-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, H1Lnk7UZNRf2pw8Z9O6PrXf9UYbYqUZXcVaGAqIhRGwn3w3gn2DlwuAhh/33xWle k0PKZqzL5KzUwVeEg+dVnw== 0000950123-99-004863.txt : 19990518 0000950123-99-004863.hdr.sgml : 19990518 ACCESSION NUMBER: 0000950123-99-004863 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990331 FILED AS OF DATE: 19990517 FILER: COMPANY DATA: COMPANY CONFORMED NAME: IRI INTERNATIONAL CORP CENTRAL INDEX KEY: 0001044979 STANDARD INDUSTRIAL CLASSIFICATION: OIL & GAS FILED MACHINERY & EQUIPMENT [3533] IRS NUMBER: 752044681 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-13593 FILM NUMBER: 99628204 BUSINESS ADDRESS: STREET 1: FIRST INTERSTATE BANK PLAZA STREET 2: 1000 LOUISIANA STE 5900 CITY: HOUSTON STATE: TX ZIP: 77002 BUSINESS PHONE: 7136518002 MAIL ADDRESS: STREET 1: FIRST INTERSTATE BANK PLAZA STREET 2: 1000 LOUISIANA SUITE 5900 CITY: HOUSTON STATE: TX ZIP: 77002 10-Q 1 IRI INTERNATIONAL CORPORATION 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 for the Quarterly Period Ended March 31, 1999 Commission File Number 001-13593 IRI INTERNATIONAL CORPORATION (Exact Name of Registrant as Specified in Its Charter) DELAWARE 75-2044681 (State or Other Jurisdiction of (I.R.S. Employer Identification. No.) Incorporation or Organization) 1000 LOUISIANA, SUITE 5900, HOUSTON, TEXAS 77002 (Address of Principal Executive Offices) (Zip Code) (713) 651-8002 (Registrant's Telephone Number, Including Area Code) NONE (Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report) Indicate by check X whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Number of shares outstanding of each class of common stock, $0.01 par value per share, at May 12, 1999: 39,900,000 Common Shares 2 PART I FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS. IRI INTERNATIONAL CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (In thousands, except share and per share amounts) ASSETS
--------------------------- March 31, December 1999 1998 --------- --------- Current assets: Cash and cash equivalents $ 26,921 $ 37,475 Marketable securities, at fair value (cost of $22,844 at March 31, 1999 and $3,743 at December 31, 1998) 19,334 3,000 Accounts receivable, less allowance for doubtful accounts of $1,202 at March 31, 1999 and $960 at December 31, 1998 21,547 29,147 Inventories 104,861 109,151 Costs and estimated earnings in excess of billings on uncompleted contracts 1,674 4,429 Other current assets 2,354 2,381 --------- --------- Total current assets 176,691 185,583 Property, plant and equipment, net 48,331 49,192 Other assets 4,082 4,391 --------- --------- $ 229,104 $ 239,166 ========= ========= LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable and accrued liabilities $ 8,847 $ 14,128 Customer advances 1,047 3,303 Other liabilities 4,096 3,906 --------- --------- Total current liabilities 13,990 21,337 Negative goodwill, less accumulated amortization 2,684 4,026 Accrued postretirement benefits 3,094 3,148 Other long term liabilities 320 396 --------- --------- Total liabilities 20,088 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 399 399 Additional paid-in capital 168,732 168,514 Retained earnings 41,806 43,308 Accumulated other comprehensive income (1,921) (1,962) --------- --------- Total shareholders' equity 209,016 210,259 Commitments and contingencies --------- --------- $ 229,104 $ 239,166 ========= =========
See accompanying notes to consolidated financial statements. 2 3 IRI INTERNATIONAL CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF INCOME (In thousands, except per share amounts) (UNAUDITED)
THREE MONTHS ENDED MARCH 31, 1999 1998 ---- ---- Revenues $ 22,543 $ 47,232 Cost of goods sold 15,828 34,383 -------- -------- Gross profit 6,715 12,849 Administrative and selling expense 6,065 7,359 Restructuring charge 805 - -------- -------- Operating income (loss) (155) 5,490 -------- -------- Other income (expense): Interest income 322 712 Interest expense (129) (97) Other, net (1,866) 389 -------- -------- (1,673) 1,004 -------- -------- Income (loss) before income taxes (1,828) 6,494 Income taxes (326) 2,122 -------- -------- Net income (loss) (1,502) 4,372 ======== ======== Basic and diluted net income (loss) per common share $ (0.038) $ 0.110 ======== ======== Weighted average shares outstanding 39,900 39,900 ======== ========
See accompanying notes to consolidated financial statements. 3 4 IRI INTERNATIONAL CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (In thousands) (UNAUDITED)
ACCUMULATED ADDITIONAL OTHER TOTAL COMMON PAID-IN RETAINED COMPREHENSIVE SHAREHOLDERS' STOCK CAPITAL EARNINGS INCOME EQUITY ----- ------- -------- ------ ------ Balances at December 31, 1998 $ 399 $ 168,514 $ 43,308 $ (1,962) $ 210,259 Non employee stock options -- 218 -- -- 218 Comprehensive income: Net loss -- -- (1,502) -- (1,502) Foreign currency translation adjustment -- -- -- 41 41 Total Comprehensive income --------- 1,461 --------- --------- --------- --------- --------- Balances at March 31, 1999 $ 399 $ 168,732 $ 41,806 $ (1,921) $ 209,016 ========= ========= ========= ========= =========
See accompanying notes to consolidated financial statements. 4 5 IRI INTERNATIONAL CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) (UNAUDITED)
THREE MONTHS ENDED MARCH 31, 1999 1998 ---- ---- Cash flows from operating activities: Net income $ (1,502) $ 4,372 Adjustments to reconcile net income to net cash provided by operations: Depreciation and amortization 1,276 844 Amortization of goodwill 313 307 Amortization of negative goodwill (1,342) (1,342) Change in employee benefit accounts (54) (58) Stock option compensation 218 -- Changes in assets and liabilities Marketable securities (16,334) 6,247 Accounts receivable 7,600 (2,802) Inventories 4,290 5,742 Other current assets 2,782 4,261 Other non current assets (4) 280 Accounts payable and accrued liabilities, customer advances -- and other liabilities (7,314) (6,599) -------- -------- Net cash provided by (used in) operations (10,071) 11,252 -------- -------- Cash flows from investing activities: Capital expenditures (415) (3,299) -------- -------- Net cash used in investing activities (415) (3,299) Cash flows from financing activities: Proceeds from notes payable -- 17 Payments on notes payable (28) Payments on capital lease obligation (68) (59) -------- -------- Net cash flows used in financing activities (68) (70) -------- -------- Increase in cash and cash equivalents (10,554) 7,883 Cash and cash equivalents at beginning of year 37,475 49,473 -------- -------- Cash and cash equivalents at end of year $ 26,921 $ 57,356 ======== ======== Supplemental cash flow information: Interest paid $ 129 $ 97 ======== ======== Income taxes paid $ 300 $ 1,240 ======== ========
5 6 IRI INTERNATIONAL CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (1) GENERAL The accompanying condensed consolidated financial statements of IRI International Corporation and subsidiaries (the "Company") as of March 31, 1999 and for the three months ended March 31, 1999 and 1998 have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission and are unaudited; however, they include all adjustments (consisting only of normal recurring adjustments) which, in the opinion of management, are necessary for a fair presentation for such periods. Accounting measurements at interim dates inherently involve greater reliance on estimates than at year-end. The results of operations for the interim periods presented are not necessarily indicative of the results to be expected for the entire year. Certain footnote disclosures normally included in annual consolidated financial statements prepared in accordance with generally accepted accounting principles have been omitted herein. The interim information should be read in conjunction with the company's Annual Report on Form 10-K for the year ended December 31, 1998. (2) INVENTORIES Inventories consist of the following at March 31,1999 and December 31, 1998 (in thousands):
1999 1998 ---- ---- Raw materials and supplies $ 43,155 $46,743 Work in process 20,083 21,241 Finished goods 41,623 41,167 -------- ------- Total $104,861 $109,151 ======== =======
6 7 IRI INTERNATIONAL CORPORATION AND SUBSIDIARIES NOTES TO CONDESNSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) (3) COMMITMENTS AND CONTINGENCIES The Company has contract commitments aggregating $13.3 million at March 31, 1999 for the manufacture and delivery of drilling rigs during the remainder of fiscal 1999. At March 31, 1999,the Company was contingently liable for approximately $3.9 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. (4) NET INCOME PER COMMON SHARE Stock options outstanding at March 31, 1999 of 2,388,500 shares were not considered in the computation of net income per common share because there was a loss for the period and inclusion of option shares is anti-dilutitive. (5) SPECIAL CHARGES In the first quarter of 1999, the Company continued its restructuring program in which the workforce was reduced 375 employees. Expenses related to employee severance incurred in connection with the restructuring program have been reported as a restructuring charge of $805,000 for the three months ended March 31, 1999. (6) NEW ACCOUNTING PRONOUNCEMENTS In April 1998, the American Institute of Certified Public Accountants issued Statement of Position 98-5 ("SOP 98-5"), Reporting of the Costs of Start-up Activities, which is effective for financial statements issued for periods beginning after December 15, 1998. The Company adopted SOP 98-5 in the first quarter of 1999 which did not have a material impact on its financial statements or accounting policies. The Company is also assessing the reporting and disclosure requirements of SFAS No 133, Accounting for Derivative Instruments and Hedging Activities. This statement establishes accounting and reporting standards for derivative instruments and hedging activities. The statement is effective for financial statements for fiscal years beginning after June 15, 1999. The company believes SFAS No 133 will not have a material impact on its financial statements or accounting policies. The Company will adopt the provisions of SFAS No. 133 in the first quarter of 2000. 7 8 IRI INTERNATIONAL CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) (7) KEY SEGMENT FINANCIAL INFORMATION The company operates through three business segments consisting of Oilfield Equipment, Downhole Tools, and Specialty Steel. Financial information by segments for the 3 months ended March 31, 1999 and 1998 is summarized below (in thousands):
OILFIELD DOWNHOLE SPECIALTY CORPORATE EQUIPMENT PRODUCTS STEEL AND OTHER TOTAL QTR ENDED MARCH 31, 1999 Sales to unaffiliated customers 10,967 11,326 1,170 (920) 22,543 Operating income (loss) 605 2,023 738 (3,521) (155) Depreciation and amortization 129 1,078 11 58 1,276 Amortization of negative goodwill 1,342 1,342 QTR ENDED MARCH 31, 1998 Sales to unaffiliated customers 25,062 19,576 2,906 (312) 47,232 Operating income (loss) 5,041 3,138 518 (3,207) 5,490 Depreciation and amortization 47 751 7 39 844 Amortization of negative goodwill 1,342 1,342
8 9 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the Consolidated Financial Statements and Notes thereto. OVERVIEW General We manufacture land-based drilling and well-servicing rigs and rig component parts for use in the domestic and international markets. The condition of the oil and gas industry and worldwide levels of exploration, development and production activity, including the number of oil and gas wells being drilled, the depth and drilling conditions of such wells, the number of well completions and the level of workover activity have a substantial impact on our revenues. Exploration, development and production activity is largely dependent on the prevailing view of future oil and natural gas prices which have been significantly volatile for the last 20 years. Oil and natural gas prices are influenced by factors affecting the supply of and demand for oil and gas, including the level of drilling activity, worldwide economic activity, interest rates and the cost of capital, environmental regulation, tax policies, political requirements of national governments, coordination by OPEC and the cost of producing oil and gas. Demand for our products in certain emerging market countries may be greatly influenced by their need for internal development, energy self-sufficiency or hard currency earnings rather than the conventional factors relating to the price of oil and natural gas. As the oil prices continued to decline and the economic conditions in Russia and other emerging markets deteriorated, the oil and gas industry dramatically reduced its capital expenditures for exploration, development and production activities. 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 if industry conditions do not improve. In response to the prevailing industry conditions we implemented a variety of measures to minimize its adverse impact on our business and financial performance. We consolidated our manufacturing operations in Pampa and Houston, Texas and implemented other cost reduction programs. These actions reduced our workforce by a total of 740 employees through April 1999. 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 tools segment. With the exception of our Canadian subsidiary, we maintain our cash and cash equivalents, and investments in U.S. dollar denominated accounts (except to the extent needed for local operating expenses). We have not engaged in and do not currently intend to engage in any significant hedging or currency trading transactions to compensate for adverse currency fluctuations among foreign currencies. 9 10 RESULTS OF OPERATIONS Sales of new rigs manufactured by us can produce large fluctuations in revenues depending on the size and the timing of the construction of orders. Individual orders of rig packages range from $1 million to $25 million and cycle times for the design, engineering and manufacturing 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, down hole tools and specialty steel segments does not reflect the allocation of corporate and unallocated administrative expenses, amortization of negative goodwill and amortization of goodwill on an individual segment basis. Certain information that reconciles the discussion of the results of operations of the individual segments to the our Condensed Consolidated Financial Statements is as follows:
THE COMPANY THREE MONTHS ENDED MARCH 31, ---------------------- 1999 1998 -------- -------- Revenues Oil field equipment .............................. $ 10,967 $ 25,062 Down hole tools .................................. 11,326 19,576 Specialty steel .................................. 1,170 2,906 Eliminations ..................................... (920) (312) -------- -------- Total .......................................... $ 22,543 $ 47,232 ======== ======== Segment operating income (loss) Oil field equipment .............................. $ 605 $ 5,041 Down hole tools .................................. 2,023 3,138 Specialty steel .................................. 738 518 -------- -------- Total .......................................... 3,366 8,697 Corporate overhead and unallocated administrative expenses ........................................ (3,744) (4,242) Amortization of negative goodwill ................ 1,342 1,342 Amortization of goodwill ........................ (314) (307) Restructuring Costs .............................. (805) -- -------- -------- Operating income (loss) .......................... $ (155) $ 5,490 ======== ========
THREE MONTHS ENDED MARCH 31, 1999 COMPARED TO THREE MONTHS ENDED MARCH 31, 1998 Oil Field Equipment Revenues and operating income for the oil field equipment segment decreased to $11.0 million and $0.6 million, respectively, for the three months ended March 31, 1999, as compared to $25.1 million and $5.0 million, respectively, for the three months ended March 31, 1998. Decreased operating income resulted from the economic and financial turmoil in Russia and the Asia-Pacific region and the downward turn in oil prices, both of which resulted in a decreased demand for our products. As a result of low margin contracts, gross margin for the three months ended March 31, 1999 was 12.2%, as compared to 24.1% for the three months ended March 31, 1998. Down Hole Tools Revenues and operating income for the down hole tools segment were $11.3 million and $2.0 million, respectively, for the three months ended March 31, 1999, as compared to $19.6 million and $3.1 million, respectively, for the three months ended March 31, 1998. Decreased revenues were primarily attributable to the downward trends in the oil industries. Gross margin for the three months ended March 31, 1999 was 31.6%, as compared to 26.7% for the three months ended March 31, 1998. The increase in gross margin was primarily due 10 11 to the full impact of price increases in the last two quarters of 1998, an increase in the amount of manufacturing overhead absorbed into inventory starting in the fourth quarter of 1998 and management's cost-cutting initiatives. Specialty Steel Revenues and operating income for the specialty steel segment were $1.2 million and $0.7 million, respectively, for the three months ended March 31, 1999, as compared to $2.9 million and $0.5 million, respectively, for the three months ended March 31, 1998. 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 19.1% for the three months ended March 31, 1998 to 16.6% for the three months year ended March 31, 1999. Corporate Administrative and Interest Expenses Corporate administrative expenses were $3.7 million for the three months ended March 31, 1999, as compared to $4.2 million for the three months ended March 31, 1998. This decrease was due primarily to the cost cutting initiatives brought on by the restructuring plan. Other Income (Expense) Other expenses increased to $1.9 million for the three months ended March 31, 1999, as compared to income of $0.4 million for the three months ended March 31, 1998. Losses on investments in marketable securities in 1999 netted $1.7 million while during the first quarter of 1998 we enjoyed a $0.4 million gain on such investments. ACCOUNTING POLICIES In June 1998, the Financial Accounting Standards Board issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"), which is effective for all quarters of fiscal years beginning after June 15, 1999. This statement requires that all derivatives be recognized on the balance sheet, measured at fair value. Adoption of this statement is not expected to have a material impact on our consolidated financial position, results of operations or cash flows. LIQUIDITY AND CAPITAL RESOURCES At March 31, 1999, we had cash, cash equivalents and marketable securities of $46.3 million, compared to $40.5 million at December 31, 1998. Our working capital was $162.7 million, compared to $164.2 million at December 31, 1998. This decrease in working capital at March 31, 1999 resulted from an increase in cash, cash equivalents and marketable securities and a decrease in accounts receivables, inventories and other current assets and liabilities. At March 31, 1999, the ratio of our current assets to current liabilities was approximately 12.6:1. At March 31, 1999, approximately $5.8 million was available for additional borrowings under the Revolving Credit Facility. We believe that our balance sheet, significant liquidity and cash flow from operations will be sufficient to meet our short term and long term liquidity needs. We believe that any credit facilities that we may need in the future will be available on commercially acceptable terms, though there can be no assurances in this regard. The Revolving Credit Facility We have a Revolving Credit Facility which matures on March 31, 2000, and under its terms we may reborrow all amounts repaid prior to its maturity. After the initial public offering of our common stock, we reduced the commitment under the Revolving Credit Facility to $9.7 million. 11 12 Our obligations under the Revolving Credit Facility are secured by first priority security interests in substantially all of our assets, including all personal property and material real property, the pledge by us of all of the outstanding capital stock of Cardwell and the pledge by us or Cardwell, as the case may be, of 66% of the outstanding capital stock of each of our direct and indirect foreign subsidiaries. These obligations are also guaranteed by Cardwell. The Revolving Credit Facility contains certain representations and warranties, covenants and events of default customary for facilities of this type. YEAR 2000 Our Year 2000 Compliance Program We have retained outside consultants to perform a Year 2000 risk analysis and assist with the development of our comprehensive project plan for Year 2000 compliance. As a result of this report, which was completed in early May, we have substantially revised our Year 2000 compliance program. Our revised Year 2000 compliance program consists of following key tasks and expected completion dates: Key Task Expected Completion Date -------- ------------------------ - - Final analysis of our relationships with key End of July customers and suppliers - - Inventory of non-Year 2000 compliant hardware End of June and software systems and other technology - - Business impact assessment of non-Year 2000 End of June compliant systems and technologies and non-Year 2000 compliant key customers and suppliers - - Replacement or remediation of non-Year 2000 End of August compliant systems and technologies - - Development of contingency plans with respect End of November to systems and technologies that cannot be replace or remediated in time and with respect to key suppliers and customers that have not become Year 2000 compliant To execute our Year 2000 compliance program, we created a Year 2000 compliance program management office staffed by key business and information technology personnel. 12 13 Our State of Readiness Inventory of Information Technology Systems and Other Technology. We are currently inventorying our hardware and software systems and other technology to determine the state of our Year 2000 readiness. Of the inventory taken thus far, we have identified issues with some of our information technology systems that support our most significant business operations. The Enterprise Resource Planning ("ERP") system that supports the down hole tools unit requires a software upgrade that is planned for installation by the end of the second quarter of 1999. The ERP system that supports the oil field equipment and specialty steel segment also requires a software upgrade that is planned for installation in the third quarter of 1999. The installation of these software upgrades will require the allocation of significant internal resources to test the upgraded ERP systems prior to their implementation. Other significant information technology systems that may not be compliant are: - - the accounting software system currently used in the Canadian operations; - - our payroll system; and - - the design engineering software system. We will have a better understanding of these systems and their respective Year 2000 compliance once we have completed our inventory. We have inventoried some of the more critical non-information technology systems of the down hole tools unit. Approximately 85% of our production machines for the down hole tools unit are manual or "numerical control" equipment not affected by Year 2000 issues. The balance of our production machines are "computer numerical control" machines; these machines produce about 30% to 40% of our production output. Although we have been notified by the manufacturer of these machines that the controls on these machines are Year 2000 compliant, we have not yet verified whether or not these machines are indeed Year 2000 compliant. We have not completed our inventory of the production machines for our other units or other non-information technology systems. Analysis of Key Suppliers and Customers. We have also initiated the inventorying of key third party relationships for Year 2000 compliance. Although we have begun to contact the suppliers and customers of the down hole tools unit, we have not yet assessed the extent and content of the responses received from those suppliers and customers. We have not begun to inventory the suppliers and customers for the oil field equipment unit and the specialty steel segment, but we believe that the loss of any of our suppliers would not have a material adverse effect on our operations. In order to increase our understanding of any unforeseen risk exposures, we plan to do a more extensive analysis of those suppliers and customers that are key to our operations. We plan to complete the analysis of our key third party relationships by the end of July 1999. Costs to Address Year 2000 Issues To date, we have incurred expenses of approximately $150,000 that are directly related to our Year 2000 compliance program. We estimate our expenses relating to Year 2000 issues will be approximately $1.3 million but they could be as high as $2.0 million. We also expect to allocate significant internal resources to the inventorying, testing and remediation of Year 2000 issues, though we have not quantified the costs of allocating these internal resources. The replacement and upgrade of several of our software and hardware systems in the ordinary course of business have had the added benefit of resolving Year 2000 issues with respect to those systems. In addition, our maintenance agreements with the vendors of our ERP systems for the down hole tools and oil field equipment units already include the cost of the software upgrades required for those systems. We believe that the costs to complete our Year 2000 compliance program will not have a material effect on our financial position, results of operations or cash flows, though we cannot give any assurances in this regard. 13 14 Risks Associated with Year 2000 Issues We believe that much of the risk associated with Year 2000 will be mitigated by the installation of the software upgrades on our ERP systems. We are, however, presently unable to determine fully the risk to our business presented by any other non-Year 2000 compliant software, hardware, or other technologies of our systems and third party relationships. We will have a better understanding of these risks once the inventory has been completed. We are presently unable to determine what effect the failure of us, our suppliers or our customers to become Year 2000 compliant will have on our business, but significant failures could have a material adverse effect on our results of operations and financial condition. At the very least, a significant failure may force us to curtail our production, prevent us from meeting customer orders on a timely basis, and/or impede our ability to monitor customer orders and inventory. Contingency Plans for Year 2000 We have not yet been able to determine the extent to which we need contingency plans because our Year 2000 inventory is not yet complete. It is our intention to develop contingency plans by the end of November 1999. CAPITAL EXPENDITURES Capital expenditures for three months ended March 31, 1999 totaled approximately $0.4 million, of which $0.1 million, was spent for computers and equipment at the downhole tools segment , $0.2 million was spent for the purchase of a building for our downhole tools segment, and $0.08 million was expended for roof repairs at our down hole tools segment. For 1999, we have budgeted capital expenditures of a total of $5.8 million, including $1.0 million for maintenance capital expenditures, $2.0 million for rental tools, $1.5 million for software upgrades and related expenditures and $1.3 million for Year 2000 compliance. We are funding capital expenditures with available cash, cash flow from operations and borrowings under the Revolving Credit Facility. 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. 14 15 INFLATION Inflation has not had a material impact on our operating and occupancy costs. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS This discussion about 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 March 31, 1999, we had approximately $26.9 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 Bowen Tools Division, all of our sales are denominated in U.S. dollars. However, foreign exchange rate fluctuations may affect our revenues indirectly to the extent that a stronger U.S. dollar affects our ability to compete on the basis of price. We do not engage in any significant hedging or currency trading activities to limit our sensitivity to changes in foreign exchange rates and/or interest rates. At March 31, 1999, we had approximately $19.3 million of marketable securities, consisting primarily of corporate equity securities. These securities were acquired principally for trading purposes and are bought and held by us for the purposes of selling them in the near term. Fluctuations in interest rates and equity prices may adversely affect the value of our marketable securities. We do not believe there has been any material change in the market risks faced by us since the end of 1998. PART II 15 16 OTHER INFORMATION ITEM 6. EXHIBITS AND REPORT ON FORM 8-K (a) Exhibits The exhibits listed on the exhibit Index following the signature page hereof are filed herewith in response to this item. (b) Reports on Form 8-K None. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Date: May 17, 1999 IRI INTERNATIONAL CORPORATION By: /s/ MUNAWAR H. HIDYATALLAH ---------------------------------- Munawar H. Hidayatallah Executive Vice President and Chief Financial Officer, Director 16 17 INDEX TO EXHIBITS EXHIBIT NO. DESCRIPTION *3.1 Form of Restated Certificate of Incorporation of IRI International Corporation *3.2 Amended and Restated Bylaws of the Company 27.1 Financial Data Schedule (submitted as an exhibit only in the electronic format of this Quarterly Report on Form 10-Q) - ---------- * Exhibit incorporated herein by reference to the Company's registration statement on Form S-1 (Registration No. 333-31157) dated September 8, 1997, as amended. 17 EX-27.1 2 FINANCIAL DATA SCHEDULE
5 3-MOS DEC-31-1999 JAN-01-1999 MAR-31-1999 26,921 19,334 22,749 1,202 104,861 179,691 58,021 9,690 229,104 13,990 0 0 0 399 208,617 229,104 22,543 22,543 15,828 6,870 1,544 0 129 (1,828) (326) (1,502) 0 0 0 (1,502) 0.04 0.04
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