-----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, RCJ7fMhLMkGin5IUu74pRd8iaFhdN/ZQ5N9U9+Fh1O9qI/VLoivBm+eF7n0HyWaO KRh0LD7Ggvapw9MSer8FaQ== 0000950123-99-010286.txt : 19991117 0000950123-99-010286.hdr.sgml : 19991117 ACCESSION NUMBER: 0000950123-99-010286 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19990930 FILED AS OF DATE: 19991115 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: 99756794 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 September 30, 1999 Commission File Number 001-13593 IRI INTERNATIONAL CORPORATION (Exact Name of Registrant as Specified in Its Charter) DELAWARE 75-2044681 (State or Other Jurisdiction of (I.R.S. Employer Identification No.) Incorporation or Organization) 1000 LOUISIANA, SUITE 5900, HOUSTON, TEXAS 77002 (Address of Principal Executive Offices)(Zip Code) (713) 651-8002 (Registrant's Telephone Number, Including Area Code) NONE (Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report) Indicate by check X whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- Number of shares outstanding of each class of common stock, $0.01 par value per share, at November 12, 1999: 39,900,000 Common Shares 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)
September 30, December 31, 1999 1998 ------------- ------------ (unaudited) ASSETS Current assets: Cash and cash equivalents......................... $ 39,791 37,475 Marketable securities, at fair value (cost of $-0- at September 30, 1999 and $3,743 at December 31, 1998).............................. -- 3,000 Accounts receivable, less allowance for doubtful accounts of $2,172 at September 30, 1999 and $960 at December 31, 1998....................... 20,920 29,147 Inventories....................................... 107,601 109,151 Costs and estimated earnings in excess of billings on uncompleted contracts............... 2,187 4,429 Other current assets.............................. 1,888 2,381 ---------- ---------- Total current assets......................... 172,387 185,583 Property, plant and equipment, net.................. 46,859 49,192 Other assets........................................ 3,403 4,391 ---------- ---------- Total liabilities............................ $ 222,649 239,166 ========== ========== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable and accrued liabilities.......... $ 13,259 $ 14,128 Customer advances................................. 1,896 3,303 Other liabilities................................. 1,981 3,906 ---------- -------- Total current liabilities..................... 17,136 21,337 Negative goodwill, less accumulated amortization.... -- 4,026 Accrued postretirement benefits..................... 3,054 3,148 Other long-term liabilities......................... 116 396 ---------- -------- Total liabilities............................. 20,306 28,907 Commitments and contingencies Shareholders' equity Preferred stock, $1.00 par value; 25,000,000 shares authorized, none issued.................. -- -- Common stock, $0.01 par value; 100,000,000 shares authorized, 39,900,000 shares issued and outstanding................................. 399 399 Additional paid-in capital........................ 168,842 168,514 Retained earnings................................. 34,562 43,308 Accumulated other comprehensive loss.............. (1,460) (1,962) Total Shareholders' equity.................... 202,343 210,259 ---------- -------- $ 222,649 $239,166 ========== ========
See accompanying notes to condensed consolidated financial statements. 2 3 IRI INTERNATIONAL CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS) (UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED ---------------------------- ---------------------------- SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, 1999 1998 1999 1998 ------------- ------------- ------------- ------------- Revenues...................................................... $26,102 40,650 68,522 139,281 Cost of goods sold............................................ 18,882 29,586 58,715 99,900 ------------- ------------- ------------- ------------- Gross profit........................................ 7,220 11,064 9,807 39,381 Selling and administrative expense............................ 6,173 6,991 21,132 21,170 Restructuring charge.......................................... 321 429 1,779 429 ------------- ------------- ------------- ------------- Operating income (loss)............................. 726 3,644 (13,104) 17,782 Other income (expense) Interest income.......................................... 343 455 982 1,766 Interest expense......................................... (12) (24) (346) (253) Other, net............................................... 2,551 (836) (988) (3,813) ------------- ------------- ------------- ------------- 2,882 (405) (352) (2,300) ------------- ------------- ------------- ------------- Income (loss) before income taxes................... 3,608 3,239 (13,456) 15,482 Income taxes (benefit)........................................ 1,262 440 (4,710) 2,786 ------------- ------------- ------------- ------------- Net income (loss)................................... $ 2,346 2,799 (8,746) 12,696 ============= ============= ============= ============= Basic and diluted net income (loss) per common share.......... 0.06 0.07 (0.22) 0.32 ============= ============= ============= ============= Weighted average shares outstanding........................... 39,900 39,900 39,900 39,900 ============= ============= ============= =============
See accompanying notes to condensed consolidated financial statements. 3 4 IRI INTERNATIONAL CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY AND COMPREHENSIVE LOSS (IN THOUSANDS) (UNAUDITED)
Accumulated shareholders' ----------------------------------------------- Additional Other Equity and Common paid-in Retained Comprehensive Comprehensive stock capital earnings income (loss) income (loss) ------ ---------- -------- ------------- ------------- Balances at December 31, 1998.................. $ 399 168,514 43,308 (1,962) 210,259 Other.......................................... -- 328 -- -- 328 Comprehensive loss Net loss.................................. -- -- (8,746) -- (8,746) Foreign currency translation adjustment... -- -- -- 502 502 ----- ------- ------ ------ ------- Total comprehensive loss............. -- -- (8,746) 502 (8,244) ----- ------- ------ ------ ------- Balances at September 30, 1999................. $ 399 168,842 34,562 (1,460) 202,343 ===== ======= ====== ====== =======
See accompanying notes to condensed consolidated financial statements. 4 5 IRI INTERNATIONAL CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS) (UNAUDITED)
Nine months ended ------------------------------- September 30, September 30, 1999 1998 ------------- ------------- Cash flows from operating activities Net income (loss) .......................................................... $(8,746) 12,696 Adjustments to reconcile net income (loss) to net cash provided by (used in) operations Depreciation and amortization ........................................ 3,733 3,218 Amortization of goodwill ............................................. 940 941 Amortization of negative goodwill .................................... (4,026) (4,026) Gain on sale of assets ............................................... (93) -- Change in employee benefit accounts .................................. (94) (228) Changes in assets and liabilities, net of effects of acquisitions Marketable securities ............................................. 3,000 8,184 Accounts receivable ............................................... 8,227 4,435 Inventories ....................................................... 1,550 (17,813) Other current assets .............................................. 2,735 1,443 Other noncurrent assets ........................................... 48 185 Accounts payable and accrued liabilities, customer advances and other liabilities ................................. (3,770) (9,926) ------- ------- Net cash provided by (used in) operations ................... 3,504 (891) ------- ------- Cash flows from investing activities Capital expenditures ....................................................... (1,417) (10,558) Proceeds from sale of assets ............................................... 110 -- ------- ------- Net cash used in investing activities ....................... (1,307) (10,558) ------- -------- Cash flows from financing activities Payments on capital lease obligation ....................................... (209) (158) Payments on notes payable .................................................. -- (72) Other ...................................................................... 328 (24) ------- ------- Net cash provided by (used in) financing activities ......... 119 (254) ------- ------- Increase (decrease) in cash and cash equivalents .............................. 2,316 (11,703) Cash and cash equivalents at beginning of period .............................. 37,475 49,473 ------- ------- Cash and cash equivalents at end of period .................................... $39,791 37,770 ======= ======= Supplemental cash flow information Interest paid .............................................................. $ 346 253 ======= ======= Income taxes paid .......................................................... $ 277 5,219 ======= =======
See accompanying notes to condensed consolidated financial statements. 5 6 IRI INTERNATIONAL CORPORATION AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (Unaudited) (1) GENERAL The accompanying condensed consolidated financial statements of IRI International Corporation and subsidiaries (the Company) as of September 30, 1999 and for the three and nine months ended September 30, 1999 and 1998 have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission and are unaudited; however, they include all adjustments (consisting only of normal recurring adjustments) which, in the opinion of management, are necessary for a fair presentation for such periods. Accounting measurements at interim dates inherently involve greater reliance on estimates than at year end. The results of operations for the interim periods presented are not necessarily indicative of the results to be expected for the entire year. Certain footnote disclosures normally included in annual consolidated financial statements prepared in accordance with generally accepted accounting principles have been omitted herein. The interim information should be read in conjunction with the Company's Annual Report on Form 10-K for the year ended December 31, 1998. (2) INVENTORIES Inventories consist of the following at September 30, 1999 and December 31, 1998 (in thousands):
1999 1998 ---- ---- Raw materials $ 40,854 46,743 Work-in-process 19,764 21,241 Finished goods 46,983 41,167 --------- ------- Total $ 107,601 109,151 ========= =======
Concurrent with the implementation and testing of a new integrated manufacturing software system (the Baan system), the Company has instituted measures to reduce manufacturing cost of goods through lowering of purchasing cost, reduced workforce and higher productivity combined with an increase in the price of its goods and services initiated since December 1998. In line with these measures, the Company is also conducting a physical inventory and is reviewing and updating its standard cost of products. Any adjustments, if necessary, will be recorded in the fourth quarter of 1999. (3) COMMITMENTS AND CONTINGENCIES The Company has contract commitments with customers aggregating $25.8 million at September 30, 1999. At September 30, 1999, the Company was contingently liable for approximately $4.7 million in letters of credit which guarantee the Company's performance for payment to third parties in accordance with specified contractual terms and conditions. These letters of credit are primarily secured by the Company's cash, accounts receivable and inventory. Management does not expect any material losses to result from these off-balance-sheet instruments as it anticipates full performance on the related contracts. 6 7 IRI INTERNATIONAL CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (4) NET INCOME (LOSS) PER COMMON SHARE Stock options outstanding at September 30, 1999 of 2,388,500 shares were not considered in the computation of net income per common share for the quarter then ended because the exercise price exceeded the average market price for the quarter. For the nine months ended September 30, 1999, there was a loss, and inclusion of option shares would be antidilutive. Stock options outstanding at September 30, 1998 of 3,886,000 shares were not considered in the computation of net income per common share for the quarter and nine months then ended because the exercise price exceeded the average market price for the respective period. (5) SPECIAL CHARGES AND OTHER ADJUSTMENTS In the third quarter of 1999, the Company continued its restructuring program in which the workforce was reduced by 20 employees in addition to the reduction of 417 employees in the first and second quarter of 1999. Expenses related to employee severance incurred in connection with the restructuring program have been reported as a restructuring charge of $321,000 for the three months ended September 30, 1999 and $1,779,000 for the nine months ended September 30, 1999. Included in the results of operations for the nine months ended September 30, 1999 are also second quarter 1999 charges to write off $2.1 million of pre-contract engineering and design costs incurred for a contract that did not materialize, a $2.2 million charge for contract adjustments, a $2.0 million increase in inventory excess and obsolescence reserves, an increase in trade accounts receivable reserves of $.9 million and software implementation and other charges of $.9 million. (6) NEW ACCOUNTING PRONOUNCEMENTS In April 1998, the American Institute of Certified Public Accountants issued Statement of Position 98-5 (SOP 98-5), Reporting of the Costs of Start-up Activities, which is effective for financial statements issued for periods beginning after December 15, 1998. The Company adopted SOP 98-5 in the first quarter of 1999 which did not have a material impact on its financial statements or accounting policies. The Company is also assessing the reporting and disclosure requirements of SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities. This statement establishes accounting and reporting standards for derivative instruments and hedging activities. SFAS No. 137 deferred the effective date of SFAS No. 133 such that the statement is effective for financial statements for fiscal years beginning after June 15, 2000. The Company believes SFAS No. 133 will not have a material impact on its financial statements or accounting policies. The Company will adopt the provisions of SFAS No. 133 in the first quarter of 2001. 7 8 IRI INTERNATIONAL CORPORATION AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (Unaudited) (7) KEY SEGMENT FINANCIAL INFORMATION The Company operates through three business segments consisting of Oilfield Equipment, Downhole Tools and Specialty Steel. Financial information by segments for the three and nine months ended September 30, 1999 and 1998 is summarized below (in thousands):
OILFIELD DOWNHOLE SPECIALTY CORPORATE EQUIPMENT PRODUCTS STEEL AND OTHER TOTAL --------- -------- ----- --------- ----- Quarter ended September 30, 1999: Sales to unaffiliated customers 14,326 12,084 917 (1,225) 26,102 Segment operating income (loss) 1,699 2,737 (103) (3,607) 726 Depreciation and amortization 130 94 11 926 1,161 Amortization of negative goodwill - - - 1,341 1,341 Quarter ended September 30, 1998: Sales to unaffiliated customers 19,677 17,568 3,427 (22) 40,650 Segment operating income (loss) 3,008 3,062 1,092 (3,518) 3,644 Depreciation and amortization 113 118 10 805 1,046 Amortization of negative goodwill - - - 1,341 1,341 Nine months ended September 30, 1999: Sales to unaffiliated customers 33,773 33,222 3,422 (1,895) 68,522 Segment operating income (loss) (3,791) 4,042 65 (13,420) (13,104) Depreciation and amortization 387 2,273 32 1,041 3,733 Amortization of negative goodwill - - - 4,025 4,025 Nine months ended September 30, 1998: Sales to unaffiliated customers 69,857 60,744 9,027 (347) 139,281 Segment operating income (loss) 12,821 11,855 2,347 (9,241) 17,782 Depreciation and amortization 300 1,984 25 909 3,218 Amortization of negative goodwill - - - 4,025 4,025
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 our condensed consolidated financial statements and the notes thereto. OVERVIEW General We manufacture land-based drilling and well-servicing rigs and rig component parts for use in the domestic and international markets. The condition of the oil and gas industry and worldwide levels of exploration, development and production activity, including the number of oil and gas wells being drilled, the depth and drilling conditions of such wells, the number of well completions and the level of workover activity have a substantial impact on our revenues. Exploration, development and production activity is largely dependent on the prevailing view of future oil and natural gas prices, which have been significantly volatile for the last 20 years. Oil and natural gas prices are influenced by factors affecting the supply of and demand for oil and gas, including the level of drilling activity, worldwide economic activity, interest rates and the cost of capital, environmental regulation, tax policies, political requirements of national governments, coordination by OPEC and the cost of producing oil and gas. Demand for our products in certain emerging market countries may be greatly influenced by their need for internal development, energy self-sufficiency or hard currency earnings rather than the conventional factors relating to the price of oil and natural gas. During the latter half of 1998 and the first quarter of 1999, declining oil prices coupled with the deteriorating economic conditions in Russia and other emerging markets resulted in a sharp drop in customer spending and a dramatically lower rig utilization rate worldwide. Our revenues, operating income and backlog have been adversely affected by these events and the value of our receivables and inventory may be further affected by these events. As a result of recent increases in oil prices during the second and third quarters of 1999, consumer spending and rig utilization rates have begun to increase. Although results of operations for the third quarter of 1999 reflect this increase in consumer spending, results of operations for the third quarter of 1999 and for the first nine months of 1999 are still substantially reduced from the results for comparable periods in 1998 and still reflect the adverse market conditions prevalent during the first six months of 1999. In addition, our gross margins for the first nine months of 1999 were also adversely affected by restructuring costs and other special charges of $5.6 million (after-tax) in the second quarter of 1999. During the first nine months of this year, we have implemented a variety of measures to consolidate our manufacturing operations in Pampa and Houston, Texas and other cost reduction programs. These actions reduced our workforce during the first nine months of 1999 by a total of 744 employees. On an ongoing basis, we will continue to consider the possibility of further consolidation and cost reduction measures but we cannot give any assurance that these or any other measures will be sufficient to offset the negative impact of the existing industry conditions. Foreign Exchange Transactions We have attempted to limit our exposure to foreign currency fluctuations. Sales denominated in foreign currencies are made only by the down hole tools segment. With the exception of our Canadian subsidiary, we maintain our cash, cash equivalents and investments in U.S. dollar denominated accounts (except to the extent needed for local operating expenses). We have not engaged in and do not currently intend to engage in any significant hedging or currency trading transactions to compensate for adverse currency fluctuations among foreign currencies. 9 10 RESULTS OF OPERATIONS Sales of new rigs manufactured by us can produce large fluctuations in revenues depending on the size and the timing of the construction of orders. Individual orders of rig packages range from $1 million to $25 million and cycle times for the design, engineering and manufacturing of rig packages range from six to nine months. These fluctuations in the size and timing of orders, may affect our quarterly revenues and operating income. Results of Segment Operations The following discussion of the results of operations of our oil field equipment, down hole tools and specialty steel segments does not reflect the allocation of corporate overhead and unallocated administrative expenses and amortization of goodwill and negative goodwill on an individual segment basis. Certain information that reconciles the discussion of the results of operations of the individual segments to our condensed consolidated financial statements is as follows:
------------------------------------------------------- THREE MONTHS NINE MONTHS ENDED ENDED SEPTEMBER 30, SEPTEMBER 30, ------------- ------------- 1999 1998 1999 1998 ---- ---- ---- ---- Revenues (IN THOUSANDS) Oilfield equipment .............................. $ 14,326 $ 19,677 $ 33,773 $ 69,857 Downhole tools .................................. 12,084 17,568 33,222 60,744 Specialty steel ................................. 917 3,427 3,422 9,027 Eliminations .................................... (1,225) (22) (1,895) (347) --------- --------- --------- --------- Total ......................................... $ 26,102 $ 40,650 $ 68,522 $ 139,281 ========= ========= ========= ========= Segment operating income (loss) Oilfield equipment .............................. $ 1,699 $ 3,008 $ (3,791) $ 12,821 Downhole tools .................................. 2,737 3,062 4,042 11,855 Specialty steel ................................. (103) 1,092 65 2,347 --------- --------- --------- --------- Total ......................................... 4,333 7,162 316 27,023 Corporate overhead and unallocated administrative expenses ...................................... (4,315) (4,117) (14,726) (11,886) Amortization of negative goodwill ............... 1,341 1,341 4,025 4,025 Amortization of goodwill ....................... (312) (313) (940) (951) Restructuring costs ............................. (321) (429) (1,779) (429) --------- --------- --------- --------- Operating income (loss) ......................... $ 726 $ 3,644 $ (13,104) $ 17,782 ========= ========= ========= =========
Oil Field Equipment The economic and financial turmoil in Russia and the Asia-Pacific region together with the downward turn in oil prices during the first quarter of 1999 led to a sharp decrease in the demand for our products. Decreased sales of rig packages resulted in decreases in revenues and operating income for the third quarter of 1999 and on a year-to-date basis. Our gross margin was also lower: 15.8% for the third quarter of 1999 as compared to 19.9% for the third quarter of 1998, and (4.7%) for the first nine months of 1999, as compared to 22.6% for the first nine months of 1998. Our gross margin for the first nine months of 1999 was negatively affected by: a $2.1 million write-off for pre-contract engineering and design costs incurred for a contract that did not materialize; and a $2.2 million charge for contract adjustments, each of which occurred during the second quarter of 1999. 10 11 Down Hole Tools The downward trends in the oil industries prevailing during the first quarter of 1999 had a significant negative impact on our customers' demand for fishing tools and power equipment, particularly in international markets, and, accordingly, on our revenues and operating income. As a result of decreased sales volume, our gross margin was significantly lower for the first nine months of 1999: 24.5% as compared to 29.8% for the first nine months of 1998. Our gross margin for the first nine months was also adversely affected by an increase in inventory obsolescence reserves of $2.0 million during the second quarter of 1999. However, our gross margin for the third quarter of 1999 rebounded to 33.0% as compared to 28.4% for the third quarter of 1998 as a result of decreases in indirect manufacturing costs, generated by cost-cutting initiatives. At the same time as the Company implemented its new integrated manufacturing software system (the Baan system), management took steps to reduce manufacturing cost of goods by reducing purchasing costs, lowering overhead through consolidations, reducing manpower and improving productivity. Together with price increases initiated by the Company as of late last year in connection with its globally recognized brand name products, these measures were aimed at improving profit margins even as revenues declined. In conjunction with these measures, the Company is also conducting a physical inventory and is reviewing and updating its standard cost of products. Any adjustments, if necessary, will be recorded in the fourth quarter of 1999. Specialty Steel Reduced demand from a major customer and a general recession in industry-wide demand due to market conditions significantly impacted our revenues and operating income. Because of the loss of the business that we transacted with this major customer and the overall reduction in our sales volume, our gross margin was significantly lower: (7.7)% for the third quarter of 1999 as compared to 33.0% for the third quarter of 1998 and 4.7% for the first nine months of 1999 as compared to 27.3% for the first nine months of 1998. Corporate and Administrative Expenses The $2.8 million increase for the first nine months of 1999, as compared to the first nine months of 1998, resulted from: a net increase in the non-employee stock option accrual of $0.7 million, increased franchise taxes of $0.3 million, second quarter increases in trade account receivable reserves of $0.9 million, and incurred software implementation costs and other charges of $0.9 million. The $0.2 million increase for the third quarter of 1999 as compared to the third quarter of 1998, resulted primarily from amortization of non-employee director stock options and new system software amortization, partially offset by decreased administrative costs. Other Income (Loss) The increase in other income for the third quarter of 1999 as compared to the third quarter of 1998 was primarily the result of increased gains with respect to marketable securities in 1999 and decreased other expense. Gains on investments in marketable securities netted $2.7 million during the third quarter of 1999, as compared to losses of $0.4 million during the third quarter of 1998. Other expense decreased to $153,000 for the third quarter of 1999, as compared to $436,000 for the third quarter of 1998. With respect to the first nine months of 1999, as compared to the first nine months of 1998, the decrease in other losses was primarily the result of decreased losses with respect to marketable securities in 1999 and decreased other expense. Losses on investments in marketable securities netted $551,000 during the first nine months of 1999, as compared to losses of $2.4 million during the first nine months of 1998. Other expense decreased to $437,000 for the first nine months of 1999, as compared to $807,000 for the first nine months of 1998. Also, the Company incurred a special charge of $0.6 million in the second quarter of 1998 relating to expenses in connection with the Company's proposed acquisition of Hitec ASA, which terminated on April 28, 1998. There was no such charge in 1999. Interest income decreased by $112,000 in the third quarter of 1999 as compared to the third quarter of 1998 and by $784,000 in the first nine months of 1999 as compared to the first nine months of 1998, resulting from lower cash balances during the 1999 periods. Income Taxes We recorded a deferred tax asset of $0.8 million for the first nine months of 1999, which we believe is more likely than not to be realized by future taxable income. 11 12 ACCOUNTING POLICIES In June 1998, the Financial Accounting Standards Board issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"). SFAS No. 137 deferred the effective date for SFAS 133 to all quarters of fiscal years beginning after June 15, 2000. This statement requires that all derivatives be recognized on the balance sheet, measured at fair value. Adoption of this statement is not expected to have a material impact on our consolidated financial position, results of operations or cash flows. LIQUIDITY AND CAPITAL RESOURCES At September 30, 1999, we had cash and cash equivalents and marketable securities of $39.8 million, compared to $40.5 million at December 31, 1998. Our working capital was $155.3 million compared to $164.2 million at December 31, 1998. This decrease in working capital at September 30, 1999 resulted from a decrease in marketable securities, accounts receivable, inventories, other current assets and liabilities, partially offset by an increase in cash and cash equivalents. At September 30, 1999, the ratio of our current assets to current liabilities was approximately 10.06:1. At September 30, 1999, approximately $5.0 million was available for letters of credit under our credit facility. At this time, we have no outstanding indebtedness other than contingent liabilities in the form of stand-by letters of credit. We believe that our balance sheet, significant liquidity and cash flow from operations will be sufficient to meet our short term and long term liquidity needs. We believe that any credit facilities that we may need in the future will be available on commercially acceptable terms, though there can be no assurances in this regard. Credit Facility We have a credit facility that matures on June 30, 2000 and that is available only for the issuance of letters of credit. After the initial public offering of our common stock, we reduced the commitment under our credit facility to $9.7 million. Our obligations under our credit facility are secured by first priority security interests in substantially all of our assets, including all personal property and material real property, the pledge by us of all of the outstanding capital stock of Cardwell and the pledge by us or Cardwell, as the case may be, of 66% of the outstanding capital stock of each of our direct and indirect foreign subsidiaries. These obligations are also guaranteed by Cardwell. Our credit facility contains certain representations and warranties, covenants and events of default customary for facilities of this type. Because of the decrease in our revenues and operating income over the past three quarters, we failed to comply with certain financial covenants in our credit facility. We have obtained waivers for the first and second quarters, as well as the third quarter of 1999, with respect to such financial covenants. YEAR 2000 Our State of Readiness This quarter, we completed testing and remediation of our information technology systems, including our network servers, LANS, WANS, personal computers, and the domestic Enterprise Resource Planning System ("ERP") for both the Downhole Tool and Oil Field Equipment divisions. In addition, we performed requisite testing at two of IRI's international locations. Although no significant issues were discovered at these international locations, those systems are being upgraded in the ordinary course of business. These upgrades will be completed in November. In addition, we also completed testing and remediation of our key non-information technology systems, including manufacturing machinery that potentially contains embedded numerical technology, phones, security systems, and office equipment. The testing of these systems occurred from July through October, 1999. Employees and outside consultants conducted this testing. Although most of our systems and machinery were already designed, or upgraded in the ordinary course of business, to be Year 2000 compliant, we performed a series of "date testing" procedures to determine 12 13 compliance. We executed business transactions while simulating the change in the millennium, and examined the results thereof. These tests were conducted with regard to: accounting (financial statements, accounts payable, accounts receivable, payroll), logistics (Materials Requirements Planning, manufacturing, distribution, invoicing), and technical (operating systems, files systems, downloads) functions. Employees verified the results of testing by (a) using the systems to see if they performed accurately, and/or (b) employing manufacturers' testing tools and test procedures. Although we have tested these systems, we cannot completely assure that all of our systems are Year 2000 Compliant. Analysis of Third Party Relationships This quarter, we also completed an inventory of our key customers and suppliers, including utility companies, telecom suppliers and financial institutions, and an analysis of how their respective Year 2000 compliance could impact our operations. We contacted these customers and suppliers to inquire: (a) the level of their technology risk; (b) the way in which technology affects their ability to buy/deliver goods that relate to our business; (c) their current system platforms and program status; (d) and whether they currently are performing due diligence testing. Based on the responses we received from such customers and suppliers, we believe that our key customers and suppliers do not pose a substantial risk to our operations, although we can give no assurances in this regard. Costs to Address Year 2000 Issues To date, we have incurred expenses of approximately $350,000 that are directly related to our Year 2000 compliance program. We estimate our expenses relating to year 2000 issues will be no more than $400,000. This low figure can be attributed to the fact that: (a) many of our systems were already designed to be Year 2000 compliant or were upgraded to be Year 2000 compliant in the ordinary course of business; and (b) maintenance agreements with the vendors of our ERP systems included the cost of software upgrades required for those systems. We believe that the costs to complete our Year 2000 compliance program will not have a material effect on our financial position, results of operations or cash flows, although we cannot give any assurances in this regard. Risks Associated with Year 2000 Issues We do not believe that we face significant Year 2000 risks because a large portion of our manufacturing equipment does not rely on embedded technology. Nonetheless, we are presently unable to determine what effect Year 2000 failures could have on us. A significant failure, however, may force us to curtail production and could prevent us from meeting customer orders on a timely basis. Contingency Plans for Year 2000 The Company is in the process of finalizing contingency plans. Preliminary plans have been developed around the most reasonably likely worst case scenario. We believe that we will have access to suppliers and manufacturing outsourcing services that will help overcome disruption of our services. In addition, we plan to gather data in a non-electronic format at the close of this year to ensure that data such as customer orders, machinery specifications, etc., will be available to us regardless of any potential Year 2000 problems. CAPITAL EXPENDITURES Capital expenditures for nine months ended September 30, 1999 totaled approximately $1.4 million, essentially all of which was spent for the implementation of new software at the down hole tools division. We are funding capital expenditures with available cash and cash flow from operations. INFORMATION CONCERNING FORWARD-LOOKING STATEMENTS With the exception of the historical information contained in this report, the matters described herein contain forward-looking statements that involve risk and uncertainties including but not limited to economic and competitive factors outside of our control. These factors more specifically include: 13 14 - - dependence on the oil and gas industry; - - competition from various entities; - - the impact of government regulations; - - the instability of certain foreign economies (including Russia and countries of the Asia-Pacific region); - - currency fluctuations; - - risks of expropriation; and - - changes in law affecting international trade and investment. Forward-looking statements are typically identified by the words "believe," "expect," "anticipate," "intend," "estimate," and similar expressions. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of their dates. INFLATION Inflation has not had a material impact on our operating and occupancy costs. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS This discussion of our exposure to market risks and our risk-management activities includes forward looking statements. These forward looking statements involve risks and uncertainties, including economic and competitive factors outside our control. Our primary risk exposures come from interest rate risks, foreign exchange rate risks, and equity price risks. Our exposure to interest rate risks are minimal with respect to indebtedness. We repaid substantially all our outstanding indebtedness in November 1997. However, at September 30, 1999, we had approximately $39.8 million of cash in interest bearing accounts. The rate of return on these accounts will vary with the prevailing interest rates. We do not engage in any significant interest rate swaps or other derivative activities designed to limit our exposure to changes in interest rates. Our direct exposure to foreign exchange risks is minimal. Except as discussed above in the "Management Discussion and Analysis of Financial Condition and Results of Operations" with respect to our down hole tools division, all of our sales are denominated in U.S. dollars. However, foreign exchange rate fluctuations may affect our revenues indirectly to the extent that a stronger U.S. dollar affects our ability to compete on the basis of price. We do not engage in any significant hedging or currency trading activities to limit our sensitivity to changes in foreign exchange rates and/or interest rates. At September 30, 1999, we had no marketable securities. From time to time, we purchase equitable securities for trading purposes. Fluctuations in interest rates and equity prices may adversely affect the value of our marketable securities. We do not believe there has been any material change in the market risks faced by us since the end of 1998. PART II OTHER INFORMATION ITEM 6. EXHIBITS AND REPORT ON FORM 8-K (a) Exhibits The exhibits listed on the exhibit Index following the signature page hereof are filed herewith in response to this item. (b) Reports on Form 8-K None. 14 15 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized. Date: November 15, 1999 IRI INTERNATIONAL CORPORATION By: /s/ ROBERT L. HARGRAVE -------------------------------- Robert L. Hargrave Chief Financial and Accounting Officer 15 16 INDEX TO EXHIBITS EXHIBIT NO. DESCRIPTION *3.1 Form of Restated Certificate of Incorporation of IRI International Corporation *3.2 Amended and Restated Bylaws of the Company 10.3C Waiver dated as of September 7, 1999 to Credit Agreement dated as of March 31, 1997 among the Company, the several banks and other financial institutions or entities from time to time parties thereto, and Credit Lyonnais New York Branch as Administrative Agent 27.1 Financial Data Schedule (submitted as an exhibit only in the electronic format of this Quarterly Report on Form 10-Q) * Exhibit incorporated herein by reference to the Company's registration statement on Form S-1 (Registration No. 333-31157) dated September 8, 1997, as amended. 16 EX-10.3.C 2 WAIVER TO CREDIT AGREEMENT 1 WAIVER, dated as of September 7, 1999 (this "Waiver"), to the CREDIT AGREEMENT, dated as of March 31, 1997, (the "Credit Agreement") among IRI INTERNATIONAL CORPORATION, a Delaware corporation (the "Borrower") as successor to the merger of ENERGY SERVICES INTERNATIONAL LTD., a Delaware corporation and former IRI INTERNATIONAL CORPORATION, a Delaware corporation, the several banks and other financial institutions or entities from time to time parties thereto (the "Lenders"), and CREDIT LYONNAIS NEW YORK BRANCH, as Administrative Agent for the Lenders (in such capacity, the "Administrative Agent"). W I T N E S S E T H : WHEREAS, pursuant to the Credit Agreement the Borrower agreed to comply with certain covenants contained in section 7.1. therein; WHEREAS, the Borrower have requested the Administrative Agent to waive the compliance with certain of such covenants; WHEREAS, the parties hereto have determined that it is in the best interest of the parties to agree and consent on the waiver for the periods established herein; NOW, THEREFORE, in consideration of the premises and of the mutual agreements herein contained, the parties hereto agree as follows: 1. Definitions. Unless otherwise defined herein, terms defined in the Credit Agreement shall be used as so defined. 2. Waiver. The Administrative Agent and the Lenders hereby waive the compliance by the Borrower with the following: (a) Section 7.1(b) of the Credit Agreement for the fiscal quarters ending December 31, 1998 and March 31, 1999; and (b) Sections 7.1(b), 7.1(c) and 7.1(d) of the Credit Agreement for the fiscal quarters ending June 30, 1999 and September 30, 1999. 3. No Revolving Credit Loans. From and after the date hereof, the Revolving Credit Commitments shall be available for the issuance of Letters of Credit only, and no Loans may be made or be outstanding. 4. Security Interest; Cash Collateral; Guarantee Letter of Credit. If on the Revolving Credit Termination Date any Letters of Credit are outstanding, or any amount remains unpaid in respect of any drawings under Letters of Credit, then at the option of the Borrower: (i) the security interest of the Administrative Agent on the Collateral will not be released and the Borrower shall not permit any Lien to be incurred on any asset 2 of the Borrower or any Subsidiary, until all amounts owing in respect of Letters of Credit are paid in full and no Letters of Credit are outstanding; or (ii) the Borrower will deposit with the Administrative Agent on the Revolving Credit Termination Date cash collateral in the amount equivalent to the undrawn amount of all such outstanding Letters of Credit, plus the amount of any unreimbursed drawings under such Letters of Credit, pursuant to a cash collateral agreement satisfactory to the Administrative Agent and until all amounts owing in respect of Letters of Credit are paid in full and no Letters of Credit are outstanding; or (iii) the Borrower will provide a letter of credit, satisfactory to the Administrative Agent, on the Revolving Credit Termination Date in the amount equivalent to the undrawn amount of all such outstanding Letters of Credit, plus the amount of any unreimbursed drawings under such Letters of Credit. 5. Effective Date. This Waiver will become effective as of the date hereof upon its execution by the Borrower, the Lenders and the Administrative Agent in accordance with the terms of the Credit Agreement. 6. Representative and Warranties. The Borrower represents and warrants to each Lender that on the date hereof and on the effective date hereof, prior to and after giving effect to the effectiveness of this Waiver (a) the representations and warranties made by the Loan Parties in the Loan Documents are true and correct in all material respects (except to the extent that such representations and warranties are expressly stated to relate to an earlier date, in which case such representations and warranties shall have been true and correct in all material respects on and as of such earlier date) and (b) no Default or Event of Default has occurred and is continuing. 7. Continuing Effect. Except as expressly waived hereby, the Credit Agreement shall continue to be and shall remain in full force and effect in accordance with its terms. 8. GOVERNING LAW. THIS WAIVER SHALL BE GOVERNED BY, AND CONSTRUED AND INTERPRETED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK. 9. Counterparts. This Waiver may be executed by the parties hereto in any number of separate counterparts, and all of said counterparts taken together shall be deemed to constitute one and the same instrument. 10. Payment of Expenses. The Loan Parties agree to pay and reimburse the Administrative Agent for all of its out-of-pocket costs and reasonable expenses incurred in connection with this Waiver, including, without limitation, the reasonable fees and disbursements of counsel to the Administrative Agent. 3 IN WITNESS WHEREOF, the parties hereto have caused this Waiver to be duly executed and delivered by their proper and duly authorized officers as of the day and year first above written. IRI INTERNATIONAL CORPORATION By:__________________________ Title: CREDIT LYONNAIS NEW YORK BRANCH, as Administrative Agent, Issuing Lender and as the sole Lender By:____________________________ Title: EX-27.1 3 FINANCIAL DATA SCHEDULE
5 YEAR DEC-31-1999 JAN-01-1999 SEP-30-1999 39,791 0 23,092 2,172 107,601 172,387 59,003 (12,144) 222,649 17,136 0 0 0 399 201,944 222,649 68,522 68,522 58,715 81,626 (6) 0 (346) (13,456) (4,710) (8,746) 0 0 0 (8,746) (0.22) (0.22)
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