Macomber 72 Director
Edward L. Palmer 82 Director
Stephen J. Solarz 59 Director
Gary W. Stratulate 43 Director, President and Chief Operating Officer
Alexander B. Trowbridge 70 Director
J. Robinson West 53 Director
</TABLE>
All executive officers of the Company serve at the pleasure of the 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 has served as Chairman of the Board of the Company since
September 1994 and was elected to the additional position of Chief Executive
Officer of the Company in March 1997. He has served as Chairman of SunResorts,
Ltd. N.V., a resort company, since 1986 and of Parman Capital Investments Ltd.,
a private investment company, since 1982.
DANIEL G. MORIARTY has been a director of the Company since 1994 and served
as President and Chief Executive Officer of the Company from 1994 to April 1997,
when he was elected Vice-Chairman of the Board of Directors. He resigned his
position as Vice-Chairman of the Board in July 1999. He served as President of
Cooper Manufacturing, a rig manufacturing division of Allied Production Corp.
from 1992 to 1994 and of Smith Energy Services, an oil field services division
of Allied Production Corp., from 1987 to 1992. From 1982 to 1987, Mr. Moriarty
served as the President and Chief Executive Officer of Leamco Services, Inc.
From 1960 to 1982, Mr. Moriarty held various positions with Halliburton Company,
rising from engineer to Vice President of the Central Region.
ABDALLAH A. ANDRAWOS has been Secretary of the Company since 1994 and a
director of the Company since April 1997. Since 1989 Mr. Andrawos has served as
Secretary and Chief Financial Officer of SunResorts, Ltd. N.V.
NINA ANSARY has served as a director of the Company since April 1997. Ms.
Ansary has been a Vice President of Parman Capital Investments Ltd., a private
investment company, since 1994. Prior to 1994, Ms. Ansary
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<PAGE> 19
was a student. Ms. Ansary is the daughter of Hushang Ansary and holds a masters
degree in political science from Columbia University.
FRANK C. CARLUCCI has been a director of the Company since 1994. Since
1993, Mr. Carlucci has served as Chairman and partner of The Carlyle Group, a
Washington, D.C. based merchant bank, and from 1989 to 1993 served as
Vice-Chairman and partner. Mr. Carlucci serves on the following corporate
boards: BDM International, Mass Mutual Life Insurance Company, Kaman
Corporation, Neurogen Corporation, Nortel Networks 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
is a self-employed investor. He 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.
ROBERT L. HARGRAVE has been a director, Vice-Chairman of the Board of
Directors and Chief Accounting and Financial Officer of the Company since July
1999. From 1995 until he came to the Company, Mr. Hargrave served as Chief
Executive Officer of Stewart & Stevenson Services, Inc., a company specializing
in the manufacture of engine driven power systems. He also served as its Chief
Financial Officer from 1980 to 1995.
RICHARD D. HIGGINBOTHAM has been a director of the Company since April
1997. He served as Executive Vice President --President of the Downhole
Products Group from April 1997 to September 1998. From 1988 until its
acquisition by 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. From 1988 to 1992, he was Chairman and President of the
Export-Import Bank of the United States, from 1973 to 1986 he was Chairman of
the Board and Chief Executive Officer of Celanese Corp. and from 1954 to 1973 he
was a managing partner of McKinsey & Co. He is also a director of The Brown
Group, Lehman Brothers Holdings Inc., Pilkington Ltd., and Textron 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, and prior thereto he served as Chairman of the Executive
Committee and a director of Citicorp and Citibank, N.A. He is also a director of
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. From 1975 to 1993, he was a member of the U.S. House of Representatives,
where he served on the Foreign Affairs, the Merchant Marine and Fisheries, the
Intelligence and the Joint Economic Committees. He is also a director of
Samsonite Corp., Santa Fe International Company and First Philippine Fund Inc.
GARY W. STRATULATE has been a director of the Company since April 1997. He
has served as President and Chief Operating Officer since July 1999. From
September 1998 to July 1999, he served as Executive Vice President--President of
the Downhole Products Group, from April 1997 to September 1998, as the President
of the Oilfield Equipment Group and from December 1994 to April 1997 as
Executive Vice President of the International Division of the Company. From June
1991 to May 1994, Mr. Stratulate was the Chief Operating Officer of Dreco Energy
Services Ltd., a manufacturer of oil field equipment.
ALEXANDER B. TROWBRIDGE has been a director of the Company since 1994.
Since 1990, Mr. Trowbridge has been the President of Trowbridge Partners, Inc.,
a management consulting firm. He was President of the National Association of
Manufacturers from 1980 through 1989. He is also a director of The Gillette
Company, New England Life Insurance Company, E.M. Warburg-Pincus Counsellors
Fund, Rouse Company, Sun
19
<PAGE> 20
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 forms were not filed in a timely manner under Section 16(a):
- With respect to Munawar Hidayatallah, a former director and officer of
the company, a Form 4 listing two transactions that occurred in July, 1999 was
filed late. In addition, a Form 4 listing one transaction that occurred in
August, 1999 was filed late.
- With respect to Robert Hargrave, a Form 3 listing a single transaction
was filed late.
- With respect to Hushang Ansary, a Form 5 listing four transactions was
filed late.
Other than as noted above, the Company believes that during such fiscal year no
other forms for any director, officer, beneficial owner of more than ten percent
of any class of equity securities of the Company required to be filed by Section
16(a) of the Exchange Act were filed late.
ITEM 11. EXECUTIVE COMPENSATION
EXECUTIVE COMPENSATION
The following table sets forth certain information regarding the
compensation paid by the Company to the 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, 1999 (collectively, the "Named Executive
Officers"):
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION
- ----------------------------------------------------------------------------------------------------------------------
OTHER ANNUAL ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION (1) COMPENSATION
- --------------------------- ---- ------ ----- ---------------- ------------
<S> <C> <C> <C> <C> <C>
Hushang Ansary,
Chairman and Chief Executive Officer 1999 $913,500 $875,000(2) --- $ 12,166(3)
1998 $900,000 --- --- ---
1997 --- --- $17,000 ---
- ----------------------------------------------------------------------------------------------------------------------
Daniel G. Moriarty,
Vice-Chairman of the Board(4) 1999 $132,113 --- $14,500 $ 11,408(3)
1998 $204,346 $100,000 --- $ 13,800(3)
1997 $202,516 $25,000 $17,000 $ 13,908(3)
- ----------------------------------------------------------------------------------------------------------------------
Munawar H. Hidayatallah,
Executive Vice President and Chief
Financial Officer(5) 1999 $206,533 $313,300 --- $113,056(3)(6)
1998 $318,450 $200,000 --- $ 13,800(3)
1997 $316,088 $100,000 $7,000 $ 14,164(3)
- ----------------------------------------------------------------------------------------------------------------------
Robert L. Hargrave, Vice Chairman of the
Board and Chief Accounting and Financial
Officer (7) 1999 $138,904 --- --- $ 444(8)
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
20
<PAGE> 21
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION
- ----------------------------------------------------------------------------------------------------------------------
OTHER ANNUAL ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION (1) COMPENSATION
- --------------------------- ---- ------ ----- ---------------- ------------
<S> <C> <C> <C> <C> <C>
Gary W. Stratulate,
President and Chief Operating Officer 1999 $252,169 --- --- $ 13,500(3)
1998 $248,442 $200,000 --- $ 13,800(3)
1997 $246,087 $125,000 $8,500 $ 14,104(3)
- ----------------------------------------------------------------------------------------------------------------------
Arthur C. Teichgraeber,
Executive Vice President -- President
of Oilfield Equipment Group(9) 1999 $150,525 --- --- $ 12,213(3)
1998 $272,759 $100,000 $45,750(10) $ 9,074(3)
1997 $207,564 $50,000 $8,500 $498,110(11)
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
- ----------------------
(1) Unless otherwise noted, consists of directors' and participation fees
received by the Named Executive Officers prior to the Company's initial
offering in November 1997 and, in the case of Mr. Moriarty's other
annual compensation for 1999, directors' fees received since July 1999.
(2) Includes $200,000, which was paid pursuant to the incentive plan
approved by the Compensation Committee of the Board of Directors on
July 15, 1999 and is subject to adjustment. See "-- Other Compensation
Plans or Programs."
(3) Includes premiums paid for life insurance and contributions
under the Company's 401K Plan.
(4) Mr. Moriarty resigned from his position in July 1999.
(5) Mr. Hidayatallah resigned from his position in July 1999.
(6) Includes consulting fees paid to Mr. Hidayatallah after he left the
Company.
(7) Mr. Hargrave was appointed Chief Accounting and Financial Officer and
Vice-Chairman of the Board on July 15, 1999 and his annual salary for 1
reflects compensation for the period from July 15, 1999 to December 31,
(8) Consists of premiums paid for life insurance.
(9) Mr. Teichgraeber left the Company in July 1999.
(10) Consists of educational assistance in the amount of $18,750 and housing
reimbursement in the amount of $27,500.
(11) Consists of license fees paid by Cardwell (prior to our acquisition of
Cardwell) to Mr. Teichgraeber and to certain entities directly or
indirectly owned by Mr. Teichgraeber.
Shown below is further information with respect to grants of stock
options pursuant to our Equity Incentive Plan during 1999 to the Named Executive
Officers:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
OPTION GRANTS IN 1999
- --------------------------------------------------------------------------------------------------------------------
NUMBER OF % OF TOTAL
SECURITIES OPTIONS POTENTIAL REALIZABLE VALUE AT
UNDERLYING GRANTED TO EXERCISE ASSUMED ANNUAL RATES OF
OPTIONS EMPLOYEES PRICE OR STOCK PRICE APPRECIATION FOR
NAME GRANTED(1) IN 1999(2) BASE PRICE EXPIRATION OPTION TERM
- ----------------------- ---------- ---------- ---------- -------------- ------------------------------
5% ($) 10% ($)
- ----------------------- ---------- ---------- ---------- -------------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Hushang Ansary --- --- --- --- --- ---
Daniel G. Moriarty 45,000 5.10% $3.875 March 15, 2009 $109,664 $277,909
</TABLE>
21
<PAGE> 22
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
OPTION GRANTS IN 1999
- --------------------------------------------------------------------------------------------------------------------
NUMBER OF % OF TOTAL
SECURITIES OPTIONS POTENTIAL REALIZABLE VALUE AT
UNDERLYING GRANTED TO EXERCISE ASSUMED ANNUAL RATES OF
OPTIONS EMPLOYEES PRICE OR STOCK PRICE APPRECIATION FOR
NAME GRANTED(1) IN 1999(2) BASE PRICE EXPIRATION OPTION TERM
- ----------------------- ---------- ---------- ---------- -------------- ------------------------------
5% ($) 10% ($)
- ----------------------- ---------- ---------- ---------- -------------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Munawar H. Hidayatallah 126,000 14.29% $3.875 March 15, 2009 $307,058 $778,145
Robert L. Hargrave 50,000 5.67% $5.000 July 15, 2009 $157,224 $398,436
Gary W. Stratulate 45,000 5.10% $3.875 March 15, 2009 $109,664 $277,909
Arthur C. Teichgraeber --- --- --- --- --- ---
</TABLE>
--------------------
(1) The options of Messrs. Moriarty, Stratulate and Hidayatallah are
immediately exercisable. The options of Mr. Hargrave become exercisable
in three equal annual installments beginning on July 15, 1999 for so
long as Mr. Hargrave remains in continuous employment with the Company.
In addition, Mr. Hargrave's options become immediately exercisable upon
his death or disability. All options granted in 1999 expire ten years
from the date of grant and are subject to early expiration upon
termination of employment by the optionee or upon termination of
employment by the Company for cause.
(2) Calculated on the basis of an aggregate grant of 901,000 options to
purchase shares of Common Stock to Named Executive Officers and
employees of the Company. All options granted pursuant to our Equity
Incentive Plan will vest upon certain changes in control, including the
NOI Merger.
The following table sets forth information regarding the value of the stock
options granted on December 14, 1998, March 15, 1999 and July 15, 1999 to the
Named Executive Officers (no stock options were exercised by any of the Named
Executive Officers in 1999):
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
OPTION VALUES AT DECEMBER 31, 1999
- --------------------------------------------------------------------------------------------------------------------
NAME VALUE OF UNEXERCISED
---- NUMBER OF SECURITIES UNDERLYING IN-THE-MONEY
UNEXERCISED OPTIONS AT OPTIONS AT
DECEMBER 31, 1999 DECEMBER 31, 1999(1)
(EXERCISABLE/UNEXERCISABLE) (EXERCISABLE/UNEXERCISABLE)
-------------------------------- ---------------------------
<S> <C> <C>
Hushang Ansary 816,667/408,333 $357,292/$178,646
Daniel G. Moriarty(2) 85,000/20,000 $23,125/$8,750
Munawar H. Hidayatallah(2) 159,333/16,667 $30,333/$7,292
Robert L. Hargrave 16,667/33,333 ---
Gary W. Stratulate 75,000/15,000 $18,750/$6,563
Arthur C. Teichgraeber(3) --- ---
</TABLE>
- ---------------
(1) Market price has been determined based on the NYSE closing price of the
Common Stock on December 31, 1999.
(2) The forfeiture provisions of Messrs. Hidayatallah's and Moriarty's
options were retroactively waived by the Board of Directors as of
January 4, 2000.
22
<PAGE> 23
(3) Mr. Teichgraeber's options were allowed to expire under an agreement
with the Company after he resigned July 15, 1999.
OTHER COMPENSATION PLANS OR PROGRAMS
The Company has a cash bonus plan pursuant to which the Company will
pay to Mr. Ansary a cash bonus equal to 4% of the Company's pretax income at the
end of each fiscal year and will reserve an additional 4% of the Company's
pretax income at the end of each fiscal year for cash bonuses to be paid to
employees of the Company upon the recommendation of the Chairman of the Board
and approval thereof by the Compensation Committee of the Board of Directors.
In addition, on July 15, 1999, the Compensation Committee of the Board
of Directors approved an incentive plan for Mr. Ansary on the basis of the
annualized returns on the Company's investments of its excess cash in marketable
securities.
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
Incentive Plan described above.
DIRECTOR COMPENSATION
Directors who are not also officers or employees of the Company are
paid annual fees equal to $30,000 plus $1,000 for each Board of Directors
meeting (but not committee meeting) attended.
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
None.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the
beneficial ownership of Common Stock as of March 24, 2000 by (i) each person
that owns beneficially more than 5% of the Common Stock, (ii) each director and
Named Executive Officer (as defined) and (iii) all directors and executive
officers of the Company as a group. For purposes of the table, a person or group
of persons is deemed to have "beneficial ownership" of any shares as of a given
date on which such person has the right to acquire such shares within 60 days
after such given date.
<TABLE>
<CAPTION>
ADDRESS OF BENEFICIAL OWNER OF NUMBER OF PERCENTAGE OF
DIRECTORS AND EXECUTIVE OFFICERS GREATER THAN 5% SHARES OWNED SHARES OWNED (1)
- -------------------------------- --------------- ------------ ----------------
<S> <C> <C> <C>
Hushang Ansary IRI International Corporation 22,664,667(2) 54.41%
1000 Louisiana, Suite 5900
Houston, Texas 77002
Daniel G. Moriarty 98,700(3) *
Abdallah A. Andrawos 51,666(4) *
Nina Ansary IRI International Corporation 3,016,667(5) 7.24%
1000 Louisiana, Suite 5900
Houston, Texas 77002
Frank C. Carlucci 1,060,667(5) 2.55%
</TABLE>
23
<PAGE> 24
<TABLE>
<CAPTION>
ADDRESS OF BENEFICIAL OWNER OF NUMBER OF PERCENTAGE OF
DIRECTORS AND EXECUTIVE OFFICERS GREATER THAN 5% SHARES OWNED SHARES OWNED (1)
- -------------------------------- --------------- ------------ ----------------
<S> <C> <C> <C>
Dr. Philip David 1,821,667(3)(6) 4.37%
Robert L. Hargrave 38,333(7) *
Munawar H. Hidayatallah 159,333(4)(8) *
Richard D. Higginbotham 15,333(9) *
John D. Macomber 16,667(4) *
Edward L. Palmer 16,667(4) *
Stephen J. Solarz 16,667(4) *
Gary W. Stratulate 113,000(10) *
Alexander B. Trowbridge 16,667(4) *
Arthur C. Teichgraeber 0(8) *
J. Robinson West 16,667(4) *
All directors and executive officers as
a group (16 persons) 26,106,701(2)(11) 62.68%
CERTAIN OTHER HOLDERS
- ---------------------
Nader Ansary IRI International Corporation 3,000,000(2) 7.20%
1000 Louisiana, Suite 5900
Houston, Texas 77002
State of Wisconsin Investment Board P.O. Box 7842 2,306,100 5.54%
121 E. Wilson Street
Madison, WI 53707
</TABLE>
*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 immediate family, and a
private charitable foundation controlled by Mr. Ansary directly own in
the aggregate 15,848,000 shares of Common Stock, and options to
purchase 800,000 additional shares. This total number also includes
3,000,000 shares of Common Stock owned by Nina Ansary, as well as
options to purchase an additional 16,667 shares, and 3,000,000 shares
owned by Nader Ansary. Mr. Ansary disclaims beneficial ownership of the
shares held by his son, his daughter, the Ansary Family Trust and the
Ansary Foundation.
(3) This total number includes options to purchase 85,000 shares. Mr.
Moriarty jointly owns 13,700 shares with his spouse.
(4) This total amount represents options to purchase shares.
(5) This total number includes options to purchase 16,667 shares.
(6) This total number includes 500,000 shares of Common Stock owned by Dr.
David's spouse, of which he disclaims beneficial ownership. It also
includes options to purchase 16,667 shares.
(7) This total number includes options to purchase 33,333 shares. Mr.
Hargrave jointly owns 5,000 shares with his spouse.
(8) This individual is no longer employed by the Company.
(9) This total number includes options to purchase 13,333 shares.
24
<PAGE> 25
(10) This total number includes options to purchase 95,000 shares.
(11) This number includes options to purchase 1,370,993 shares of Common
Stock granted pursuant to the Incentive Plan (as defined).
CHANGE IN CONTROL
See the discussion under Item 1 relating to the NOI Merger. The consummation of
the NOI Merger will trigger a change in control at a future date, though no
assurances can be given that the NOI Merger will be consummated.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Mr. Carlucci, an outside director of the Company, has an oral agreement
with Mr. Ansary regarding a potential contract between the Company and a
Ukrainian company. If Mr. Carlucci successfully assists the Company in
obtaining this contract, he will receive approximately 0.5% of the contract
amount.
Prior to the closing of the NOI Merger, Mr. Ansary has the right to
assume the lease of our executive offices located at Suite 5900, 1000 Louisiana
Houston, Texas. In addition, he has the right to purchase certain fixed assets,
fixtures, furniture and other items located at such offices for their aggregate
book value, and assume the retail automobile lease contracts for three
automobiles, for a total amount of approximately $570,000.
PART IV.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORT ON FORM 8-K
(a) Consolidated Financial Statements
See Index to Consolidated Financial Statements and Schedules which
appears on page F-1 hereof.
(b) Reports on Form 8-K
None.
(c) Exhibits
The exhibits listed on the Exhibit Index following the signature page
hereof are filed herewith in response to this Item.
25
<PAGE> 26
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/ Robert L. Hargrave
----------------------
Robert L. Hargrave, Chief Accounting and Financial
Officer and Vice Chairman of the Board of
Directors
Date: March 30, 2000
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>
<S> <C>
*
- -----------------------------------------------------
Hushang Ansary, Chairman of the Board and Date: March 30, 2000
Chief Executive Officer
*
- -----------------------------------------------------
Daniel G. Moriarty, Director Date: March 30, 2000
/s/ Robert L. Hargrave
- -----------------------------------------------------
Robert L. Hargrave, Vice Chairman of the Board, Date: March 30, 2000
and Chief Accounting and Financial Officer
*
- -----------------------------------------------------
Abdallah Andrawos, Secretary and Director Date: March 30, 2000
*
- -----------------------------------------------------
Gary W. Stratulate, President, Chief Operating Date: March 30, 2000
Officer and Director
*
- -----------------------------------------------------
Richard D. Higginbotham, Director Date: March 30, 2000
</TABLE>
26
<PAGE> 27
<TABLE>
<S> <C>
*
- -----------------------------------------------------
Nina Ansary, Director Date: March 30, 2000
*
- -----------------------------------------------------
Frank C. Carlucci, Director Date: March 30, 2000
*
- -----------------------------------------------------
Dr. Philip David, Director Date: March 30, 2000
*
- -----------------------------------------------------
John D. Macomber, Director Date: March 30, 2000
*
- -----------------------------------------------------
Edward L. Palmer, Director Date: March 30, 2000
*
- -----------------------------------------------------
Stephen J. Solarz, Director Date: March 30, 2000
*
- -----------------------------------------------------
Alexander B. Trowbridge, Director Date: March 30, 2000
*
- -----------------------------------------------------
J. Robinson West, Director Date: March 30, 2000
</TABLE>
27
<PAGE> 28
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- --------------------------------------------------------------------------------------------------------
<S> <C>
*3.1 Form of Restated Certificate of Incorporation of IRI International Corporation.
*3.2 Certificate of Ownership and Merger of ESI with the Company filed on October 14, 1997.
*3.3 Amended and Restated By-Laws of the Company.
*4.2 Form of Registration Rights Agreement between the Company and its current stockholders.
*10.1 Form of Indemnification Agreement among the Company and its officers and directors.
*10.2 Employment Agreement, dated as of April 17, 1997, between Cardwell and A.C. Teichgraeber and
joined by the Company.
10.3 Credit Agreement, dated as of December 29, 1999, among the Company and Bank One, Texas, N.A.
*10.5 Asset Purchase Agreement, dated as of January 20, 1997, by and among Bowen Tools,
Inc.-Delaware, Bowen, Air Liquide and the Company.
*10.6 Acquisition Agreement, dated as of March 20, 1997, by and among A.C. Teichgraeber,
Teichgraeber Family Limited Partnership, L.P., Arthur C. Teichgraeber Charitable Remainder
Trust, Greenwood Pipe and Threading Company, EDCO Drilling Company Inc. and the Company.
*10.7 Equity Incentive Plan of the Company.
*10.8 Form of Nonqualified Stock Option Agreement.
*10.9 Collective Bargaining Agreement dated as of July 8, 1997 between Bowen and General Drivers,
Warehousemen, Helpers, Production Maintenance and Service Employees, Local Union No. 968.
*21 List of Subsidiaries of the Company.
23.1 Consent of KPMG LLP.
24 Excerpts from Minutes of Board Meeting held on March 14, 2000 relating to Power of Attorney
for Robert L. Hargrave.
27.1 Financial Data Schedule of the Company.
* Exhibit incorporated herein by reference to the Registrant's registration statement on Form S-1
(Registration No. 333-31157) dated September 8, 1997, as amended.
</TABLE>
28
<PAGE> 29
IRI INTERNATIONAL CORPORATION AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Independent Auditors' Report...................................................................................F-2
Consolidated Balance Sheets -- December 31, 1999 and 1998......................................................F-3
Consolidated Statements of Operations -- Years ended December 31, 1999, 1998 and 1997..........................F-4
Consolidated Statements of Shareholders' Equity and Comprehensive Income -- Years ended December 31, 1999,
1998, and 1997.................................................................................................F-5
Consolidated Statements of Cash Flows -- Years ended December 31, 1999, 1998 and 1997..........................F-6
Notes to Consolidated Financial Statements.....................................................................F-7
</TABLE>
All schedules are omitted as the required information is applicable or
presented in the consolidated financial statements or related notes.
F-1
<PAGE> 30
INDEPENDENT AUDITORS' REPORT
To the Shareholders and Board of Directors
of IRI International Corporation:
We have audited the accompanying consolidated balance sheets of IRI
International Corporation and Subsidiaries as of December 31, 1999 and 1998, and
the related consolidated statements of operations, shareholders' equity and
comprehensive income, and cash flows for each of the years in the three-year
period ended December 31, 1999. 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 and Subsidiaries as of December 31, 1999 and 1998, and the results
of their operations and their cash flows for each of the years in the three-year
period ended December 31, 1999, in conformity with generally accepted accounting
principles.
KPMG LLP
Houston, Texas
March 8, 2000
F-2
<PAGE> 31
IRI INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)
<TABLE>
<CAPTION>
ASSETS December 31,
-------------------------------
1999 1998
---------- ---------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 35,688 $ 37,475
Marketable securities, at fair value (cost of $13,437 at
December 31, 1999 and $3,743 at December 31, 1998) 14,686 3,000
Accounts receivable, less allowance for doubtful accounts of $1,740 at
December 31, 1999 and $960 at December 31, 1998 14,476 29,147
Income tax receivable 2,717 -
Inventories 92,572 109,151
Costs and estimated earnings in excess of billings on uncompleted
contracts 1,400 4,429
Deferred income tax assets 1,388 -
Other current assets 1,242 2,381
--------- --------
Total current assets 164,169 185,583
Property, plant and equipment, net 45,697 49,192
Deferred income tax assets 3,945 -
Other assets 3,282 4,391
--------- --------
$ 217,093 $ 239,166
========= ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Notes payable $ 1 $ 16
Accounts payable 5,256 8,094
Accrued liabilities 4,332 6,018
Customer advances 1,938 3,303
Foreign income tax payable 996 -
Other liabilities 1,498 3,644
Current installments of obligation under capital lease 299 262
--------- --------
Total current liabilities 14,320 21,337
Negative goodwill, less accumulated amortization - 4,026
Obligation under capital lease, less current installments - 319
Accrued postretirement benefits other than pensions 1,427 1,562
Pension liability - 1,586
Other long-term liabilities 46 77
--------- --------
Total liabilities 15,793 28,907
--------- --------
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 1999 and 1998 399 399
Additional paid-in capital 168,884 168,514
Retained earnings 32,403 43,308
Accumulated other comprehensive loss (386) (1,962)
--------- --------
Total shareholders' equity 201,300 210,259
Commitments and contingencies
--------- --------
$ 217,093 $ 239,166
========= ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE> 32
IRI INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Years ended December 31,
-----------------------------------------------------------
1999 1998 1997
--------- ----------- -----------
<S> <C> <C> <C>
Revenues $ 92,190 $ 175,045 $ 185,366
Cost of goods sold 83,156 126,626 139,204
--------- ----------- -----------
Gross profit 9,034 48,419 46,162
Selling and administrative expense 27,831 30,526 23,543
Restructuring charge 1,779 590 -
--------- ----------- -----------
Operating income (loss) (20,576) 17,303 22,619
--------- ----------- -----------
Other income (expense):
Interest income 1,539 2,213 746
Interest expense (363) (360) (8,762)
Other, net 23 (3,491) 718
--------- ----------- -----------
1,199 (1,638) (7,298)
--------- ----------- -----------
Income (loss) before income taxes
and extraordinary item (19,377) 15,665 15,321
Income tax (expense) benefit 8,472 (3,283) (2,786)
--------- ----------- -----------
Income (loss) before extraordinary item (10,905) 12,382 12,535
Extraordinary item - extinguishment of debt
(net of tax benefit of $841) - - (1,512)
--------- ----------- -----------
Net income (loss) $(10,905) $ 12,382 $ 11,023
========= =========== ===========
Income (loss) per common share - basic
and diluted:
Income (loss) before extraordinary item (0.27) $ 0.31 $ 0.40
Extraordinary item - - (0.05)
--------- ----------- -----------
Net income (loss) per common share -
basic and diluted $ (0.27) $ 0.31 $ 0.35
========= =========== ===========
Weighted-average shares outstanding -
basic and diluted 39,900 39,900 31,275
========= =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE> 33
IRI INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY AND COMPREHENSIVE INCOME
(In thousands)
<TABLE>
<CAPTION>
Common Accumulated
stock Additional other Total
Preferred Common $0.01 par paid-in Retained comprehensive shareholders'
shares shares value capital earnings income (loss) equity
--------- ------ --------- ----------- --------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances at December 31, 1996 - 30,000 $ 300 $ 4,700 $ 19,903 $ - $ 24,903
Initial public offering, net of costs - 9,900 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 - 39,900 399 168,538 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 - 39,900 399 168,514 43,308 (1,962) 210,259
Other - - - 370 - - 370
Comprehensive loss:
Net loss - - - - (10,905) - (10,905)
Change in minimum pension liability
adjustment - - - - - 1,988 1,988
Foreign currency translation adjustment - - - - - (412) (412)
--------- ------ --------- ----------- --------- ------------- -------------
Total comprehensive loss (9,329)
--------- ------ --------- ---------- --------- ------------- ------------
Balance at December 31, 1999 - 39,900 $ 399 $ 168,884 $ 32,403 $ (386) $ 201,300
========= ====== ========= ========== ========= ============= ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE> 34
IRI INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Years ended December 31,
----------------------------------------
1999 1998 1997
----------- --------- ---------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (10,905) $ 12,382 $ 11,023
Adjustments to reconcile net income to net cash
provided by operations:
Extraordinary item - extinguishment of debt - - 1,512
Depreciation and amortization 5,069 4,032 4,871
Amortization of goodwill 1,254 1,255 880
Amortization of negative goodwill (4,026) (5,367) (5,367)
Change in employee benefit accounts (1,942) 728 129
Stock option compensation expense 370 499 -
Deferred income tax (5,333) - -
Gain on sale of assets (2) - (372)
Changes in assets and liabilities, net of effects of acquisitions:
Marketable securities (11,686) 5,218 (8,218)
Accounts receivable 14,671 3,983 (14,772)
Income tax receivable (2,717) - -
Inventories 16,579 (8,250) (21,058)
Other current assets 4,168 3,487 (6,918)
Other noncurrent assets 76 190 (113)
Accounts payable and accrued liabilities (4,524) (13,685) 17,682
Foreign income tax payable 996 - -
Customer advances and other liabilities (1,981) (5,631) 593
----------- --------- ---------
Net cash flows provided by (used in) operations 67 (1,159) (20,128)
----------- --------- ---------
Cash flows from investing activities:
Capital expenditures (2,178) (10,005) (5,755)
Proceeds from sale of assets 606 - 523
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 provided by (used in) investing activities (1,572) (10,005) (95,499)
----------- --------- ---------
Cash flows from financing activities:
Payments on capital lease obligation (282) (226) (312)
Proceeds from notes payable - - 113,482
Debt issuance costs - - (3,971)
Payments on notes payable - (85) 116,671)
Issuance of common stock - - 163,937
Other - (523) -
----------- --------- ---------
Net cash flows provided by (used in) financing activities (282) (834) 156,465
----------- --------- ---------
Increase (decrease) in cash and cash equivalents (1,787) (11,998) 40,838
Cash and cash equivalents at beginning of year 37,475 49,473 8,635
----------- --------- ---------
Cash and cash equivalents at end of year $ 35,688 $ 37,475 $ 49,473
----------- --------- ---------
Supplemental cash flow information:
Interest paid $ 363 $ 360 $ 8,762
=========== ========= =========
Income tax paid (refunded) $ (1,656) $ 5,219 $ 158
=========== ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE> 35
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 Ingersol-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). The Company also
manufactures and markets fishing and drilling tools, power and
wireline/pressure control equipment used in the drilling and completion
of oil and gas wells. 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 paid was applied
against nonmonentary 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 was being amortized using
the straight-line method over 5 years. Negative goodwill amortization
of $4.0 million for the year ended December 31, 1999 and $5.4 million
for each of the years ended December 31, 1998 and 1997, is included in
cost of goods sold in the accompanying consolidated 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.
(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 $35,700,000 and $37,500,000 at December
31, 1999 and 1998, 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, 1999, 1998 and 1997, the
Company entered into capital lease obligations of $-0-, $-0-
and $309,000, respectively.
F-7
<PAGE> 36
IRI INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(c) MARKETABLE SECURITIES
Marketable securities at December 31, 1999 and 1998 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 gains (losses) of $1,249,000 and $(743,000) are
included in other income for the years ended December 31, 1999
and 1998, respectively.
(d) INVENTORIES
Inventories are stated at the lower of cost or market. Cost is
determined using standard costs which approximate actual cost
on a first-in, first-out basis for all inventories excluding
oilfield equipment work-in-process, parts and raw materials,
which are recorded at actual cost on a first-in, first-out
basis. Work-in-process inventories related to fixed price
contracts are stated at the accumulated cost of material,
labor and manufacturing overhead, less the estimated costs of
units delivered.
(e) PROPERTY, PLANT AND EQUIPMENT
Depreciation of property, plant and equipment is provided over
the estimated service lives of assets principally using the
straight-line method. Maintenance, repairs and minor
replacements are charged to operations as incurred; major
repairs, replacements or improvements are capitalized.
Long-lived assets and certain identifiable intangible assets
are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset
may not be recoverable. Recoverability of assets to be held
and used is measured by a comparison of the carrying amount 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.
F-8
<PAGE> 37
IRI INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(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, 1999 are $4,812,000 and $3,412,000,
respectively, related to uncompleted contracts ($1,400,000,
net) at December 31, 1999. Included in revenues and cost of
goods sold for the year ended December 31, 1998 are
$14,218,000 and $9,789,0000, respectively, related to
uncompleted contracts ($4,429,000 net) at December 31, 1998.
(h) INCOME (LOSS) PER COMMON SHARE
Basic income (loss) per common share is computed by dividing
net income (loss) available to common shareholders by the
weighted average number of common shares outstanding for the
period. Diluted income per common share 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 income (loss) per
common share are the same. Options outstanding at December 31,
1998 and 1997 are antidilutive as the exercise price is
greater than the average market price during 1998 and 1997,
respectively. Options outstanding at December 31, 1999 are
antidilutive due to the net loss incurred during the year.
Securities excluded from the computation of diluted income per
common share for 1999 that could be potentially dilutive in
the future consist of options to purchase 2,426,000 shares of
common stock at December 31, 1999.
(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, thus the carrying amount
approximates estimated fair value.
F-9
<PAGE> 38
IRI INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
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 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 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 statement information has
been reclassified to conform to the requirements of SFAS No.
130.
(l) RECENT ACCOUNTING PRONOUNCEMENTS
Statement of Financial Accounting Standards No. 133,
Accounting for Derivative Instruments and Hedging Activities,
was issued by the Financial Accounting Standards Board in June
1998. SFAS 133 standardizes the accounting for derivative
instruments, including derivative instruments embedded in
other contracts. Under the standard, entities are required to
carry all derivative instruments in the statement of financial
position at fair value. The accounting for changes in the fair
value (i.e., gains or losses) of a derivative instrument
depends on whether it has been designated and qualifies as
part of a hedging relationship and, if so, on the reason for
holding it. If specified conditions are met, entities may
elect to designate a derivative instrument as a hedge of
exposures to changes in fair values, cash flows, or foreign
currencies. If the hedged exposure is a fair value exposure,
the gain or loss on the derivative instrument is recognized in
earnings in the period of change together with the offsetting
loss or gain on the hedged item attributable to the risk being
hedged. If the hedged exposure is a cash flow exposure, the
effective portion of the gain or loss on the derivative
instrument is reported initially as a component of other
comprehensive income (outside earnings) and subsequently
F-10
<PAGE> 39
IRI INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
reclassified into earnings when the forecasted transaction
affects earnings. Any amounts excluded from the assessment of
hedge effectiveness, as well as the ineffective portion of the
gain or loss, is reported in earnings immediately. Accounting
for foreign currency hedges is similar to the accounting for
fair value and cash flow hedges. If the derivative instrument
is not designated as a hedge, the gain or loss is recognized
in earnings in the period of change.
The Company will adopt SFAS 133 beginning January 1, 2001. The
Company has not yet determined the impact that SFAS 133 will
have on the financial statements. Management believes that the
determination will not be meaningful until closer to the date
of initial adoption.
(m) RECLASSIFICATIONS
Certain prior year amounts were reclassified to conform with
current year presentation.
(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 and drilling tools, 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 6,096
Other assets 812
Current liabilities (11,677)
-----------------
Total $ 90,267
=================
</TABLE>
F-11
<PAGE> 40
IRI INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
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.
(4) INVENTORIES
A summary of inventories follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1999 1998
----------------- ------------------
<S> <C> <C>
Raw materials and supplies $ 35,524 $ 46,743
Work in process 13,929 21,241
Finished goods 43,119 41,167
----------------- ------------------
Total $ 92,572 $ 109,151
================= ==================
</TABLE>
(5) PROPERTY, PLANT AND EQUIPMENT
A summary of property, plant and equipment follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1999 1998
----------------- ------------------
<S> <C> <C>
Land and land improvements $ 2,823 $ 2,910
Buildings 8,169 7,731
Machinery and equipment 48,041 46,965
----------------- ------------------
59,033 57,606
Less accumulated depreciation (13,336) (8,414)
----------------- ------------------
Property, plant and equipment, net $ 45,697 $ 49,192
================= ==================
</TABLE>
Machinery and equipment includes capitalized lease assets of $1,119,000
at December 31, 1999 and 1998.
(6) NOTES PAYABLE
In connection with the acquisitions described in note 3, the Company
entered into a $65.0 million senior secured term loan facility due in
quarterly installments beginning June 30, 1997 through March 31, 2002
and a $31.0 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 had a $9.7 million revolving credit facility with a
maturity date of March 31, 2000. Amounts outstanding under the
revolving credit facility were secured by substantially all of the
assets of the Company and accrued interest at a rate per annum equal to
the one, two, three or six-month LIBOR plus 2-3/4%. The revolving
credit facility agreement contained provisions, among others, that
restricted incurrence of indebtedness, guarantees, acquisitions, and
distributions to shareholders, and required the Company to meet
specified financial maintenance tests.
F-12
<PAGE> 41
IRI INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
On December 29, 1999, the revolving credit facility was replaced with a
new $10.0 million revolving credit facility, which matures on December
28, 2000 and provides exclusively for bank guarantees and commercial
and standby letters of credit. The new revolving credit facility
agreement contains provisions, among others, that limit liens on
accounts receivables, inventory and related general intangibles and
that require the Company to meet specified financial maintenance tests.
At December 31, 1999, approximately $5.9 million was available for bank
guarantees and letters of credit under the new revolving credit
facility. The Company had no outstanding indebtedness at December 31,
1999.
(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 (LOSS)
The accumulated balances for each classification of comprehensive
income (loss) are as follows (in thousands):
<TABLE>
<CAPTION>
ACCUMULATED
FOREIGN MINIMUM OTHER
CURRENCY PENSION COMPREHENSIVE
ITEMS LIABILITY INCOME (LOSS)
------------------ ----------------- -----------------------
<S> <C> <C> <C>
Beginning balance $ 26 $ (1,988) $ (1,962)
Current period change (412) 1,988 1,576
------------------ ---------------- -----------------------
Ending balance $ (386) $ - $ (386)
================== ================= =======================
</TABLE>
(9) STOCK OPTIONS
Prior to its 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 equal to the
initial public offering price. The options granted to Directors not
employed by the Company vest as to one-half of the option shares on the
effective date of the Offering and as to a further one-quarter of the
option shares on the first and second anniversaries of the effective
date of the Offering. Certain executive officers and employees
F-13
<PAGE> 42
IRI INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
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 with an exercise price
equal to the fair market value of the common stock at grant date. During
1999, the Company granted an aggregate of 901,000 options with an
exercise price equal to the fair market value of the common stock at
grant date to certain executive officers and employees. In addition,
70,000 options were forfeited by employees that terminated their
employment with the Company.
A summary of the status of the Company's fixed stock option plan as of
December 31, 1999 and 1998 and changes during the years then ended is
presented below:
<TABLE>
<CAPTION>
WEIGHTED
SHARES AVERAGE
FIXED OPTIONS (000) EXERCISE PRICE
-------------------------------------------------- -------------- ---------------------
<S> <C> <C>
Outstanding at December 31, 1996 - $ -
Granted 1,933 18.00
Forfeited (2) 18.00
-------------- ---------------------
Outstanding at December 31, 1997 1,931 18.00
Granted 1,645 3.56
Cancelled (1,931) (18.00)
-------------- ---------------------
Outstanding at December 31, 1998 1,645 3.56
Granted 901 3.97
Forfeited (70) (3.56)
============== =====================
Outstanding at December 31, 1999 2,476 $ 3.71
============== =====================
Options exercisable at December 31, 1999 1,526 $ 3.66
============== =====================
Weighted average fair value of
options granted during 1999 $ 3.97
=====================
</TABLE>
The weighted average remaining contracted life of stock options at
December 31, 1999 was approximately nine years.
F-14
<PAGE> 43
The Company applies APB Opinion 25 in accounting for its stock option
plan. Accordingly, no compensation cost has been recognized for stock
options granted to employees. Compensation expense is recorded for
options granted to nonemployee 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 nonemployee director options
granted was $370,000 and $499,000 for the years ended December 31, 1999
and 1998, respectively. 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 (loss) and income (loss) per
common share for the years ended December 31, 1999, 1998 and 1997 would
have been reduced to the pro forma amounts indicated below (in
thousands except per share amounts):
<TABLE>
<CAPTION>
1999 1998 1997
----------------- ----------------- ------------------
<S> <C> <C> <C>
Net income (loss):
As reported $ (10,905) $ 12,382 $ 11,023
================= ================= ==================
Pro forma $ (12,627) $ 11,199 $ 7,216
================= ================= ==================
Basic and diluted income (loss)
per common share:
As reported $ (0.27) $ 0.31 $ 0.35
================= ================= ==================
Pro forma $ (0.32) $ 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>
1999 1998 1997
----------------- ----------------- ------------------
<S> <C> <C> <C>
Expected life (years) 5 5 3.3
Risk-free interest rate 6.34% 4.42% 6.20%
Volatility 70.00% 70.00% 30.00%
Dividend yield 0.00% 0.00% 0.00%
</TABLE>
F-15
<PAGE> 44
IRI INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(10) INCOME TAXES
Income tax expense (benefit) attributable to income (loss) before
extraordinary item consists of the following (in thousands):
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------------------------
1999 1998 1997
----------------- ---------------- --------------
<S> <C> <C> <C>
Current:
U. S. Federal $ (3,539) $ 2,609 $ 1,965
State - 425 312
Foreign 400 249 509
----------------- ---------------- --------------
(3,139) 3,283 2,786
----------------- ---------------- --------------
Deferred:
U. S. Federal (5,333) - -
State - - -
Foreign - - -
----------------- ---------------- --------------
(5,333) - -
----------------- ---------------- --------------
Total income tax expense
(benefit) $ (8,472) $ 3,283 $ 2,786
----------------- ---------------- --------------
</TABLE>
Income tax expense (benefit) differs from the amount computed by
applying the statutory rate of 35% to income (loss) before income taxes
as follows (in thousands):
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------------------------------
1999 1998 1997
---------------- ---------------- ---------------------
<S> <C> <C> <C>
Computed "expected" tax
expense (benefit) $ (6,782) $ 5,483 $ 5,362
Change in the valuation
allowance (1,029) (998) (1,291)
Amortization of negative
goodwill (1,409) (1,879) (1,879)
Amortization of goodwill 439 442 308
State income taxes, net of
federal benefit - 276 203
Foreign taxes and other 309 (41) 83
---------------- ---------------- ---------------------
$ (8,472) $ 3,283 $ 2,786
---------------- ---------------- ---------------------
</TABLE>
F-16
<PAGE> 45
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, 1999 and 1998, are as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------------------
1999 1998
--------------------- -----------------------
<S> <C> <C>
Deferred income tax assets:
Capital loss carryforward $ 841 $ 690
Basis in inventories 3,758 4,201
Unrealized loss on marketable equity securities - 260
Employee benefits 1,002 1,102
Net operating loss carryforwards 8,145 1,050
Other, principally accrued liabilities 249 378
--------------------- ---------------------
Total gross deferred income tax assets 13,995 7,681
Less valuation allowance 2,351 3,380
--------------------- ---------------------
Net deferred income tax assets 11,644 4,301
--------------------- ---------------------
Deferred income tax liabilities:
Costs and estimated earnings in excess of
billings on uncompleted contracts 1,270 1,917
Basis in and depreciation of property,
plant and equipment 4,604 2,384
Unrealized gain on marketable equity
securities 437 -
--------------------- ---------------------
Total gross deferred income tax
liabilities 6,311 4,301
--------------------- ---------------------
Net deferred income tax assets $ 5,333 $ -
===================== =====================
</TABLE>
The Company has provided a valuation allowance for deferred tax assets
of $2,351,000 and $3,380,000 at December 31, 1999 and December 31,
1998, respectively. The valuation allowance decreased $1,029,000 during
the year ended December 31, 1999 and $998,000 during the year ended
December 31, 1998. In assessing the realizability of deferred tax
assets, management considers whether it is more likely than not that
some portion or all of the deferred tax assets will not be realized.
The ultimate realization of deferred tax assets is dependent upon the
generation of future taxable income during the periods in which those
temporary differences become deductible. Management considers the
scheduled reversal of deferred tax liabilities, projected future
taxable income, and tax planning strategies in making this assessment.
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 $3,000,000 available at December
31, 1999) expiring from 2003 through 2009. To the extent such
carryforwards are not utilized in a year, they may be utilized in
subsequent years.
F-17
<PAGE> 46
IRI INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
In addition, at December 31, 1999, after carryback, the Company has a
net operating loss carryforward of $20,300,000 which will expire in
2020, if unused.
(11) LEASES
At December 31, 1999, 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> <C>
2000 $ 1,071 $ 316
2001 580 -
2002 133 -
2003 40 -
2004 1 -
----------------- ------------------
Total minimum lease payments $ 1,825 316
-----------------
Less amount representing interest 17
------------------
Present value of minimum
lease payments $ 299
------------------
</TABLE>
Total rental expense was $2,555,000, $2,751,000 and $2,142,000 for the
years ended December 31, 1999, 1998 and 1997, respectively.
(12) PENSION AND OTHER POSTRETIREMENT 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.
F-18
<PAGE> 47
IRI INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
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
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.
F-19
<PAGE> 48
IRI INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
The funded status and the amounts recognized in the balance sheets as
of December 31, 1999, 1998 and 1997, the date of the last actuarial
valuation are as follows (in thousands):
<TABLE>
<CAPTION>
PENSION BENEFITS OTHER BENEFITS
----------------------------------- ------------------------------------
1999 1998 1997 1999 1998 1997
--------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
CHANGE IN BENEFIT OBLIGATION:
Benefit obligation at beginning of year $ 8,435 $ 8,061 $ 7,289 $ 1,829 $ 1,841 $ 1,821
Service cost 107 106 108 - - -
Interest cost 536 520 571 134 134 144
Plan participants' contributions - - - 26 27 30
Actuarial (gain) loss (1,361) 322 691 157 (28) 44
Benefits paid (771) (574) (598) (263) (145) (198)
--------- ---------- ---------- ---------- ---------- ----------
Benefit obligation at end of year 6,946 8,435 8,061 1,883 1,829 1,841
--------- ---------- ---------- ---------- ---------- ----------
CHANGE IN PLAN ASSETS:
Fair value of plan assets at beginning
of year 6,849 7,122 7,321 - - -
Actual return on plan assets 1,625 301 399 - - -
Employer contribution - - - 231 118 168
Plan participants' contributions - - - 26 27 30
Benefits paid (771) (574) (598) (257) (145) (198)
--------- ---------- ---------- ---------- ---------- ----------
Fair value of plan assets at end
of year 7,703 6,849 7,122 - - -
--------- ---------- ---------- ---------- ---------- ----------
Funded status 757 (1,586) (939) (1,883) (1,829) (1,841)
Unrecognized actuarial loss (536) 1,988 1,457 456 323 360
--------- ---------- ---------- ---------- ---------- ----------
Net amount recognized $ 221 $ 402 $ 518 $(1,427) $(1,506) $(1,481)
--------- ---------- ---------- ---------- ---------- ----------
Amounts recognized in the statement of
financial position consist of:
Prepaid benefit cost $ 221 $ - $ - $ - $ - $ -
Accrued benefit liability - (1,586) (939) (1,427) (1,506) (1,481)
Accumulated other comprehensive loss - 1,988 1,457 - - -
--------- ---------- ---------- ---------- ---------- ----------
Net amount recognized $ 221 $ 402 $ 518 $(1,427) $(1,506) $(1,481)
--------- ---------- ---------- ---------- ---------- ----------
WEIGHTED-AVERAGE ASSUMPTIONS AS OF DECEMBER 31:
Discount rate 7.75% 6.75% 7.30% 7.75% 6.75% 7.30%
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-20
<PAGE> 49
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 (in thousands) are not
affected by increases in the assumed health care cost trend rate.
<TABLE>
<CAPTION>
PENSION BENEFITS OTHER BENEFITS
---------------------------------- ------------------------------------
COMPONENTS OF NET PERIODIC BENEFIT
COST: 1999 1998 1997 1999 1998 1997
-------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Service cost $ 107 106 108 - - -
Interest cost 536 520 571 134 134 144
Expected return on plan assets (534) (557) (570) - - -
Amortization of prior service
cost - - - - - -
Amortization of transition
asset - - - - - -
Recognized net actuarial loss 72 9 7 19 45 -
</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 $6,946,000, $6,946,000, and
$7,703,000, respectively, as of December 31, 1999 and $8,435,000,
$8,435,000 and $6,849,000, respectively, as of December 31, 1998.
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 $892,000,
$1,289,000 and $1,076,000 for the years ended December 31, 1999, 1998
and 1997, respectively.
F-21
<PAGE> 50
IRI INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(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. During
1999, the Company continued its restructuring program. Accordingly, the
Company consolidated manufacturing operations, closing two plants, and
further reduced its workforce by 122 employees in addition to the 315
employees originally estimated. Expenses incurred in connection with
the restructuring program have been reported as a restructuring charge
of $1,779,000 in 1999 and $590,000 in 1998. Substantially all amounts
were paid as of December 31, 1999.
(14) BUSINESS SEGMENTS
In the fourth quarter of 1998, the Company adopted SFAS No. 131,
Disclosures about Segments of an Enterprise and Related Information.
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 Products, 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.
F-22
<PAGE> 51
IRI INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
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, 1999
Sales to unaffiliated
customers $ 44,365 $ 42,892 $ 4,933 $ - $ - $ 92,190
Operating income (loss) (5,850) 2,543 722 (17,991) - (20,576)
Identifiable assets 48,659 95,201 7,165 66,068 - 217,093
Depreciation and
amortization 562 3,248 42 1,217 - 5,069
Amortization of goodwill - - - 1,254 - 1,254
Amortization of negative
goodwill - - - 4,026 - 4,026
Capital expenditures 13 2,165 - - - 2,178
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 goodwill - - - 1,255 - 1,255
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 $ 65,336 $13,501 $ - $ - $ 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 goodwill - - - 880 - 880
Amortization of negative
goodwill - - - 5,367 - 5,367
Capital expenditures 2,216 1,649 314 1,885 - 6,064
</TABLE>
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>
YEARS ENDED DECEMBER 31,
---------------------------------------------------------------
1999 1998 1997
------------------ ------------------- ------------------
<S> <C> <C> <C>
Russia $ 4,522 $ 22,137 $ 47,375
Europe (excluding Russia) 6,937 12,649 12,783
Asia (excluding Russia) 7,928 17,831 11,113
South America 1,014 15,829 9,166
Africa 25,732 17,469 14,432
Other 3,545 1,869 6,665
------------------ ------------------- ------------------
Total export sales 49,678 87,784 101,534
Domestic sales 42,512 87,261 83,832
------------------ ------------------- ------------------
Total sales $ 92,190 $ 175,045 $ 185,366
------------------ ------------------- ------------------
</TABLE>
F-23
<PAGE> 52
IRI INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
In 1999, one customer accounted for 16.9% of revenues. For the year
ended December 31, 1998, no one customer accounted for more than 10% of
revenues.
(15) COMMITMENTS AND CONTINGENCIES
The Company has contract commitments aggregating $41.0 million at
December 31, 1999 for the manufacture and delivery of drilling and
workover rigs during fiscal year 2000.
At December 31, 1999, the Company was contingently liable for
approximately $4.1 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 remeditaion to
be conducted at such facilities by Air Liquide or Bowen. There can be
no assurance that Air Liquide or Bowen will meet its obligations under
the indemnification arrangements or that there will not be future
contamination for which the Company might be fully liable and that may
require the Company to incur significant costs that could have a
material adverse effect on the Company's financial 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.
F-24
<PAGE> 53
IRI INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
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 (IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
QUARTER ENDED QUARTER ENDED QUARTER ENDED QUARTER ENDED
1999 MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
- ----------------------------------- ---------------- ----------------- ---------------- -----------------
<S> <C> <C> <C> <C>
Revenues $ 22,543 $ 19,877 $ 26,102 $ 23,668
Gross profit 6,715 (4,128)(a) 7,220 (773)(b)
Net income (loss) (1,502)(d) (9,590)(c)(d) 2,346(d) (2,159)
Basic and diluted income (loss)
per common share (0.04) (0.24) 0.06 (0.05)
1998
- -----------------------------------
Revenues $ 47,232 $ 51,399 $ 40,650 $ 35,764
Gross profit 12,849 15,468 11,064 9,038
Net income (loss) 4,372 5,525 2,799(d) (314)(d)
Basic and diluted income (loss)
per common share 0.11 0.14 0.07 (0.01)
1997
- -----------------------------------
Revenues $ 16,594 $ 41,191 $ 54,345 $ 73,236
Gross profit 4,142 8,519 12,653 20,848
Net income (loss) 1,657 (1,236) 2,530 8,072
Basic and diluted income (loss)
per common share 0.06 (0.04) 0.08 0.23
</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).
(a) Includes pre-tax charges of $6.8 million, consisting of a $2.0
million increase in the inventory obsolescence reserve, $2.1
million write-off of pre-contract engineering and design costs
incurred for a contract that did not materialize, a $2.2
million charge for contract adjustments and other charges.
(b) Includes pre-tax inventory valuation charges of $5.9 million.
(c) Includes pre-tax charges of $1.3 million relating to provision
for bad debt and software implementation.
(d) Includes restructuring charges of $805,000, $653,000 and
$321,000 incurred during the first three quarters of 1999 and
$429,000 and $161,000 during the third and fourth quarter of
1998, respectively (see note 13).
F-25
<PAGE> 1
CREDIT AGREEMENT
THIS CREDIT AGREEMENT, dated as of December 29, 1999, is between IRI
INTERNATIONAL CORPORATION, a Delaware corporation ("Borrower"), and BANK ONE,
TEXAS, N.A., a national banking association ("Lender").
R E C I T A L S:
Borrower has requested Lender to extend credit to Borrower in the form
of commercial and standby letters of credit and bank guarantees not to exceed
an aggregate principal amount of Ten Million and No/100 Dollars
($10,000,000.00) at any time outstanding. Lender is willing to make such
extensions of credit to Borrower upon the terms and conditions hereinafter set
forth.
NOW THEREFORE, in consideration of the premises and the mutual
covenants herein contained, the parties hereto agree as follows:
ARTICLE I
Definitions
Section 1.1 Definitions. As used in this Agreement, the
following terms have the following meanings:
"Advance" means a funding of a Bank Guarantee or a Letter of
Credit, as applicable, pursuant to Article III.
"Affiliate" means, as to any Person, any other Person (i) that
directly or indirectly, through one or more intermediaries, controls
or is controlled by, or is under common control with, such Person;
(ii) that directly or indirectly beneficially owns or holds five
percent (5%) or more of any class of voting stock of such Person; or
(iii) five percent (5%) or more of the voting stock of which is
directly or indirectly beneficially owned or held by the Person in
question. The term "control" means the possession, directly or
indirectly, of the power to direct or cause direction of the
management and policies of a Person, whether through the ownership of
voting securities, by contract, or otherwise; provided, however, in no
event shall Lender be deemed an Affiliate of Borrower or any of its
Subsidiaries.
"Bank Guarantee Application" means an application for a bank
guarantee and reimbursement agreement, in a form acceptable to Lender,
properly completed and signed by Borrower.
"Bank Guarantee Liabilities" means, at any time, the aggregate
face amount of all outstanding Bank Guarantees.
"Bank Guarantee" means a Guaranty provided by the Lender or a
Lending Installation for the benefit of Borrower pursuant to Article
II.
<PAGE> 2
"Business Day" means any day on which commercial banks are not
authorized or required to close in Houston, Texas.
"Capitalization" means, at any particular time, all amounts
which, in conformity with GAAP, would be included as debt and equity
on a consolidated balance sheet of Borrower and its Subsidiaries.
"Chinese Petroleum Corp. Letter of Credit" means that certain
letter of credit issued by Lender to Chinese Petroleum Corp. in the
amount of $48,781.00, expiring September, 2001.
"Code" means the Internal Revenue Code of 1986, as amended,
and the regulations promulgated and rulings issued thereunder.
"Commercial Letter of Credit" means a commercial letter of
credit issued by Lender for the account of Borrower pursuant to
Article II.
"Commitment" means the obligation of Lender to issue Letters
of Credit and provide Bank Guarantees hereunder in an aggregate
principal amount at any time outstanding up to but not exceeding Ten
Million and No/100 Dollars ($10,000,000.00).
"Consolidated Tangible Net Worth" means, at any particular
time, all amounts which, in conformity with GAAP, would be included as
stockholders' equity on a consolidated balance sheet of Borrower and
the Subsidiaries; provided, however, there shall be subtracted
therefrom: (i) any amount at which shares of capital stock of Borrower
appear as an asset on Borrower's balance sheet, (ii) goodwill,
including any amounts, however designated, that represent the excess
of the purchase price paid for assets or stock over the value assigned
thereto, (iii) patents, trademarks, trade names, and copyrights, (iv)
deferred expenses, (v) loans and advances to any stockholder,
director, officer, or employee of Borrower or any Subsidiary or any
Affiliate, and (vi) all other assets which are properly classified as
intangible assets.
"Debt" means as to any Person at any time (without
duplication): (i) all obligations of such Person for borrowed money,
(ii) all obligations of such Person evidenced by bonds, notes,
debentures, or other similar instruments, (iii) all obligations of
such Person to pay the deferred purchase price of property or
services, except trade accounts payable of such Person arising in the
ordinary course of business which are not past due by more than ninety
(90) days unless such trade accounts payable are being contested in
good faith by appropriate proceedings, (iv) all obligations of such
Person under any lease which, in conformity with GAAP, is required to
be capitalized for balance sheet purposes, (v) all obligations of such
Person under guaranties, endorsements (other than for collection or
deposit in the ordinary course of business), assumptions or other
contingent obligations, in respect of, or to purchase or otherwise
acquire, any Debt,
-2-
<PAGE> 3
(vi) all obligations secured by a Lien existing on property owned by
such Person, whether or not the obligations secured thereby have been
assumed by such Person or are non-recourse to the credit of such
Person, (vii) all reimbursement obligations of such Person (whether
contingent or otherwise) in respect of letters of credit, bankers'
acceptances, surety or other bonds and similar instruments, and (viii)
the Commitment.
"Default Rate" means the lesser of (a) the Maximum Rate or,
(b) the sum of the Prime Rate in effect from day to day plus one and
one-half percent (1-1/2 %).
"Dollars" and "$" mean lawful money of the United States of
America.
"Environmental Laws" means any and all federal, state, and
local laws, regulations, and requirements pertaining to health,
safety, or the environment, including, without limitation, the
Comprehensive Environmental Response, Compensation and Liability Act
of 1980, 42 U.S.C. Section 9601 et seq., the Resource Conservation and
Recovery Act of 1976, 42 U.S.C. Section 6901 et seq., the Occupational
Safety and Health Act, 29 U.S.C. Section 651 et seq., the Clean Air
Act, 42 U.S.C. Section 7401 et seq., the Clean Water Act, 33 U.S.C.
Section 1251 et seq., the Toxic Substances Control Act, 15 U.S.C.
Section 2601 et seq., and all similar laws, regulations, and
requirements of any governmental authority or agency having
jurisdiction over Borrower or any Subsidiary or any of their
respective properties or assets, as such laws, regulations, and
requirements may be amended or supplemented from time to time.
"ERISA" means the Employee Retirement Income Security Act of
1974, as amended from time to time, and the regulations and published
interpretations thereunder.
"ERISA Affiliate" means any corporation or trade or business
which is a member of the same controlled group of corporations (within
the meaning of Section 414(b) of the Code) as Borrower or is under
common control (within the meaning of Section 414(c) of the Code) with
Borrower.
"Event of Default" has the meaning specified in Section 12.1.
"GAAP" means generally accepted accounting principles, applied
on a consistent basis, as set forth in Opinions of the Accounting
Principles Board of the American Institute of Certified Public
Accountants and/or in statements of the Financial Accounting Standards
Board and/or their respective successors and which are applicable in
the circumstances as of the date in question. Accounting principles
are applied on a "consistent basis" when the accounting principles
observed in a current period are comparable in all material respects
to those accounting principles applied in a preceding period (other
than any change in accounting principles required or suggested in
Opinions of the Accounting Principles Board of the American Institute
of Certified Public Accountants and/or in statements of the Financial
Accounting Standards Board and/or
-3-
<PAGE> 4
their respective successors and which are applicable in the
circumstances as of the date in question.)
"Hazardous Substance" means any substance, product, waste,
pollutant, material, chemical, contaminant, constituent, or other
material which is or becomes listed, regulated, or addressed under any
Environmental Law, including, without limitation, asbestos, petroleum,
and polychlorinated biphenyls.
"Lending Installation" means the office, branch, subsidiary or
affiliate of Lender selected by Lender pursuant to Section 2.6.
"Letter of Credit" means any Commercial Letter of Credit or
Standby Letter of Credit.
"Letter of Credit Liabilities" means, at any time, the
aggregate face amount of all outstanding Letters of Credit.
"Letter of Credit Master Agreement" means the Standby Letter
of Credit Master Agreement and the Commercial Letter of Credit Master
Agreement from time to time entered into by the Borrower and the
Lender, each substantially in the form attached hereto as Exhibit "C"
and Exhibit "D," except as modified by Section 11.4 hereof.
"Letter of Credit Request Form" means a certificate, in
substantially the form of Exhibit B hereto, properly completed and
signed by Borrower requesting issuance of a Letter of Credit, together
with such applications and agreements as Lender shall customarily use
in connection with issuance of letters of credit.
"Lien" means any lien, mortgage, security interest, tax lien,
financing statement, pledge, charge, hypothecation, assignment,
preference, priority, or other encumbrance of any kind or nature
whatsoever (including, without limitation, any conditional sale or
title retention agreement), whether arising by contract, operation of
law, or otherwise.
"Loan Documents" means this Agreement and all promissory
notes, security agreements, deeds of trust, assignments, bank
guarantees, letters of credit, guaranties, and other instruments,
documents, and agreements executed and delivered pursuant to or in
connection with this Agreement, as such instruments, documents, and
agreements may be amended, modified, renewed, extended, or
supplemented from time to time.
"Material Adverse Effect" means a material adverse effect (i)
on the consolidated business operations, financial condition or
properties of the Borrower and its Subsidiaries, taken as a whole, and
(ii) on the ability of Borrower to pay and perform its obligations
under the Loan Documents to which it is a party.
"Maximum Rate" means the maximum rate of nonusurious interest
permitted from day to day by applicable law, including as to Chapter
346 of the Texas Finance
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Code (and as the same may be incorporated by reference in other Texas
statutes), but otherwise without limitation, that rate based upon the
"indicated rate ceiling" and calculated after taking into account any
and all relevant fees, payments, and other charges in respect of the
Loan Documents which are deemed to be interest under applicable law.
"Multiemployer Plan" means a multiemployer plan defined as
such in Section 3(37) of ERISA to which contributions have been made
by Borrower or any ERISA Affiliate and which is covered by Title IV of
ERISA.
"Note" means the promissory note of Borrower payable to the
order of Lender, in substantially the form of Exhibit A hereto, and
all extensions, renewals and modifications thereof.
"Obligated Party" means or any Person who is or becomes a
party to any agreement that guarantees or secures payment and
performance of the Obligations or any part thereof.
"Obligations" means all obligations, indebtedness, and
liabilities of Borrower to Lender, now existing or hereafter arising,
whether direct, indirect, related, unrelated, fixed, contingent,
liquidated, unliquidated, joint, several, or joint and several,
arising under this Agreement and the other Loan Documents (including,
without limitation, Borrower's contingent reimbursement obligations in
respect of Bank Guarantees and Letters of Credit), and all interest
accruing thereon and all attorneys' fees and other expenses incurred
in the enforcement or collection thereof.
"PBGC" means the Pension Benefit Guaranty Corporation or any
entity succeeding to all or any of its functions under ERISA.
"Person" means any individual, corporation, business trust,
association, company, partnership, joint venture, governmental
authority, or other entity.
"Plan" means any employee benefit or other plan established or
maintained by Borrower or any ERISA Affiliate and which is covered by
Title IV of ERISA.
"Prime Rate" means a rate per annum equal to the prime rate of
interest announced from time to time by Lender or its parent (which is
not necessarily the lowest rate charged to any customer), changing
when and as said prime rate changes.
"Prohibited Transaction" means any transaction set forth in
Section 406 of ERISA or Section 4975 of the Code.
"Reportable Event" means any of the events set forth in
Section 4043 of ERISA.
"Regulatory Change" means, with respect to Lender, any change
after the date of this Agreement in United States federal, state, or
foreign laws or regulations (including
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Regulation D) or the adoption or making after such date of any
interpretations, directives, or requests applying to a class of banks
including Lender of or under any United States federal or state, or
any foreign, laws or regulations (whether or not having the force of
law) by any court or governmental or monetary authority charged with
the interpretation or administration thereof.
"Regulation D" means Regulation D of the Board of Governors of
the Federal Reserve System as the same may be amended or supplemented
from time to time.
"RICO" means the Racketeer Influenced and Corrupt Organization
Act of 1970, as amended from time to time.
"Standby Letter of Credit" means standby letters of credit
issued by Lender for the account of Borrower pursuant to Article II.
"Subsidiary" means any corporation or entity of which more
than fifty percent (50%) of (i) the issued and outstanding securities
having ordinary voting power for the election of a majority of
directors, or (ii) in the case of an entity that is not a corporation,
of the equity interests is owned or controlled, directly or
indirectly, by Borrower, by Borrower and one or more other
Subsidiaries, or by one or more other Subsidiaries.
"Termination Date" means 11:00 A.M. Houston, Texas time on
December 29, 2000, or such earlier date on which the Commitment
terminates as provided in this Agreement.
Section 1.2 Other Definitional Provisions. All definitions
contained in this Agreement are equally applicable to the singular and plural
forms of the terms defined. The words "hereof," "herein," and "hereunder" and
words of similar import referring to this Agreement refer to this Agreement as a
whole and not to any particular provision of this Agreement. Unless otherwise
specified, all Article and Section references pertain to this Agreement. All
accounting terms not specifically defined herein shall be construed in
accordance with GAAP. Terms used herein that are defined in the Uniform
Commercial Code as adopted by the State of Texas, unless otherwise defined
herein, shall have the meanings specified in the Uniform Commercial Code as
adopted by the State of Texas.
ARTICLE II
Bank Guarantees and Letters of Credit
Section 2.1 Bank Guarantees and Letters of Credits.
(a) Subject to the terms and conditions of this Agreement,
Lender agrees to issue one or more Letters of Credit and agrees to
cause a Lending Installation to issue one or more Bank Guarantees for
the account of Borrower from time to time from the
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date hereof to and including the Termination Date; provided, however,
that the aggregate amount of the outstanding Bank Guarantee
Liabilities and the Letter of Credit Liabilities shall not at any time
exceed an amount equal to the Commitment.
(b) Each Commercial Letter of Credit shall have an expiration
date not to exceed one year and each Standby Letter of Credit shall
have an expiration date not to exceed one and a half years, no Letter
of Credit shall have an expiration date beyond six months after the
Termination Date (except for the Chinese Petroleum Corp. Letter of
Credit), must support a transaction that is entered into in the
ordinary course of Borrower's business, must otherwise be satisfactory
in form and substance to Lender, and shall be issued pursuant to such
documents and instruments (including, without limitation, Lender's
standard application for issuance of letters of credit as then in
effect) as Lender may require. Notwithstanding the foregoing, Letters
of Credit in the aggregate of up to $500,000 may be issued with
expiration dates later than six months beyond the Termination Date,
with customary evergreen provisions, provided however that such
Letters of Credit shall be cash collateralized as of the Termination
Date.
(c) Each Bank Guarantee shall have an expiration date not to
exceed one year, shall not have an expiration date beyond six months
after the Termination Date must support a transaction that is entered
into in the ordinary course of Borrower's business, must otherwise be
satisfactory in form and substance to the applicable Lending
Installation, and shall be issued pursuant to such documents and
instruments (including, without limitation, the applicable Lending
Installation's standard application for issuance of bank guarantees as
then in effect) as the applicable Lending Installation may require.
Section 2.2 Procedure for Issuing Bank Guarantees and Letters of
Credit. Each Bank Guarantee and Letter of Credit shall be issued on at least
three Business Days' prior notice from Borrower to Lender by means of a Bank
Guarantee Application or Letter of Credit Request Form, as applicable,
describing the transaction proposed to be supported thereby and specifying (a)
the date on which such Bank Guarantee or Letter of Credit, as applicable, is to
be issued (which shall be a Business Day) and the face amount thereof, (b) the
name and address of the beneficiary, (c) the expiration date of such Bank
Guarantee or Letter of Credit and (d) and if a Letter of Credit, (i) whether
such Letter of Credit shall permit a single drawing or multiple drawings, (ii)
the conditions permitting the drawing or drawings thereunder, (iii) whether the
draft thereunder shall be a sight or time draft and, if the latter, the date
when the draft shall be payable, and (iv) the form of the draft and any other
documents required to be presented at the time of any drawing (such notice to
set forth the exact wording of such documents or to attach copies thereof).
Lender at its option may accept telephonic requests for Bank Guarantees or
Letters of Credit, provided that such acceptance shall not constitute a waiver
of Lender's right to require delivery of a Bank Guarantee Application or Letter
of Credit Request Form, as applicable, in connection with subsequent Bank
Guarantees or Letters of Credit provided hereunder. Any telephonic request for
a Bank Guarantee or Letter of Credit by Borrower shall be promptly confirmed by
submission of a properly completed Bank Guarantee Application or Letter of
Credit Request Form, as applicable, to Lender. Upon fulfillment of the
applicable
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conditions precedent in Article VI, Lender shall make, or shall cause a Lending
Installation to make, if applicable, the applicable Bank Guarantee or Letter of
Credit available to Borrower or, if so requested by Borrower, to the
beneficiary of such Bank Guarantee or Letter of Credit.
Section 2.3 Fees.
(a) Bank Guarantee and Commercial Letter of Credit Fees.
Borrower shall pay to Lender a Bank Guarantee fee or Commercial Letter
of Credit fee equal to the greater of (i) $250; or (ii) an amount
equal to seventy-five hundredths of one percent (.75%) per annum of
the stated amount of such Bank Guarantee or Commercial Letter of
Credit, for the period during which such Bank Guarantee or Commercial
Letter of Credit will remain outstanding, based on a 365 day year and
the actual number of days elapsed, plus all expenses incurred by the
Lender arising from the issuance thereunder. Said fees shall be
payable quarterly in arrears on the 29th day of each March, June,
September and December during the term hereof.
(b) Standby Letter of Credit Fee. Borrower shall pay to
Lender a Standby Letter of Credit fee equal to the greater of (i) $300;
or (ii) an amount equal to seventy-five hundredths of one percent
(.75%) per annum of the stated amount of such Standby Letter of Credit,
for the period during which such Standby Letter of Credit will remain
outstanding, based on a 365 day year and the actual number of days
elapsed, plus all expenses incurred by the Lender arising from the
issuance thereunder. Said fees shall be payable quarterly in arrears
on the 29th day of each March, June, September and December during the
term hereof.
(c) Customary Fees and Expenses. Borrower shall pay to
Lender all customary fees and expenses incurred by the Lender or a
Lending Installation, as applicable, related to the issuance and/or
Advance of all Bank Guarantees and Letters of Credit, which fees and
expenses shall be billed by Lender to Borrower quarterly, and due
within 30 days of receipt thereof.
Section 2.4 Obligations Absolute. The obligations of Borrower
under this Agreement and the other Loan Documents (including without limitation
the obligation of Borrower to reimburse Lender for draws under any Bank
Guarantee or Letter of Credit) shall be absolute, unconditional, and
irrevocable, and shall be performed strictly in accordance with the terms of
this Agreement and the other Loan Documents under all circumstances whatsoever,
including without limitation the following circumstances:
(a) Any lack of validity or enforceability of any Bank
Guarantee or Letter of Credit or any other Loan Document;
(b) Any amendment or waiver of or any consent to
departure from any Loan Document;
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(c) The existence of any claim, set-off, counterclaim,
defense or other rights which Borrower, any Obligated Party, or any
other Person may have at any time against any beneficiary of any Bank
Guarantee or Letter of Credit, Lender, or any other Person, whether in
connection with this Agreement or any other Loan Document or any
unrelated transaction;
(d) Any statement, draft, or other document presented
under any Bank Guarantee or Letter of Credit proving to be forged,
fraudulent, invalid, or insufficient in any respect or any statement
therein being untrue or inaccurate in any respect whatsoever;
(e) Payment by Lender under any Bank Guarantee or Letter
of Credit against presentation of a draft or other document which does
not comply with the terms of such Bank Guarantee or Letter of Credit;
or
(f) Any other circumstance or happening whatsoever,
whether or not similar to any of the foregoing.
Section 2.5 Limitation of Liability. Borrower assumes all risks of
the acts or omissions of any beneficiary of any Bank Guarantee or Letter of
Credit with respect to its use of such Bank Guarantee or Letter of Credit.
Neither Lender nor a Lending Installation nor any of their officers or
directors shall have any responsibility or liability to Borrower or any other
Person for: (a) the failure of any draft to bear any reference or adequate
reference to any Bank Guarantee or Letter of Credit, or the failure of any
documents to accompany any draft at negotiation, or the failure of any Person
to surrender or to take up any Bank Guarantee or Letter of Credit or to send
documents apart from drafts as required by the terms of any Bank Guarantee or
Letter of Credit, or the failure of any Person to note the amount of any
instrument on any Bank Guarantee or Letter of Credit, each of which
requirements, if contained in any Bank Guarantee or Letter of Credit itself, it
is agreed may be waived by Lender or a Lending Installation, as applicable, (b)
errors, omissions, interruptions, or delays in transmission or delivery of any
messages, (c) the validity, sufficiency, or genuineness of any draft or other
document, or any endorsement(s) thereon, even if any such draft, document or
endorsement should in fact prove to be in any and all respects invalid,
insufficient, fraudulent, or forged or any statement therein is untrue or
inaccurate in any respect, (d) the payment by the Lender or a Lending
Installation, as applicable, to the beneficiary of any Bank Guarantee or Letter
of Credit against presentation of any draft or other document that does not
comply with the terms of the Bank Guarantee or Letter of Credit, or (e) any
other circumstance whatsoever in making or failing to make any payment under a
Bank Guarantee or Letter of Credit. Borrower shall have a claim against Lender
or a Lending Installation, as applicable, and Lender or a Lending Installation,
as applicable, shall be liable to Borrower, to the extent of any direct, but
not consequential, damages suffered by Borrower which Borrower proves in a
final nonappealable judgment were caused by (i) Lender's or a Lending
Installation's, as applicable, willful misconduct or gross negligence in
determining whether documents presented under any Bank Guarantee or Letter of
Credit complied with the terms thereof or (ii) Lender's or a Lending
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Installation's, as applicable, willful failure to pay under any Bank Guarantee
or Letter of Credit or after presentation to it of documents strictly complying
with the terms and conditions of such Bank Guarantee or Letter of Credit.
Lender or a Lending Installation, as applicable, may accept documents that
appear on their face to be in order, without responsibility for further
investigation, regardless of any notice or information to the contrary.
Section 2.6 Lending Installations. Lender may book any Bank
Guarantees and Letters of Credit at any Lending Installation selected by Lender
and change its Lending Installations from time to time. All terms of this
Agreement shall apply to any such Lending Installation and the Bank Guarantees,
Letters of Credit, and the Note shall be held by the Lender for the benefit of
the Lending Installation, as applicable. Lender may designate replacement or
additional Lending Installations through which Bank Guarantees or Letters of
Credit may be issued and for whose accounts payments on Advances with respect to
such Bank Guarantees or Letters of Credit are to be made.
Section 2.7 Account with Lender. During the term of this Agreement,
Borrower shall maintain its primary deposit accounts and cash management
services with Lender.
ARTICLE III
Advances
Section 3.1 Advances. (a) Each payment by Lender pursuant to a
drawing under a Bank Guarantee or Letter of Credit shall constitute and be
deemed an Advance by Lender to Borrower under the Note and this Agreement as of
the day and time such payment is made by Lender and in the amount of such
payment.
(b) Borrower will be deemed to have made an Advance if at the
Termination Date there are any Letters of Credit or Bank Guarantees outstanding
that have an expiration beyond the Termination Date and that have not been cash
collateralized.
(c) Subject to the terms and provisions of this Agreement,
Borrower may borrow (by way of Advances pursuant to subsections (a) and (b)
above), repay, and reborrow (by way of Advances pursuant to subsections (a) and
(b) above) hereunder.
Section 3.2 Repayment of Advances. Borrower shall repay the unpaid
principal amount of all Advances on demand, and if not demanded by the Lender,
at the Termination Date
Section 3.3 Interest. The unpaid principal amount of the Advances
shall bear interest prior to maturity at a varying rate per annum equal from
day to day to the lesser of (a) the Maximum Rate, or (b) the Prime Rate, each
such change in the rate of interest charged on the Advances to become
effective, without notice to Borrower, on the effective date of each change in
the Prime Rate or the Maximum Rate, as the case may be; provided, however, if
at any time the rate of interest specified in clause (b) preceding shall exceed
the Maximum Rate, thereby
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causing the interest on the Advances to be limited to the Maximum Rate, then
any subsequent reduction in the Prime Rate shall not reduce the rate of
interest on the Advances below the Maximum Rate until the aggregate amount of
interest accrued on the Advances equals the aggregate amount of interest which
would have accrued on the Advances if the interest rate specified in clause (b)
preceding had at all times been in effect. If repayment of any Advance is not
made within 10 days of the demand therefor pursuant to Section 3.3 hereof, the
unpaid principal amount of such Advance shall bear interest at the Default
Rate.
ARTICLE IV
Payments
Section 4.1 Method of Payment. All payments of principal,
interest, and other amounts to be made by Borrower under this Agreement, the
Note, and the other Loan Documents shall be made to Lender at its office at
Bank One Center, 910 Travis, Houston, Texas 77002, without setoff, deduction,
or counterclaim, in Dollars and in immediately available funds. Borrower shall,
at the time of making each such payment, specify to Lender the sums payable by
Borrower under this Agreement, the Note, or other Loan Document to which such
payment is to be applied (and in the event Borrower fails to so specify, or if
an Event of Default has occurred and is continuing, Lender may apply such
payment to the Obligations in such order and manner as it may elect in its sole
discretion). Whenever any payment under this Agreement, the Note, or any other
Loan Document shall be stated to be due on a day that is not a Business Day,
such payment may be made on the next succeeding Business Day, and such
extension of time shall in such case be included in the computation of the
payment of interest and commitment fee, as the case may be.
Section 4.2 Computation of Interest. Interest on the indebtedness
evidenced by the Note shall be computed on the basis of a year of 365 days and
the actual number of days elapsed (including the first day but excluding the
last day) unless such calculation would result in a usurious rate, in which
case interest shall be calculated on the basis of a year of 365 or 366 days, as
the case may be.
Section 4.3 Capital Adequacy. If, after the date hereof, Lender
shall have determined that the adoption of any applicable law, rule or
regulation regarding capital adequacy, or any change therein, or any change in
the interpretation or administration thereof by any governmental authority,
central bank or comparable agency charged with the interpretation or
administration thereof, or compliance by Lender (or its parent) with any
request or directive regarding capital adequacy (whether or not having the
force of law) of any such authority, central bank or comparable agency, has or
would have the effect of reducing the rate of return on Lender's (or its
parent's) capital as a consequence of its obligations hereunder or the
transactions contemplated hereby to a level below that which Lender (or its
parent) could have achieved but for such adoption, change or compliance (taking
into consideration Lender's policies with respect to capital adequacy) by an
amount deemed by Lender to be material, then from time to time, within ten (10)
Business Days after demand by Lender, Borrower shall pay to Lender such
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additional amount or amounts as will compensate Lender (or its parent) for such
reduction. A certificate of Lender claiming compensation under this Section and
setting forth the additional amount or amounts to be paid to it hereunder shall
be conclusive, provided that the determination thereof is made on a reasonable
basis. In determining such amount or amounts, Lender may use any reasonable
averaging and attribution methods.
Section 4.4 Additional Costs in Respect of Letters of Credit. If
as a result of any Regulatory Change there shall be imposed, modified, or
deemed applicable any tax, reserve, special deposit, or similar requirement
against or with respect to or measured by reference to Letters of Credit issued
or to be issued hereunder or Lender's Commitment to issue Letters of Credit
hereunder, and the result shall be to increase the cost to Lender of issuing or
maintaining any Letter of Credit or its Commitment to issue Letters of Credit
hereunder or reduce any amount receivable by Lender hereunder in respect of any
Letter of Credit (which increase in cost, or reduction in amount receivable,
shall be the result of Lender's reasonable allocation of the aggregate of such
increases or reductions resulting from such event), then, upon demand by
Lender, Borrower agrees to pay Lender, from time to time as specified by
Lender, such additional amounts as shall be sufficient to compensate Lender for
such increased costs or reductions in amount. A statement as to such increased
costs or reductions in amount incurred by Lender, submitted by Lender to
Borrower, shall be conclusive as to the amount thereof, provided that the
determination thereof is made on a reasonable basis.
ARTICLE V
Conditions Precedent
Section 5.1 Initial Bank Guarantee or Letter of Credit. The
obligation of Lender to provide an initial Bank Guarantee or Letter of Credit
is subject to the condition precedent that Lender shall have received on or
before the day of such Bank Guarantee or Letter of Credit, all of the
following, each dated (unless otherwise indicated) the date hereof, in form and
substance satisfactory to Lender:
(a) Resolutions. Resolutions of the Board of Directors of
Borrower certified by its Secretary or an Assistant Secretary which
authorize the execution, delivery, and performance by Borrower of this
Agreement and the other Loan Documents to which Borrower is or is to
be a party;
(b) Incumbency Certificate. A certificate of incumbency
certified by the Secretary or an Assistant Secretary of Borrower
certifying the names of the officers of Borrower authorized to sign
this Agreement and each of the other Loan Documents to which Borrower
is or is to be a party (including the certificates contemplated
herein) together with specimen signatures of such officers;
(c) Articles of Incorporation. The articles of
incorporation of Borrower certified by the Secretary of State of state
of incorporation of Borrower and dated within
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ten (10) days prior to the date of such initial Bank Guarantee or
Letter of Credit.
(d) Bylaws. The bylaws of Borrower certified by the
Secretary or an Assistant Secretary of Borrower;
(e) Governmental Certificates. Certificates of the
appropriate government officials of the state of incorporation of
Borrower as to the existence and good standing of Borrower, each dated
within 10 days prior to the date of the initial Advance;
(f) Note. The Note executed by Borrower;
(g) UCC Search. The results of a Uniform Commercial Code
search showing all financing statements and other documents or
instruments on file against Borrower in the office of the Secretary of
State of Delaware and the Secretary of State of Texas, such search to
be as of a date no more than ten (10) days prior to the date of the
initial Bank Guarantee or Letter of Credit; and
(h) Attorneys' Fees and Expenses. Evidence that the costs
and expenses (including attorneys' fees) referred to in Section 11.1,
to the extent incurred, shall have been paid in full by Borrower.
Section 5.2 All Bank Guarantees or Letters of Credit. The
obligation of Lender to provide any Bank Guarantee or issue any Letter of
Credit, (including the initial Bank Guarantee and the initial Letter of Credit)
is subject to the following additional conditions precedent:
(a) Request for Bank Guarantee or Letter of Credit.
Lender shall have received in accordance with Section 2.2, a Bank
Guarantee Application or Letter of Credit Request Form, dated the date
of such Bank Guarantee or Letter of Credit, and executed by an
authorized officer of Borrower, all of the statements in which shall
be true and correct on and as of such date; and
(b) Additional Documentation. Lender shall have received
such additional approvals, opinions, or documents as Lender or its
legal counsel, Winstead Sechrest & Minick P.C., may request.
ARTICLE VI
Representations and Warranties
To induce Lender to enter into this Agreement, Borrower represents and
warrants to Lender that:
Section 6.1 Corporate Existence. Borrower and each Subsidiary (a)
is a corporation duly organized, validly existing, and in good standing under
the laws of the jurisdiction of its
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incorporation; (b) has all requisite corporate power and authority to own its
assets and carry on its business as now being or as proposed to be conducted;
and (c) is qualified to do business in all jurisdictions in which the nature of
its business makes such qualification necessary and where failure to so qualify
would reasonably be expected to have a Material Adverse Effect. Borrower has
the corporate power and authority to execute, deliver, and perform its
obligations under this Agreement and the other Loan Documents to which it is or
may become a party.
Section 6.2 Financial Statements. Borrower has delivered to
Lender audited consolidated financial statements of Borrower and its
Subsidiaries as at and for the fiscal year ended December 31, 1998, and
unaudited consolidated financial statements of Borrower and its Subsidiaries
for the nine-month period ended September 30, 1999. Such financial statements
are true and correct, have been prepared in accordance with GAAP (except as
disclosed therein), and fairly and accurately present, on a consolidated basis,
the financial condition of Borrower and its Subsidiaries as of the respective
dates indicated therein and the results of operations for the respective
periods indicated therein. Neither Borrower nor any of its Subsidiaries has any
material contingent liabilities, liabilities for taxes, material forward or
long-term commitments, or unrealized or anticipated losses from any unfavorable
commitments not reflected in such financial statements. There has been no
material adverse change in the business, condition (financial or otherwise),
operations, prospects, or properties of Borrower or any of its Subsidiaries
since the effective date of the most recent financial statements referred to in
this Section.
Section 6.3 Corporate Action; No Breach. The execution, delivery,
and performance by Borrower of this Agreement and the other Loan Documents to
which Borrower is or may become a party have been duly authorized by all
requisite action on the part of Borrower and do not and will not violate or
conflict with the articles of incorporation or bylaws of Borrower or any law,
rule, or regulation or any order, writ, injunction, or decree of any court,
governmental authority, or arbitrator, and do not and will not conflict with,
result in a breach of, or constitute a default under, or result in the creation
or imposition of any Lien upon any of the revenues or assets of Borrower or any
Subsidiary pursuant to the provisions of any indenture, mortgage, deed of
trust, security agreement, franchise, permit, license, or other instrument or
agreement by which Borrower or any Subsidiary or any of their respective
properties is bound, except for violations, conflicts, breaches or defaults
which would not reasonably be expected to have a Material Adverse Effect.
Section 6.4 Operation of Business. Borrower and each of its
Subsidiaries possess all licenses, permits, franchises, patents, copyrights,
trademarks, and trade names, or rights thereto, to conduct their respective
businesses substantially as now conducted and as presently proposed to be
conducted except where failure to have such licenses, permits, franchises,
patents, copyrights, trademarks and tradenames and rights thereto would not
reasonably be expected to have a Material Adverse Effect, and Borrower and each
of its Subsidiaries are not in violation of any valid rights of others with
respect to any of the foregoing, except where such violation would not
reasonably be expected to have a Material Adverse Effect.
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Section 6.5 Litigation and Judgments. Except as disclosed on
Schedule 1 hereto, there is no action, suit, investigation, or proceeding
before or by any court, governmental authority, or arbitrator pending or, to
the knowledge of Borrower, threatened against or affecting Borrower or any
Subsidiary, that would, if adversely determined (taking into account the
probable nature and scope of the remedy therein), be reasonably expected to
have a Material Adverse Effect. There are no outstanding judgments against
Borrower or any Subsidiary.
Section 6.6 Rights in Properties; Liens. Borrower and each
Subsidiary have good and indefeasible title to or valid leasehold interests in
their respective properties and assets, real and personal, including the
properties, assets, and leasehold interests reflected in the financial
statements described in Section 6.2, except for encumbrances including
covenants, restrictions, rights, easements and minor irregularities in title
which would not reasonably be expected to have a Material Adverse Effect, and
none of the properties, assets, or leasehold interests of Borrower or any
Subsidiary is subject to any Lien that is prohibited by Section 8.1.
Section 6.7 Enforceability. This Agreement constitutes, and the
other Loan Documents to which Borrower is party, when delivered, shall
constitute the legal, valid, and binding obligations of Borrower, enforceable
against Borrower in accordance with their respective terms, except as limited
by bankruptcy, insolvency, or other laws of general application relating to the
enforcement of creditors' rights.
Section 6.8 Approvals. No authorization, approval, or consent of,
and no filing or registration with, any court, governmental authority, or third
party is or will be necessary for the execution, delivery, or performance by
Borrower of this Agreement and the other Loan Documents to which Borrower is or
may become a party or the validity or enforceability thereof.
Section 6.9 Debt. Borrower and its Subsidiaries have no Debt,
except as disclosed on Schedule 2 hereto.
Section 6.10 Taxes. (a) Borrower and each Subsidiary have filed
all tax returns (federal, state, and local) required to be filed, including all
income, franchise, employment, property, and sales taxes, and have paid all of
their respective liabilities for taxes, assessments, governmental charges, and
other levies that are due and payable, and (b) Borrower knows of no pending
investigation of Borrower or any Subsidiary by any taxing authority or of any
pending but unassessed tax liability of Borrower or any Subsidiary except where
failure to file such returns, pay such liabilities or where such pending
investigation (taking into account the probable nature and scope of the
remedy), would result in a pending unassessed tax liability, the amount of
which would not reasonably be expected to have a Material Adverse Effect. The
federal income tax liability of Borrower and its Subsidiaries has been audited
by the Internal Revenue Service and has been finally determined and satisfied
for all taxable years up to and including the taxable year ending December 31,
1998.
Section 6.11 Use of Proceeds; Margin Securities. Neither Borrower
nor any Subsidiary is engaged principally, or as one of its important
activities, in the business of extending credit for
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the purpose of purchasing or carrying margin stock (within the meaning of
Regulations T, U, or X of the Board of Governors of the Federal Reserve
System), and no part of the proceeds of any extension of credit under this
Agreement will be used to purchase or carry any such margin stock or to extend
credit to others for the purpose of purchasing or carrying margin stock.
Section 6.12 ERISA. Borrower and each Subsidiary have complied
with all applicable minimum funding requirements and all other applicable and
material requirements of ERISA and there are no existing conditions that would
reasonably be expected to have a Material Adverse Effect. No Reportable Event
has occurred in connection with any Plan that might constitute grounds for the
termination thereof by the PBGC or for the appointment by the appropriate
United States District Court of a trustee to administer such Plan.
Section 6.13 Disclosure. No statement, information, report,
representation, or warranty made by Borrower in this Agreement or in any other
Loan Document or furnished to Lender in writing in connection with this
Agreement or any transaction contemplated hereby contains any untrue statement
of a material fact or omits to state any material fact necessary to make the
statements herein or therein not misleading.
Section 6.14 Subsidiaries. Borrower has no Subsidiaries other than
those listed on Schedule 3 hereto, and Schedule 3 sets forth the jurisdiction
of incorporation of each Subsidiary and the percentage of Borrower's ownership
of the outstanding voting stock of each Subsidiary. All of the outstanding
capital stock of each Subsidiary has been validly issued, is fully paid, and is
nonassessable.
Section 6.15 Agreements. Neither Borrower nor any Subsidiary is a
party to any indenture, loan, or credit agreement, or to any lease or other
agreement or instrument, or subject to any charter or corporate restriction
which could have a Material Adverse Effect. Neither Borrower nor any Subsidiary
is in default in any respect in the performance, observance, or fulfillment of
any of the obligations, covenants, or conditions contained in any agreement or
instrument material to its business to which it is a party where such default
would reasonably be expected to have a Material Adverse Effect.
Section 6.16 Compliance with Laws. Neither Borrower nor any
Subsidiary is in violation in any material respect of any law, rule,
regulation, order, or decree of any court, governmental authority, or
arbitrator where such violation would reasonably be expected to have a Material
Adverse Effect.
Section 6.17 Investment Company Act. Neither Borrower nor any
Subsidiary is an "investment company" within the meaning of the Investment
Company Act of 1940, as amended.
Section 6.18 Public Utility Holding Company Act. Neither Borrower
nor any Subsidiary is a "holding company" or a "subsidiary company" of a
"holding company" or an "affiliate" of a "holding company" or a "public
utility" within the meaning of the Public Utility
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Holding Company Act of 1935, as amended.
Section 6.19 Environmental Matters.
(a) To the best of the Borrower's knowledge, Borrower,
each Subsidiary, and all of their respective properties, assets, and
operations are in full compliance with all Environmental Laws except
where such compliance would not reasonably be expected to have a
Material Adverse Effect. Borrower is not aware of, nor has Borrower
received notice of, any past, present, or future conditions, events,
activities, practices, or incidents which may interfere with or
prevent the compliance or continued compliance of Borrower and the
Subsidiaries with all Environmental Laws.
(b) Borrower and each Subsidiary have obtained all
permits, licenses, and authorizations which are required under
Environmental Laws and the failure to obtain which would reasonably be
expected to have a Material Adverse Effect.
(c) No Hazardous Substances exist on, about, or within or
have been used, generated, stored, transported, disposed of on, or
released from any of the properties or assets of Borrower or any
Subsidiary in violation of any Environmental Law if such violation
would reasonably be expected to have a Material Adverse Effect. The
use which Borrower and the Subsidiaries make and intend to make of
their respective properties and assets will not result in the use,
generation, storage, transportation, accumulation, disposal, or
release of any Hazardous Substance on, in, or from any such properties
or assets in violation of any Environmental Law if such violation
would reasonably be expected to have a Material Adverse Effect.
(d) There is no action, suit, proceeding, investigation,
or inquiry before any court, administrative agency, or other
governmental authority pending or, to the knowledge of Borrower,
threatened against Borrower or any Subsidiary relating in any way to
any Environmental Law. Neither Borrower nor any Subsidiary has (i) any
liability for remedial action under any Environmental Law, (ii)
received any request for information by any governmental authority
with respect to the condition, use, or operation of any of its
properties or assets, or (iii) received any notice from any
governmental authority or other Person with respect to any violation
of or liability under any Environmental Law.
(e) No Lien arising under any Environmental Law has
attached to any of the properties or assets of Borrower or any of its
Subsidiaries.
Section 6.20 Year 2000 Provisions. Borrower represents and
warrants as follows to Lender that: (i) as of the date of any request for a
Letter of Credit or a Bank Guarantee hereunder; (ii) as of the date of any
renewal, extension or modification of this Agreement; and (iii) at all times
this Agreement or Lender's commitment to make Advances under this Agreement is
outstanding:
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(a) All devices, systems, machinery, information
technology, computer software and hardware, and other date sensitive
technology (jointly and severally the "Systems") necessary for
Borrower to carry on its business as presently conducted and as
contemplated to be conducted in the future are Year 2000 Compliant or
will be Year 2000 Compliant within a period of time reasonably
expected to result in no material disruption of any of Borrower's
business operations. For purposes of these provisions, "Year 2000
Compliant" means that such Systems are designed to be used prior to,
during and after the Gregorian calendar year 2000 A.D. and will
operate during each such time period without error relating to date
data, specifically including any error relating to, or the product of,
date data which represents or references different centuries or more
than one century.
(b) Borrower has: (1) undertaken a detailed inventory,
review, and assessment of all areas within its business and operations
that could be materially adversely affected by the failure of Borrower
to be Year 2000 Compliant on a timely basis; (2) developed a detailed
plan and time line for becoming Year 2000 Compliant on a timely basis,
and (3) to date, implemented that plan in accordance with that
timetable in all material respects.
(c) Borrower has made written inquiry of each of its key
suppliers, vendors, and customers, as to whether such persons have
initiated programs to become Year 2000 Compliant and on the basis of
such inquiries, Borrower reasonably believes that all such persons
will be or become so compliant. For purposes hereof, "key suppliers,
vendors, and customers" refers to those suppliers, vendors, and
customers of Borrower whose business failure would reasonably be
expected to have a Material Adverse Effect. For purposes of this
paragraph, Lender, as a lender of funds under the terms of this
Agreement, confirms to Borrower that Lender has initiated its own
corporate-wide Year 2000 program with respect to its lending
activities.
ARTICLE VII
Positive Covenants
Borrower covenants and agrees that, as long as the Obligations or any
part thereof are outstanding or Lender has any Commitment hereunder, Borrower
will perform and observe the following positive covenants, unless Lender shall
otherwise consent in writing:
Section 7.1 Reporting Requirements. Borrower will furnish to
Lender:
(a) Annual Financial Statements. (i) As soon as available,
and in any event within 90 days after the end of each fiscal year of
Borrower, beginning with the fiscal year ending December 31, 1999, a
copy of the Form 10-K Annual Report of Borrower and the Subsidiaries
for such fiscal year; (ii) as soon as available, and in any event
within 45 days after the end of each of the quarters of each fiscal
year of Borrower, a copy of the
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Form 10-Q of Borrower and the Subsidiaries as of the end of such fiscal
quarter and for the portion of the fiscal year then ended; and (iii) as
soon as available, one copy of any other financial statement, report,
notice or proxy statement sent by Borrower or any Subsidiary to its
stockholders generally and one copy of any other regular, periodic or
special report, registration statement, or prospectus filed by Borrower
or any Subsidiary with any securities exchange or the Securities and
Exchange Commission or any successor agency.
(b) Annual Projections. By December 31 of each year,
annual projections of Borrower for the subsequent fiscal year.
(c) Management Letters. Promptly upon receipt thereof, a
copy of any management letter or written report submitted to Borrower
or any Subsidiary by independent certified public accountants with
respect to the business, condition (financial or otherwise),
operations, or properties of Borrower or any Subsidiary;
(d) Notice of Litigation. Promptly after the commencement
thereof, notice of all actions, suits, and proceedings before any
court or governmental department, commission, board, bureau, agency,
or instrumentality, domestic or foreign, affecting Borrower or any
Subsidiary which, if determined adversely to Borrower or such
Subsidiary, would reasonably be expected to have a Material Adverse
Effect;
(e) Notice of Default. As soon as possible and in any
event within five days after the occurrence of each Event of Default
and each event which, with the giving of notice or lapse of time or
both, would constitute an Event of Default, a written notice setting
forth the details of such Event of Default or event and the action
which Borrower has taken and proposes to take with respect thereto;
(f) ERISA Reports. Promptly after the filing or receipt
thereof, copies of all reports, including annual reports, and notices
which Borrower or any Subsidiary files with or receives from the PBGC
or the U.S. Department of Labor under ERISA; and as soon as possible
and in any event within five days after Borrower or any Subsidiary
knows or has reason to know that any Reportable Event or Prohibited
Transaction has occurred with respect to any Plan or that the PBGC or
Borrower or any Subsidiary has instituted or will institute
proceedings under Title IV of ERISA to terminate any Plan, a
certificate of the chief financial officer of Borrower setting forth
the details as to such Reportable Event or Prohibited Transaction or
Plan termination and the action that Borrower proposes to take with
respect thereto;
(g) Reports to Other Creditors. Promptly after the
furnishing thereof, copies of any statement or report furnished to any
other party pursuant to the terms of any indenture, loan, or credit or
similar agreement and not otherwise required to be furnished to Lender
pursuant to any other clause of this Section;
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(h) Notice of Environmental Law Violation. As soon as
possible and in any event within five days after the occurrence
thereof, written notice of any violation of any Environmental Law that
Borrower or any Subsidiary reports or is required to report to any
governmental authority;
(i) Notice of Material Adverse Effect. As soon as
possible and in any event within five days after the occurrence
thereof, written notice of any matter that would reasonably be
expected to have a Material Adverse Effect;
(j) General Information. Promptly, such other information
concerning Borrower or any Subsidiary as Lender may from time to time
reasonably request.
Section 7.2 Maintenance of Existence; Conduct of Business. Except
for mergers, consolidations, liquidations or amalgamations not otherwise
prohibited by this Agreement, Borrower will preserve and maintain, and, will
cause each Subsidiary to preserve and maintain, its corporate existence and all
of its leases, privileges, licenses, permits, franchises, qualifications and
rights that are necessary or desirable in the ordinary conduct of its business,
and conduct, and cause each Subsidiary to conduct, its business as presently
conducted in an orderly and efficient manner in accordance with good business
practices.
Section 7.3 Maintenance of Properties. Borrower will maintain,
keep, and preserve, and cause each Subsidiary to maintain, keep, and preserve,
all of its properties (tangible and intangible) necessary or useful in the
proper conduct of its business in good working order and condition, except
where the failure to so maintain, keep or preserve would not reasonably be
expected to have a Material Adverse Effect.
Section 7.4 Taxes and Claims. Borrower will pay or discharge, and
will cause each Subsidiary to pay or discharge, at or before maturity or before
becoming delinquent (i) all material taxes, levies, assessments, and
governmental charges imposed on it or its income or profits or any of its
property, and (ii) all lawful claims for labor, material, and supplies, which,
if unpaid, might become a Lien prohibited by Section 8.1 upon any of its
property; provided, however, that neither Borrower nor any Subsidiary shall be
required to pay or discharge any tax, levy, assessment, or governmental charge
which is being contested in good faith by appropriate proceedings diligently
pursued, and for which adequate reserves have been established.
Section 7.5 Insurance. Borrower will maintain, and will cause
each Subsidiary to maintain, with financially sound and reputable insurance
companies workmen's compensation insurance, liability insurance, and insurance
on its property, assets, and business at least in such amounts and against such
risks as are usually insured against by Persons engaged in similar businesses.
Section 7.6 Inspection Rights. At any reasonable time and from
time to time, Borrower will permit, and will cause each Subsidiary to permit,
representatives of Lender to examine and make copies of the books and records
of, and visit and inspect the properties of
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Borrower and any Subsidiary, and to discuss the business, operations, and
financial condition of Borrower and the Subsidiaries with their respective
officers and employees and with their independent certified public accountants.
Section 7.7 Keeping Books and Records. Borrower will maintain,
and will cause each Subsidiary to maintain, proper books of record and account
in which full, true, and correct entries in conformity with GAAP shall be made
of all dealings and transactions in relation to its business and activities.
Section 7.8 Compliance with Laws. Borrower will comply, and will
cause each Subsidiary to comply, in all material respects with all applicable
laws, rules, regulations, and orders of any court, governmental authority, or
arbitrator, including, without limitation, any directives or regulations issued
by the U.S. Department of Treasury, Office of Foreign Assets Control, except
where the failure to comply would not reasonably be expected to have a Material
Adverse Effect.
The Borrower shall not serve under or enter into any contract with, a
Person included within the definition of (i) "national" of a "designated
foreign country," or "specially designated national" of a "designated foreign
county," in the Foreign Assets Control Regulations or the Cuban Assets Control
Regulations of the United States Treasury Department, 31 C.F.R. Parts 500 and
515, in each case as amended, (ii) "Government of Libya," "entity of the
Government of Libya" or "Libyan entity" in the Libyan Sanctions Regulations of
the United States Treasury Department, 31 C.F.R Part 550, as amended, or
(iii)"Government of Iraq," "entity of the Government of Iraq" or "Iraqi
Government entity" in the Iraqi Sanctions Regulations, 31 C.F.R Part 575, as
amended, all within the meaning of said Regulations or of any regulations,
interpretations or rulings issued thereunder, or engage in any transaction that
violates any provision of said Regulations or that violates any provision of
the Iranian Transactions Regulations, 31 C.F.R. Part 560, as amended, the
Transaction Control Regulations, 31 C.F.R. Part 505, as amended, the Foreign
Assets Control Regulations, 31 C.F.R. Part 500, as amended, or Executive Orders
12810 and 12831; provided however that to the extent any of the foregoing
regulations are repealed and not replaced by similar regulations, restrictions
or sanctions, the prohibitions herein shall not apply as they pertain to such
regulations.
Section 7.9 Compliance with Agreements. Borrower will comply, and
will cause each Subsidiary to comply, in all material respects with all
contracts, agreements, and instruments binding on it or affecting its
properties or business, except where the failure to comply would not reasonably
be expected to have a Material Adverse Effect.
Section 7.10 Further Assurances. Borrower will execute and
deliver, and will cause each Subsidiary to execute and deliver, such further
instruments as may be requested by Lender to carry out the provisions and
purposes of this Agreement and the other Loan Documents.
Section 7.11 ERISA. Borrower will comply, and will cause each
Subsidiary to comply, with all minimum funding requirements, and all other
material requirements, of ERISA, except
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where the failure to comply would not reasonably be expected to have a Material
Adverse Effect.
Section 7.12 Year 2000 Compliance. Borrower covenants and agrees
with Lender that, while any Letter of Credit or Bank Guarantee is in effect,
Borrower will:
(a) At all times prior to January 1, 2000, furnish such
additional information, statements and other reports with respect to
Borrower's activities, course of action and progress towards becoming
Year 2000 Compliant as Lender may request from time to time.
(b) In the event of any change in circumstances that
causes or will likely cause any of Borrower's representations and
warranties with respect to its being or becoming Year 2000 Compliant
to no longer be true (hereinafter, referred to as a "Change in
Circumstances") then Borrower shall promptly, and in any event within
ten days of receipt of information regarding a Change in
Circumstances, provide Lender with written notice (the "Notice") that
describes in reasonable detail the Change in Circumstances and how
such Change in Circumstances caused or will likely cause Borrower's
representations and warranties with respect to being or becoming Year
2000 Compliant to no longer be true. Borrower shall, within 10 days of
a request, also provide Lender with any additional information Lender
requests of Borrower in connection with the Notice and/or a Change in
Circumstances.
(c) Give any representative of Lender access during all
business hours, upon reasonable prior notice to Borrower, to, and
permit such representative to examine, copy or make excerpts from, any
and all books, records and documents in the possession of Borrower and
relating to its affairs, and to inspect any of the properties and
Systems of Borrower, all at the sole cost and expense of Lender.
Section 7.13 Accounts with Lender. Borrower shall transfer all of
its primary operating accounts and treasury management to Lender by March 31,
2000.
ARTICLE VIII
Negative Covenants
Borrower covenants and agrees that, as long as the Obligations or any
part thereof are outstanding or Lender has any Commitment hereunder, Borrower
will perform and observe the following negative covenants, unless Lender shall
otherwise consent in writing:
Section 8.1 Limitation on Liens. Borrower will not incur,
create, assume, or permit to exist, and will not permit any Subsidiary to
incur, create, assume, or permit to exist, any Lien upon any of its accounts,
accounts receivable, inventory or related general intangibles, whether now
owned or hereafter acquired, unless Lender has entered into an intercreditor
agreement with the prospective holder of the Lien, in form and substance
acceptable to Lender.
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Nothing in the foregoing section shall prohibit:
(a) Liens on equipment or inventory of Borrower created by a
purchase money security interest;
(b) undetermined or inchoate liens arising or potentially arising
under statutory provisions that have not at the time been
filed or registered in accordance with applicable law or of
that written notice has not been duly given in accordance
with applicable law or that, although filed or registered,
relate to obligations not due or delinquent;
(c) Liens (i) of landlords and carriers, warehousemen, mechanics,
suppliers, sellers, materialmen or repairmen, or other
similar Liens arising by operation of law, and (ii) Liens
that have not been registered in accordance with applicable
law, in each case arising in the ordinary course of business
and with respect to amounts not yet delinquent or that are
being contested in good faith by appropriate proceedings
diligently pursued and diligently conducted and for which
adequate reserves have been established;
(d) Liens on a property of a Person which Liens are existing at
the time such Person is merged into or consolidated with the
Borrower and Liens on property existing at the time of
acquisition thereof by the Borrower; provided that such Liens
were not placed on such property in contemplation of the
consummation of such merger, consolidation or acquisition and
do not extend to any assets other than those of the Person
merged into or consolidated with the Borrower, or the
property so acquired, and proceeds and products of any of the
foregoing;
(e) Liens in favor of customs and revenue authorities arising as
a matter of law to secure payment of customs duties in
connection with the importation of goods;
(f) Liens arising out of conditional sale, title retention,
consignment or similar arrangements for the sale of goods
entered into by the Borrower in the ordinary course of
business of the Borrower;
(g) Liens extending, renewing or replacing any of the foregoing
Liens, provided that the principal amount of the indebtedness
or other obligation secured by such Lien is not increased or
the maturity thereof shortened and such Lien is not extended
to cover any additional indebtedness, obligations or
property, other than like obligations and the substitution of
like property (or categories of property to the extent the
terms of the Lien being extended, renewed or replaced,
extended to or covered such categories of property) or the
proceeds or products of the property subject thereto; and
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(h) Liens on any proceeds (including, without limitation,
insurance, condemnation and eminent domain proceeds) or
products of any collateral a Lien over which is permitted by
clauses (a) to and including (g) above.
ARTICLE IX
Financial Covenants
Borrower covenants and agrees that, as long as the Obligations or any
part thereof are outstanding or Lender has any Commitment hereunder, Borrower
will observe and perform the following financial covenants, unless Lender shall
otherwise consent in writing:
Section 9.1 Debt to Capitalization Ratio. Borrower will at all
times maintain a ratio Debt to Capitalization of at least 1.0 to 4.0.
Section 9.2 Consolidated Tangible Net Worth. Borrower will at all
times maintain Consolidated Tangible Net Worth in an amount not less than One
Hundred Eighty-One Million and No/100 Dollars ($181,000,000.00).
ARTICLE X
Default
Section 10.1 Events of Default. Without in any manner impairing
the demand nature of the Note, each of the following shall be deemed an "Event
of Default":
(a) Borrower shall fail to pay when due the principal on
any Advances or any part thereof, or the Borrower shall fail to pay
within 5 Business Days when due any other monetary obligation
hereunder other than principal on Advances.
(b) Any representation or warranty made or deemed made by
Borrower or any Obligated Party (or any of their respective officers)
in any Loan Document or in any certificate, report, notice, or
financial statement furnished at any time in connection with this
Agreement shall be false, misleading, or erroneous in any material
respect when made or deemed to have been made.
(c) Borrower or any Obligated Party shall fail to
perform, observe, or comply with any covenant, agreement, or term
contained in this Agreement or any other Loan Document.
(d) Borrower, any Subsidiary, or any Obligated Party
shall commence a voluntary proceeding seeking liquidation,
reorganization, or other relief with respect to itself or its debts
under any bankruptcy, insolvency, or other similar law now or
hereafter
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in effect or seeking the appointment of a trustee, receiver,
liquidator, custodian, or other similar official of it or a
substantial part of its property or shall consent to any such relief
or to the appointment of or taking possession by any such official in
an involuntary case or other proceeding commenced against it or shall
make a general assignment for the benefit of creditors or shall
generally fail to pay its debts as they become due or shall take any
corporate action to authorize any of the foregoing.
(e) An involuntary proceeding shall be commenced against
Borrower, any Subsidiary, or any Obligated Party seeking liquidation,
reorganization, or other relief with respect to it or its debts under
any bankruptcy, insolvency, or other similar law now or hereafter in
effect or seeking the appointment of a trustee, receiver, liquidator,
custodian or other similar official for it or a substantial part of
its property, and such involuntary proceeding shall remain undismissed
and unstayed for a period of 30 days.
(f) Borrower, any Subsidiary, or any Obligated Party
shall fail to discharge within a period of 30 days after the
commencement thereof any attachment, sequestration, or similar
proceeding or proceedings involving an aggregate amount in excess
$1,000,000 against any of its assets or properties.
(g) Borrower, any Subsidiary, or any Obligated Party
shall fail to satisfy and discharge promptly any judgment or judgments
against it for the payment of money in an aggregate amount in excess
of $1,000,000.
(h) Borrower, any Subsidiary, or any Obligated Party
shall fail to pay when due any principal of or interest on any Debt
(other than the Obligations) in an aggregate amount in excess of
$1,000,000, or the maturity of any such Debt shall have been
accelerated, or any such Debt shall have been required to be prepaid
prior to the stated maturity thereof, or any event shall have occurred
that permits (or, with the giving of notice or lapse of time or both,
would permit) any holder or holders of such Debt or any Person acting
on behalf of such holder or holders to accelerate the maturity thereof
or require any such prepayment.
(i) This Agreement or any other Loan Document shall cease
to be in full force and effect or shall be declared null and void or
the validity or enforceability thereof shall be contested or
challenged by Borrower, any Subsidiary, any Obligated Party or any of
their respective shareholders, or Borrower or any Obligated Party
shall deny that it has any further liability or obligation under any
of the Loan Documents.
(j) Any of the following events shall occur or exist with
respect to Borrower or any ERISA Affiliate: (i) any Prohibited
Transaction involving any Plan; (ii) any Reportable Event with respect
to any Plan; (iii) the filing under Section 4041 of ERISA of a notice
of intent to terminate any Plan or the termination of any Plan; (iv)
any event or circumstance that might constitute grounds entitling the
PBGC to institute proceedings under Section 4042 of ERISA for the
termination of, or for the appointment of a trustee
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to administer, any Plan, or the institution by the PBGC of any such
proceedings; (v) complete or partial withdrawal under Section 4201 or
4204 of ERISA from a Multiemployer Plan or the reorganization,
insolvency, or termination of any Multiemployer Plan; and in each case
above, such event or condition, together with all other events or
conditions, if any, have subjected or could in the reasonable opinion
of Lender subject Borrower to any tax, penalty, or other liability to
a Plan, a Multiemployer Plan, the PBGC, or otherwise (or any
combination thereof) which in the aggregate exceed or could reasonably
be expected to exceed $500,000.
(k) Borrower, any of its Subsidiaries, or any Obligated
Party, or any of their respective properties, revenues, or assets,
shall become subject to an order of forfeiture, seizure, or
divestiture (whether under RICO or otherwise) and the same shall not
have been discharged within 30 days from the date of entry thereof.
Section 10.2 Remedies Upon Default. If any Event of Default shall
occur, Lender may without notice terminate its Commitment to make Advances,
issue Letters of Credit, and create Acceptances hereunder and declare the
Obligations or any part thereof to be immediately due and payable, and the same
shall thereupon become immediately due and payable, without notice, demand,
presentment, notice of dishonor, notice of acceleration, notice of intent to
accelerate, notice of intent to demand, protest, or other formalities of any
kind, all of which are hereby expressly waived by Borrower; provided, however,
that upon the occurrence of an Event of Default under Section 10.1(d) or
Section 10.1(e), the Commitment of Lender to make Advances, issue Letters of
Credit, and create Acceptances shall automatically terminate, and the
Obligations shall become immediately due and payable without notice, demand,
presentment, notice of dishonor, notice of acceleration, notice of intent to
accelerate, notice of intent to demand, protest, or other formalities of any
kind, all of which are hereby expressly waived by Borrower. If any Event of
Default shall occur, Lender may exercise all rights and remedies available to
it in law or in equity, under the Loan Documents, or otherwise.
Section 10.3 Bank Guarantees and Letters of Credit. If the
Termination Date or any Event of Default shall occur, Borrower shall, if
requested by Lender or otherwise required by the terms of this Agreement,
immediately deposit with and pledge to Lender cash or cash equivalent
investments in an amount equal to the outstanding Bank Guarantees and Letter of
Credit Liabilities as security for the Obligations.
Section 10.4 Performance by Lender. If Borrower shall fail to
perform any covenant, duty, or agreement contained in any of the Loan
Documents, Lender may perform or attempt to perform such covenant, duty, or
agreement on behalf of Borrower. In such event, Borrower shall, at the request
of Lender, promptly pay any amount expended by Lender in such performance or
attempted performance to Lender, together with interest thereon at the Default
Rate from the date of such expenditure until paid. Notwithstanding the
foregoing, it is expressly agreed that Lender shall not have any liability or
responsibility for the performance of any obligation of Borrower under this
Agreement or any other Loan Document.
-26-
<PAGE> 27
ARTICLE XI
Miscellaneous
Section 11.1 Expenses of Lender. Borrower hereby agrees to pay
Lender on demand: (i) all costs and expenses incurred by Lender in connection
with the preparation, negotiation, and execution of this Agreement and the
other Loan Documents and any and all amendments, modifications, renewals,
extensions, and supplements thereof and thereto, including, without limitation,
the fees and expenses of Lender's legal counsel, (ii) all costs and expenses
incurred by Lender in connection with the enforcement of this Agreement or any
other Loan Document, including, without limitation, the fees and expenses of
Lender's legal counsel, and (iii) all other costs and expenses incurred by
Lender in connection with this Agreement or any other Loan Document, including,
without limitation, all costs, expenses, taxes, assessments, filing fees, and
other charges levied by a governmental authority or otherwise payable in
respect of this Agreement or any other Loan Document.
Section 11.2 INDEMNIFICATION. BORROWER HEREBY INDEMNIFIES LENDER
AND EACH AFFILIATE THEREOF AND THEIR RESPECTIVE OFFICERS, DIRECTORS, EMPLOYEES,
ATTORNEYS AND AGENTS (EACH AN "INDEMNIFIED PERSON") FROM, AND HOLDS EACH OF
THEM HARMLESS AGAINST, ANY AND ALL LOSSES, LIABILITIES, CLAIMS, DAMAGES,
PENALTIES, JUDGMENTS, DISBURSEMENTS, COSTS, AND EXPENSES (INCLUDING ATTORNEYS'
FEES) ("LOSSES") TO WHICH ANY OF THEM MAY BECOME SUBJECT IN CONNECTION WITH ANY
CLAIM, INVESTIGATION, LITIGATION OR PROCEEDING (OR THE PREPARATION OF ANY
DEFENSE IN CONNECTION THEREWITH) (COLLECTIVELY "PROCEEDINGS") (WHETHER OR NOT
SUCH INDEMNIFIED PERSON IS A PARTY THERETO) INSOFAR AS SUCH LOSSES DIRECTLY
ARISE OUT OF OR RELATE TO OR RESULT FROM, WHICH DIRECTLY OR INDIRECTLY ARISE
FROM OR RELATE TO (I) THE NEGOTIATION, EXECUTION, DELIVERY, PERFORMANCE,
ADMINISTRATION, OR ENFORCEMENT OF ANY OF THE LOAN DOCUMENTS, (II) ANY OF THE
TRANSACTIONS CONTEMPLATED BY THE LOAN DOCUMENTS, (III) ANY BREACH BY BORROWER
OF ANY REPRESENTATION, WARRANTY, COVENANT, OR OTHER AGREEMENT CONTAINED IN ANY
OF THE LOAN DOCUMENTS, (IV) THE PRESENCE, RELEASE, THREATENED RELEASE,
DISPOSAL, REMOVAL, OR CLEANUP OF ANY HAZARDOUS SUBSTANCE LOCATED ON, ABOUT,
WITHIN, OR AFFECTING ANY OF THE PROPERTIES OR ASSETS OF BORROWER OR ANY
SUBSIDIARY, (V) THE USE OR PROPOSED USE OF ANY LETTER OF CREDIT, ISSUED
PURSUANT HERETO (VI) ANY AND ALL TAXES, LEVIES, DEDUCTIONS, AND CHARGES IMPOSED
ON LENDER OR ANY OF LENDER'S CORRESPONDENTS IN RESPECT OF ANY LETTER OF CREDIT
ISSUED PURSUANT HERETO, OR (VII) ANY INVESTIGATION, LITIGATION, OR OTHER
PROCEEDING RELATING TO ANY OF THE FOREGOING AND ANY LEGAL PROCEEDING RELATING
TO ANY COURT ORDER, INJUNCTION, OR OTHER PROCESS OR DECREE RESTRAINING OR
SEEKING TO RESTRAIN LENDER OR ANY OF LENDER'S CORRESPONDENTS FROM PAYING ANY
-27-
<PAGE> 28
AMOUNT UNDER ANY LETTER OF CREDIT ISSUED PURSUANT HERETO. WITHOUT LIMITING ANY
PROVISION OF THIS AGREEMENT OR OF ANY OTHER LOAN DOCUMENT, IT IS THE EXPRESS
INTENTION OF THE PARTIES HERETO THAT EACH PERSON TO BE INDEMNIFIED UNDER THIS
SECTION SHALL BE INDEMNIFIED FROM AND HELD HARMLESS AGAINST ANY AND ALL LOSSES,
LIABILITIES, CLAIMS, DAMAGES, PENALTIES, JUDGMENTS, DISBURSEMENTS, COSTS, AND
EXPENSES (INCLUDING ATTORNEYS' FEES) ARISING OUT OF OR RESULTING FROM THE SOLE
OR CONTRIBUTORY NEGLIGENCE OF THE PERSON TO BE INDEMNIFIED BUT NOT FROM THE
GROSS NEGLIGENCE OR WILFULL MISCONDUCT OF SUCH PERSON.
Promptly after receipt by any Indemnified Person of notice of its
involvement in any pending or threatened Proceeding as to which, or related to
or arising out of any matter for which indemnification may be sought hereunder
(an "Indemnified Proceeding"), such Indemnified Person shall, if a claim in
respect thereof is to be made against Borrower under the Loan Documents, notify
Borrower in writing of such involvement; provided, however, that the failure by
such Indemnified Person to so notify Borrower shall not relieve Borrower from
the obligation to indemnify or any other liability hereunder or otherwise
except to the extent that such failure to provide notice prejudices Borrower in
any material respect. In case any Indemnified Person's involvement in such
Indemnified Proceeding shall be in any capacity other than as a witness,
Borrower and its counsel shall be entitled to participate therein with such
Indemnified Person and its counsel. To the extent Borrower wishes, Borrower
also shall be entitled to assume the defense of any Indemnified Proceeding with
counsel of Borrower's choice that is reasonably acceptable to the relevant
Indemnified Person and after notice from Borrower to such Indemnified Person of
Borrower's election so to assume the defense thereof, Borrower will not be
liable to such Indemnified Person for the cost of defense thereof.
Notwithstanding the foregoing, Borrower shall not be entitled to assume the
defense of any Indemnified Proceeding, and the limitations in the preceding
sentence on Borrower's liability to any Indemnified Person shall not apply, if
counsel to any Indemnified Person reasonably determines, and Borrower
reasonable concurs, that there are actual or potential conflicts of interest
between such Indemnified Person and Borrower or that defenses available to such
Indemnified Person may not be asserted by Borrower on the behalf of such
Indemnified Person. In any event, notwithstanding the foregoing, Borrower shall
not be required to indemnify any Indemnified Person for the settlement of any
Indemnified Proceeding entered into without Borrower's prior written consent.
If Borrower assumes the defense of any Indemnified Proceeding as provided
above, Borrower shall not settle or compromise any such Indemnified Proceeding
without the relevant Indemnified Person's prior written consent if the
settlement or compromise involves performance by, or adverse admission of, such
Indemnified Person.
Only one counsel shall be retained by all Indemnified Persons with
respect to any Indemnified Proceeding, unless counsel to any Indemnified Person
reasonably determines, and the Borrower reasonably concurs, that there are
actual or potential conflicts of interest between such Indemnified Person and
other Indemnified Persons, in which case such Indemnified Person may retain
separate counsel together with all other Indemnified Person subject to the same
-28-
<PAGE> 29
conflict of interest.
Section 11.3 Limitation of Liability. Neither Lender nor any
Affiliate, officer, director, employee, attorney, or agent of Lender shall have
any liability with respect to, and Borrower hereby waives, releases, and agrees
not to sue any of them upon, any claim for any special, indirect, incidental,
or consequential damages suffered or incurred by Borrower in connection with,
arising out of, or in any way related to, this Agreement or any of the other
Loan Documents, or any of the transactions contemplated by this Agreement or
any of the other Loan Documents. Borrower hereby waives, releases, and agrees
not to sue Lender or any of Lender's Affiliates, officers, directors,
employees, attorneys, or agents for punitive damages in respect of any claim in
connection with, arising out of, or in any way related to, this Agreement or
any of the other Loan Documents, or any of the transactions contemplated by
this Agreement or any of the other Loan Documents.
Section 11.4 Modification to Letter of Credit Master Agreements.
The following modifications are hereby made to the Letter of Credit Master
Agreements provided by Lender to the Borrower (and to the extent there are any
discrepancies between such Letter of Credit Master Agreements and this
Agreement, the provisions of this Agreement shall prevail):
(a) Section 2 thereto is deleted in its entirety and replaced by
the following:
"Applicant agrees to pay such fees and interest as set forth
in the Loan Agreement between Issuer and Applicant dated as of
December 29, 1999 (hereinafter referred to as the "Loan
Agreement")";
(b) Section 4(i) thereto is deleted in its entirety and replaced
by the following:
"Applicant is a corporation organized under the laws of the
State of Delware";
(c) Section 4(iii) thereto is amended by adding the following
clause at the beginning of said subsection:
"To the best of Applicant's knowledge";
(d) Section 4(v) thereto is deleted in its entirety;
(e) Section 5 thereto is deleted in its entirety;
(f) Section 10 thereto is amended by adding the following clause
at the beginning of said section:
"During the continuance of an Event of Default,";
(g) Section 11(c) thereto is amended by deleting "three percentage
points" and
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<PAGE> 30
replacing it with "one and one-half percentage points" and by
deleting "Base Rate" and replacing it with "Prime Rate, as defined
in the Loan Agreement";
(h) Section 13 thereto is deleted in its entirety;
(i) Section 14 thereto is amended by deleting the first clause of
the first sentence to remove the reference to the deleted Section 13; and
(j) Section 16 thereto is deleted in its entirety.
Section 11.5 No Duty. All attorneys, accountants, appraisers, and
other professional Persons and consultants retained by Lender shall have the
right to act exclusively in the interest of Lender and shall have no duty of
disclosure, duty of loyalty, duty of care, or other duty or obligation of any
type or nature whatsoever to Borrower or any of Borrower's shareholders or any
other Person.
Section 11.6 Lender Not Fiduciary. The relationship between
Borrower and Lender is solely that of debtor and creditor, and Lender has no
fiduciary or other special relationship with Borrower, and no term or condition
of any of the Loan Documents shall be construed so as to deem the relationship
between Borrower and Lender to be other than that of debtor and creditor.
Section 11.7 Equitable Relief. Borrower recognizes that in the
event Borrower fails to pay, perform, observe, or discharge any or all of the
Obligations, any remedy at law may prove to be inadequate relief to Lender.
Borrower therefore agrees that Lender, if Lender so requests, shall be entitled
to temporary and permanent injunctive relief in any such case without the
necessity of proving actual damages.
Section 11.8 No Waiver; Cumulative Remedies. No failure on the
part of Lender to exercise and no delay in exercising, and no course of dealing
with respect to, any right, power, or privilege under this Agreement shall
operate as a waiver thereof, nor shall any single or partial exercise of any
right, power, or privilege under this Agreement preclude any other or further
exercise thereof or the exercise of any other right, power, or privilege. The
rights and remedies provided for in this Agreement and the other Loan Documents
are cumulative and not exclusive of any rights and remedies provided by law.
Section 11.9 Successors and Assigns. This Agreement is binding
upon and shall inure to the benefit of Lender and Borrower and their respective
successors and assigns, except that Borrower may not assign or transfer any of
its rights or obligations under this Agreement without the prior written
consent of Lender.
Section 11.10 Survival. All representations and warranties made in
this Agreement or any other Loan Document or in any document, statement, or
certificate furnished in connection with this Agreement shall survive the
execution and delivery of this Agreement and the other Loan Documents, and no
investigation by Lender or any closing shall affect the representations and
warranties or the right of Lender to rely upon them. Without prejudice to the
survival of any
-30-
<PAGE> 31
other obligation of Borrower hereunder, the obligations of Borrower under
Sections11.1, and 11.2 shall survive repayment of the Note and termination of
the Commitment and the Letters of Credit.
Section 11.1 ENTIRE AGREEMENT; AMENDMENT. THIS AGREEMENT, THE
NOTE, AND THE OTHER LOAN DOCUMENTS REFERRED TO HEREIN EMBODY THE FINAL, ENTIRE
AGREEMENT AMONG THE PARTIES HERETO AND SUPERSEDE ANY AND ALL PRIOR COMMITMENTS,
AGREEMENTS, REPRESENTATIONS, AND UNDERSTANDINGS, WHETHER WRITTEN OR ORAL,
RELATING TO THE SUBJECT MATTER HEREOF AND MAY NOT BE CONTRADICTED OR VARIED BY
EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS OR
DISCUSSIONS OF THE PARTIES HERETO. THERE ARE NO ORAL AGREEMENTS AMONG THE
PARTIES HERETO. The provisions of this Agreement and the other Loan Documents
to which Borrower is a party may be amended or waived only by an instrument in
writing signed by the parties hereto.
Section 11.12 Maximum Interest Rate. No provision of this
Agreement or of any other Loan Document shall require the payment or the
collection of interest in excess of the maximum permitted by applicable law. If
any excess of interest in such respect is hereby provided for, or shall be
adjudicated to be so provided, in any Loan Document or otherwise in connection
with this loan transaction, the provisions of this Section shall govern and
prevail and neither Borrower nor the sureties, guarantors, successors, or
assigns of Borrower shall be obligated to pay the excess amount of such
interest or any other excess sum paid for the use, forbearance, or detention of
sums loaned pursuant hereto. In the event Lender ever receives, collects, or
applies as interest any such sum, such amount which would be in excess of the
maximum amount permitted by applicable law shall be applied as a payment and
reduction of the principal of the indebtedness evidenced by the Note; and, if
the principal of the Note has been paid in full, any remaining excess shall
forthwith be paid to Borrower. In determining whether or not the interest paid
or payable exceeds the Maximum Rate, Borrower and Lender shall, to the extent
permitted by applicable law, (i) characterize any non-principal payment as an
expense, fee, or premium rather than as interest, (ii) exclude voluntary
prepayments and the effects thereof, and (iii) amortize, prorate, allocate, and
spread in equal or unequal parts the total amount of interest throughout the
entire contemplated term of the indebtedness evidenced by the Note so that
interest for the entire term does not exceed the Maximum Rate.
Section 11.13 Notices. All notices and other communications
provided for in this Agreement and the other Loan Documents to which Borrower
is a party shall be given or made by telex, telegraph, telecopy, cable, or in
writing and telexed, telecopied, telegraphed, cabled, mailed by certified mail
return receipt requested, or delivered to the intended recipient at the
"Address for Notices" specified below its name on the signature pages hereof;
or, as to any party, at such other address as shall be designated by such party
in a notice to the other party given in accordance with this Section. Except as
otherwise provided in this Agreement, all such communications shall be deemed
to have been duly given when transmitted by telex or telecopy, subject to
telephone confirmation of receipt, or delivered to the telegraph or cable
office, subject
-31-
<PAGE> 32
to telephone confirmation of receipt, or when personally delivered or, in the
case of a mailed notice, when duly deposited in the mails, in each case given
or addressed as aforesaid; provided, however, notices to Lender pursuant to
Articles II, III, and IV shall not be effective until received by Lender.
Section 11.14 Applicable Law; Venue; Service of Process. This
Agreement shall be governed by and construed in accordance with the laws of the
State of Texas and the applicable laws of the United States of America. This
Agreement has been entered into in Harris County, Texas, and it shall be
performable for all purposes in Harris County, Texas. Any action or proceeding
against Borrower under or in connection with any of the Loan Documents may be
brought in any state or federal court in Harris County, Texas. Borrower hereby
irrevocably (i) submits to the nonexclusive jurisdiction of such courts, and
(ii) waives any objection it may now or hereafter have as to the venue of any
such action or proceeding brought in any such court or that any such court is
an inconvenient forum. Borrower agrees that service of process upon it may be
made by certified or registered mail, return receipt requested, at its address
specified or determined in accordance with the provisions of Section 11.13.
Nothing herein or in any of the other Loan Documents shall affect the right of
Lender to serve process in any other manner permitted by law or shall limit the
right of Lender to bring any action or proceeding against Borrower or with
respect to any of its property in courts in other jurisdictions. Any action or
proceeding by Borrower against Lender shall be brought only in a court located
in Harris County, Texas.
Section 11.15 Demand Nature. Notwithstanding anything to the
contrary contained herein or in any other Loan Document, Borrower's obligation
to repay outstanding Advances and to pay accrued interest thereon shall at all
times be a demand obligation, and Lender need not rely on or prove the
existence of an Event of Default before making demand for the payment of any or
all outstanding Advances and accrued and unpaid interest thereon.
Section 11.16 Counterparts. This Agreement may be executed in one
or more counterparts, each of which shall be deemed an original, but all of
which together shall constitute one and the same instrument.
Section 11.17 Severability. Any provision of this Agreement held
by a court of competent jurisdiction to be invalid or unenforceable shall not
impair or invalidate the remainder of this Agreement and the effect thereof
shall be confined to the provision held to be invalid or illegal.
Section 11.18 Headings. The headings, captions, and arrangements
used in this Agreement are for convenience only and shall not affect the
interpretation of this Agreement.
Section 11.19 Non-Application of Chapter 303 of Texas Credit Code.
The provisions of Chapter 303 of the Texas Finance Code are specifically
declared by the parties hereto not to be applicable to this Agreement or any of
the other Loan Documents or to the transactions contemplated hereby.
-32-
<PAGE> 33
Section 11.20 Participations. Lender shall have the right at any
time and from time to time to grant participations in the Note and any other
Loan Documents. Each actual or proposed participant shall be entitled to
receive all information received by Lender regarding the creditworthiness of
Borrower, including, without limitation, information required to be disclosed
to a participant pursuant to Banking Circular 181 (Rev., August 2, 1984),
issued by the Comptroller of the Currency (whether the actual or proposed
participant is subject to the circular or not).
Section 11.21 Construction. Borrower and Lender acknowledge that
each of them has had the benefit of legal counsel of its own choice and has
been afforded an opportunity to review this Agreement and the other Loan
Documents with its legal counsel and that this Agreement and the other Loan
Documents shall be construed as if jointly drafted by Borrower and Lender.
Section 11.22 Arbitration. Any controversy or claim between or
among the parties hereto including but not limited to those arising out of or
relating to this Agreement or any related agreements or instruments, including
any claim based on or arising from an alleged tort, shall be determined by
binding arbitration in accordance with the Federal Arbitration Act (or if not
applicable, the applicable state law), the Commercial Arbitration Rules of the
American Arbitration Association ("AAA"), and the "Special Rules" set forth
below. In the event of any inconsistency, the Special Rules shall control.
Judgment upon any arbitration award may be entered in any court having
jurisdiction. Any part to this Agreement may bring an action, including a
summary or expedited proceeding, to compel arbitration of any controversy or
claim to which this agreement applies in any court having jurisdiction over the
action.
(a) Special Rules. The arbitration shall be conducted in
Houston, Texas and presided over by an arbitrator provided at the
nearest location of Judicial Arbitration & Mediation Services ("JAMS")
office, or if JAMS is not able or is legally precluded from providing
an arbitrator, then the AAA. All arbitration will be commenced within
120 days of the demand for arbitration and the decision/award rendered
within 30 days thereafter; further, the arbitrator shall only, upon
showing of cause, be permitted to extend the commencement period of an
additional 60 days.
(b) Reservation of Rights. Nothing in this Agreement shall
be deemed to (i) limit the applicability of any otherwise applicable
statutes of limitation or repose and any waivers contained in this
Agreement; or (ii) be a waiver by the Lender of the protection
afforded to it by 12 U.S.C. Sec. 91 or any substantially equivalent
state law; or (iii) limit the right of any party hereto (A) to
exercise self help remedies such as (but not limited to) setoff, or
(B) to foreclose against any real or personal property collateral, or
(C) to obtain from a court provisional or ancillary remedies such as
(but not limited to) injunctive relief or the appointment of a
receiver. Any party may exercise such self help rights, foreclose upon
such property, or obtain such provisional or ancillary remedies
before, during or after the pendency of any arbitration proceeding
brought pursuant to this Agreement. Neither exercise of self help
remedies nor the institution or maintenance of an action for
provisional or ancillary remedies shall constitute a waiver of the
right of
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<PAGE> 34
any party, including the claimant in any such action, to arbitrate the
merits of the controversy or claim occasioning resort to such
remedies.
Section 11.23 WAIVER OF JURY TRIAL. TO THE FULLEST EXTENT
PERMITTED BY APPLICABLE LAW, BORROWER HEREBY IRREVOCABLY AND EXPRESSLY WAIVES
ALL RIGHT TO A TRIAL BY JURY IN ANY ACTION, PROCEEDING, OR COUNTERCLAIM
(WHETHER BASED UPON CONTRACT, TORT, OR OTHERWISE) ARISING OUT OF OR RELATING TO
ANY OF THE LOAN DOCUMENTS OR THE TRANSACTIONS CONTEMPLATED THEREBY OR THE
ACTIONS OF LENDER IN THE NEGOTIATION, ADMINISTRATION, OR ENFORCEMENT THEREOF.
IN WITNESS WHEREOF, the parties hereto have duly executed this
Agreement as of the day and year first above written.
BORROWER:
IRI INTERNATIONAL CORPORATION,
a Delaware corporation
By:
Robert Hargrave
Vice Chairman and Chief Financial Officer
Address for Notices:
2400 Crockett
Houston, Texas 77007
Fax No.: (713) 651-1526
Telephone No.: (713) 651-8002
Attention: Mr. Robert Hargrave
LENDER:
BANK ONE, TEXAS, N.A.,
a national banking association
By:
Karen Shouse
First Vice President
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<PAGE> 35
Address for Notices:
910 Travis, 7th Floor
Houston, Texas 77002
Fax No.: (713) 751-6177
Telephone No.: (713) 751-3640
Attention: Ms. Karen Shouse
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<PAGE> 36
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit Description of Exhibit Section
------- ---------------------- -------
<S> <C> <C>
"A" Note 2.2
"B" Letter of Credit Request Form 3.2
"C" Standy Letter of Credit Master Agreement 1.1
"D" Commercial Letter of Credit Master Agreement 1.1
INDEX TO SCHEDULES
<CAPTION>
Schedule Description of Schedule Section
-------- ----------------------- -------
<S> <C> <C>
1 Existing Litigation 7.5
2 Existing Debt 7.9
3 List of Subsidiaries 7.14
</TABLE>
<PAGE> 37
SCHEDULE 1
Existing Litigation
None.
<PAGE> 38
SCHEDULE 2
Existing Debt
Master Lease Agreement No. 127 by and between Borrower and Data
General Corporation dated December 26, 1995, with Lease Schedule attached dated
February 1, 1996.
<PAGE> 39
SCHEDULE 3
List of Subsidiaries
<TABLE>
<CAPTION>
=====================================================================================================================
PERCENTAGE OF
NAME OF JURISDICTION OF VOTING STOCK OWNED
SUBSIDIARY INCORPORATION BY BORROWER
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Bowen Mexicana, S.A. de Mexico 100%
C.V.
- ---------------------------------------------------------------------------------------------------------------------
Bowen Tools, Ltd. Canada 100%
- ---------------------------------------------------------------------------------------------------------------------
Cardwell International, Ltd. Kansas 100%
- ---------------------------------------------------------------------------------------------------------------------
Cardwell Manufacturing Canada 100%
Company, Ltd.
- ---------------------------------------------------------------------------------------------------------------------
Cardwell Exports, Ltd. U.S. Virgin Islands 100%
- ---------------------------------------------------------------------------------------------------------------------
IRI Energy Services Barbados 100%
(Barbados) Limited
- ---------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------
=====================================================================================================================
</TABLE>
<PAGE> 40
******************************************************************************
IRI INTERNATIONAL CORPORATION
CREDIT AGREEMENT
Dated as of December 29, 1999
$10,000,000
BANK ONE, TEXAS, N.A.
******************************************************************************
<PAGE> 41
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
ARTICLE I
Definitions......................................................................................... 1
----------- -
Section 1.1 Definitions................................................................. 1
----------- -
Section 1.2 Other Definitional Provisions............................................... 6
----------------------------- -
ARTICLE II
Bank Guarantees and Letters of Credit............................................................... 6
------------------------------------- -
Section 2.1 Bank Guarantees and Letters of Credits...................................... 6
-------------------------------------- -
Section 2.2 Procedure for Issuing Bank Guarantees and Letters of Credit................. 7
----------------------------------------------------------- -
Section 2.3 Fees........................................................................ 8
---- -
Section 2.4 Obligations Absolute........................................................ 8
-------------------- -
Section 2.5 Limitation of Liability..................................................... 9
----------------------- -
Section 2.6 Lending Installations....................................................... 10
--------------------- --
Section 2.7 Account with Lender......................................................... 10
------------------- --
ARTICLE III
Advances............................................................................................ 10
-------- --
Section 3.2 Repayment of Advances....................................................... 10
--------------------- --
Section 3.3 Interest.................................................................... 10
-------- --
ARTICLE IV
Payments............................................................................................ 11
-------- --
Section 4.1 Method of Payment........................................................... 11
----------------- --
Section 4.2 Computation of Interest..................................................... 11
----------------------- --
Section 4.3 Capital Adequacy............................................................ 11
---------------- --
Section 4.4 Additional Costs in Respect of Letters of Credit............................ 12
------------------------------------------------ --
ARTICLE V
Conditions Precedent................................................................................ 12
-------------------- --
Section 5.1 Initial Bank Guarantee or Letter of Credi.................................. 12
------------------------------------------ --
Section 5.2 All Bank Guarantees or Letters of Credit.................................... 13
---------------------------------------- --
ARTICLE VI
Representations and Warranties...................................................................... 14
------------------------------ --
Section 6.1 Corporate Existence......................................................... 14
------------------- --
Section 6.2 Financial Statements........................................................ 14
-------------------- --
Section 6.3 Corporate Action; No Breach................................................. 14
--------------------------- --
Section 6.4 Operation of Business....................................................... 15
--------------------- --
Section 6.5 Litigation and Judgments.................................................... 15
------------------------ --
Section 6.6 Rights in Properties; Liens................................................. 15
--------------------------- --
Section 6.7 Enforceability.............................................................. 15
-------------- --
Section 6.8 Approvals................................................................... 15
--------- --
Section 6.9 Debt........................................................................ 15
---- --
Section 6.10 Taxes....................................................................... 15
----- --
Section 6.11 Use of Proceeds; Margin Securities.......................................... 16
---------------------------------- --
Section 6.12 ERISA....................................................................... 16
----- --
</TABLE>
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<PAGE> 42
`
TABLE OF CONTENTS
(CONTINUED)
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
Section 6.13 Disclosure.................................................................. 16
---------- --
Section 6.14 Subsidiaries................................................................ 16
------------ --
Section 6.15 Agreements.................................................................. 16
---------- --
Section 6.16 Compliance with Laws........................................................ 17
-------------------- --
Section 6.17 Investment Company Act...................................................... 17
---------------------- --
Section 6.18 Public Utility Holding Company Act.......................................... 17
---------------------------------- --
Section 6.19 Environmental Matters....................................................... 17
--------------------- --
Section 6.20 Year 2000 Provisions........................................................ 18
-------------------- --
ARTICLE VII
Positive Covenants.................................................................................. 19
------------------ --
Section 7.1 Reporting Requirements...................................................... 19
---------------------- --
Section 7.2 Maintenance of Existence; Conduct of Business............................... 20
--------------------------------------------- --
Section 7.3 Maintenance of Properties................................................... 20
------------------------- --
Section 7.4 Taxes and Claims............................................................ 21
---------------- --
Section 7.5 Insurance................................................................... 21
--------- --
Section 7.6 Inspection Rights........................................................... 21
----------------- --
Section 7.7 Keeping Books and Records................................................... 21
------------------------- --
Section 7.8 Compliance with Laws........................................................ 21
-------------------- --
Section 7.9 Compliance with Agreements.................................................. 22
-------------------------- --
Section 7.10 Further Assurances.......................................................... 22
------------------ --
Section 7.11 ERISA....................................................................... 22
----- --
Section 7.12 Year 2000 Compliance........................................................ 22
-------------------- --
Section 7.13 Accounts with Lender........................................................ 23
-------------------- --
ARTICLE VIII
Negative Covenants.................................................................................. 23
------------------ --
Section 8.1 Limitation on Liens......................................................... 23
------------------- --
ARTICLE IX
Financial Covenants................................................................................. 24
------------------- --
Section 9.1 Debt to Capitalization Ratio................................................ 24
---------------------------- --
Section 9.2 Consolidated Tangible Net Worth............................................. 24
------------------------------- --
ARTICLE X
Default............................................................................................. 25
------- --
Section 10.1 Events of Default........................................................... 25
----------------- --
Section 10.2 Remedies Upon Default....................................................... 26
--------------------- --
Section 10.3 Bank Guarantees and Letters of Credit....................................... 27
------------------------------------- --
Section 10.4 Performance by Lender....................................................... 27
--------------------- --
ARTICLE XI
Miscellaneous....................................................................................... 27
------------- --
Section 11.1 Expenses of Lender.......................................................... 27
------------------ --
</TABLE>
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<PAGE> 43
TABLE OF CONTENTS
(CONTINUED)
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
Section 11.2 Indemnification.............................................................. 27
--------------- --
Section 11.3 Limitation of Liability...................................................... 29
----------------------- --
Section 11.4 Modification to Letter of Credit Master Agreements........................... 29
-------------------------------------------------- --
Section 11.5 No Duty...................................................................... 30
------- --
Section 11.6 Lender Not Fiduciary......................................................... 30
-------------------- --
Section 11.7 Equitable Relief............................................................. 31
---------------- --
Section 11.8 No Waiver; Cumulative Remedies............................................... 31
------------------------------ --
Section 11.9 Successors and Assigns....................................................... 31
---------------------- --
Section 11.10 Survival..................................................................... 31
-------- --
Section 11.11 Entire Agreement; Amendment.................................................. 31
--------------------------- --
Section 11.12 Maximum Interest Rate........................................................ 31
--------------------- --
Section 11.13 Notices...................................................................... 32
------- --
Section 11.14 Applicable Law; Venue; Service of Process.................................... 32
----------------------------------------- --
Section 11.15 Demand Nature................................................................ 33
------------- --
Section 11.16 Counterparts................................................................. 33
------------ --
Section 11.17 Severability................................................................. 33
------------ --
Section 11.18 Headings..................................................................... 33
-------- --
Section 11.19 Non-Application of Chapter 303 of Texas Credit Code.......................... 33
--------------------------------------------------- --
Section 11.20 Participations............................................................... 33
-------------- --
Section 11.21 Construction................................................................. 33
------------ --
Section 11.23 WAIVER OF JURY TRIAL......................................................... 34
-------------------- --
</TABLE>
-43-
<PAGE> 1
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
The Board of Directors
IRI International Corporation:
We consent to incorporation by reference in the Registration Statement No.
333-40525 of IRI International Corporation on Form S-8, of our report dated
March 8, 2000, relating to the consolidated balance sheets of IRI International
Corporation and Subsidiaries as of December 31, 1999 and 1998, and the related
consolidated statements of operations, shareholders' equity and comprehensive
income and cash flows for each of the years in the three-year period ended
December 31, 1999, which report appears in the December 31, 1999 annual report
on Form 10-K of IRI International Corporation.
KPMG LLP
Houston, Texas
March 27, 2000
<PAGE> 1
Exhibit 24
Power of Attorney
Excerpts from Minutes of the Meeting of the Board of Directors
of IRI International Corporation
held on March 14, 2000
I, Abdallah Andrawos, Secretary of IRI International Corporation (the
"Company"), hereby certify that the following resolutions were unanimously
approved by all of the directors of the Company at the meeting of the Board of
Directors of the Company held on March 14, 2000:
RESOLVED that the officers of the Company be, and each of them
individually hereby is, authorized to prepare and file with the Securities and
Exchange Commission the Company's report on Form 10-K (including any amendments
thereto on Form 10-K/A) for the fiscal year ended December 31, 1999; and
FURTHER RESOLVED, that the officers of this Company be, and each of them
individually hereby is, authorized to prepare, file with the New York Stock
Exchange, and distribute to the Company's stockholders, the Annual Report to
Stockholders for the year ended December 31, 1999; and
FURTHER RESOLVED that Robert L. Hargrave be appointed as the true and
lawful attorney-in-fact to sign on behalf of each of the directors of the
Company, in their capacity as a director or officer, or both, as the case may
be, of the Company, the Company's report on Form 10-K (including any amendments
thereto on Form 10-K/A), and to file the same, with all exhibits thereto, and
other documents in connection therewith, with the Securities and Exchange
Commission, and
FURTHER RESOLVED that the officers of the Company be, and each of them
individually hereby is, authorized, for and on behalf of the Company, to
execute, deliver, file, acknowledge and record any and all such documents and
instruments, and to take or cause to be done any and all such other actions as
they, or any of them, may deem necessary or desirable to effectuate and carry
out the resolutions adopted hereby; and
FURTHER RESOLVED that all actions previously taken by any officer,
director, representative or agent of the Company in the name or on behalf of
the Company or any of its affiliates in connection with the matters
contemplated by the foregoing resolutions be, and each of same hereby is,
adopted, ratified, confirmed and approved in all respects as the act and deed
of the Company; and
FURTHER RESOLVED that a fully executed copy of these resolutions be filed
with the minutes of proceeds of the Board.
/s/ Abdallah Andrawos
---------------------------
Secretary
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 35,688
<SECURITIES> 14,686
<RECEIVABLES> 16,216
<ALLOWANCES> (1,740)
<INVENTORY> 92,572
<CURRENT-ASSETS> 164,169
<PP&E> 59,033
<DEPRECIATION> (13,336)
<TOTAL-ASSETS> 217,093
<CURRENT-LIABILITIES> 14,320
<BONDS> 0
0
0
<COMMON> 399
<OTHER-SE> 200,901
<TOTAL-LIABILITY-AND-EQUITY> 217,093
<SALES> 92,190
<TOTAL-REVENUES> 92,190
<CGS> 83,156
<TOTAL-COSTS> 29,610
<OTHER-EXPENSES> (1,562)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 363
<INCOME-PRETAX> (19,377)
<INCOME-TAX> (8,472)
<INCOME-CONTINUING> (10,905)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (10,905)
<EPS-BASIC> (0.27)
<EPS-DILUTED> (0.27)
</TABLE>
