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Iri International Corp – ‘10-K/A’ for 12/31/97

As of:  Thursday, 4/30/98   ·   For:  12/31/97   ·   Accession #:  950123-98-4310   ·   File #:  1-13593

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  As Of                Filer                Filing    For·On·As Docs:Size              Issuer               Agent

 4/30/98  Iri International Corp            10-K/A     12/31/97    2:111K                                   RR Donnelley/FA

Amendment to Annual Report   —   Form 10-K
Filing Table of Contents

Document/Exhibit                   Description                      Pages   Size 

 1: 10-K/A      Amended Form 10-K                                     35    204K 
 2: EX-23.1     Consent of Kpmg Peat Marwick LLP                       1      5K 


10-K/A   —   Amended Form 10-K
Document Table of Contents

Page (sequential) | (alphabetic) Top
 
11st Page   -   Filing Submission
2Item 8. Financial Statements and Supplementary Data
3Independent Auditors' Report
4Consolidated Balance Sheets
5Consolidated Statements of Operations
6Consolidated Statements of Cash Flows
7Consolidated Statements of Shareholders' Equity
8Notes to Consolidated Financial Statements
22Item 10. Directors and Executive Officers of the Registrant
24Item 11. Executive Compensation
27Compensation Plans and Arrangements
"The Incentive Plan
"Options
30Item 12. Security Ownership of Certain Beneficial Owners and Management
31Item 13. Certain Relationships and Related Transactions
"Registration Rights Agreement
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================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM 10-K/A [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997 [ ] 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 333-31157 IRI INTERNATIONAL CORPORATION (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) [Download Table] DELAWARE 75-2044681 (STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER) 1000 LOUISIANA, SUITE 5900 HOUSTON, TEXAS 77002 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE) REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (713) 651-8002 SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: [Download Table] NAME OF EACH EXCHANGE TITLE OF EACH CLASS ON WHICH REGISTERED ------------------- --------------------- Common Stock, $.01 par value New York Stock Exchange SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K/A or any amendment to this Form 10-K/A. [ ] As of March 17, 1998, the aggregate market value of voting stock held by non-affiliates of the Registrant was $141,370,217 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 17, 1998. ================================================================================
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IRI International Corporation ("IRI" or the "Company") hereby amends its annual report on Form 10-K originally filed with the Securities and Exchange Commission on March 26, 1998, pursuant to Instruction G(3) to Form 10-K, by completing Items 10 through 13 appearing in Part III thereof. In its Form 10-K as originally filed, the Registrant indicated that the information required for such items would be incorporated by reference from the proxy statement related to the Registrant's annual stockholders meeting. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. IRI INTERNATIONAL CORPORATION AND SUBSIDIARIES INDEX TO CONSOLIDATED FINANCIAL STATEMENTS [Download Table] PAGE ---- Independent Auditors' Report................................ 3 Consolidated Balance Sheets -- December 31, 1997 and 1996... 4 Consolidated Statements of Operations -- year ended December 31, 1997, nine months ended December 31, 1996 and year ended March 31, 1996...................................... 5 Consolidated Statements of Cash Flows -- year ended December 31, 1997, nine months ended December 31, 1996 and year ended March 31, 1996...................................... 6 Consolidated Statements of Shareholders' Equity -- year ended December 31, 1997, nine months ended December 31, 1996 and year ended March 31, 1996........................ 7 Notes to Consolidated Financial Statements.................. 8 All schedules are omitted as the required information is inapplicable or presented in the consolidated financial statements or related notes. 2
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INDEPENDENT AUDITORS' REPORT The Board of Directors IRI International Corporation: We have audited the consolidated financial statements of IRI International Corporation and subsidiaries as listed in the accompanying index. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of IRI International Corporation as of December 31, 1997 and 1996 and the results of their operations and their cash flows for the year ended December 31, 1997, the nine months ended December 31, 1996, and the year ended March 31, 1996 in conformity with generally accepted accounting principles. KPMG Peat Marwick LLP Houston, Texas February 27, 1998 3
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IRI INTERNATIONAL CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS) [Download Table] DECEMBER 31, ------------------- 1997 1996 -------- ------- ASSETS Current assets: Cash and cash equivalents................................. $ 49,473 $ 8,635 Marketable securities, at fair value (cost of $7,448)..... 8,218 -- Accounts receivable, less allowance for doubtful accounts of $455 at December 31, 1997 and $36 at December 31, 1996................................................... 33,130 8,036 Inventories............................................... 100,901 37,995 Costs and estimated earnings in excess of billings on uncompleted contracts.................................. 8,853 23 Other current assets...................................... 1,444 957 -------- ------- Total current assets................................... 202,019 55,646 Property, plant and equipment, net.......................... 43,219 2,398 Other assets................................................ 5,836 627 -------- ------- $251,074 $58,671 ======== ======= LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Notes payable............................................. $ 38 $ 3,157 Accounts payable.......................................... 19,453 6,790 Accrued liabilities....................................... 8,344 3,530 Customer advances......................................... 7,546 2,607 Other liabilities......................................... 4,527 760 Current installments of obligation under capital lease.... 221 144 -------- ------- Total current liabilities.............................. 40,129 16,988 Negative goodwill, less accumulated amortization............ 9,393 14,760 Obligation under capital lease, less current installments... 586 522 Accrued postretirement benefits other than pensions......... 1,481 1,498 Pension liability........................................... 939 -- Other long-term liabilities................................. 140 -- -------- ------- Total liabilities...................................... 52,668 33,768 -------- ------- 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, and 30,000,000 shares issued and outstanding in 1997 and 1996, respectively......... 399 300 Additional paid-in capital................................ 168,538 4,700 Retained earnings......................................... 30,926 19,903 Minimum pension liability adjustment...................... (1,457) -- -------- ------- Total shareholders' equity............................. 198,406 24,903 ======== ======= Commitments and contingencies............................... $251,074 $58,671 ======== ======= See accompanying notes to consolidated financial statements 4
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IRI INTERNATIONAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) [Enlarge/Download Table] NINE MONTHS YEAR ENDED ENDED YEAR ENDED DECEMBER 31, DECEMBER 31, MARCH 31, 1997 1996 1996 ------------ ------------ ---------- Revenues............................................... $185,366 $62,298 $52,506 Cost of goods sold..................................... 139,204 44,968 36,877 -------- ------- ------- Gross profit......................................... 46,162 17,330 15,629 -------- ------- ------- Selling and administrative expense..................... 23,543 8,220 7,990 -------- ------- ------- Operating income..................................... 22,619 9,110 7,639 -------- ------- ------- Other income (expense): Interest income...................................... 746 90 371 Interest expense..................................... (8,762) (615) (47) Other, net........................................... 718 (110) -- -------- ------- ------- (7,298) (635) 324 -------- ------- ------- Income before income taxes and extraordinary item............................................ 15,321 8,475 7,963 Income taxes........................................... 2,786 98 -- -------- ------- ------- Income before extraordinary item.................. 12,535 8,377 7,963 Extraordinary item -- extinguishment of debt (net of tax benefit of $841)................................. (1,512) -- -- -------- ------- ------- Net income........................................... $ 11,023 $ 8,377 $ 7,963 -------- ------- ------- Income per common share: Income before extraordinary item..................... $ 0.40 $ 0.28 $ 0.27 Extraordinary item................................... (0.05) -- -- -------- ------- ------- Net income per common share............................ $ 0.35 $ 0.28 $ 0.27 ======== ======= ======= Weighted average shares outstanding.................... 31,275 30,000 30,000 ======== ======= ======= See accompanying notes to consolidated financial statements. 5
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IRI INTERNATIONAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS) [Enlarge/Download Table] YEAR ENDED NINE MONTHS ENDED YEAR ENDED DECEMBER 31, DECEMBER 31, MARCH 31, 1997 1996 1996 ------------ ----------------- ----------- Cash flows from operating activities: Net income...................................... $ 11,023 $ 8,377 $ 7,963 Adjustments to reconcile net income to net cash provided by operations: Extraordinary charge......................... 1,512 -- -- Depreciation and amortization................ 5,751 98 64 Amortization of negative goodwill............ (5,367) (4,026) (5,367) Change in employee benefit accounts.......... 129 (53) (249) Gain on sale of assets....................... (372) -- -- Changes in assets and liabilities, net of effects of acquisitions: Marketable securities........................ (8,218) -- -- Accounts receivable.......................... (14,772) (2,594) 72 Inventories.................................. (21,058) (6,840) (2,043) Other current assets......................... (6,918) (125) (201) Other non current assets..................... (113) -- -- Accounts payable and accrued liabilities..... 17,682 2,728 3,580 Customer advances and other liabilities...... 593 1,264 360 -------- ------- ------- Net cash provided by (used in) operations............................ (20,128) (1,171) 4,179 -------- ------- ------- Cash flows from investing activities: Capital expenditures............................ (5,755) (911) (717) Acquisition of Bowen net assets, net of cash acquired..................................... (77,693) -- -- Acquisition of Cardwell net assets, net of cash acquired .................................... (12,574) -- -- -------- ------- ------- Net cash flows used in investing activities............................ (96,022) (911) (717) -------- ------- ------- Cash flows from financing activities: Payments on capital lease obligation............ (312) (144) -- Proceeds from notes payable..................... 113,482 3,157 -- Debt issuance costs............................. (3,971) -- -- Payments on notes payable....................... (116,671) -- -- Issuance of common stock........................ 163,937 -- -- Proceeds from sale of assets.................... 523 -- -- -------- ------- ------- Net cash flows provided by financing activities............................ 156,988 3,013 -- -------- ------- ------- Increase in cash and cash equivalents............. 40,838 931 3,462 Cash and cash equivalents at beginning of year.... 8,635 7,704 4,242 -------- ------- ------- Cash and cash equivalents at end of year.......... $ 49,473 $ 8,635 $ 7,704 ======== ======= ======= Supplemental cash flow information: Interest paid................................... $ 8,762 $ 303 $ 47 ======== ======= ======= Income taxes paid............................... $ 158 $ -- $ 263 ======== ======= ======= See accompanying notes to consolidated financial statements 6
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IRI INTERNATIONAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (IN THOUSANDS) [Enlarge/Download Table] MINIMUM ADDITIONAL PENSION TOTAL COMMON PAID-IN RETAINED LIABILITY SHAREHOLDERS STOCK CAPITAL EARNINGS ADJUSTMENT EQUITY ------ ---------- -------- ---------- ------------ Balances at April 1, 1995........... $300 $ 4,700 $ 3,563 $ -- $ 8,563 Net income........................ -- -- 7,963 -- 7,963 ---- -------- -------- ------- -------- Balances at March 31, 1996.......... 300 4,700 11,526 -- 16,526 Net income........................ -- -- 8,377 -- 8,377 ---- -------- -------- ------- -------- Balances at December 31, 1996....... 300 4,700 19,903 -- 24,903 Proceeds from initial public offering, net of costs......... 99 163,838 163,937 -- 163,838 Change in minimum pension liability adjustment........... -- -- -- (1,457) (1,457) Net income........................ -- -- 11,023 -- 11,023 ---- -------- -------- ------- -------- Balances at December 31, 1997....... $399 $168,538 $ 30,926 ($1,457) $198,406 ==== ======== ======== ======= ======== See accompanying notes to consolidated financial statements 7
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IRI INTERNATIONAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (1) GENERAL IRI International Corporation (IRI or Company), a Delaware corporation, was formed on July 30, 1985, through the combination of Ingersoll-Rand Oilfield Products Company, a wholly-owned subsidiary of Ingersoll-Rand Company, established August 1, 1980, and the Ideco Division of Dresser Industries, Inc. On November 19, 1997, the Company sold 9.9 million shares of its common stock through an initial public offering (IPO). Net proceeds totaled approximately $163.9 million and were used partially to repay debt incurred in connection with the acquisitions (see Notes 3 and 6). Remaining proceeds are invested primarily in interest bearing deposit accounts and marketable equity securities. The Company manufactures and sells a full line of oil and gas mobile well servicing and drilling rigs, deep oil and gas skid-mounted drilling rigs, associated drilling equipment (Oilfield Equipment), and specialty steel products (Specialty Steel). Raw materials are readily available and the Company is not dependent upon a single or a few suppliers. On September 20, 1994, all of the outstanding common and preferred stock of IRI was acquired by Energy Services International (ESI) for cash of $5 million. The acquisition has been recorded using the purchase method of accounting and the purchase price has been allocated to the assets acquired and liabilities assumed based upon their estimated fair values at the date of the acquisition. The excess of the fair value of net assets acquired over consideration was applied against nonmonetary assets (property, plant and equipment) reducing the balances at the acquisition date to zero. The remaining excess of the fair value of net assets acquired over consideration paid of $26.8 million was recorded as negative goodwill and is being amortized using the straight-line method over 5 years. Negative goodwill amortization of $5.4 million for the year ended December 31, 1997, $4.0 million for the nine months ended December 31, 1996, and $5.4 million for the year ended March 31, 1996, is included in cost of goods sold in the accompanying statements of operations. IRI was subsequently merged into ESI in October 1997. ESI was the surviving corporation and changed its name to IRI International Corporation. During 1996, the Company elected to change its fiscal year end from March 31 to December 31. (2) SIGNIFICANT ACCOUNTING POLICIES (a) Principles of Consolidation The consolidated financial statements include the accounts of the Company and its subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. (b) Statements of Cash Flows Cash equivalents of $49,500,000 and $8,600,000 at December 31, 1997 and 1996, 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 year ended December 31, 1997 and the nine months ended December 31, 1996, the Company entered into capital lease obligations of $309,000 and $810,000, respectively. (c) Marketable Securities Marketable securities at December 31, 1997 consist of corporate equity securities. The Company classifies its equity securities as trading securities. Trading securities are bought and held principally for the 8
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IRI INTERNATIONAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) purpose of selling them in the near term and are recorded at fair value. Unrealized holding gains of approximately $770,000 are included in other income for the year ended December 31, 1997. (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 among of an asset to future net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell. (f) Income Taxes Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. (g) Revenue Recognition The Company recognizes construction contract revenues for rigs and significant components using the percentage-of-completion method. Under the percentage-of-completion method, revenues and profits are recognized based on the percentage of completion throughout the performance period of the contract. The percentage-of-completion is calculated based on the ratio of contract costs incurred to date to total estimated contract costs after providing for all known or anticipated costs. Costs include material, direct labor and engineering and manufacturing overhead. Selling expenses and general and administrative expenses are charged to operations as incurred. The effect of changes in estimates of contract costs is recorded currently. If estimates of costs to complete contracts indicate a loss, provision is made currently for the total loss anticipated. All remaining revenue is generally recorded when the equipment is shipped. Costs and estimated earnings in excess of billing on uncompleted contracts represent revenues earned under the percentage-of-completion method but not yet billable under the terms of the contract. Amounts are billable under contracts generally upon shipment of the products or completion of the contracts. Included in revenues and cost of goods sold for the year ended December 31, 1997 is $34,842,000 and $25,989,000, respectively, related to uncompleted contracts ($8,853,000, net) at December 31, 1997. Included in revenues 9
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IRI INTERNATIONAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) and cost of goods sold for the nine months ended December 31, 1996 is $764,000 and $741,000, respectively, related to uncompleted contracts ($23,000 net) at December 31, 1996. (h) Earnings per Common Share The Company adopted Statement of Financial Accounting Standard ("SFAS") No. 128, "Earnings Per Share" during the fourth quarter of 1997. Under SFAS No. 128, basic earnings per share (EPS) is computed by dividing income available to common shareholders by the weighted average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the entity. For the years and quarters presented herein, basic and diluted earnings per share are the same. Options outstanding at December 31, 1997 are anti-dilutive as the exercise price is greater than the market price at December 31, 1997. (i) Financial Instruments and Credit Risk Concentrations The Company invests its excess cash in financial instruments, primarily overnight investments and money market mutual funds. These financial instruments could potentially subject the Company to concentrations of credit risk; however, the Company's management considers the financial stability and creditworthiness of a financial institution before investing the Company's funds. The carrying amounts of the financial instruments in the accompanying financial statements (cash, accounts receivable and payables) approximate fair value because of the short maturities of these instruments. The capital lease obligation bears interest at rates that approximate market rates and, thus the carrying amount approximates estimated fair value. A substantial portion of the Company's customers are engaged in the energy industry. This concentration of customers may impact the Company's overall exposure to credit risk, either positively or negatively, in that customers may 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. (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 10
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IRI INTERNATIONAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) notes. The notes outstanding under the term loan facility and the senior subordinated increasing rate notes were repaid with the proceeds from the Company's equity offering (see note 1). Bowen, headquartered in Houston, Texas, designs, manufactures and markets fishing tools and drilling, power and wireline/pressure control equipment used in the drilling and completion of oil and gas wells. Cardwell, headquartered in El Dorado, Kansas, manufactures and sells drilling rigs, related oilfield equipment and supplies predominantly to foreign countries. The acquisitions have been recorded using the purchase method of accounting and results of operations of the acquired companies have been included in the consolidated statement of operations of IRI from the dates of the respective acquisitions. The cost of the Bowen and Cardwell acquisitions have been allocated to the assets acquired and liabilities assumed based on their respective fair values as follows (in thousands): [Download Table] Current assets.............................................. $ 57,389 Property, plant and equipment............................... 37,647 Excess of cost over fair value of net tangible assets of businesses acquired, net.................................. 6,096 Other assets................................................ 812 Current liabilities......................................... (11,677) -------- Total............................................. $ 90,267 ======== 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. The following sets forth selected consolidated financial information for the Company on a pro forma basis for the years ended December 31, 1997 and 1996, assuming the Bowen and Cardwell acquisitions had occurred on January 1, 1996 (in thousands, except per share amounts): [Download Table] 1997 1996 -------- -------- (UNAUDITED) Revenues............................................... $207,776 $188,391 ======== ======== Gross profit........................................... $ 51,244 $ 61,891 ======== ======== Operating income....................................... $ 23,616 $ 17,588 ======== ======== Net income............................................. $ 9,300 $ 5,738 ======== ======== Net income per common share............................ $ 0.30 $ 0.19 ======== ======== Pro forma adjustments primarily relate to additional interest expense resulting from debt to finance the acquisitions, additional depreciation and amortization expense as a result of the purchase price allocations to property, plant and equipment and excess of cost over net tangible assets purchased and the related tax effects of these adjustments. The pro forma information is not necessarily indicative of the results that actually would have been achieved had such transactions been consummated as of January 1, 1996, or that may be achieved in the future. 11
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IRI INTERNATIONAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (4) INVENTORIES A summary of inventories follows (in thousands): [Download Table] DECEMBER 31, DECEMBER 31, 1997 1996 ------------ ------------ Raw materials and supplies........................ $ 39,087 $29,163 Work in process................................... 28,771 7,645 Finished goods.................................... 33,043 1,187 -------- ------- Total................................... $100,901 $37,995 ======== ======= (5) PROPERTY, PLANT AND EQUIPMENT A summary of property, plant and equipment follows (in thousands): [Download Table] DECEMBER 31, DECEMBER 31, 1997 1996 ------------ ------------ Land and land improvements........................ $ 2,869 $ 13 Buildings......................................... 7,378 277 Machinery and equipment........................... 36,318 2,276 ------- ------ 46,565 2,566 Less accumulated depreciation..................... (3,346) (168) ------- ------ Property, plant and equipment, net................ $43,219 $2,398 ======= ====== Machinery and equipment includes capitalized lease assets of $1,119,000, and $810,000 at December 31, 1997 and 1996, respectively. (6) NOTES PAYABLE In connection with the acquisitions described in note 3, the Company entered into a $65 million senior secured term loan facility due in quarterly installments beginning June 30, 1997 through March 31, 2002 and a $31 million interim senior subordinated increasing rate note due March 31, 1998. Amounts outstanding under these notes were repaid with proceeds from the Company's initial public offering in November 1997. The extinguishment of this debt resulted in an extraordinary charge of $1,512,000 consisting of unamortized financing costs of $2,353,000 and income tax benefit of $841,000. The Company has a $9.7 million revolving credit facility which matures on March 31, 2000. Amounts outstanding under the revolving credit facility are secured by substantially all of the assets of the Company and accrue interest at a rate per annum equal to the one, two, three or six month LIBOR plus 2 3/4%. Amounts available under the revolving credit facility ($3,605,000 at December 31, 1997) are limited to the excess of the revolving credit commitment over then outstanding letter of credit obligations. The revolving credit facility agreement contains provisions, among others, that restrict incurrence of indebtedness, guarantees, acquisitions, and distributions to shareholders, and require the Company to meet specified financial maintenance tests. During the year ended March 31, 1996, the Company obtained a $15 million revolving credit facility with a bank available through February 1998. Borrowings under the credit facility bear interest at the prime rate (8.25% at December 31, 1996) plus an applicable margin. As of December 31, 1996, there was $21,000 outstanding on the line of credit. The line of credit was canceled on March 31, 1997 in connection with the acquisitions and related financing described in note 3. 12
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IRI INTERNATIONAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) At December 31, 1996 the Company had a $3 million unsecured demand note payable to Towers Financial Services bearing interest at 14% per annum. The note and accrued interest were paid in January 1997. (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) STOCK OPTIONS In anticipation of the initial public stock offering, the Company granted its Directors and certain of its officers and employees an aggregate of 1,933,000 options to purchase shares of common stock. Directors not employed by the Company received options to purchase an aggregate of 160,000 shares of common stock having an exercise price that will be equal to the initial public offering price. The options granted to Directors not employed by the Company vest as to one-half of the option shares on the effective date of the Offering and as to a further one-quarter of the option shares on the first and second anniversaries of the effective date of the Offering. Certain executive officers and employees received options to purchase an aggregate of 1,773,000 shares of common stock having an exercise price equal to the greater of the initial public offering price and the fair market value of the option shares on the date such options vest. The options granted to certain executive officers and employees generally vest as to one-third of the option shares upon the effective date of the Offering and as to a further one-third of the option shares on the first and second anniversaries of the effective date of the Offering. The Company applies APB Opinion 25 in accounting for its plan. Accordingly, no compensation cost has been recognized for stock options granted to employees. Compensation expense is recorded for options granted to non-employee directors based on the estimated fair value of the options on the date of grant. The compensation cost that has been charged against income for non-employee director options granted was $499,000 for the year ended December 31, 1997. Had compensation cost for the Company's stock option plans been determined based on the fair value at the grant dates for awards to employees under the plan consistent with the method of SFAS No. 123, the Company's net income and earnings per share for the year ended December 31, 1997 would have been reduced to the pro forma amounts indicated below (in thousands except per share data): [Download Table] Net income As reported............................................... $11,023 ======= Pro forma................................................. $ 7,216 ======= Basic and diluted earnings per share As reported............................................... $ 0.35 ======= Pro forma................................................. $ 0.23 ======= 13
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IRI INTERNATIONAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 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: [Download Table] Expected life (years)....................................... 3.3 Risk-free interest rate..................................... 6.2% Volatility.................................................. 30.0% Dividend yield.............................................. 0.0% A summary of the status of the Company's fixed stock option plan as of December 31, 1997 and changes during the year ended is presented below: [Download Table] WEIGHTED AVERAGE FIXED OPTIONS SHARES(000) EXERCISE PRICE ------------- ----------- -------------- Outstanding at the beginning of the year........... -- $ -- Granted............................................ 1,933 18.00 Exercised.......................................... -- Forfeited.......................................... (2) 18.00 ----- ------ Outstanding at end of the year..................... 1,931 $18.00 ----- ====== Options exercisable at the year end................ 630 $18.00 Weighted average fair value of options granted during the year.................................. $ 5.33 ------ Weighted average remaining contractual life of stock options at December 31, 1997 was 9.9 years. (9) INCOME TAXES Current income tax expense attributable to income before extraordinary item consists of the following: [Download Table] NINE MONTHS YEAR ENDED ENDED YEAR ENDED DECEMBER 31, DECEMBER 31, MARCH 31, 1997 1996 1996 ------------ ------------ ---------- U.S. Federal.......................... $1,965 $98 $-- State................................. 312 -- -- Foreign............................... $ 509 $-- -- ------ --- --- $2,786 $98 $-- ====== === === 14
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IRI INTERNATIONAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Income tax expense differs from the amount computed by applying the statutory rate of 35 percent at December 31, 1997 (34% at December 31, 1996 and March 31, 1996) to income before income taxes as follows (in thousands): [Download Table] NINE MONTHS YEAR ENDED ENDED YEAR ENDED DECEMBER 31, DECEMBER 31, MARCH 31, 1997 1996 1996 ------------ ------------ ---------- Computed "expected" tax expense....... $ 5,362 $ 2,882 $ 2,707 Change in the valuation allowance..... (1,291) (1,504) (1,046) Amortization of negative goodwill..... (1,879) (1,369) (1,825) Amortization of goodwill.............. 308 -- -- State income taxes, net of federal benefit............................. 203 -- -- Other................................. 83 89 164 ------- ------- ------- $ 2,786 $ 98 $ -- ======= ======= ======= 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, 1997 and December 31, 1996, are as follows (in thousands): [Download Table] DECEMBER 31, DECEMBER 31, 1997 1996 ------------ ------------ Deferred income tax assets: Basis in inventories............................ $4,744 $1,692 Basis in and depreciation of property, plant and equipment.................................... -- 277 Employee benefits............................... 823 509 Net operating loss carryforwards................ 1,224 1,800 Alternative minimum tax credit carryover........ 565 256 Other, principally accrued liabilities.......... 909 280 ------ ------ Total gross deferred income tax assets....... 8,265 5,882 Less valuation allowance........................ 4,378 5,669 ------ ------ Net deferred income tax assets............... 3,887 213 ------ ------ Deferred income tax liabilities: Costs and estimated earnings in access of billings on uncompleted contracts............ 3,010 -- Unrealized gain on marketable equity securities................................... 262 -- Basis in and depreciation of property, plant and equipment.................................... 615 -- Prepaid pension cost............................ -- 213 ------ ------ Total gross deferred income tax liabilities................................ 3,887 213 ------ ------ Net deferred income tax liability............ $ -- $ -- ====== ====== Because of the uncertainty of generating future taxable income, the Company has provided a valuation allowance for deferred tax assets of $4,378,000 and $5,669,000 at December 31, 1997 and December 31, 1996, respectively. The valuation allowance decreased $1,291,000 during the year ended December 31, 1997 and $1,504,000 during the nine months ended December 31, 1996. In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion of all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of 15
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IRI INTERNATIONAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 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 $3,600,000 available at December 31, 1997) expiring from 2003 through 2009. To the extent such carryforwards are not utilized in a year, they may be utilized in subsequent years. (10) LEASES At December 31, 1997, 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): [Download Table] OPERATING CAPITAL LEASES LEASES --------- ------- 1998........................................................ $1,657 $ 314 1999........................................................ 1,542 314 2000........................................................ 1,310 313 2001........................................................ 1,042 -- 2002........................................................ 982 -- ------ ----- Total minimum lease payments...................... $6,533 941 ====== Less amount representing interest........................... (134) ----- Present value of minimum lease payments..................... $ 807 ===== Total rental expense was $2,142,000 for the year ended December 31, 1997, $860,000 for the nine months ended December 31, 1996, and $546,000 for the year ended March 31, 1996. (11) PENSION PLAN The Company has a noncontributory defined benefit pension plan, which covers substantially all employees. Employees with 10 or more years of service are entitled to pension benefits beginning at normal retirement age (65) based on years of service and the employees' compensation for the 60 consecutive month period in which his compensation is the highest. The plan incorporates provisions for early retirement, the privilege to elect a life annuity, surviving spouse benefits, and disability benefits. Employees of the Company who were employees of Ingersoll-Rand Oilfield Products Company or the Ideco Division of Dresser Industries, Inc., immediately prior to becoming employees of IRI, are entitled to uninterrupted service tenure for purposes of retirement benefit calculations. Benefits payable under the IRI retirement plan are offset by benefits payable under the retirement plans of Dresser and Ingersoll-Rand Oilfield Products Company. The Company uses the accrued benefit cost method to compute the annual contributions to the plan, with minimum and maximum contributions determined on a cumulative basis and the Company having the flexibility to choose which contribution to make and which can vary from one period to the next. 16
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IRI INTERNATIONAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 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. The funded status and the amounts recognized in the balance sheets as of December 31, 1997 and December 31, 1996, the date of the latest actuarial valuation, are as follows (in thousands): [Download Table] DECEMBER 31, DECEMBER 31, 1997 1996 ------------ ------------ Actuarial present value of benefit obligations: Vested..................................... $(7,948) $(7,231) Nonvested.................................. (113) (58) ------- ------- Accumulated benefit obligation............... $(8,061) $(7,289) ======= ======= Projected benefit obligation for service rendered to date........................... $(8,061) $(7,289) Plan assets at fair value.................... 7,122 7,321 ------- ------- Projected benefit obligation less than (greater than) plan assets................. (939) 32 Unrecognized net gain from past experience different from that assumed and effects of changes in assumptions..................... 1,457 595 ------- ------- Adjustment required to recognize minimum liability.................................. (1,457) -- ------- ------- Prepaid (accrued) pension cost............... $ (939) $ 627 ======= ======= The Plan assets consist primarily of interest bearing demand deposit accounts at December 31, 1997 and time-share real estate notes and fixed income time deposits at December 31, 1996. The provisions of SFAS No. 87, "Employers' Accounting for Pensions", require the recognition of an additional minimum liability for each defined benefit plan for which the accumulated benefit obligation exceeds plan assets. This amount has been recorded as a long-term liability with an offsetting intangible asset. Because the asset recognized may not exceed the amount of unrecognized prior service cost and transition obligation on an individual plan basis, the balance of $1,457,000 is reported as a separate reduction of shareholders' equity at December 31, 1997. Net pension cost includes the following components (in thousands): [Download Table] NINE MONTHS YEAR ENDED ENDED YEAR ENDED DECEMBER 31, DECEMBER 31, MARCH 31, 1997 1996 1996 ------------ ------------ ---------- Service cost.......................... $ 108 $ 81 $ 108 Interest cost......................... 571 419 556 Actual return on plan assets.......... (499) (270) (565) Net amortization and deferral......... (71) (157) 154 ----- ----- ----- Total pension expense (income).................. $ 109 $ 73 $ 253 ===== ===== ===== 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. 17
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IRI INTERNATIONAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The development of the actuarial present value of the projected benefit obligation at December 31, 1997 and December 31, 1996 was based upon a weighted average discount rate of 7.30% and 7.90%, respectively, and an expected long-term rate of return on assets of 8.0%. 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 plan is administered by the Pension Committee which is appointed by IRI's Board of Directors. The Company also has a defined contribution plan which covers most of its employees. The plan provides mandatory contributions from the Company to eligible employees in the plan equal to 7 1/2% of their annual pay. Plan participants become fully vested in contributions made by the Company following three years of credited service. The Company recognized expense associated with the plan of approximately $1,076,000, $665,000, and $418,000 for the year ended December 31, 1997, the nine-months ended December 31, 1996 and the year ended March 31, 1996, respectively. (12) POSTRETIREMENT BENEFITS OTHER THAN PENSIONS 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 after 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. The 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. Summary information on the Company's plan at December 31, 1997 and December 31, 1996 is as follows (in thousands): [Download Table] DECEMBER 31, DECEMBER 31, 1997 1996 ------------ ------------ Accumulated post retirement benefit obligation: Active employees eligible to retire............. $ 579 $ 594 Retired participants............................ 1,262 1,227 Unamortized gain or loss associated with actuarial assumption changes and plan amendment........... (360) (323) ------ ------ Accrued postretirement benefit costs............ $1,481 $1,498 ====== ====== Net period postretirement benefit cost includes the following components (in thousands): [Download Table] NINE MONTHS YEAR ENDED ENDED YEAR ENDED DECEMBER 31, DECEMBER 31, MARCH 31, 1997 1996 1996 ------------ ------------ ----------- Service cost......................... $ -- $ -- $ 30 Interest cost........................ 144 103 187 Net amortization and deferral........ 7 2 -- ---- ---- ---- Net periodic postretirement benefit cost (income)...................... $151 $105 $217 ==== ==== ==== On August 11, 1995, the 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 18
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IRI INTERNATIONAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 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 discount rates used in determining the accumulated postretirement benefit obligation were 7.30% and 7.75% at December 31, 1997 and December 31, 1996, respectively. The assumed health care cost trend rate was 10% in 1995 graded down to 5% after 12 years. Because health care cost increases over 5% annually are borne by the employees, the amounts reported are not affected by increases in the assumed health care cost trend rate. (13) BUSINESS SEGMENTS The Company operates through three business segments consisting of Oilfield Equipment, Downhole Tools, and Specialty Steel. The Oilfield Equipment segment is principally engaged in the design and manufacture of drilling and well servicing rigs and components for use on land and offshore drilling platforms. The Company specializes in providing small truck-mounted rigs to stationary land deep drilling rigs to meet the functional requirements of customers drilling in remote and harsh environments. The Downhole Products segment designs, manufactures, sells and rents fishing and drilling tools. The Company's Specialty Steel segment manufactures premium carbon, alloy and specialty steel for use in commercial and military products as well as for the manufacture of oilfield equipment products. IRI's steel products are also used in the petroleum, aircraft and power generation industries. Financial information by industry segment is summarized below (in thousands): [Enlarge/Download Table] CORPORATE OILFIELD DOWNHOLE SPECIALTY AND EQUIPMENT PRODUCTS STEEL OTHER ELIMINATIONS TOTAL --------- -------- --------- --------- ------------ -------- Year ended December 31, 1997 Sales to unaffiliated customers... $106,529 $67,166 $13,501 $ -- $(1,830) $185,366 Operating income (loss)........... 15,617 11,869 4,503 (9,370) -- 22,619 Identifiable assets............... 94,011 51,258 9,457 96,348 -- 251,074 Depreciation...................... 248 1,796 30 1,100 -- 3,174 Amortization of negative goodwill....................... -- -- -- (5,367) -- (5,367) Capital expenditures.............. 2,216 1,649 314 1,885 -- 6,064 Nine Months Ended December 31, 1996 Sales to unaffiliated customers... $ 52,029 $ -- $10,269 $ -- $ -- $ 62,298 Operating income (loss)........... 7,399 -- 2,879 (1,168) -- 9,110 Identifiable assets............... 40,169 -- 6,956 11,546 -- 58,671 Depreciation...................... 79 -- 10 9 -- 98 Amortization of negative goodwill....................... -- -- -- (4,026) -- (4,026) Capital expenditures.............. 545 -- 218 958 -- 1,721 Year Ended March 31, 1996 Sales to unaffiliated customers... $ 40,176 $ -- $12,330 $ -- $ -- $ 52,506 Operating income.................. 4,141 -- 2,608 890 -- 7,639 Identifiable assets............... 30,979 -- 6,302 9,350 -- 46,631 Depreciation...................... 40 -- 12 12 -- 64 Amortization of negative goodwill....................... -- -- -- (5,367) -- (5,367) Capital expenditures.............. 581 -- 130 6 -- 717 19
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IRI INTERNATIONAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Export sales by geographic region based upon the ultimate destination in which equipment or services were sold, shipped or provided to the customer by the Company were as follows (in thousands): [Enlarge/Download Table] NINE MONTHS YEAR YEAR ENDED ENDED ENDED DECEMBER 31, DECEMBER 31, MARCH 31, 1997 1996 1996 ------------ ------------ ---------- Russia................................................. $ 47,375 $39,717 $26,459 Europe (excluding Russia).............................. 12,783 151 2,068 Asia (excluding Russia)................................ 11,113 72 128 South America.......................................... 9,166 634 -- Africa................................................. 14,432 -- 391 Other.................................................. 6,665 -- -- -------- ------- ------- Total export sales........................... 101,534 40,574 29,046 Domestic sales......................................... 83,832 21,724 23,460 -------- ------- ------- Total sales.................................. $185,366 $62,298 $52,506 ======== ======= ======= For the year ended December 31, 1997, one customer accounted for 12.9% of revenues. For the nine months ended December 31, 1996, two customers accounted for 38% and 14% of revenues, respectively, and for the year ended March 31, 1996, one customer accounted for 36% of revenues. (14) COMMITMENTS AND CONTINGENCIES The Company has contract commitments aggregating $69.4 million at December 31, 1997 for the manufacture and delivery of drilling and workover rigs during fiscal year 1998. At December 31, 1997, the Company was contingently liable for approximately $6.6 million in letters of credit which guarantee the Company's performance for payment to third parties in accordance with specified contractual terms and conditions. These letters of credit are primarily secured by the Company's cash, accounts receivable and inventory. Management does not expect any material losses to result from these off-balance-sheet instruments as it anticipates full performance on the related contracts. Various federal, state and local laws, regulations and ordinances govern the removal, encapsulation or disturbance of asbestos containing materials ("ACMs"). Such laws and regulations may impose liability for the release of ACMs and may provide for third parties to seek recovery from owners or operators of facilities at which ACMs were or are located for personal injury associated with exposure to ACMs. The Company is aware of the presence of ACMs at its facilities, but it believes that such materials are in acceptable condition at this time. The Company believes that any future costs related to remediation of ACMs at these sites will not be material, either on an annual basis or in the aggregate, although there can be no assurance with respect thereto. The Company has sought to reduce the impact of costs arising from or related to actual or potential environmental conditions at the Bowen Tools Division facilities caused or created by Bowen or its predecessors in title through the Company's contractual arrangements with Air Liquide America Corporation ("Air Liquide"). Pursuant to such arrangements, Air Liquide and Bowen agreed to indemnify the Company for such costs. Air Liquide provided the Company with certain environmental assessments with respect to most of the Bowen properties conveyed to the Company. In some cases, these initial assessments recommended the performance of further investigation to evaluate the need for and to determine the extent of the removal or remediation of hazardous substances required to address historical operations of Bowen. Air Liquide is conducting a further environmental review of the Bowen Tools Division facilities to determine the potential scope of remediation to be conducted at such facilities by Air Liquide or Bowen. There can be no assurance 20
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IRI INTERNATIONAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) that Air Liquide or Bowen will meet its obligations under the indemnification arrangements or that there will not be future contamination for which the Company might be fully liable and that may require the Company to incur significant costs that could have a material adverse effect on the Company's financial conditions and results of operations. Although the Company believes that it is in substantial compliance with existing laws and regulations, there can be no assurance that substantial costs for compliance will not be incurred in the future. Moreover, it is possible that other developments, such as stricter environmental laws, regulations and enforcement policies thereunder, could result in additional, presently unquantifiable, costs or liabilities to the Company. The Company is involved in various other claims and legal actions arising in the ordinary course of business. In the opinion of management, the ultimate disposition of these matters will not have a material adverse effect on the Company's consolidated financial position, results of operations or liquidity. (15) SUBSEQUENT EVENT On March 8, 1998, the Board of Directors of the Company and of Hitec ASA, a Norwegian Corporation ("Hitec") approved a transaction (the "Hitec Transaction") whereby the businesses of the Company and Hitec will be combined and the resulting company will be named "IRI Hitec, Inc." Pursuant to the Hitec Transaction, Hitec shareholders will receive 0.5748 of a newly issued share of IRI Common Stock for each common share of Hitec. The Hitec Transaction is subject to, among other things, the approval of the Company's stockholders and the tender of at least 90% of Hitec's outstanding common shares. Hitec is engaged primarily in the design and engineering of advanced technology for the offshore oil and gas industry. (16) QUARTERLY FINANCIAL DATA (UNAUDITED) [Enlarge/Download Table] QUARTER QUARTER QUARTER QUARTER ENDED ENDED ENDED ENDED MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, --------- --------- ------------- ------------ 1997 Sales and other operating revenues......... $16,594 $41,191 $54,345 $73,236 Gross profit............................... 4,142 8,519 12,653 20,848 Net earnings............................... 1,657 (1,236) 2,530 8,072 Basic and diluted earnings per common share.................................... 0.06 (0.04) 0.08 0.23 1996 Sales and other operating revenues......... $13,365 $15,982 $28,870 $17,446 Gross profit............................... 5,303 2,895 7,622 6,813 Net earnings............................... 2,827 82 4,564 3,731 Basic and diluted earnings per common share.................................... 0.10 0.00 0.15 0.12 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). 21
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ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. The directors and executive officers of IRI International Corporation (the "Company"), and their ages and positions with the Company as of the date of March 17, 1998 are as follows: [Enlarge/Download Table] NAME AGE POSITION ---- --- -------- Hushang Ansary................ 70 Chairman of the Board and Chief Executive Officer Daniel G. Moriarty............ 63 Vice-Chairman of the Board Abdallah Andrawos............. 41 Director and Secretary Nina Ansary................... 31 Director Frank C. Carlucci............. 67 Director Dr. Philip David.............. 66 Director Munawar H. Hidayatallah....... 53 Director, Executive Vice President and Chief Financial Officer Richard D. Higginbotham....... 60 Director, President and Chief Operating Officer -- Bowen Tools Edward L. Palmer.............. 80 Director Stephen J. Solarz............. 57 Director Gary W. Stratulate............ 41 Director, President and Chief Operating Officer -- IRI Division Arthur C. Teichgraeber........ 42 Director, President and Chief Operating Officer -- Cardwell International Ltd. Alexander B. Trowbridge....... 68 Director J. Robinson West.............. 51 Director Except as described under "-- Compensation Plans and Arrangements," all executive officers of the Company serve at the pleasure of the Company's Board of Directors (the "IRI Board"). Directors are elected at the Company's annual meeting of stockholders and serve for a one-year term or until their successors are elected and qualified or until their earlier resignation or removal in accordance with the Company's Restated Certificate of Incorporation and the Company's Amended and Restated Bylaws (the "Company Bylaws"). HUSHANG ANSARY is an international entrepreneur, investor and industrialist. He has served as Chairman of the Board of the Company since September 1994 and was elected to the additional position of Chief Executive Officer of the Company in March 1997. He has served as Chairman of SunResorts, Ltd. N.V., a resort company, since 1986 and of Parman Capital Investments Ltd., a private investment company, since 1982. DANIEL G. MORIARTY has been a director of the Company since 1994 and served as Chief Executive Officer of the Company from 1994 to April 1997, when he was elected Vice-Chairman of the Board. He served as President of Cooper Manufacturing, a rig manufacturing division of Allied Production Corp. from 1992 to 1994 and of Smith Energy Services, an oilfield 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 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 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: 22
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BDM International, Mass Mutual Life Insurance Company, General Dynamics Corporation, Kaman Corporation, Neurogen Corporation, Northern Telecom Ltd., Quaker Oats Company, SunResorts, Ltd. N.V., Texas Biotechnology Corporation, Pharmacia & Upjohn Inc., Ashland Inc. and Westinghouse Electric Corporation. He is also a Trustee of the Rand Corporation. DR. PHILIP DAVID has been a director of the Company since 1994. Dr. David was a consultant to Fairchild Corporation from January 1988 to June 1993 and was a Professor of Urban Studies and Planning at the Massachusetts Institute of Technology from 1971 until June 1987. Dr. David is a director of Fairchild Corporation. MUNAWAR H. HIDAYATALLAH has been a director and Executive Vice President -- Corporate Development of the Company since 1994 and the Company's Chief Financial Officer since April 1997. From 1982 to 1994, Mr. Hidayatallah served as President and Chief Executive Officer of Crescott Inc., a holding company with interests in financial services, food processing and franchising, and from 1992 to 1994 he served as President and Chief Executive Officer of its subsidiary, Beverly Hills Securities Company. RICHARD D. HIGGINBOTHAM has been a director of the Company and President and Chief Operating Officer of the Bowen Tools Division of the Company since April 1997. Prior to its acquisition by Company, Mr. Higginbotham served as President of Bowen Tools, Inc. since 1988 and from 1982 to 1988 served as Bowen's Senior Vice President of Marketing. 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 Bristol-Myers Squibb Company, The Brown Group, Lehman Brothers Holdings Inc., Pilkington Ltd., Textron Inc. and Xerox Corporation. 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 Devon Group Inc., Holmes Protection Group 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., Culligan Water Technologies Inc., Geophone Company, L.L.C. and First Philippine Fund Inc. GARY W. STRATULATE has been a director of the Company and President and Chief Operating Officer of its IRI Operations since April 1997. From December 1994 to April 1997, he served as the 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 oilfield equipment. ARTHUR C. TEICHGRAEBER has been a director of the Company and President and Chief Operating Officer of the Company's wholly-owned subsidiary, Cardwell International, Ltd., since April 1997. Prior to its acquisition by the Company, Mr. Teichgraeber held various positions at Cardwell, rising from sales engineer to President. 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 23
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Company, Sun Company, Harris Corporation, Waste Management Inc., ICOS Corporation 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 pursuant to the Company with respect to its most recent fiscal year, the Company believes that during such fiscal year no director, officer, beneficial owner of more than ten percent of any class of equity securities of the Company failed to file on a timely basis, as disclosed in the above Forms, reports required by Section 16(a) of the Exchange Act during the most recent fiscal year or prior fiscal years. COMMITTEES The following are the standing committees of the IRI Board: Executive Committee. The Executive Committee consists of Messrs. Ansary, Carlucci, Solarz and Moriarty, with Mr. Ansary serving as Chairman. The Executive Committee has full power and authority to exercise all the powers of the IRI Board in the management of the business except the power to fill vacancies on the IRI Board and the power to amend the Company Bylaws and except as provided by law. Audit Committee. The Audit Committee consists of Mr. Macomber and Dr. David, with Mr. Macomber serving as Chairman. The Audit Committee has responsibility for, among other things, (i) recommending the selection of the Company's independent accountants, (ii) reviewing and approving the scope of the independent accountants' audit activity and extent of non-audit services, (iii) reviewing with management and the independent accountants the adequacy of the Company's basic accounting systems and the effectiveness of the Company's internal audit plan and activities, (iv) reviewing with management and the independent accountants the Company's financial statements and exercising general oversight of the Company's financial reporting process, (v) reviewing the Company's litigation and other legal matters that may affect the Company's financial condition and (vi) monitoring compliance with the Company's business ethics and other policies. Compensation Committee. The Compensation Committee consists of Dr. David and Mr. West, with Dr. David serving as Chairman. The Compensation Committee has responsibility for (i) reviewing and approving the recommendations of the Chief Executive Officer as to appropriate compensation of the Company's principal executive officers, (ii) examining periodically the general compensation structure of the Company and (iii) supervising the welfare, pension and compensation plans of the Company. ITEM 11. EXECUTIVE COMPENSATION. DIRECTOR COMPENSATION Directors who are not also officers or employees of the Company are paid annual fees equal to $30,000 plus $1,000 for each IRI Board meeting (but not committee meeting) attended. Prior to the Company's initial public offering in November 1997, Mr Ansary, Mr. Moriarty and Mr. Hidayatallah were each paid $17,000 and $39,000 in directors' fees for 1997 and 1996, respectively, and Mr. Higginbotham, Mr. Stratulate and Mr. Teichgraeber were each paid $8,500 in directors' fees for 1997. None of the aforementioned directors received any directors' fees subsequent to November 1997. EXECUTIVE COMPENSATION The following table sets forth certain information regarding the compensation paid by the Company to Hushang Ansary, Chairman and Chief Executive Officer, and each of the five other most highly compensated 24
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executive officers of the Company for the 12 months ended December 31, 1997 (collectively, the "Named Executive Officers"): SUMMARY COMPENSATION TABLE(1) [Enlarge/Download Table] ANNUAL COMPENSATION ----------------------------------- OTHER ANNUAL ALL OTHER NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION(2) COMPENSATION --------------------------- ---- -------- -------- --------------- ------------ Hushang Ansary........................ 1997 -- -- $17,000 -- Chairman and Chief Executive Officer 1996 -- -- 39,000 -- Daniel G. Moriarty.................... 1997 $202,516 $ 25,000 $17,000 -- Vice-Chairman of the Board 1996 145,254 106,504 39,000 -- Munawar H. Hidayatallah............... 1997 $316,088 $100,000 $17,000 -- Executive Vice President and Chief 1996 186,750 121,324 $39,000 -- Financial Officer Richard D. Higginbotham............... 1997 $224,559 $ 25,000 $ 8,500 -- President and Chief Operating 1996 135,000 60,000 -- -- Officer of Bowen Tools Division Gary W. Stratulate.................... 1997 $246,087 $125,000 $ 8,500 -- President and Chief Operating 1996 186,750 137,500 -- -- Officer of IRI Division Arthur C. Teichgraeber................ 1997 $207,564 $ 50,000 $ 8,500 -- President and Chief Operating 1996 102,870 -- -- $498,110(3) Officer of Cardwell --------------- (1) Under rules promulgated by the Securities and Exchange Commission, since the Company has not been a reporting company during the three immediately preceding fiscal years, only the information with respect to the two most recently completed fiscal years is required to be presented in the Summary Compensation Table. (2) Consists of directors' fees received by the Named Executive Officers prior to the Company's initial public offering in November 1997. (3) Consists of license fees paid by Cardwell to Mr. Teichgraeber and to certain entities directly or indirectly owned by Mr. Teichgraeber. Shown below is further information with respect to grants of stock options during 1997 to the Named Executive Officers: OPTION GRANTS IN 1997 [Enlarge/Download Table] POTENTIAL REALIZABLE VALUE AT ASSUMED ANNUAL RATES OF NUMBER OF % OF TOTAL STOCK PRICE APPRECIATION FOR SECURITIES OPTIONS GRANTED EXERCISE PRICE OPTION TERM UNDERLYING TO EMPLOYEES OR BASE ---------------------------- NAME OPTIONS GRANTED IN 1997(1) PRICE(2)(3) EXPIRATION DATE 5% 10% ---- --------------- --------------- -------------- ----------------- ------------- ------------- Hushang Ansary....... 1,000,000 56.40% $18.00 November 13, 2007 $11,320,103 $28,687,364 Daniel G. Moriatry... 50,000 2.82 18.00 November 13, 2007 566,005 1,434,368 Munawar H. Hidayatallah....... 45,000 2.54 18.00 November 13, 2007 509,405 1,290,931 Richard D. Higginbotham....... 35,000 1.97 18.00 November 13, 2007 396,204 1,004,058 Gary W. Stratulate... 40,000 2.26 18.00 November 13, 2007 452,804 1,147,495 Arthur C. Teichgraeber....... 35,000 1.97 18.00 November 13, 2007 396,204 1,004,058 --------------- (1) Calculated assuming grants to employees, other than Named Executive Officers, of options to purchase an aggregate of 568,000 shares of the Company's common stock, par value $0.01 per share ("IRI Common Stock"). (2) As described below, the exercise price as to one-third of the shares covered by the options is the offering price of the IRI Common Stock pursuant to the Company's initial public offering (the "IPO Price"), the exercise price as to the second one-third of the shares covered by the options is the greater of the IPO Price and the fair market value per share on November 13, 1998, and the exercise price as to the final 25
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one-third of the shares covered by the options is the greater of the IPO Price and the fair market value per share on November 13, 1999. (3) Market price has been assumed to equal the IPO Price. The following table sets forth information regarding the value of the stock options granted on October 14, 1997 to the Named Executive Officers (no options were exercised by any of the Named Executive Officers in 1997): OPTION VALUES AT DECEMBER 31, 1997 [Enlarge/Download Table] NUMBER OF SECURITIES VALUE OF UNDERLYING UNEXERCISED UNEXERCISED OPTIONS AT IN-THE-MONEY OPTIONS NAME DECEMBER 31, 1997 AT DECEMBER 31, 1997(1) ---- ---------------------- ----------------------- Hushang Ansary...................................... 1,000,000 $0 Daniel G. Moriarty.................................. 50,000 0 Munawar H. Hidayatallah............................. 45,000 0 Richard D. Higginbotham............................. 35,000 0 Gary W. Stratulate.................................. 40,000 0 Arthur C. Teichgraeber.............................. 35,000 $0 --------------- (1) Market price has been assumed to be equal to the IPO Price. STOCK OPTIONS Pursuant to the Incentive Plan (described below under "-- Compensation Plans and Arrangements -- The Incentive Plan"), the Company has granted to its directors and certain of its officers and employees an aggregate of 1,933,000 options to purchase shares of IRI Common Stock. Such options and the terms thereof are described in the following paragraphs. On June 17, 1997, the Company granted options to purchase 20,000 shares of IRI Common Stock to each of the directors not employed by the Company (the "Outside Directors"). The options were granted pursuant to the Incentive Plan and are not intended to qualify as "incentive stock options" (as described below under "-- Compensation Plans and Arrangements -- The Incentive Plan -- Options"). The options have an exercise price per share equal to the IPO Price per share and generally have a five-year term. The options are exercisable (i) cumulatively to the extent of one-half of the shares on November 13, 1997 and (ii) cumulatively to the extent of one-quarter of the shares after each of November 13, 1998 and 1999 for so long as the Outside Director remains in continuous service with the Company. In addition, the options become immediately exercisable upon an Outside Director's death or disability. On October 14, 1997, the Compensation Committee granted certain stock options to the Named Executive Officers as described in the preceding tables and the following discussion. All of the stock options granted to the Named Executive Officers in 1997 were granted pursuant to the Incentive Plan. The stock options have a ten-year term and are not intended to qualify as "incentive stock options" (as described below under "-- Compensation Plans and Arrangements -- The Incentive Plan -- Options"). The stock options granted to each Named Executive Officer are exercisable cumulatively to the extent of one-third of the shares of IRI Common Stock covered thereby on November 13, 1997 ("Tranche A Shares"), one-third of the shares of IRI Common Stock covered thereby on November 13, 1998 ("Tranche B Shares"), and one-third of the shares of IRI Common Stock covered thereby on November 13, 1999 ("Tranche C Shares"), for so long as the Named Executive Officer remains in continuous employment with the Company or one of its affiliates. In addition, the options become immediately exercisable upon the Named Executive Officer's death or disability. Once exercisable, the options have the following exercise prices: Tranche A Shares -- the IPO Price; Tranche B Shares -- the greater of the IPO Price and the fair market 26
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value per share on November 13, 1998; Tranche C Shares -- the greater of the IPO Price and the fair market value per share on November 13, 1999. On October 14, 1997, the Compensation Committee granted a total of 258,000 stock options to designated senior employees. All of the stock options granted to the designated senior employees were granted pursuant to the Incentive Plan. The stock options have a ten-year term and are not intended to qualify as "incentive stock options" (as described below under "-- Compensation Plans and Arrangements -- The Incentive Plan -- Options"). The stock options granted to each designated senior employee have the same terms and conditions as the stock option granted to the Named Executive Officers described above. On October 14, 1997, the Compensation Committee granted a total of 310,000 stock options to employees of the Company having at least five years of service with the Company or its predecessors. The number of stock options granted to each such employee is 500, and such options are exercisable cumulatively to the extent of 100 shares of IRI Common Stock on November 13, 1997 ("Tranche 1 Shares"), 100 shares of IRI Common Stock on November 13, 1998 ("Tranche 2 Shares"), 100 shares of IRI Common Stock on November 13, 1999 ("Tranche 3 Shares"), 100 shares of IRI Common Stock on November 13, 2000 ("Tranche 4 Shares") and 100 shares of IRI Common Stock on November 13, 2001 ("Tranche 5 Shares"), for so long as such employee remains in continuous employment with the Company or one of its affiliates. In addition, the options become immediately exercisable upon such employee's death or disability. Once exercisable, the options have the following exercise prices: Tranche 1 Shares -- the IPO Price; Tranche 2 Shares -- the greater of the IPO Price and the fair market value per share on November 13, 1998; Tranche 3 Shares -- the greater of the IPO Price and the fair market value per share on November 13, 1999; Tranche 4 Shares -- the greater of the IPO Price and the fair market value per share on November 13, 2000; and Tranche 5 Shares -- the greater of the IPO Price and the fair market value per share on November 13, 2001. COMPENSATION PLANS AND ARRANGEMENTS Compensation of Named Executive Officers -- In General The compensation of the Named Executive Officers is approved by the Compensation Committee upon the recommendation of the Chief Executive Officer and, in the case of Mr. Teichgraeber, in accordance with his employment agreement with Cardwell The Incentive Plan On June 17, 1997, the Company adopted an equity incentive plan (the "Incentive Plan") to attract and retain qualified officers, directors and other key employees of, and consultants to, the Company. Shares Available Under the Incentive Plan. Subject to adjustment as provided in the Incentive Plan, the number of shares of IRI Common Stock that may be issued or transferred and covered by outstanding awards granted under the Incentive Plan will not exceed 4,000,000, which may be shares of original issuance or treasury shares or a combination thereof. Officers, directors and other key employees of and consultants to the Company ("Participants") may be selected by the Compensation Committee to receive benefits under the Incentive Plan. Options. The Compensation Committee may authorize the grant of rights that entitle the optionee to purchase IRI Common Stock ("Option Rights") at a price equal to or greater or less than market value on the date of grant. Subject to adjustment as provided in the Incentive Plan, no participant will be granted Option Rights, in the aggregate, for more than 3,000,000 shares during any three consecutive calendar years. The Compensation Committee may provide that the option price is payable at the time of exercise (i) in cash, (ii) by the transfer to the Company of nonforfeitable, unrestricted shares of IRI Common Stock, (iii) with any other legal consideration the Compensation Committee may deem appropriate, or (iv) by any combination of the foregoing methods of payment. A grant may provide for deferred payment of the option price from the proceeds of sale through a broker on the date of exercise of some or all of the shares of IRI Common Stock to which the exercise relates if there is then a public market for the IRI Common Stock. A grant may provide for automatic grant of reload option rights upon the exercise of Option Rights, including reload option 27
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rights, for shares of IRI Common Stock or any other noncash consideration authorized under the Incentive Plan, except that the term of any reload option right may not extend beyond the term of the Option Right originally exercised. The Compensation Committee has the authority to specify at the time Option Rights are granted that shares of IRI Common Stock will not be accepted in payment of the option price until they have been owned by the optionee for a specified period; however, the Incentive Plan does not require any such holding period and would permit immediate sequential exchanges of shares of IRI Common Stock at the time of exercise of Option Rights. Option Rights granted under the Incentive Plan may be Option Rights that are intended to qualify as "incentive stock options" within the meaning of Section 422 of the Code, or Option Rights that are not intended to so qualify. Any grant may provide for the payment of dividend equivalents to the optionee on a current, deferred or contingent basis or may provide that dividend equivalents be credited against the option price. No Option Right may be exercised more than ten years from the date of grant. Each grant must specify the period of continuous employment with, or continuous engagement of consulting services by, the Company that is necessary before the Option Rights will become exercisable and may provide for the earlier exercise of the Option Rights in the event of a change of control of the Company or other similar transaction or event. Successive grants may be made to the same optionee regardless of whether Option Rights previously granted to him or her remain unexercised. Transferability. No Option Right is transferable by a participant except by will or the laws of descent and distribution. Option Rights may not be exercised during a participant's lifetime except by the participant or, in the event of the participant's incapacity, by the participant's guardian or legal representative acting in a fiduciary capacity on behalf of the participant under state law and court supervision. Notwithstanding the foregoing, the Compensation Committee, in its sole discretion, may provide for the transferability of particular awards under the Incentive Plan. The Compensation Committee may specify at the date of grant that all or any part of shares of IRI Common Stock that is to be issued or transferred by the Company upon the exercise of Option Rights shall be subject to further restrictions on transfer. Adjustments. The maximum number of shares that may be issued or transferred under the Incentive Plan, the number of shares covered by outstanding Option Rights and the option prices or base prices per share applicable thereto are subject to adjustment in the event of stock dividends, stock splits, combinations of shares, recapitalizations, mergers, consolidations, spinoffs, reorganizations, liquidations, issuances of rights or warrants and similar transactions or events. In the event of any such transaction or event, the Compensation Committee may in its discretion provide in substitution for any or all outstanding awards under the Incentive Plan such alternative consideration as it may in good faith determine to be equitable in the circumstances and may require the surrender of all awards so replaced. The Compensation Committee may also, as it determines to be appropriate in order to reflect any such transaction or event, make or provide for such adjustments in the number of shares that may be issued or transferred and covered by outstanding awards granted under the Incentive Plan and the number of shares permitted to be covered by awards granted under the plan to any one participant during any calendar year. Administration and Amendments. The Incentive Plan will be administered by the Compensation Committee of the Board (such committee is referred to in this description of the Incentive Plan as the "Committee"). The Committee must consist of not less than two members who are "non-employee directors" within the meaning of Rule 16b-3 and "outside directors" within the meaning of Section 162(m) of the Code. In connection with its administration of the Incentive Plan, the Committee is authorized to interpret the Incentive Plan and related agreements and other documents. The Committee may make grants to participants under any or a combination of all of the various categories of awards that are authorized under the Incentive Plan and may condition the grant of awards on the surrender or deferral by the participant of the participant's right to receive a cash bonus or other compensation otherwise payable by the Company to the participant. 28
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The Incentive Plan may be amended from time to time by the Committee, but without further approval by the shareholders of the Company no such amendment may cause the Incentive Plan to cease to satisfy any applicable condition of Rule 16b-3 or cause any award under the Incentive Plan to cease to qualify for any applicable exception to Section 162(m) of the Code. Federal Income Tax Consequences. The following is a brief summary of certain of the federal income tax consequences of certain transactions under the Incentive Plan based on federal income tax laws in effect on the date of the Company's initial public offering. This summary is not intended to be exhaustive and does not describe state or local tax consequences. In general, (i) no income will be recognized by an optionee at the time a nonqualified Option Right is granted, (ii) at the time of exercise of a nonqualified Option Right, ordinary income will be recognized by the optionee in an amount equal to the difference between the option price paid for the shares and the fair market value of the shares if they are nonrestricted on the date of exercise and (iii) at the time of sale of shares acquired pursuant to the exercise of a nonqualified Option Right, any appreciation (or depreciation) in the value of the shares after the date of exercise will be treated as either short-term or long-term capital gain (or loss) depending on how long the shares have been held. No income generally will be recognized by an optionee upon the grant or exercise of an incentive stock option. If shares of IRI Common Stock are issued to an optionee pursuant to the exercise of an incentive stock option and no disqualifying disposition of the shares is made by the optionee within two years after the date of grant or within one year after the transfer of the shares to the optionee, then upon the sale of the shares any amount realized in excess of the option price will be taxed to the optionee as long-term capital gain and any loss sustained will be a long-term capital loss. If shares of IRI Common Stock acquired upon the exercise of an incentive stock option are disposed of prior to the expiration of either holding period described above, the optionee generally will recognize ordinary income in the year of disposition in an amount equal to any excess of the fair market value of the shares at the time of exercise (or, if less, the amount realized on the disposition of the shares in a sale or exchange) over the option price paid for the shares. Any further gain (or loss) realized by the optionee generally will be taxed as short-term or long-term gain (or loss) depending on the holding period. In limited circumstances where the sale of stock that is received as the result of a grant of an award could subject an officer or director to suit under Section 16(b) of the Securities Exchange Act of 1934 (the "Exchange Act"), the tax consequences to the officer or director may differ from the tax consequences described above. In these circumstances, unless a special election has been made, the principal difference usually will be to postpone valuation and taxation of the stock received so long as the sale of the stock received could subject the officer or director to suit under Section 16(b) of the Exchange Act, but not longer than six months. To the extent that a participant recognizes ordinary income in the circumstances described above, the Company will be entitled to a corresponding deduction provided that, among other things, (i) the income meets the test of reasonableness, is an ordinary and necessary business expense and is not an "excess parachute payment" within the meaning of Section 280G of the Code and is not disallowed by the Section 162(m) $1.0 million limitation on certain executive compensation and (ii) any applicable reporting obligations are satisfied. Other Compensation Plans or Programs The Company does not maintain any other compensation plans or programs that apply to the Named Executive Officers, other than broad-based retirement plans. EMPLOYMENT AGREEMENTS, SEVERANCE AGREEMENTS AND CHANGE-IN-CONTROL AGREEMENTS Mr. Teichgraeber has a five-year employment agreement with Cardwell, commencing as of April 17, 1997 and ending as of April 16, 2002. Under the agreement, Mr. Teichgraeber receives an annual base salary of $250,000, subject to review by Cardwell for increase (but not decrease) at the end of each twelve month 29
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period. Commencing with the twelve month period ending March 31, 1998, Mr. Teichgraeber also is eligible to receive an annual performance bonus of up to $600,000. The actual amount of such bonus, if any, is determined by the Company in its sole discretion. If a Change in Control (as defined in such agreement) occurs during the term of the agreement and while Mr. Teichgraeber is still employed by Cardwell, Mr. Teichgraeber is eligible to receive a special change in control bonus. The actual amount of such bonus, if any, shall be determined by the Company in its sole discretion. If Mr. Teichgraeber's employment with Cardwell is terminated during the term of the agreement: (i) by Cardwell for Cause (as defined in such agreement) or by Mr. Teichgraeber for any reason other than Good Reason (as defined in such agreement), Mr. Teichgraeber is not entitled to receive any further compensation or benefits under the agreement; (ii) by Cardwell for any reason other than Cause or Disability (as defined in such agreement), Mr. Teichgraeber is entitled to receive a lump sum payment equal to his then-current base salary for the remainder of the term of the agreement; or (iii) as a result of his death or by Cardwell as a result of his Disability, Mr. Teichgraeber is entitled to receive payments equal to his then-current base salary (less any applicable disability benefits) for a period of six months. Finally, during the period ending on the later of the effective date of the termination of Mr. Teichgraeber's employment with Cardwell or the last day of the term of the agreement, Mr. Teichgraeber is prohibited from engaging in Competitive Activity (as defined in such agreement) with the Company, and is prohibited from soliciting any employee of the Company or any of its affiliates to terminate employment. No other Named Executive Officer has an employment agreement, severance agreement or change-in-control agreement with the Company or any affiliate. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. The following table sets forth certain information regarding the beneficial ownership of IRI Common Stock as of March 17, 1998 by (i) each person that owns beneficially more than 5% of the IRI Common Stock, (ii) each director and Named Executive Officer of the Company and (iii) all directors and executive officers of the Company as a group. For purposes of 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. [Enlarge/Download Table] DIRECTORS AND NUMBER OF PERCENTAGE OF EXECUTIVE OFFICERS SHARES OWNED(1) SHARES OWNED(1) ------------------ --------------- --------------- Hushang Ansary.............................................. 24,094,333(2)(3) 59.4% Daniel G. Moriarty.......................................... 22,167(3) * Abdallah Andrawos........................................... 13,333(3) * Nina Ansary................................................. 3,010,000(3) 7.4% Frank C. Carlucci........................................... 1,090,000(3) 2.7% Dr. Philip David............................................ 1,360,000(3) 3.4% Munawar H. Hidayatallah..................................... 47,500(3) * Richard D. Higginbotham..................................... 13,667(3) * John D. Macomber............................................ 10,000(3) * Edward L. Palmer............................................ 10,000(3) * Stephen J. Solarz........................................... 10,000(3) * Gary W. Stratulate.......................................... 38,333(3) * Arthur C. Teichgraeber...................................... 39,622(3) * Alexander B. Trowbridge..................................... 10,000(3) * J. Robinson West............................................ 10,000(3) * All directors and executive officers as a group (15 persons).................................................. 29,778,955(2)(3) 73.5% CERTAIN OTHER HOLDERS Nader Ansary................................................ 3,000,000 7.4% The Ansary Family Trust..................................... 2,850,000(2) 7.0% --------------- * Less than 1%. (1) Assumes exercise of vested options. 30
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(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 17,751,000 shares of IRI Common Stock. Includes 6,010,000 shares of IRI Common Stock owned by Nina Ansary and Nader Ansary (Mr. Ansary's daughter and son), of which Mr. Ansary disclaims beneficial ownership. (3) Including, in the case of Mr. Ansary, Ms. Ansary, Mr. Carlucci and Mr. David, and otherwise consisting of, options to purchase shares of IRI Common Stock granted pursuant to the Incentive Plan. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. CORPORATE CONSOLIDATION On October 14, 1997, the Company and its then sole stockholder, Energy Services International Ltd. ("ESI"), merged pursuant to Section 253 of the Delaware General Corporation Law (the "Merger"), and ESI, as the surviving entity, changed its name to IRI International Corporation. As a result of the Merger, the stockholders of ESI became the stockholders of the Company, the number of issued and outstanding shares of IRI Common Stock was increased to 30,000,000 and all issued and outstanding shares of the Company's preferred stock (including all accrued and unpaid dividends thereon) and all shares of treasury stock were canceled. OTHER TRANSACTIONS During the three month period ended March 31, 1997, the Company paid ESI approximately $450,000 to reimburse ESI for certain administrative service costs (compensation and related expenses) paid by ESI on behalf of the Company for services rendered between September 20, 1994 and March 31, 1997. At December 31, 1996, the Company was owed $158,000 by an affiliate for services rendered by Company personnel to the affiliate during 1996. Payment was received in July 1997, and no further services have been rendered. REGISTRATION RIGHTS AGREEMENT In November 1997, the Company entered into a registration rights agreement with each of the stockholders who held IRI Common Stock prior to the Company's initial public offering (the "Registration Rights Agreement"). The Registration Rights Agreement provides for demand registration rights pursuant to which, upon the request of a holder or holders (the "Requesting Holders") who are affiliates of the Company or who own at least 10% of the shares of IRI Common Stock subject to such agreement (the "Registrable Securities"), the Company will file a registration statement under the Securities Act to register Registrable Securities held by the Requesting Holder and any other stockholders holding Registrable Securities, provided that at least 10% of the number of shares of Registrable Securities or aggregate principal amount of Registrable Securities outstanding at such time is requested to be registered. In addition, subject to certain conditions and limitations, the Registration Rights Agreement will provide that holders of Registrable Securities may participate in any registration by the Company of its shares of IRI Common Stock in an underwritten offering. The Registration Rights conferred by the Registration Rights Agreement are transferable to transferees of the Registrable Securities covered thereby. Under the Registration Rights Agreement, the Company is required to pay all the costs associated with such an offer other than underwriting discounts and commissions and transfer taxes attributable to the Registrable Securities sold. In addition, the Company will indemnify the Requesting Holders, and the Requesting Holders will indemnify the Company, against certain liabilities in respect of any registration statement or offering covered by the Registration Rights Agreement. INDEMNIFICATION AGREEMENTS In November 1997, the Company entered into an indemnification agreement (each, an "Indemnification Agreement") with each of its directors and executive officers (each, an "Indemnitee"). Each Indemnification 31
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Agreement will provide that the Company will indemnify each Indemnitee when he or she is involved in any manner or is threatened to be involved in any proceeding (i) by reason of the fact he or she is or was or had agreed to become a director or officer of the Company, or is or was serving or had agreed to serve at the request of the Company as a director, officer, employee or agent of another entity, or by reason of any action alleged to have been taken or omitted in such capacity, against all liabilities actually incurred by the Indemnitee in connection therewith so long as the Indemnitee acted in good faith and in a manner he or she reasonably believed to be in or not opposed to the best interests of the Company, and, with respect to any criminal proceeding, had no reasonable cause to believe his or her conduct was unlawful or (ii) by or in the right of the Company to procure a judgment in its favor by reason of the fact that he or she is or was or had agreed to become a director or officer of the Company, or is or was serving or had agreed to serve at the request of the Company as a director, officer, employee or agent of another entity, against all liabilities actually incurred by the Indemnitee in connection therewith so long as he or she acted in good faith and in a manner he or she reasonably believed to be in or not opposed to the best interests of the Company, except no indemnification will be made if the Indemnitee is adjudged to be liable to the Company, unless and only to the extent a proper court determines that despite the adjudication of liability the Indemnitee is entitled to indemnity. The Company has agreed to indemnify each Indemnitee against liabilities arising from the Indemnitee's alleged or actual negligence or breach of duty or misstatement made, or acquiesced to, in his or her capacity as an officer or director of the Company, or while serving at the request of the Company as a director, officer, employee or agent of another entity. In the event the Company disputes an Indemnitee's right to indemnification under an Indemnification Agreement, the Company has agreed to pay all expenses relating to the Indemnitee's enforcement of its rights under his or her Indemnification Agreement. 32
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SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. IRI INTERNATIONAL CORPORATION By: /s/ MUNAWAR H. HIDAYATALLAH ------------------------------------ Munawar H. Hidayatallah, Executive Vice President and Chief Financial Officer, Director Date: April 27, 1998 Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, 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 [Enlarge/Download Table] * Chairman of the Board and Chief Date: April 27, 1998 ------------------------------------------ Executive Officer Hushang Ansary * Vice-Chairman of the Board Date: April 27, 1998 ------------------------------------------ Daniel G. Moriarty /s/ MUNAWAR H. HIDAYATALLAH Executive Vice President, Chief Date: April 27, 1998 ------------------------------------------ Financial and Accounting Officer Munawar H. Hidayatallah and Director * Secretary and Director Date: April 27, 1998 ------------------------------------------ Abdallah Andrawos * President and Chief Operating Date: April 27, 1998 ------------------------------------------ Officer of the Gary W. Stratulate IRI Division and Director * President and Chief Operating Date: April 27, 1998 ------------------------------------------ Officer of the Richard D. Higginbotham Bowen Tools Division and Director * President and Chief Operating Date: April 27, 1998 ------------------------------------------ Officer of Cardwell International, Arthur C. Teichgraeber Ltd. and Director * Director Date: April 27, 1998 ------------------------------------------ Nina Ansary * Director Date: April 27, 1998 ------------------------------------------ Frank C. Carlucci * Director Date: April 27, 1998 ------------------------------------------ Dr. Philip David 33
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[Download Table] * Director Date: April 27, 1998 ------------------------------------------ John D. Macomber * Director Date: April 27, 1998 ------------------------------------------ Edward L. Palmer * Director Date: April 27, 1998 ------------------------------------------ Stephen J. Solarz * Director Date: April 27, 1998 ------------------------------------------ Alexander B. Trowbridge * Director Date: April 27, 1998 ------------------------------------------ J. Robinson West --------------- * By Munawar H. Hidayatallah, Attorney-In-Fact 34
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INDEX TO EXHIBITS [Download Table] EXHIBIT NO. DESCRIPTION ----------- ----------- *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 Bylaws 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 March 31, 1997, among ESI, the Company, the several lenders from time to time parties thereto, Credit Lyonnais New York Branch and Lehman Commercial Paper Inc. (the "Credit Agreement"). *10.3A -- Amendment No. 1 to the Credit Agreement. *10.3B -- Form of Agreement and Consent to the Credit Agreement. *10.4 -- Senior Subordinated Increasing Rate Note Purchase Agreement, dated as of March 31, 1997, by and among the Company, Energy Services International Limited and Strategic Resource Partners Fund ("Senior Note Purchase Agreement"). *10.4A -- Form of Agreement and Consent to the Senior Note Purchase Agreement. *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 Peat Marwick LLP. --------------- * 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. 35

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11/13/0725
4/16/0229
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11/13/0027
3/31/001210-Q
11/13/992627
11/13/982527
Filed on:4/30/98
4/27/983334
3/31/98123010-Q
3/26/98210-K405
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3/8/9821
2/27/983
For Period End:12/31/9712610-K405
11/19/978S-8
11/13/972627
10/14/971335
9/8/9735S-1
7/8/9735
6/30/9712
6/17/972627
4/17/971035
3/31/971035
3/20/9735
1/20/9735
12/31/96231
9/1/9618
3/31/96220
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