-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, CQDav3GZg/dvVhaJoqda+LXZYykfXujcxbmo4s7Ga7PpiNxlrR3kE9ZAOFzWIxon pmvdo7s68YGbdIQAQ9Ys1A== 0000950123-00-002994.txt : 20000331 0000950123-00-002994.hdr.sgml : 20000331 ACCESSION NUMBER: 0000950123-00-002994 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000330 FILER: COMPANY DATA: COMPANY CONFORMED NAME: IRI INTERNATIONAL CORP CENTRAL INDEX KEY: 0001044979 STANDARD INDUSTRIAL CLASSIFICATION: OIL & GAS FILED MACHINERY & EQUIPMENT [3533] IRS NUMBER: 752044681 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-13593 FILM NUMBER: 585864 BUSINESS ADDRESS: STREET 1: FIRST INTERSTATE BANK PLAZA STREET 2: 1000 LOUISIANA STE 5900 CITY: HOUSTON STATE: TX ZIP: 77002 BUSINESS PHONE: 7136518002 MAIL ADDRESS: STREET 1: FIRST INTERSTATE BANK PLAZA STREET 2: 1000 LOUISIANA SUITE 5900 CITY: HOUSTON STATE: TX ZIP: 77002 10-K 1 IRI INTERNATIONAL CORPORATION 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO COMMISSION FILE NUMBER 1-13593 ------------------------------ IRI INTERNATIONAL CORPORATION ------------------------------------------------------ (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) 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: TITLE OF EACH CLASS NAME OF EACH EXCHANGE 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 OR ANY AMENDMENT TO THIS FORM 10-K.[ ] APPLICABLE ONLY TO REGISTRANTS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PRECEDING FIVE YEARS: INDICATE BY CHECK MARK WHETHER THE REGISTRANT HAS FILED ALL DOCUMENTS AND REPORTS REQUIRED TO BE FILED BY SECTION 12, 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 SUBSEQUENT TO THE DISTRIBUTION OF SECURITIES UNDER A PLAN CONFIRMED BY A COURT. YES __ NO __ AS OF MARCH 24, 2000, THE AGGREGATE MARKET VALUE OF VOTING STOCK HELD BY NON-AFFILIATES OF THE REGISTRANT WAS $125,001,772 BASED ON THE LAST REPORTED SALE PRICE OF THE REGISTRANT'S COMMON STOCK ON THE NEW YORK STOCK EXCHANGE. 39,900,000 SHARES OF COMMON STOCK WERE OUTSTANDING ON MARCH 24, 2000. DOCUMENTS INCORPORATED BY REFERENCE ----------------------------------- NONE 2 ITEM 1. BUSINESS IRI International Corporation (the "Company" or "we" or "us") is one of the world's largest manufacturers of land-based drilling, well-servicing rigs and rig component parts for use in the global oil and gas industry. We are principally engaged in the design, manufacture, service, sale and rental of on-shore and off-shore oil field equipment for the domestic and international markets. Our Oilfield Equipment Division designs and produces rigs to meet the special requirements of our global clientele for service in remote areas and harsh climatic conditions. Our Downhole Products Division is a major manufacturer of down hole fishing and drilling tools. It offers a complete line of oil field power equipment, including top drives, power swivels, wireline pressure control equipment and coiled tubing systems, which complement our drilling and well-servicing rigs. We also manufacture and maintain a significant inventory of replacement parts for rigs produced by us and others, enabling us to meet the needs of our customers on a timely basis. Our Specialty Steel Division produces premium alloy steel for commercial and military use and for use in manufacturing oil field equipment products. We market our oil field equipment primarily through our own sales force and through designated agents and distributors in every major oil and gas producing region in the world. We maintain 25 domestic and 7 international sales, parts and service centers in areas of significant drilling and production operations. Our network of service centers in the United States provides our customers with refurbishment or repair services as well as ready access to replacement parts for equipment in the field. Our worldwide sales and marketing activities are closely coordinated with and supported by a staff of engineers and design technicians. This network allows us to provide our customers with products meeting their customized design specifications. Our predecessor was founded in 1985 through the combination of Ingersoll-Rand Oilfield Products Company and the Ideco Division of Dresser Industries, Inc., and was later acquired by Energy Services International Ltd. in 1994 ("ESI"). We acquired the business and operations of the Bowen Tools Division (the "Bowen Acquisition") on March 31, 1997 and Cardwell International, Ltd. (the "Cardwell Acquisition") on April 17, 1997 (together, the "Acquisitions"). In October 1997, we merged with ESI, and ESI, as the surviving entity, changed its name to IRI International Corporation. In November 1997, we consummated the initial public offering of 13,800,000 shares (which included 3,900,000 shares sold by certain stockholders) of our Common Stock. On March 16, 2000, we announced the signing of a definitive merger agreement with National-Oilwell, Inc., (the "NOI Merger") a worldwide leader in the design, manufacture and sale of comprehensive systems and components used in oil and gas drilling and production, as well as in the provision of supply chain integration services to the upstream oil and gas industry. The merger agreement, unanimously approved by each company's board of directors, calls for our stockholders to receive .3385 share of National Oilwell common stock for each common share of the Company. National-Oilwell will issue approximately 14.4 million shares of its common stock for all common shares of the Company issued and outstanding and all options to purchase common shares of the Company, which options will become fully vested at closing. This transaction is expected to be accounted for as a pooling of interests and be tax-free to both companies and our stockholders. Holders of the majority of our outstanding shares as well as National-Oilwell's largest stockholder and its CEO have entered into voting agreements in support of the transaction. The voting agreements do not prohibit any of the shareholders from selling shares in accordance with applicable law, including SEC Rule 144, unless such sale would affect adversely the accounting and regulatory treatment of the NOI Merger as a "pooling of interests." Subject to shareholder approval, the closing of the transaction is expected to occur during the second quarter of this year. DRILLING AND WELL-SERVICING RIGS Products We design, construct and sell a total of 48 standard models of drilling and well-servicing rigs under the IDECO(R), FRANKS(R), CARDWELL(TM) and IRI(TM) brand names. Our products include: - land-based skid mounted rigs; - off-shore drilling and well-servicing rigs; 2 3 - self-propelled drilling and well-servicing rigs; - slant hole drilling rigs; and - heli-rigs. In addition to our standard models, we manufacture customized drilling and well-servicing rigs to customer specifications to accommodate, among other things, extreme weather conditions, moving systems or hook load capacities. We also design, manufacture and sell component products used in the original construction, modernization or repair of land and off-shore rigs, including masts, derricks, substructures and other components used in hoisting, power transmission, pumping and mud systems. The sale of drilling and well-servicing rigs and component parts accounted for $27.3 million (or 29.6%), $55.8 million (or 31.8%) and $74.2 million (or 40.0%) of our revenues for 1999, 1998 and 1997, respectively. Competition Our competitors in our diverse areas of manufacturing are National-Oilwell, Inc., Tulsa Industries, Inc., Hydralift A.S.A., Maritime Hydraulics U.S., Inc., Bentec GMBH, and Crown Industries Inc. We compete on the basis of price, quality, the ability to introduce new and improved products and the ability to supply and deliver products in a timely and cost effective manner. Backlog Sales of our drilling and well-servicing rigs are made almost exclusively on the basis of written purchase orders or contracts. We include in our rig backlog those orders or purchase commitments that we are reasonably certain will be consummated based on industry practice, the historical relationship between us and the customer or the financial terms of the sale, including cash advances, letters of credit or similar credit support arrangements. The total value of our rig backlog as of December 31, 1999 and 1998 was $41.0 million and $21.3 million, respectively. We cannot assure that the contracts included in our backlog will ultimately generate anticipated revenues in the period expected or otherwise. We attempt to mitigate the financial risks in sales to our international customers by requiring, where commercially feasible, cash advances, irrevocable letters of credit or similar credit support arrangements. As of December 31, 1999, we had received approximately $1.9 million in cash down payments and approximately $40.8 million in letters of credit or assignments of letters of credit to support customer orders. Customers Sales of drilling and well-servicing rigs are made to various customers, which change from year to year depending on the size and timing of rig purchase orders. During 1999, our largest revenue customer accounted for 33.5% of the revenues of our oil field equipment segment and our second largest revenue customer accounted for 11.5 % of the revenues of our oil field equipment segment. In 1999, we received a significant order from Surgutneftgaz, a customer based in the former Soviet Union, the majority of which order we expect to fulfill in 2000. FISHING AND DRILLING TOOLS Our Downhole Products Division designs, manufactures, sells and rents fishing and drilling tools under the BOWEN(R) brand name. These include: - external and internal catch fishing tools; - junk catch fishing tools; - milling and cutting tools; - accessory tools such as jars, jar intensifiers and bumper subs; and - repair and remedial tools. 3 4 Fishing and drilling tool sales and rentals accounted for $36.3 million (or 39.4%), $56.7 million (or 32.4%) and $47.8 (or 25.8%) of our revenues for 1999, 1998 and 1997, respectively. Competition In the fishing and drilling tool business, like the rig manufacturing business, we compete on the basis of price, quality, the ability to introduce new and improved products and the ability to supply and deliver products in a timely and cost effective manner. Our primary competitors are Smith International, Inc. and Spring Engineers, Inc. in the manufacture of fishing tools, and Weatherford International, Inc., National-Oilwell, Inc., and Smith International, Inc. in the manufacture of drilling tools. We are the leading provider of fishing tools. We are a minor player in the drilling tool market, but we have plans to expand this part of our business. POWER AND WIRELINE/PRESSURE CONTROL EQUIPMENT Power Equipment In addition to fishing and drilling tools, our Downhole Products Division also manufactures products for the power equipment market, including: - power-swivel systems used in well-servicing and drilling applications; - top drives; - power subs; - bucking units; - power tongs; and - coiled tubing systems. The market for power equipment is very competitive. Our competitive position varies by product. We compete on the basis of product design, quality, ability to meet delivery requirements and price. Our competitors in this segment are Tesco Corporation, Canadian Rig Ltd., Maritime Hydraulics US, Inc., Varco International, Inc., King Oil Tools Inc., Stewart & Stevenson Services, Inc., and Hydra Rig. Wireline/Pressure Control Equipment We also manufacture wire line and pressure control equipment under the BOWEN(R) brand name. These products include: - small blowout preventers; - unions; - tool traps; - tool catchers; - lubricator risers; - control heads; - stuffing boxes; and - wellhead adapters. Like the market for power equipment, the market for pressure control equipment is very competitive. Similarly, our competitive position varies by product. We compete on the basis of product design, quality, ability to meet delivery requirements and price. Our competitors in the market include Elmar Services Ltd. and Tuboscope Inc. Sales and rentals of power and wireline/pressure control equipment products accounted for $6.6 million (or 7.2%), $19.5 million (or 11.1%) and $17.5 million (or 9.4%) of our revenues for 1999, 1998 and 1997, respectively. 4 5 SPECIALTY STEEL PRODUCTS Our Specialty Steel Division manufactures premium specialty steel forgings for commercial and military use and for use in manufacturing oil field equipment products. Specialty steel products accounted for $4.9 million (or 5.4 %), $10.4 million (or 5.9%) and $13.5 million (or 7.3%) of our revenues for 1999, 1998 and 1997, respectively. We manufacture over 100 different alloys to form forged products in round, square and rectangular solid, trepanned, counter bored and stepped forms to meet customer specifications. We sell our specialty steel products primarily to customers in the heavy equipment, aircraft, petroleum and power generation industries in North America and to the United States military. We also sell our specialty steel products as feedstock directly to forgers and extruders. Competition The U.S. specialty steel market is highly competitive due primarily to the high cost of freight associated with moving small amounts of high tonnage finished goods. Competitive factors include price, delivery, quality and service. Steel ingots and billets are commodities and are extremely price competitive. Our major competitors in the specialty steel market are National Forge Company, Ellwood Group, Inc., Scot Forge Co., Erie Forge and Steel, Inc. and FirstMiss Steel Inc. Customers The Specialty Steel Division sold 31.3% of its production for 1999 to the governmental and military sectors. Besides the governmental and military sectors, its two largest customers accounted for 20.0% and 10.3%, respectively, of its revenues for 1999. The loss of any of these customer may materially adversely affect the revenues and operating results of the Specialty Steel Division, though it will not materially adversely affect our revenues and operating results taken as a whole. REPLACEMENT PARTS AND REFURBISHMENT We manufacture and maintain a significant inventory of replacement parts and replacement components. We also refurbish older rigs for our customers. We believe that these businesses will grow over the next several years because of increased worldwide rig utilization and the age of the international rig fleet, most of which were constructed prior to 1982. We believe we are well positioned to provide replacement parts and refurbishment services as a result of the large number of operating rigs manufactured under our brand names and the preference of equipment owners to obtain replacement parts and refurbishment services from the original manufacturer. Replacement parts and refurbishment services accounted for $17.0 million (or 18.5 %), $32.6 million (or 18.6%) and $32.3 million (or 17.4%) of our revenues for 1999, 1998 and 1997, respectively. ENGINEERING AND PRODUCT DEVELOPMENT We maintain a staff of engineers and design technicians to: - design and test new products, components and systems for use in manufacturing and drilling applications; - enhance the capabilities of existing products; and - assist our sales organization and customers with special requirements and products. We intend to continue our research, engineering and product development programs to develop safer and more environmentally-friendly and efficient products that are complementary to our existing products and equipment. Our total engineering and product development expenses for 1999, 1998 and 1997 were $2.7 million, $3.4 million and $4.3 million, respectively. We have budgeted $3.4 million for engineering and product development expenses for 2000. 5 6 MARKETING, SALES AND DISTRIBUTION We market our oil field products primarily through our own sales force and through designated agents and distributors in every major oil and gas producing region in the world. Our customers include international and domestic drilling contractors and international and domestic oil and gas exploration and production companies, including foreign state-owned oil and gas enterprises. We maintain 25 domestic and 7 international sales, parts and service centers in areas of significant drilling and production operations. See Note 14 to the Consolidated Financial Statements for financial information related to our revenues by geographic region. RAW MATERIALS We purchase our components, parts and raw materials from several commercial sources. These materials are readily available from suppliers and based on past experience, we anticipate that such materials will continue to be available, although we can give no assurances in this regard. We believe that the loss of any of our suppliers would not have a material adverse effect on our operations. WORKING CAPITAL ITEMS Consistent with industry practice, we maintain significant amounts of inventory, which enables us to readily meet the demands of our customers. INTELLECTUAL PROPERTY We own or have licenses to use a number of U.S. and foreign patents covering a variety of products. Although on the whole the patents are important to us, no single patent is essential to our business. In general, we depend upon product name recognition, manufacturing quality control and application of our expertise rather than patented technology in the conduct of our business. We enjoy product brand name recognition, principally through our BOWEN(R), IDECO(R), FRANKS(R), CARDWELL(TM), and IRI(TM) trademarks, and consider such trademarks to be important to our business. EMPLOYEES Generally, we consider our relations with our employees to be good. As of December 31, 1999, we employed a total of 775 persons, of whom 27 were employed outside the United States. Approximately 35% of these employees were salaried and the balance were compensated on an hourly basis. Approximately 33% of our employees are represented by a union or are parties to a collective bargaining agreement. The collective bargaining agreement between us and our employees is effective for the period from July 1997 until July 2000, covers approximately 250 employees and contains customary provisions with respect to wages, hours and working conditions for certain production and maintenance employees in the Downhole Products Division. The collective bargaining agreement required a 4.5% wage increase in its first year, and 3% increases in its second and third years. Unless one of the parties to the collective bargaining agreement notifies the other party in writing, not less than 60 days prior to the expiration of the term of the agreement, of an intention to modify or terminate the agreement, the current collective bargaining agreement will be renewed in July 2000. RISKS AND INSURANCE Our operations are subject to the usual hazards inherent in manufacturing products and providing services for the oil and gas industry. These hazards include: - personal injury and loss of life; 6 7 - business interruptions; - property and equipment damage; and - pollution or environmental damage. We maintain comprehensive insurance covering our assets and insuring against risks at levels that we believe are appropriate and in accordance with industry practice. We cannot assure, however, that our insurance coverage will be adequate in all circumstances or against all hazards or risks, or that we will be able to maintain adequate insurance coverage in the future at commercially reasonable rates or on acceptable terms. Our services and products are used in drilling, production and well-servicing operations. These types of operations are subject to inherent risks, including: - property damage; - personal injury; - suspension of operations; and - loss of production. We maintain product liability and worker's compensation insurance. Although the limits of our insurance coverage against an accident are generally in accordance with industry practice, such insurance may not be adequate to protect us against liability or losses accruing from the consequences of such an incident. ENVIRONMENTAL MATTERS Our manufacturing operations are subject to a broad range of federal, state and local environmental laws, both in the United States and in foreign jurisdictions, including those governing: - discharges into the air and water; - handling and disposal of solid and hazardous wastes; and - remediation of contaminated soil and groundwater. Our policy is to eliminate and minimize generation of wastes at our facilities through plant operations, process design and maintenance. We continually strive to reduce wastes by sending these materials off-site for recycling and/or re-use. The Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA") imposes liability without regard to fault, on certain classes of persons for the release of a hazardous substance into the environment. These persons include the owner and operator of the disposal site or sites where the release occurred and companies that sent hazardous substances to such sites. Persons who are responsible for releases of hazardous substances under CERCLA may be subject to joint and several liability for the costs of cleaning up hazardous substances that have been released into the environment. We currently own or lease, and have in the past owned or leased, numerous properties that have been used for the manufacture and storage of products and equipment containing or requiring oil and/or other hazardous substances. Although we have used standard operating and disposal practices, hazardous substances may have been disposed of or released on or under the properties owned or leased by us or on or under other locations where such wastes have been taken for disposal. In addition, many of these properties have been operated by third parties whose treatment and disposal or release of hydrocarbons or other wastes was not under our control. These properties and the wastes disposed thereon may be subject to CERCLA, the Resource Conservation and Recovery Act and analogous state laws. Under such laws, we could be required to remediate any hazardous substances or wastes discovered on or under these properties. Various federal, state and local laws, regulations and ordinances govern the removal, encapsulation or disturbance of asbestos containing materials ("ACM"). These laws and regulations may impose liability for the release of ACM. We are aware of the presence of ACM at our facilities, but we believe that such material is in 7 8 acceptable condition at this time. Although we cannot give any assurances, we believe that any future costs related to remediation of ACM at these sites will not be material, either on an annual basis or in the aggregate. We have tried to reduce the impact of costs related to actual or potential environmental conditions at the Downhole Products Division facilities through our contractual arrangements with Air Liquide America Corporation ("Air Liquide"). Air Liquide and Bowen agreed to indemnify us for costs relating to environmental conditions existing at these facilities prior to our purchase of the Bowen Tools Division. We cannot assure that Air Liquide or Bowen will meet its obligations under the indemnification arrangements or that there will not be future contamination for which we might be fully liable and that may require us to incur significant costs that could have a material adverse effect on our financial condition and results of operations. Although we believe we are currently in substantial compliance with environmental laws and regulations, as is the case with most industrial manufacturers, we could incur significant costs related to environmental compliance in the future. Future environmental compliance may involve remediating existing conditions at our facilities or modifying our operations. These potential costs may have a material adverse effect on our financial condition and results of operations. Moreover, other developments, such as stricter environmental laws, regulations and enforcement policies thereunder, could result in additional, presently unquantifiable, costs or liabilities to us. ITEM 2. PROPERTIES The principal offices and facilities owned or leased by us and their current uses are described in the following table:
FACILITY SIZE PROPERTY SIZE LOCATION (SQ. FT.) (ACRES) TENANCY USE Pampa, TX 1,000,000 499 Owned Rig and specialty steel manufacturing, administration and warehousing Houston, TX 539,700 19 Owned Drilling tool manufacturing, administration and warehousing Beaumont, TX(1) 350,000 10 Owned Rig parts sales and warehousing El Dorado, KS(2) 139,912 23 Owned Rig parts sales and warehousing Houston, TX 16,249 N/A Leased Executive Offices Houston, TX 50,154 2 Owned Administration
- ------------- (1) Rig manufacturing was ceased at this facility in early 1999. (2) Rig manufacturing was ceased at this facility in December 1998. We also own or lease facilities at 32 domestic and international locations, substantially all of which are sales, service or warehouse locations. ITEM 3. LEGAL PROCEEDINGS There are pending or threatened against us various claims, lawsuits and administrative proceedings all arising from the ordinary course of business with respect to commercial product liability and employee matters. Although no assurance can be given with respect to the outcome of these or any other pending legal and administrative proceedings and the effects such outcomes may have on us, we believe that any ultimate liability resulting from the outcome of such proceedings to the extent not otherwise provided for will not have a material adverse effect on our consolidated financial statements. We maintain comprehensive liability insurance. We believe such coverage to be of a nature and amount sufficient to ensure that we are adequately protected from any material financial loss as a result of such claims. We currently are not the subject of any legal actions for which we are neither insured nor indemnified and which we 8 9 believe will individually or in the aggregate have a material adverse effect on our financial condition, results of operations or liquidity, nor to our knowledge is any such litigation threatened. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. PART II. ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Our common stock, par value $0.01 per share (the "Common Stock") became listed on the New York Stock Exchange on November 14, 1997 under the symbol "IIR". Prior to that time there was no public market for our common stock. Our common stock closed at $9 1/16 on March 24, 2000. The following table sets forth (as reported by New York Stock Exchange) for the periods indicated the prices of the Common Stock. FISCAL 2000 HIGH LOW - ----------- ---- --- 1st Quarter (through March 24, 2000) 9 7/16 3 3/8 FISCAL 1999 HIGH LOW - ----------- ---- --- 1st Quarter 4 3/8 2 7/8 2nd Quarter 6 3/16 3 5/8 3rd Quarter 5 5/8 4 1/4 4th Quarter 4 7/8 2 15/16 FISCAL 1998 HIGH LOW - ----------- ---- --- 1st Quarter 14 1/2 10 2nd Quarter 14 15/16 10 3/4 3rd Quarter 12 1/4 4 3/8 4th Quarter 6 3/4 2 1/2 The number of record holders of the Common Stock as of March 24, 2000 was 90. Pursuant to our Incentive Plan, 2,586,000 shares of Common Stock are subject to outstanding options at March 24, 2000. We have never declared or paid cash dividends on our capital stock. We currently expect to retain future earnings to provide for the continual growth and development of our business. During 1999, we made no sales of equity securities not registered under the Securities Act of 1933. 9 10 ITEM 6. SELECTED FINANCIAL DATA The following table sets forth selected historical financial information for the Company. The information presented for the years ended December 31, 1999, 1998 and 1997, and the year ended March 31, 1996, as well as the nine month period ended December 31, 1996, is derived from our audited consolidated financial statements. The information for the nine month period ended December 31, 1995 is derived from our unaudited consolidated financial statements. The following information should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Consolidated Financial Statements of the Company, including the notes thereto, included elsewhere in this annual report.
NINE MONTHS TWELVE MONTHS ENDED YEAR ENDED ENDED DECEMBER 31, DECEMBER 31, MARCH 31, --------------------------------- ---------------------- ---------------- (UNAUDITED) 1999 1998 1997(1) 1996 1995 1996 --------- --------- --------- --------- ---------- ---------------- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) OPERATING DATA: Revenue $ 92,190 $ 175,045 $ 185,366 $ 62,298 $ 39,141 $ 52,506 Cost of goods sold (2) 83,156 126,626 139,204 44,968 28,815 36,877 --------- --------- --------- --------- --------- --------- Gross profit 9,034 48,419 46,162 17,330 10,326 15,629 Selling, general and administrative expense 27,831 30,526 23,543 8,220 5,400 7,990 Restructuring charge 1,779 590 -- -- -- -- --------- --------- --------- -------- --------- --------- Operating income (loss) (20,576) 17,303 22,619 9,110 4,926 7,639 Interest expense (363) (360) (8,762) (615) -- (47) Other income (expense) - net 1,562 (1,278) 1,464 (20) 210 371 Income taxes 8,472 (3,283) (2,786) (98) -- -- --------- --------- --------- --------- --------- --------- Income (loss) before extraordinary item (10,905) 12,382 12,535 8,377 5,136 7,963 Extraordinary charge on early extinguishment of debt, net of tax benefit -- -- (1,512) -- -- -- --------- --------- --------- --------- --------- --------- Net income (loss) (10,905) 12,382 11,023 8,377 5,136 7,963 Weighted average shares outstanding 39,900 39,900 31,275 30,000 30,000 30,000 --------- --------- --------- --------- --------- --------- Income (loss) per common share $ (0.27) $ 0.31 $ 0.35 $ 0.28 $ 0.17 $ 0.27 ========= ========= ========= ========= ========= =========
DECEMBER 31, MARCH 31, ----------------------------------------------- ---------- 1999 1998 1997 1996 1996 ----------------------------------------------- ---------- BALANCE SHEET DATA: Working capital $ 149,849 $ 164,246 $ 161,890 $ 38,658 $ 35,461 Total assets 217,093 239,166 251,074 58,671 46,631 Long-term debt and obligation under capital lease less current installments -- 319 586 522 -- Shareholder's equity 201,300 210,259 198,406 24,903 16,526
(1) The Company acquired the business and operations of the Downhole Products Division on March 31, 1997 and Cardwell International, Ltd. on April 17, 1997. (2) Amortization of negative goodwill decreased cost of goods sold in all periods. Negative goodwill was fully amortized as of September 30, 1999. See Notes to our Consolidated Financial Statements and "Management's Discussion and Analysis of Financial Condition and Results of Operations - Overview" ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis of our financial condition and results of operations should be read in conjunction with "Selected Consolidated Financial Information," the Consolidated Financial Statements and Notes thereto and the other information included elsewhere in this Annual Report on Form 10-K. Our fiscal year was changed from the twelve-month period ending March 31 to the calendar year, effective December 31, 1996. 10 11 OVERVIEW General We manufacture land-based drilling and well-servicing rigs and rig component parts for use in the domestic and international markets. The condition of the oil and gas industry and worldwide levels of exploration, development and production activity, including the number of oil and gas wells being drilled, the depth and drilling conditions of such wells, the number of well completions and the level of workover activity have a substantial impact on our revenues. Exploration, development and production activity is largely dependent on the prevailing view of future oil and natural gas prices, which have been significantly volatile for the last 20 years. Oil and natural gas prices are influenced by factors affecting the supply of and demand for oil and gas, including the level of drilling activity, worldwide economic activity, interest rates and the cost of capital, environmental regulation, tax policies, political requirements of national governments, coordination by OPEC and the cost of producing oil and gas. Demand for our products in certain emerging market countries may be greatly influenced by their need for internal development, energy self-sufficiency or hard currency earnings rather than the conventional factors relating to the price of oil and natural gas. During the latter half of 1998 and the first quarter of 1999, declining oil prices coupled with the deteriorating economic conditions in Russia and other emerging markets resulted in a sharp drop in customer spending and a dramatically lower rig utilization rate worldwide. Our revenues, operating income and backlog have been adversely affected by these events and the value of our receivables and inventory may be further affected by these events. As a result of recent increases in oil prices during the second, third and fourth quarters of 1999, consumer spending and rig utilization rates have begun to increase. Although results of operations for the latter half of 1999 reflect this increase in consumer spending, results of operations for 1999 are still substantially reduced from the results for 1998 and still reflect the adverse market conditions prevalent during the first six months of 1999. In addition, our gross margins for 1999 were also adversely affected by restructuring costs and other special charges of $5.6 million (after-tax) in the second quarter of 1999, and an inventory valuation adjustment of $5.9 million in the fourth quarter of 1999. During 1999, we have implemented a variety of measures to consolidate our manufacturing operations in Pampa and Houston, Texas and other cost reduction programs. These actions reduced our workforce during 1999 by a total of 744 employees. On an ongoing basis, we will continue to consider the possibility of further consolidation and cost reduction measures but we cannot give any assurance that these or any other measures will be sufficient to offset the negative impact of the existing industry conditions. Foreign Exchange Transactions We have attempted to limit our exposure to foreign currency fluctuations. Sales denominated in foreign currencies are made only by the Downhole Products segment. With the exception of our Canadian subsidiary, we maintain our cash, cash equivalents and investments in U.S. dollar denominated accounts (except to the extent needed for local operating expenses). We have not engaged in and do not currently intend to engage in any significant hedging or currency trading transactions to compensate for adverse currency fluctuations among foreign currencies. Negative Goodwill On September 20, 1994, all of our outstanding capital stock was acquired by an affiliate of certain of our stockholders for $5.0 million in cash (the "Company Acquisition"). The Company Acquisition was recorded using the purchase method of accounting and the purchase price allocated to the assets acquired and liabilities assumed based upon their estimated fair values at the date of the Company Acquisition. The excess of the fair value of net assets acquired over the consideration paid was applied against non-monetary assets (property, plant and equipment), reducing the balances of these assets at the date of the Company Acquisition to zero, and the remaining excess of the fair value of net assets acquired over consideration paid was recorded as negative goodwill. The purchase price has been allocated to the assets acquired and liabilities assumed based upon their fair values at the date of the acquisition as follows (in thousands): 11 12 Inventories.............................................................. $ 33,287 Other current assets..................................................... 7,743 Current liabilities...................................................... (7,372) Accrued retirement benefits.............................................. (1,821) Negative goodwill........................................................ (26,837) ---------- $ 5,000 ==========
Negative goodwill was being amortized using the straight-line method over five years ended September 19, 1999. See Note 1 to the Consolidated Financial Statements. Amortization of negative goodwill decreased cost of goods sold by $4.0 million in fiscal year ended December 31, 1999 and by $5.4 million in each of the fiscal years ended December 31, 1998 and 1997 and the year ended March 31, 1996. RESULTS OF OPERATIONS In June 1997, we changed our fiscal year from a March 31 year-end to a December 31 year-end, effective with the period ended December 31, 1996, in order to harmonize the fiscal years of IRI, Cardwell and Bowen. The following discussion of the results of operations of our business units does not reflect allocation of corporate overhead expense, unallocated administrative expense or amortization of goodwill and negative goodwill. See Note 14 to our Consolidated Financial Statements for a presentation of segment information. Sales of new rigs manufactured by us can produce large fluctuations in revenues depending on the size and the timing of the construction of orders. Individual orders of rig packages range from $1 million to $25 million and cycle times for the design, engineering and manufacturing or rig packages range from six to nine months. These fluctuations may affect our quarterly revenues and operating income. Results of Segment Operations The following discussion of the results of operations of our oil field equipment, downhole products and specialty steel segments does not reflect the allocation of corporate and unallocated administrative expenses, amortization of negative goodwill and amortization of goodwill on an individual segment basis. Certain information that reconciles the discussion of the results of operations of the individual segments to our Consolidated Financial Statements is as follows: 12 13
THE COMPANY - ----------------------------------------------------------------------------------- TWELVE MONTHS ENDED DECEMBER 31, - ----------------------------------------------------------------------------------- 1999 1998 1997 -------- -------- --------- Revenues Oil field equipment........... $ 44,365 $ 88,395 $106,529 Downhole Products............. 42,892 76,249 65,336 Specialty steel............... 4,933 10,401 13,501 -------- -------- -------- Total....................... $ 92,190 $175,045 $185,366 ======== ======== ======== Segment operating income (loss) Oil field equipment.................... $ (5,850) $ 13,533 $ 15,617 Downhole Products............ 2,543 17,186 11,869 Specialty steel.............. 722 1,668 4,503 -------- -------- -------- Total...................... (2,585) 32,387 31,989 Corporate overhead and unallocated administrative expenses..................... (18,982) (18,606) (13,862) Restructuring Charge............ (1,779) (590) -- Amortization of negative goodwill................... 4,026 5,367 5,370 Amortization of goodwill..... (1,254) (1,255) 878 --------- --------- -------- Operating income (loss)...... $(20,576) $ 17,303 $ 22,619 ========= ======== ========
FISCAL YEAR ENDED DECEMBER 31, 1999 COMPARED TO FISCAL YEAR ENDED DECEMBER 31, 1998 Oil Field Equipment The economic and financial turmoil in Russia and the Asia-Pacific region together with the downward turn in oil prices during the latter half of 1998 and the beginning of 1999 led to a sharp decrease in the demand for our products. Decreased sales of rig packages resulted in decreases in revenues and operating income for 1999. As a result of decreased revenue, our gross margin was: (6.1)% for 1999 as compared to 19.5% for 1998. In addition, our gross margin for 1999 was negatively affected by: a $3.0 million write-off for pre-contract engineering and design costs and a $1.3 million charge for contract adjustments, each of which occurred during the second quarter of 1999. Downhole Products As a result of decreased sales volume, our gross margin was significantly lower for 1999: 18.0% as compared to 33.0% for 1998. In addition, our gross margin for 1999 was adversely affected by an inventory valuation adjustment of $2.0 million during the second quarter of 1999 and $5.9 million in the fourth quarter of 1999. Specialty Steel Reduced demand caused by an industry-wide recession significantly impacted our revenues and operating income. However, our gross margins remained almost unchanged at 17.4% for 1999 versus 17.5% for 1998. Corporate and Administrative Expenses The $0.4 million increase in corporate and administrative expenses for 1999, as compared to 1998, occurred as a result of a $3.5 million increase in corporate costs offset by a $3.1 million decrease in administrative expenses. Corporate expenses increased in 1999 in the areas of professional services, promotion, and employee-related costs. The Oilfield Equipment Division experienced a net decrease in administrative expenses of $2.6 million as a result of a reduction of salaries and related expenses of $1.8 million and the reduction of other costs by $0.8 million. The Downhole Products Division decreased its expenses by $1.7 million, which resulted primarily from a reduction of its administrative staff. This decrease was offset by a $1.2 million provision for doubtful accounts recorded in the second quarter of 1999. Restructuring Charge The Company incurred a restructuring charge of $1.8 million in 1999, and $0.6 million in 1998 in connection with its restructuring program. Accordingly, the Company consolidated manufacturing operations, closing two plants in 1999, and reduced its workforce. 13 14 Other Income (Expense) Other income for 1999 reflected a gain of $1.6 million compared to a loss of $1.3 million in 1998, which reflected a $0.7 million gain on investments in marketable securities in 1999, compared to a loss of $2.7 million in 1998. Income Taxes The change in the effective income tax rate to (43.7)% for 1999 from 21.0% for 1998 is attributable primarily to the 1999 net operating loss and the recognition of a deferred tax benefit of $5.3 million in 1999. FISCAL YEAR ENDED DECEMBER 31, 1998 COMPARED TO FISCAL YEAR ENDED DECEMBER 31, 1997 Oil Field Equipment The economic and financial turmoil in Russia and the Asia-Pacific region together with the downward turn in oil prices resulted in a decreased demand for our products. Gross margin for the fiscal year ended December 31, 1998 was 19.5%, as compared to 17.8% for the fiscal year ended December 31, 1997. This increase resulted principally from an extensive cost restructuring program and a favorable mix between manufactured equipment and buy-outs. Downhole Products The downward trend in the oil industry prevailing in the latter half of 1998 had a negative impact on our customers' demands for fishing tools and power equipment. Accordingly, our revenues for 1998 decreased compared to 1997. Gross margin for the fiscal year ended December 31, 1998 was 33.0%, as compared to 26.5% for the fiscal year ended December 31, 1997. The increase in monthly operating income and gross margin was primarily due to the full impact of price increases in the last two quarters of 1997, an increase in the amount of manufacturing overhead absorbed into inventory and management's cost-cutting initiatives. Specialty Steel The decrease in revenues was primarily the result of reduced demand from a major customer. Because of the loss of the high margin business that we transacted with this major customer, our gross margins also decreased from 34.6% for the fiscal year ended December 31, 1997 to 17.5% for the fiscal year ended December 31, 1998. 14 15 Corporate Administrative and Interest Expenses The increase in corporate administrative expenses was due primarily to the inclusion of corporate administrative expenses for our Downhole Products Division and Cardwell operations for the full year in 1998 as compared to only nine months for 1997. In addition, corporate administrative expenses increased as a result of the higher professional fees associated with being a public company and the implementation of new software systems. Interest expense decreased mainly because we repaid our debt with the proceeds from the initial public offering of our Common Stock. Restucturing Charge The Company incurred a restructuring charge of $0.6 million in 1998 in connection with its restructuring program. Other Income (Expense) Other expense for 1998 includes: - $2.2 million of interest income (due to higher cash balances in 1998); - $2.7 million of losses on trading securities (as compared to a gain of $0.8 million for 1997); - $0.6 million of special charges (relating to expenses incurred in connection with the proposed acquisition of Hitec ASA, which was terminated on April 28, 1998); and - $0.2 million of miscellaneous other expenses. Income Taxes The increase in the effective income tax rate to 21.0% for 1998 from 18.2% for 1997 is attributable primarily to an increase in non-deductible goodwill amortization and the change in the valuation allowance for deferred tax assets. RECENT ACCOUNTING PRONOUNCEMENTS Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities, was issued by the Financial Accounting Standards Board in June 1998. SFAS 133 standardizes the accounting for derivative instruments, including derivative instruments embedded in other contracts. Under the standard, entities are required to carry all derivative instruments in the statement of financial position at fair value. The accounting for changes in the fair value (i.e., gains or losses) of a derivative instrument depends on whether it has been designated and qualifies as part of a hedging relationship and, if so, on the reason for holding it. If specified conditions are met, entities may elect to designate a derivative instrument as a hedge of exposures to changes in fair values, cash flows, or foreign currencies. If the hedged exposure is a fair value exposure, the gain or loss on the derivative instrument is recognized in earnings in the period of change together with the offsetting loss or gain on the hedged item attributable to the risk being hedged. If the hedged exposure is a cash flow exposure the effective portion of the gain or loss on the derivative instrument is reported initially as a component of other comprehensive income (outside earnings) and subsequently reclassified into earnings when the forecasted transaction affects earnings. Any amounts excluded from the assessment of hedge effectiveness, as well as the ineffective portion of the gain or loss, is reported in earnings immediately. Accounting for foreign currency hedges is similar to the accounting for fair value and cash flow hedges. If the derivative instrument is not designated as a hedge, the gain or loss is recognized in earnings in the period of change. The Company will adopt SFAS 133 beginning January 1, 2001. The Company has not yet determined the impact that SFAS 133 will have on consolidated financial statements. Management believes that the determination will not be meaningful until closer to the date of initial adoption. 15 16 LIQUIDITY AND CAPITAL RESOURCES At December 31, 1999, we had cash and cash equivalents and marketable securities of $50.4 million, compared to $40.5 million at December 31, 1998. Our working capital was $149.8 million compared to $164.2 million at December 31, 1998. This decrease in working capital resulted from a decrease in accounts receivable, inventories, and other current assets, partially offset by an increase in cash and cash equivalents and marketable securities and income taxes receivable and a decrease in current liabilities. We believe that our balance sheet, significant liquidity and cash flow from operations will be sufficient to meet our short term and long term liquidity needs. We believe that any credit facilities that we may need in the future will be available on commercially acceptable terms, though there can be no assurances in this regard. Credit Facility The Company had a $9.7 million revolving credit facility with a maturity date of March 31, 2000. Amounts outstanding under the revolving credit facility were secured by substantially all of the assets of the Company and accrued interest at a rate per annum equal to the one, two, three or six-month LIBOR plus 2-3/4%. The revolving credit facility agreement contained provisions that restricted incurrence of indebtedness, guarantees, acquisitions, and distributions to shareholders, and required the Company to meet specified financial maintenance tests. On December 29, 1999, the revolving credit facility was replaced with a new $10.0 million revolving credit facility, which matures on December 28, 2000 and provides exclusively for bank guarantees and commercial and standby letters of credit. The new revolving credit facility agreement contains provisions that limit liens on accounts receivables, inventory and related general intangibles and that require the Company to meet specified financial maintenance tests. At December 31, 1999, approximately $5.9 million was available for bank guarantees and letters of credit under the new revolving credit facility. The Company had no outstanding indebtedness at December 31, 1999. YEAR 2000 We did not experience any significant malfunctions or errors in our operating or business systems when the date changed from 1999 to 2000. Based on operations since January 1, 2000, we do not expect any significant impact to our ongoing business as a result of the "Year 2000 issue." However, it is possible that the full impact of the date change, which was of concern due to computer programs that use two digits instead of four digits to define years, has not been fully recognized. For example, it is possible that Year 2000 or similar issues may occur with billing, payroll, or financial closings at month, quarterly, or year end. We believe that any such problems are likely to be minor and correctable. In addition, we could still be negatively affected if our customers or suppliers are adversely affected by the Year 2000 or similar issues. We currently are not aware of any significant Year 2000 or similar problems that have arisen for our customers or suppliers. We expended approximately $0.5 million on Year 2000 readiness efforts from 1997 to 1999. These efforts included replacing some outdated, noncompliant hardware and noncompliant software as well as identifying and remediating Year 2000 problems. These efforts did not include, however, certain ERP systems upgrades, which were done in the ordinary course of business during 1998 and 1999 and which had the added benefit of resolving Year 2000 issues with respect to those systems. CAPITAL EXPENDITURES Capital expenditures for 1999 totaled approximately $2.2 million, essentially all of which was spent on additions to our rental tool fleet and implementation of new software at the Downhole Products Division. For 2000, we have budgeted capital expenditures of $3.5 million, including amounts primarily to be used for the purchase of rental tools for the Downhole Products Division and manufacturing equipment for the Oilfield 16 17 Equipment Division. Capital expenditures are expected to be funded with available cash and cash flow from operations. INFORMATION CONCERNING FORWARD-LOOKING STATEMENTS With the exception of the historical information contained in this report, the matters described herein contain forward-looking statements that involve risk and uncertainties including but not limited to economic and competitive factors outside of our control. These factors more specifically include: - dependence on the oil and gas industry; - competition from various entities; - the impact of government regulations; - the instability of certain foreign economies (including Russia and countries of the Asia-Pacific region); - currency fluctuations; - risks of expropriation; and - changes in law affecting international trade and investment. Forward-looking statements are typically identified by the words "believe," "expect," "anticipate" "intend," "estimate," and similar expressions. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of their dates. INFLATION Inflation has not had a material impact on our operating and occupancy costs. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK This discussion of our exposure to market risks and our risk-management activities includes forward looking statements. These forward looking statements involve risks and uncertainties, including economic and competitive factors outside our control. Our primary risk exposures come from interest rate risks, foreign exchange rate risks, and equity price risks. Our exposure to interest rate risks are minimal with respect to indebtedness. We repaid substantially all our outstanding indebtedness in November 1997. However, at December 31, 1999, we had approximately $35.7 million of cash in interest bearing accounts. The rate of return on these accounts will vary with the prevailing interest rates. We do not engage in any significant interest rate swaps or other derivative activities designed to limit our exposure to changes in interest rates. Our direct exposure to foreign exchange risks is minimal. Except as discussed above in the "Management Discussion and Analysis of Financial Condition and Results of Operations" with respect to our Downhole Products Division, all of our sales are denominated in U.S. dollars. However, foreign exchange rate fluctuations may affect our revenues indirectly to the extent that a stronger U.S. dollar affects our ability to compete on the basis of price. We do not engage in any significant hedging or currency trading activities to limit our sensitivity to changes in foreign exchange rates and/or interest rates. At December 31, 1999, we had marketable securities of $14.7 million. From time to time, we purchase equitable securities for trading purposes. Fluctuations in interest rates and equity prices may adversely affect the value of our marketable securities. We do not believe there has been any material change in the market risks faced by us since the end of 1999. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA See Index to Consolidated Financial Statements and Exhibits, which appears on Page F-1 hereof. 17 18 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III. ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. The directors and executive officers of the Company, and their ages and positions with the Company as of March 30, 2000, are as follows:
NAME AGE POSITION - ---- --- -------- Hushang Ansary 72 Chairman of the Board and Chief Executive Officer Daniel G. Moriarty 65 Director Abdallah A. Andrawos 44 Director and Secretary Nina Ansary 33 Director Frank C. Carlucci 69 Director Dr. Philip David 68 Director Robert L. Hargrave 58 Director, Vice-Chairman of the Board of Directors, Chief Accounting and Financial Officer Richard D. Higginbotham 62 Director John D. Macomber 72 Director Edward L. Palmer 82 Director Stephen J. Solarz 59 Director Gary W. Stratulate 43 Director, President and Chief Operating Officer Alexander B. Trowbridge 70 Director J. Robinson West 53 Director
All executive officers of the Company serve at the pleasure of the Board of Directors (the "IRI Board"). Directors are elected at the Company's annual meeting of stockholders and serve for a one-year term or until their successors are elected and qualified or until their earlier resignation or removal in accordance with the Company's Restated Certificate of Incorporation and the Company's Amended and Restated Bylaws (the "Company Bylaws"). HUSHANG ANSARY has served as Chairman of the Board of the Company since September 1994 and was elected to the additional position of Chief Executive Officer of the Company in March 1997. He has served as Chairman of SunResorts, Ltd. N.V., a resort company, since 1986 and of Parman Capital Investments Ltd., a private investment company, since 1982. DANIEL G. MORIARTY has been a director of the Company since 1994 and served as President and Chief Executive Officer of the Company from 1994 to April 1997, when he was elected Vice-Chairman of the Board of Directors. He resigned his position as Vice-Chairman of the Board in July 1999. He served as President of Cooper Manufacturing, a rig manufacturing division of Allied Production Corp. from 1992 to 1994 and of Smith Energy Services, an oil field services division of Allied Production Corp., from 1987 to 1992. From 1982 to 1987, Mr. Moriarty served as the President and Chief Executive Officer of Leamco Services, Inc. From 1960 to 1982, Mr. Moriarty held various positions with Halliburton Company, rising from engineer to Vice President of the Central Region. ABDALLAH A. ANDRAWOS has been Secretary of the Company since 1994 and a director of the Company since April 1997. Since 1989 Mr. Andrawos has served as Secretary and Chief Financial Officer of SunResorts, Ltd. N.V. NINA ANSARY has served as a director of the Company since April 1997. Ms. Ansary has been a Vice President of Parman Capital Investments Ltd., a private investment company, since 1994. Prior to 1994, Ms. Ansary 18 19 was a student. Ms. Ansary is the daughter of Hushang Ansary and holds a masters degree in political science from Columbia University. FRANK C. CARLUCCI has been a director of the Company since 1994. Since 1993, Mr. Carlucci has served as Chairman and partner of The Carlyle Group, a Washington, D.C. based merchant bank, and from 1989 to 1993 served as Vice-Chairman and partner. Mr. Carlucci serves on the following corporate boards: BDM International, Mass Mutual Life Insurance Company, Kaman Corporation, Neurogen Corporation, Nortel Networks Corporation, Northern Telecom Ltd., Quaker Oats Company, SunResorts, Ltd. N.V., Texas Biotechnology Corporation, Pharmacia & Upjohn Inc. and Ashland Inc. He is also a Trustee of the Rand Corporation. DR. PHILIP DAVID has been a director of the Company since 1994. Dr. David is a self-employed investor. He was a consultant to Fairchild Corporation from January 1988 to June 1993 and was a Professor of Urban Studies and Planning at the Massachusetts Institute of Technology from 1971 until June 1987. Dr. David is a director of Fairchild Corporation. ROBERT L. HARGRAVE has been a director, Vice-Chairman of the Board of Directors and Chief Accounting and Financial Officer of the Company since July 1999. From 1995 until he came to the Company, Mr. Hargrave served as Chief Executive Officer of Stewart & Stevenson Services, Inc., a company specializing in the manufacture of engine driven power systems. He also served as its Chief Financial Officer from 1980 to 1995. RICHARD D. HIGGINBOTHAM has been a director of the Company since April 1997. He served as Executive Vice President --President of the Downhole Products Group from April 1997 to September 1998. From 1988 until its acquisition by Company, Mr. Higginbotham served as President of Bowen Tools, Inc. JOHN D. MACOMBER has been a director of the Company since 1994. Mr. Macomber has been a principal of JDM Investment Group, a private investment company, since 1992. From 1988 to 1992, he was Chairman and President of the Export-Import Bank of the United States, from 1973 to 1986 he was Chairman of the Board and Chief Executive Officer of Celanese Corp. and from 1954 to 1973 he was a managing partner of McKinsey & Co. He is also a director of The Brown Group, Lehman Brothers Holdings Inc., Pilkington Ltd., and Textron Inc. He is also a director and Vice-Chairman of The Atlantic Council of the United States and a director of the French American Foundation and the National Executive Services Corp. Mr. Macomber is a trustee of The Folger Library and a member of the Council on Foreign Relations and the Bretton Woods Committee. Mr. Macomber is Chairman of the Council for Excellence in Government and a trustee of the Carnegie Institute of Washington. EDWARD L. PALMER has been a director of the Company since June 1997. Mr. Palmer has been President of the Mill Neck Group Inc., a management consulting firm, since 1982, and prior thereto he served as Chairman of the Executive Committee and a director of Citicorp and Citibank, N.A. He is also a director of Commodore Applied Technologies, Inc. and SunResorts, Ltd. N.V. STEPHEN J. SOLARZ has been a director of the Company since 1994. Mr. Solarz has been President of Solarz Associates, an international consulting firm, since 1993. From 1975 to 1993, he was a member of the U.S. House of Representatives, where he served on the Foreign Affairs, the Merchant Marine and Fisheries, the Intelligence and the Joint Economic Committees. He is also a director of Samsonite Corp., Santa Fe International Company and First Philippine Fund Inc. GARY W. STRATULATE has been a director of the Company since April 1997. He has served as President and Chief Operating Officer since July 1999. From September 1998 to July 1999, he served as Executive Vice President--President of the Downhole Products Group, from April 1997 to September 1998, as the President of the Oilfield Equipment Group and from December 1994 to April 1997 as Executive Vice President of the International Division of the Company. From June 1991 to May 1994, Mr. Stratulate was the Chief Operating Officer of Dreco Energy Services Ltd., a manufacturer of oil field equipment. ALEXANDER B. TROWBRIDGE has been a director of the Company since 1994. Since 1990, Mr. Trowbridge has been the President of Trowbridge Partners, Inc., a management consulting firm. He was President of the National Association of Manufacturers from 1980 through 1989. He is also a director of The Gillette Company, New England Life Insurance Company, E.M. Warburg-Pincus Counsellors Fund, Rouse Company, Sun 19 20 Company, Harris Corporation, ICOS Corporation Sunoco, Inc. and SunResorts, Ltd. N.V. He is a charter trustee of Phillips Academy, Andover. J. ROBINSON WEST has been a director of the Company since 1994. Mr. West is Chairman of The Petroleum Finance Company, Ltd., a petroleum industry consulting firm, and served as its President from 1984 to 1996. SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE Based solely upon a review of Forms 3 and 4 and amendments thereto furnished to the Company pursuant to Rule 16a-3 under the Exchange Act during its most recent fiscal year and Form 5 and amendments thereto furnished to the Company with respect to its most recent fiscal year, the Company believes that the following forms were not filed in a timely manner under Section 16(a): - With respect to Munawar Hidayatallah, a former director and officer of the company, a Form 4 listing two transactions that occurred in July, 1999 was filed late. In addition, a Form 4 listing one transaction that occurred in August, 1999 was filed late. - With respect to Robert Hargrave, a Form 3 listing a single transaction was filed late. - With respect to Hushang Ansary, a Form 5 listing four transactions was filed late. Other than as noted above, the Company believes that during such fiscal year no other forms for any director, officer, beneficial owner of more than ten percent of any class of equity securities of the Company required to be filed by Section 16(a) of the Exchange Act were filed late. ITEM 11. EXECUTIVE COMPENSATION EXECUTIVE COMPENSATION The following table sets forth certain information regarding the compensation paid by the Company to the Chairman and Chief Executive Officer and each of the five other most highly compensated executive officers of the Company for the 12 months ended December 31, 1999 (collectively, the "Named Executive Officers"):
- ---------------------------------------------------------------------------------------------------------------------- SUMMARY COMPENSATION TABLE ANNUAL COMPENSATION - ---------------------------------------------------------------------------------------------------------------------- OTHER ANNUAL ALL OTHER NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION (1) COMPENSATION - --------------------------- ---- ------ ----- ---------------- ------------ Hushang Ansary, Chairman and Chief Executive Officer 1999 $913,500 $875,000(2) --- $ 12,166(3) 1998 $900,000 --- --- --- 1997 --- --- $17,000 --- - ---------------------------------------------------------------------------------------------------------------------- Daniel G. Moriarty, Vice-Chairman of the Board(4) 1999 $132,113 --- $14,500 $ 11,408(3) 1998 $204,346 $100,000 --- $ 13,800(3) 1997 $202,516 $25,000 $17,000 $ 13,908(3) - ---------------------------------------------------------------------------------------------------------------------- Munawar H. Hidayatallah, Executive Vice President and Chief Financial Officer(5) 1999 $206,533 $313,300 --- $113,056(3)(6) 1998 $318,450 $200,000 --- $ 13,800(3) 1997 $316,088 $100,000 $7,000 $ 14,164(3) - ---------------------------------------------------------------------------------------------------------------------- Robert L. Hargrave, Vice Chairman of the Board and Chief Accounting and Financial Officer (7) 1999 $138,904 --- --- $ 444(8) - ----------------------------------------------------------------------------------------------------------------------
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- ---------------------------------------------------------------------------------------------------------------------- SUMMARY COMPENSATION TABLE ANNUAL COMPENSATION - ---------------------------------------------------------------------------------------------------------------------- OTHER ANNUAL ALL OTHER NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION (1) COMPENSATION - --------------------------- ---- ------ ----- ---------------- ------------ Gary W. Stratulate, President and Chief Operating Officer 1999 $252,169 --- --- $ 13,500(3) 1998 $248,442 $200,000 --- $ 13,800(3) 1997 $246,087 $125,000 $8,500 $ 14,104(3) - ---------------------------------------------------------------------------------------------------------------------- Arthur C. Teichgraeber, Executive Vice President -- President of Oilfield Equipment Group(9) 1999 $150,525 --- --- $ 12,213(3) 1998 $272,759 $100,000 $45,750(10) $ 9,074(3) 1997 $207,564 $50,000 $8,500 $498,110(11) - ----------------------------------------------------------------------------------------------------------------------
- ---------------------- (1) Unless otherwise noted, consists of directors' and participation fees received by the Named Executive Officers prior to the Company's initial offering in November 1997 and, in the case of Mr. Moriarty's other annual compensation for 1999, directors' fees received since July 1999. (2) Includes $200,000, which was paid pursuant to the incentive plan approved by the Compensation Committee of the Board of Directors on July 15, 1999 and is subject to adjustment. See "-- Other Compensation Plans or Programs." (3) Includes premiums paid for life insurance and contributions under the Company's 401K Plan. (4) Mr. Moriarty resigned from his position in July 1999. (5) Mr. Hidayatallah resigned from his position in July 1999. (6) Includes consulting fees paid to Mr. Hidayatallah after he left the Company. (7) Mr. Hargrave was appointed Chief Accounting and Financial Officer and Vice-Chairman of the Board on July 15, 1999 and his annual salary for 1 reflects compensation for the period from July 15, 1999 to December 31, (8) Consists of premiums paid for life insurance. (9) Mr. Teichgraeber left the Company in July 1999. (10) Consists of educational assistance in the amount of $18,750 and housing reimbursement in the amount of $27,500. (11) Consists of license fees paid by Cardwell (prior to our acquisition of Cardwell) to Mr. Teichgraeber and to certain entities directly or indirectly owned by Mr. Teichgraeber. Shown below is further information with respect to grants of stock options pursuant to our Equity Incentive Plan during 1999 to the Named Executive Officers:
- -------------------------------------------------------------------------------------------------------------------- OPTION GRANTS IN 1999 - -------------------------------------------------------------------------------------------------------------------- NUMBER OF % OF TOTAL SECURITIES OPTIONS POTENTIAL REALIZABLE VALUE AT UNDERLYING GRANTED TO EXERCISE ASSUMED ANNUAL RATES OF OPTIONS EMPLOYEES PRICE OR STOCK PRICE APPRECIATION FOR NAME GRANTED(1) IN 1999(2) BASE PRICE EXPIRATION OPTION TERM - ----------------------- ---------- ---------- ---------- -------------- ------------------------------ 5% ($) 10% ($) - ----------------------- ---------- ---------- ---------- -------------- ----------- ----------- Hushang Ansary --- --- --- --- --- --- Daniel G. Moriarty 45,000 5.10% $3.875 March 15, 2009 $109,664 $277,909
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- -------------------------------------------------------------------------------------------------------------------- OPTION GRANTS IN 1999 - -------------------------------------------------------------------------------------------------------------------- NUMBER OF % OF TOTAL SECURITIES OPTIONS POTENTIAL REALIZABLE VALUE AT UNDERLYING GRANTED TO EXERCISE ASSUMED ANNUAL RATES OF OPTIONS EMPLOYEES PRICE OR STOCK PRICE APPRECIATION FOR NAME GRANTED(1) IN 1999(2) BASE PRICE EXPIRATION OPTION TERM - ----------------------- ---------- ---------- ---------- -------------- ------------------------------ 5% ($) 10% ($) - ----------------------- ---------- ---------- ---------- -------------- ----------- ----------- Munawar H. Hidayatallah 126,000 14.29% $3.875 March 15, 2009 $307,058 $778,145 Robert L. Hargrave 50,000 5.67% $5.000 July 15, 2009 $157,224 $398,436 Gary W. Stratulate 45,000 5.10% $3.875 March 15, 2009 $109,664 $277,909 Arthur C. Teichgraeber --- --- --- --- --- ---
-------------------- (1) The options of Messrs. Moriarty, Stratulate and Hidayatallah are immediately exercisable. The options of Mr. Hargrave become exercisable in three equal annual installments beginning on July 15, 1999 for so long as Mr. Hargrave remains in continuous employment with the Company. In addition, Mr. Hargrave's options become immediately exercisable upon his death or disability. All options granted in 1999 expire ten years from the date of grant and are subject to early expiration upon termination of employment by the optionee or upon termination of employment by the Company for cause. (2) Calculated on the basis of an aggregate grant of 901,000 options to purchase shares of Common Stock to Named Executive Officers and employees of the Company. All options granted pursuant to our Equity Incentive Plan will vest upon certain changes in control, including the NOI Merger. The following table sets forth information regarding the value of the stock options granted on December 14, 1998, March 15, 1999 and July 15, 1999 to the Named Executive Officers (no stock options were exercised by any of the Named Executive Officers in 1999):
- -------------------------------------------------------------------------------------------------------------------- OPTION VALUES AT DECEMBER 31, 1999 - -------------------------------------------------------------------------------------------------------------------- NAME VALUE OF UNEXERCISED ---- NUMBER OF SECURITIES UNDERLYING IN-THE-MONEY UNEXERCISED OPTIONS AT OPTIONS AT DECEMBER 31, 1999 DECEMBER 31, 1999(1) (EXERCISABLE/UNEXERCISABLE) (EXERCISABLE/UNEXERCISABLE) -------------------------------- --------------------------- Hushang Ansary 816,667/408,333 $357,292/$178,646 Daniel G. Moriarty(2) 85,000/20,000 $23,125/$8,750 Munawar H. Hidayatallah(2) 159,333/16,667 $30,333/$7,292 Robert L. Hargrave 16,667/33,333 --- Gary W. Stratulate 75,000/15,000 $18,750/$6,563 Arthur C. Teichgraeber(3) --- ---
- --------------- (1) Market price has been determined based on the NYSE closing price of the Common Stock on December 31, 1999. (2) The forfeiture provisions of Messrs. Hidayatallah's and Moriarty's options were retroactively waived by the Board of Directors as of January 4, 2000. 22 23 (3) Mr. Teichgraeber's options were allowed to expire under an agreement with the Company after he resigned July 15, 1999. OTHER COMPENSATION PLANS OR PROGRAMS The Company has a cash bonus plan pursuant to which the Company will pay to Mr. Ansary a cash bonus equal to 4% of the Company's pretax income at the end of each fiscal year and will reserve an additional 4% of the Company's pretax income at the end of each fiscal year for cash bonuses to be paid to employees of the Company upon the recommendation of the Chairman of the Board and approval thereof by the Compensation Committee of the Board of Directors. In addition, on July 15, 1999, the Compensation Committee of the Board of Directors approved an incentive plan for Mr. Ansary on the basis of the annualized returns on the Company's investments of its excess cash in marketable securities. The Company does not maintain any other compensation plans or programs that apply to the Named Executive Officers, other than 401(k) plans and the Incentive Plan described above. DIRECTOR COMPENSATION Directors who are not also officers or employees of the Company are paid annual fees equal to $30,000 plus $1,000 for each Board of Directors meeting (but not committee meeting) attended. EMPLOYMENT AGREEMENTS, SEVERANCE AGREEMENTS AND CHANGE-IN-CONTROL AGREEMENTS No Named Executive Officer has an employment agreement, severance agreement or change-in-control agreement with the Company or any affiliate. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION None. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table sets forth certain information regarding the beneficial ownership of Common Stock as of March 24, 2000 by (i) each person that owns beneficially more than 5% of the Common Stock, (ii) each director and Named Executive Officer (as defined) and (iii) all directors and executive officers of the Company as a group. For purposes of the table, a person or group of persons is deemed to have "beneficial ownership" of any shares as of a given date on which such person has the right to acquire such shares within 60 days after such given date.
ADDRESS OF BENEFICIAL OWNER OF NUMBER OF PERCENTAGE OF DIRECTORS AND EXECUTIVE OFFICERS GREATER THAN 5% SHARES OWNED SHARES OWNED (1) - -------------------------------- --------------- ------------ ---------------- Hushang Ansary IRI International Corporation 22,664,667(2) 54.41% 1000 Louisiana, Suite 5900 Houston, Texas 77002 Daniel G. Moriarty 98,700(3) * Abdallah A. Andrawos 51,666(4) * Nina Ansary IRI International Corporation 3,016,667(5) 7.24% 1000 Louisiana, Suite 5900 Houston, Texas 77002 Frank C. Carlucci 1,060,667(5) 2.55%
23 24
ADDRESS OF BENEFICIAL OWNER OF NUMBER OF PERCENTAGE OF DIRECTORS AND EXECUTIVE OFFICERS GREATER THAN 5% SHARES OWNED SHARES OWNED (1) - -------------------------------- --------------- ------------ ---------------- Dr. Philip David 1,821,667(3)(6) 4.37% Robert L. Hargrave 38,333(7) * Munawar H. Hidayatallah 159,333(4)(8) * Richard D. Higginbotham 15,333(9) * John D. Macomber 16,667(4) * Edward L. Palmer 16,667(4) * Stephen J. Solarz 16,667(4) * Gary W. Stratulate 113,000(10) * Alexander B. Trowbridge 16,667(4) * Arthur C. Teichgraeber 0(8) * J. Robinson West 16,667(4) * All directors and executive officers as a group (16 persons) 26,106,701(2)(11) 62.68% CERTAIN OTHER HOLDERS - --------------------- Nader Ansary IRI International Corporation 3,000,000(2) 7.20% 1000 Louisiana, Suite 5900 Houston, Texas 77002 State of Wisconsin Investment Board P.O. Box 7842 2,306,100 5.54% 121 E. Wilson Street Madison, WI 53707
*Less than 1%. (1) Assumes exercise of vested options. (2) Mr. Ansary, The Ansary Family Trust, a trust controlled by Mr. Ansary for the benefit, inter alia, of members of his immediate family, and a private charitable foundation controlled by Mr. Ansary directly own in the aggregate 15,848,000 shares of Common Stock, and options to purchase 800,000 additional shares. This total number also includes 3,000,000 shares of Common Stock owned by Nina Ansary, as well as options to purchase an additional 16,667 shares, and 3,000,000 shares owned by Nader Ansary. Mr. Ansary disclaims beneficial ownership of the shares held by his son, his daughter, the Ansary Family Trust and the Ansary Foundation. (3) This total number includes options to purchase 85,000 shares. Mr. Moriarty jointly owns 13,700 shares with his spouse. (4) This total amount represents options to purchase shares. (5) This total number includes options to purchase 16,667 shares. (6) This total number includes 500,000 shares of Common Stock owned by Dr. David's spouse, of which he disclaims beneficial ownership. It also includes options to purchase 16,667 shares. (7) This total number includes options to purchase 33,333 shares. Mr. Hargrave jointly owns 5,000 shares with his spouse. (8) This individual is no longer employed by the Company. (9) This total number includes options to purchase 13,333 shares. 24 25 (10) This total number includes options to purchase 95,000 shares. (11) This number includes options to purchase 1,370,993 shares of Common Stock granted pursuant to the Incentive Plan (as defined). CHANGE IN CONTROL See the discussion under Item 1 relating to the NOI Merger. The consummation of the NOI Merger will trigger a change in control at a future date, though no assurances can be given that the NOI Merger will be consummated. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Mr. Carlucci, an outside director of the Company, has an oral agreement with Mr. Ansary regarding a potential contract between the Company and a Ukrainian company. If Mr. Carlucci successfully assists the Company in obtaining this contract, he will receive approximately 0.5% of the contract amount. Prior to the closing of the NOI Merger, Mr. Ansary has the right to assume the lease of our executive offices located at Suite 5900, 1000 Louisiana Houston, Texas. In addition, he has the right to purchase certain fixed assets, fixtures, furniture and other items located at such offices for their aggregate book value, and assume the retail automobile lease contracts for three automobiles, for a total amount of approximately $570,000. PART IV. ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORT ON FORM 8-K (a) Consolidated Financial Statements See Index to Consolidated Financial Statements and Schedules which appears on page F-1 hereof. (b) Reports on Form 8-K None. (c) Exhibits The exhibits listed on the Exhibit Index following the signature page hereof are filed herewith in response to this Item. 25 26 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. IRI INTERNATIONAL CORPORATION By: /s/ Robert L. Hargrave ---------------------- Robert L. Hargrave, Chief Accounting and Financial Officer and Vice Chairman of the Board of Directors Date: March 30, 2000 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. SIGNATURES * - ----------------------------------------------------- Hushang Ansary, Chairman of the Board and Date: March 30, 2000 Chief Executive Officer * - ----------------------------------------------------- Daniel G. Moriarty, Director Date: March 30, 2000 /s/ Robert L. Hargrave - ----------------------------------------------------- Robert L. Hargrave, Vice Chairman of the Board, Date: March 30, 2000 and Chief Accounting and Financial Officer * - ----------------------------------------------------- Abdallah Andrawos, Secretary and Director Date: March 30, 2000 * - ----------------------------------------------------- Gary W. Stratulate, President, Chief Operating Date: March 30, 2000 Officer and Director * - ----------------------------------------------------- Richard D. Higginbotham, Director Date: March 30, 2000
26 27 * - ----------------------------------------------------- Nina Ansary, Director Date: March 30, 2000 * - ----------------------------------------------------- Frank C. Carlucci, Director Date: March 30, 2000 * - ----------------------------------------------------- Dr. Philip David, Director Date: March 30, 2000 * - ----------------------------------------------------- John D. Macomber, Director Date: March 30, 2000 * - ----------------------------------------------------- Edward L. Palmer, Director Date: March 30, 2000 * - ----------------------------------------------------- Stephen J. Solarz, Director Date: March 30, 2000 * - ----------------------------------------------------- Alexander B. Trowbridge, Director Date: March 30, 2000 * - ----------------------------------------------------- J. Robinson West, Director Date: March 30, 2000
27 28 INDEX TO EXHIBITS
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 By-Laws of the Company. *4.2 Form of Registration Rights Agreement between the Company and its current stockholders. *10.1 Form of Indemnification Agreement among the Company and its officers and directors. *10.2 Employment Agreement, dated as of April 17, 1997, between Cardwell and A.C. Teichgraeber and joined by the Company. 10.3 Credit Agreement, dated as of December 29, 1999, among the Company and Bank One, Texas, N.A. *10.5 Asset Purchase Agreement, dated as of January 20, 1997, by and among Bowen Tools, Inc.-Delaware, Bowen, Air Liquide and the Company. *10.6 Acquisition Agreement, dated as of March 20, 1997, by and among A.C. Teichgraeber, Teichgraeber Family Limited Partnership, L.P., Arthur C. Teichgraeber Charitable Remainder Trust, Greenwood Pipe and Threading Company, EDCO Drilling Company Inc. and the Company. *10.7 Equity Incentive Plan of the Company. *10.8 Form of Nonqualified Stock Option Agreement. *10.9 Collective Bargaining Agreement dated as of July 8, 1997 between Bowen and General Drivers, Warehousemen, Helpers, Production Maintenance and Service Employees, Local Union No. 968. *21 List of Subsidiaries of the Company. 23.1 Consent of KPMG LLP. 24 Excerpts from Minutes of Board Meeting held on March 14, 2000 relating to Power of Attorney for Robert L. Hargrave. 27.1 Financial Data Schedule of the Company. * Exhibit incorporated herein by reference to the Registrant's registration statement on Form S-1 (Registration No. 333-31157) dated September 8, 1997, as amended.
28 29 IRI INTERNATIONAL CORPORATION AND SUBSIDIARIES INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page ---- Independent Auditors' Report...................................................................................F-2 Consolidated Balance Sheets -- December 31, 1999 and 1998......................................................F-3 Consolidated Statements of Operations -- Years ended December 31, 1999, 1998 and 1997..........................F-4 Consolidated Statements of Shareholders' Equity and Comprehensive Income -- Years ended December 31, 1999, 1998, and 1997.................................................................................................F-5 Consolidated Statements of Cash Flows -- Years ended December 31, 1999, 1998 and 1997..........................F-6 Notes to Consolidated Financial Statements.....................................................................F-7
All schedules are omitted as the required information is applicable or presented in the consolidated financial statements or related notes. F-1 30 INDEPENDENT AUDITORS' REPORT To the Shareholders and Board of Directors of IRI International Corporation: We have audited the accompanying consolidated balance sheets of IRI International Corporation and Subsidiaries as of December 31, 1999 and 1998, and the related consolidated statements of operations, shareholders' equity and comprehensive income, and cash flows for each of the years in the three-year period ended December 31, 1999. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of IRI International Corporation and Subsidiaries as of December 31, 1999 and 1998, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1999, in conformity with generally accepted accounting principles. KPMG LLP Houston, Texas March 8, 2000 F-2 31 IRI INTERNATIONAL CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (In thousands, except share and per share amounts)
ASSETS December 31, ------------------------------- 1999 1998 ---------- --------- Current assets: Cash and cash equivalents $ 35,688 $ 37,475 Marketable securities, at fair value (cost of $13,437 at December 31, 1999 and $3,743 at December 31, 1998) 14,686 3,000 Accounts receivable, less allowance for doubtful accounts of $1,740 at December 31, 1999 and $960 at December 31, 1998 14,476 29,147 Income tax receivable 2,717 - Inventories 92,572 109,151 Costs and estimated earnings in excess of billings on uncompleted contracts 1,400 4,429 Deferred income tax assets 1,388 - Other current assets 1,242 2,381 --------- -------- Total current assets 164,169 185,583 Property, plant and equipment, net 45,697 49,192 Deferred income tax assets 3,945 - Other assets 3,282 4,391 --------- -------- $ 217,093 $ 239,166 ========= ======== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Notes payable $ 1 $ 16 Accounts payable 5,256 8,094 Accrued liabilities 4,332 6,018 Customer advances 1,938 3,303 Foreign income tax payable 996 - Other liabilities 1,498 3,644 Current installments of obligation under capital lease 299 262 --------- -------- Total current liabilities 14,320 21,337 Negative goodwill, less accumulated amortization - 4,026 Obligation under capital lease, less current installments - 319 Accrued postretirement benefits other than pensions 1,427 1,562 Pension liability - 1,586 Other long-term liabilities 46 77 --------- -------- Total liabilities 15,793 28,907 --------- -------- Shareholders' equity Preferred stock, $1.00 par value; 25,000,000 shares authorized, none issued - - Common stock, $0.01 par value; 100,000,000 shares authorized, 39,900,000 shares issued and outstanding in 1999 and 1998 399 399 Additional paid-in capital 168,884 168,514 Retained earnings 32,403 43,308 Accumulated other comprehensive loss (386) (1,962) --------- -------- Total shareholders' equity 201,300 210,259 Commitments and contingencies --------- -------- $ 217,093 $ 239,166 ========= ========
See accompanying notes to consolidated financial statements. F-3 32 IRI INTERNATIONAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per share amounts)
Years ended December 31, ----------------------------------------------------------- 1999 1998 1997 --------- ----------- ----------- Revenues $ 92,190 $ 175,045 $ 185,366 Cost of goods sold 83,156 126,626 139,204 --------- ----------- ----------- Gross profit 9,034 48,419 46,162 Selling and administrative expense 27,831 30,526 23,543 Restructuring charge 1,779 590 - --------- ----------- ----------- Operating income (loss) (20,576) 17,303 22,619 --------- ----------- ----------- Other income (expense): Interest income 1,539 2,213 746 Interest expense (363) (360) (8,762) Other, net 23 (3,491) 718 --------- ----------- ----------- 1,199 (1,638) (7,298) --------- ----------- ----------- Income (loss) before income taxes and extraordinary item (19,377) 15,665 15,321 Income tax (expense) benefit 8,472 (3,283) (2,786) --------- ----------- ----------- Income (loss) before extraordinary item (10,905) 12,382 12,535 Extraordinary item - extinguishment of debt (net of tax benefit of $841) - - (1,512) --------- ----------- ----------- Net income (loss) $(10,905) $ 12,382 $ 11,023 ========= =========== =========== Income (loss) per common share - basic and diluted: Income (loss) before extraordinary item (0.27) $ 0.31 $ 0.40 Extraordinary item - - (0.05) --------- ----------- ----------- Net income (loss) per common share - basic and diluted $ (0.27) $ 0.31 $ 0.35 ========= =========== =========== Weighted-average shares outstanding - basic and diluted 39,900 39,900 31,275 ========= =========== ===========
See accompanying notes to consolidated financial statements. F-4 33 IRI INTERNATIONAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY AND COMPREHENSIVE INCOME (In thousands)
Common Accumulated stock Additional other Total Preferred Common $0.01 par paid-in Retained comprehensive shareholders' shares shares value capital earnings income (loss) equity --------- ------ --------- ----------- --------- ------------- ------------- Balances at December 31, 1996 - 30,000 $ 300 $ 4,700 $ 19,903 $ - $ 24,903 Initial public offering, net of costs - 9,900 99 163,838 - - 163,937 Comprehensive income: Net income - - - - 11,023 - 11,023 Change in minimum pension liability adjustment - - - - - (1,457) (1,457) --------- ------ --------- ----------- --------- ------------- ------------- Total comprehensive income 9,566 --------- ------ --------- ---------- --------- ------------- ------------ Balances at December 31, 1997 - 39,900 399 168,538 30,926 (1,457) 198,406 Other - - - (24) - - (24) Comprehensive income: Net income - - - - 12,382 - 12,382 Change in minimum pension liability adjustment - - - - - (531) (531) Foreign currency translation adjustment - - - - - 26 26 --------- ------ --------- ----------- --------- ------------- ------------- Total comprehensive income 11,877 --------- ------ --------- ---------- --------- ------------- ------------ Balance at December 31, 1998 - 39,900 399 168,514 43,308 (1,962) 210,259 Other - - - 370 - - 370 Comprehensive loss: Net loss - - - - (10,905) - (10,905) Change in minimum pension liability adjustment - - - - - 1,988 1,988 Foreign currency translation adjustment - - - - - (412) (412) --------- ------ --------- ----------- --------- ------------- ------------- Total comprehensive loss (9,329) --------- ------ --------- ---------- --------- ------------- ------------ Balance at December 31, 1999 - 39,900 $ 399 $ 168,884 $ 32,403 $ (386) $ 201,300 ========= ====== ========= ========== ========= ============= ============
See accompanying notes to consolidated financial statements. F-5 34 IRI INTERNATIONAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands)
Years ended December 31, ---------------------------------------- 1999 1998 1997 ----------- --------- --------- Cash flows from operating activities: Net income (loss) $ (10,905) $ 12,382 $ 11,023 Adjustments to reconcile net income to net cash provided by operations: Extraordinary item - extinguishment of debt - - 1,512 Depreciation and amortization 5,069 4,032 4,871 Amortization of goodwill 1,254 1,255 880 Amortization of negative goodwill (4,026) (5,367) (5,367) Change in employee benefit accounts (1,942) 728 129 Stock option compensation expense 370 499 - Deferred income tax (5,333) - - Gain on sale of assets (2) - (372) Changes in assets and liabilities, net of effects of acquisitions: Marketable securities (11,686) 5,218 (8,218) Accounts receivable 14,671 3,983 (14,772) Income tax receivable (2,717) - - Inventories 16,579 (8,250) (21,058) Other current assets 4,168 3,487 (6,918) Other noncurrent assets 76 190 (113) Accounts payable and accrued liabilities (4,524) (13,685) 17,682 Foreign income tax payable 996 - - Customer advances and other liabilities (1,981) (5,631) 593 ----------- --------- --------- Net cash flows provided by (used in) operations 67 (1,159) (20,128) ----------- --------- --------- Cash flows from investing activities: Capital expenditures (2,178) (10,005) (5,755) Proceeds from sale of assets 606 - 523 Acquisition of Bowen net assets, net of cash acquired - - (77,693) Acquisition of Cardwell net assets, net of cash acquired - - (12,574) ----------- --------- --------- Net cash flows provided by (used in) investing activities (1,572) (10,005) (95,499) ----------- --------- --------- Cash flows from financing activities: Payments on capital lease obligation (282) (226) (312) Proceeds from notes payable - - 113,482 Debt issuance costs - - (3,971) Payments on notes payable - (85) 116,671) Issuance of common stock - - 163,937 Other - (523) - ----------- --------- --------- Net cash flows provided by (used in) financing activities (282) (834) 156,465 ----------- --------- --------- Increase (decrease) in cash and cash equivalents (1,787) (11,998) 40,838 Cash and cash equivalents at beginning of year 37,475 49,473 8,635 ----------- --------- --------- Cash and cash equivalents at end of year $ 35,688 $ 37,475 $ 49,473 ----------- --------- --------- Supplemental cash flow information: Interest paid $ 363 $ 360 $ 8,762 =========== ========= ========= Income tax paid (refunded) $ (1,656) $ 5,219 $ 158 =========== ========= =========
See accompanying notes to consolidated financial statements. F-6 35 IRI INTERNATIONAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (1) GENERAL IRI International Corporation (IRI or Company), a Delaware corporation, was formed on July 30, 1985, through the combination of Ingersol-Rand Oilfield Products Company, a wholly-owned subsidiary of Ingersoll-Rand Company, established August 1, 1980, and the Ideco Division of Dresser Industries, Inc. On November 19, 1997, the Company sold 9.9 million shares of its common stock through an initial public offering (IPO). Net proceeds totaled approximately $163.9 million and were used partially to repay debt incurred in connection with the acquisitions (see notes 3 and 6). The Company manufactures and sells a full line of oil and gas mobile well servicing and drilling rigs, deep oil and gas skid-mounted drilling rigs, associated drilling equipment (Oilfield Equipment), and specialty steel products (Specialty Steel). The Company also manufactures and markets fishing and drilling tools, power and wireline/pressure control equipment used in the drilling and completion of oil and gas wells. Raw materials are readily available and the Company is not dependent upon a single or a few suppliers. On September 20, 1994, all of the outstanding common and preferred stock of IRI was acquired by Energy Services International (ESI) for cash of $5 million. The acquisition has been recorded using the purchase method of accounting and the purchase price has been allocated to the assets acquired and liabilities assumed based upon their estimated fair values at the date of the acquisition. The excess of the fair value of net assets acquired over consideration paid was applied against nonmonentary assets (property, plant and equipment) reducing the balances at the acquisition date to zero. The remaining excess of the fair value of net assets acquired over consideration paid of $26.8 million was recorded as negative goodwill and was being amortized using the straight-line method over 5 years. Negative goodwill amortization of $4.0 million for the year ended December 31, 1999 and $5.4 million for each of the years ended December 31, 1998 and 1997, is included in cost of goods sold in the accompanying consolidated statements of operations. IRI was subsequently merged into ESI in October 1997. ESI was the surviving corporation and changed its name to IRI International Corporation. (2) SIGNIFICANT ACCOUNTING POLICIES (a) PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of the Company and its subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. (b) STATEMENTS OF CASH FLOWS Cash equivalents of $35,700,000 and $37,500,000 at December 31, 1999 and 1998, respectively, consisted of interest-bearing cash deposits. For purposes of the statement of cash flows, the Company considers all cash and short-term highly liquid debt instruments with original maturities of three months or less to be cash equivalents. During the years ended December 31, 1999, 1998 and 1997, the Company entered into capital lease obligations of $-0-, $-0- and $309,000, respectively. F-7 36 IRI INTERNATIONAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED (c) MARKETABLE SECURITIES Marketable securities at December 31, 1999 and 1998 consist of corporate equity securities. The Company classifies its equity securities as trading securities. Trading securities are bought and held principally for the purpose of selling them in the near term and are recorded at fair value. Unrealized holding gains (losses) of $1,249,000 and $(743,000) are included in other income for the years ended December 31, 1999 and 1998, respectively. (d) INVENTORIES Inventories are stated at the lower of cost or market. Cost is determined using standard costs which approximate actual cost on a first-in, first-out basis for all inventories excluding oilfield equipment work-in-process, parts and raw materials, which are recorded at actual cost on a first-in, first-out basis. Work-in-process inventories related to fixed price contracts are stated at the accumulated cost of material, labor and manufacturing overhead, less the estimated costs of units delivered. (e) PROPERTY, PLANT AND EQUIPMENT Depreciation of property, plant and equipment is provided over the estimated service lives of assets principally using the straight-line method. Maintenance, repairs and minor replacements are charged to operations as incurred; major repairs, replacements or improvements are capitalized. Long-lived assets and certain identifiable intangible assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell. (f) INCOME TAXES Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. F-8 37 IRI INTERNATIONAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED (g) REVENUE RECOGNITION The Company recognizes construction contract revenues for rigs and significant components using the percentage-of-completion method. Under the percentage-of-completion method, revenues and profits are recognized based on the percentage of completion throughout the performance period of the contract. The percentage-of-completion is calculated based on the ratio of contract costs incurred to date to total estimated contract costs after providing for all known or anticipated costs. Costs include material, direct labor and engineering and manufacturing overhead. Selling expenses and general and administrative expenses are charged to operations as incurred. The effect of changes in estimates of contract costs is recorded currently. If estimates of costs to complete contracts indicate a loss, provision is made currently for the total loss anticipated. All remaining revenue is generally recorded when the equipment is shipped. Costs and estimated earnings in excess of billing on uncompleted contracts represent revenues earned under the percentage-of-completion method but not yet billable under the terms of the contract. Amounts are billable under contracts generally upon shipment of the products or completion of the contracts. Included in revenues and cost of goods sold for the year ended December 31, 1999 are $4,812,000 and $3,412,000, respectively, related to uncompleted contracts ($1,400,000, net) at December 31, 1999. Included in revenues and cost of goods sold for the year ended December 31, 1998 are $14,218,000 and $9,789,0000, respectively, related to uncompleted contracts ($4,429,000 net) at December 31, 1998. (h) INCOME (LOSS) PER COMMON SHARE Basic income (loss) per common share is computed by dividing net income (loss) available to common shareholders by the weighted average number of common shares outstanding for the period. Diluted income per common share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the entity. For the years and quarters presented herein, basic and diluted income (loss) per common share are the same. Options outstanding at December 31, 1998 and 1997 are antidilutive as the exercise price is greater than the average market price during 1998 and 1997, respectively. Options outstanding at December 31, 1999 are antidilutive due to the net loss incurred during the year. Securities excluded from the computation of diluted income per common share for 1999 that could be potentially dilutive in the future consist of options to purchase 2,426,000 shares of common stock at December 31, 1999. (i) FINANCIAL INSTRUMENTS AND CREDIT RISK CONCENTRATIONS The Company invests its excess cash in financial instruments, primarily overnight investments and money market mutual funds. These financial instruments could potentially subject the Company to concentrations of credit risk; however, the Company's management considers the financial stability and creditworthiness of a financial institution before investing the Company's funds. The carrying amounts of the financial instruments in the accompanying financial statements (cash, accounts receivable and payables) approximate fair value because of the short maturities of these instruments. The capital lease obligation bears interest at rates that approximate market rates, thus the carrying amount approximates estimated fair value. F-9 38 IRI INTERNATIONAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED A substantial portion of the Company's customers are engaged in the energy industry. This concentration of customers may impact the Company's overall exposure to credit risk, either positively or negatively, in that customers may be similarly affected by changes in economic and industry conditions. The Company performs ongoing credit evaluations of its customers. The Company maintains reserves for potential credit losses, and actual losses have historically been within the Company's expectations. Foreign sales also present various risks, including risks of war, civil disturbances and governmental activities that may limit or disrupt markets, restrict the movement of funds or result in the deprivation of contract rights or the taking of property without fair consideration. Most of the Company's foreign sales, however, are to large international companies or are secured by letters of credit or similar arrangements. (j) USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. (k) COMPREHENSIVE INCOME On January 1, 1998, the Company adopted SFAS No. 130, Reporting Comprehensive Income. SFAS No. 130 establishes standards for reporting and presentation of comprehensive income and its components in a full set of financial statements. Comprehensive income consists of net income and net unrealized gains (losses) on securities and is presented in the consolidated statements of stockholder's equity and comprehensive income. The statement requires only additional disclosures in the consolidated financial statements; it does not affect the Company's financial position or results of operations. Prior year financial statement information has been reclassified to conform to the requirements of SFAS No. 130. (l) RECENT ACCOUNTING PRONOUNCEMENTS Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities, was issued by the Financial Accounting Standards Board in June 1998. SFAS 133 standardizes the accounting for derivative instruments, including derivative instruments embedded in other contracts. Under the standard, entities are required to carry all derivative instruments in the statement of financial position at fair value. The accounting for changes in the fair value (i.e., gains or losses) of a derivative instrument depends on whether it has been designated and qualifies as part of a hedging relationship and, if so, on the reason for holding it. If specified conditions are met, entities may elect to designate a derivative instrument as a hedge of exposures to changes in fair values, cash flows, or foreign currencies. If the hedged exposure is a fair value exposure, the gain or loss on the derivative instrument is recognized in earnings in the period of change together with the offsetting loss or gain on the hedged item attributable to the risk being hedged. If the hedged exposure is a cash flow exposure, the effective portion of the gain or loss on the derivative instrument is reported initially as a component of other comprehensive income (outside earnings) and subsequently F-10 39 IRI INTERNATIONAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED reclassified into earnings when the forecasted transaction affects earnings. Any amounts excluded from the assessment of hedge effectiveness, as well as the ineffective portion of the gain or loss, is reported in earnings immediately. Accounting for foreign currency hedges is similar to the accounting for fair value and cash flow hedges. If the derivative instrument is not designated as a hedge, the gain or loss is recognized in earnings in the period of change. The Company will adopt SFAS 133 beginning January 1, 2001. The Company has not yet determined the impact that SFAS 133 will have on the financial statements. Management believes that the determination will not be meaningful until closer to the date of initial adoption. (m) RECLASSIFICATIONS Certain prior year amounts were reclassified to conform with current year presentation. (3) ACQUISITIONS On March 31, 1997, the Company acquired certain assets and assumed liabilities of Bowen Tools, Inc. (Bowen), a wholly-owned subsidiary of the French chemical concern L'Air Liquide, for a total consideration of $75.1 million. On April 17, 1997, the Company also acquired the stock of Cardwell International Ltd. (Cardwell), a privately owned company, as well as certain assets held by affiliates of Cardwell for approximately $12 million in cash at closing and partial payment ($3 million) of a note payable to bank. In addition the Company incurred approximately $3.2 million ($2.6 million for Bowen and $.6 million for Cardwell) of transaction costs in connection with the acquisitions. The acquisitions were financed through a $65 million senior secured term loan facility and $31 million of interim senior subordinated increasing rate notes. The notes outstanding under the term loan facility and the senior subordinated increasing rate notes were repaid with the proceeds from the Company's equity offering (see note 1). Bowen, headquartered in Houston, Texas, designs, manufactures and markets fishing and drilling tools, power and wireline/pressure control equipment used in the drilling and completion of oil and gas wells. Cardwell, headquartered in El Dorado, Kansas, manufactures and sells drilling rigs, related oilfield equipment and supplies predominantly to foreign countries. The acquisitions have been recorded using the purchase method of accounting and results of operations of the acquired companies have been included in the consolidated statement of operations of IRI from the dates of the respective acquisitions. The cost of the Bowen and Cardwell acquisitions have been allocated to the assets acquired and liabilities assumed based on their respective fair values as follows (in thousands): Current assets $ 57,389 Property, plant and equipment 37,647 Excess of cost over fair value of net tangible assets of businesses acquired 6,096 Other assets 812 Current liabilities (11,677) ----------------- Total $ 90,267 =================
F-11 40 IRI INTERNATIONAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED The excess of consideration given over the fair value of the net tangible assets acquired of $6,096,000 is being amortized over five years using the straight-line method. (4) INVENTORIES A summary of inventories follows (in thousands):
DECEMBER 31, DECEMBER 31, 1999 1998 ----------------- ------------------ Raw materials and supplies $ 35,524 $ 46,743 Work in process 13,929 21,241 Finished goods 43,119 41,167 ----------------- ------------------ Total $ 92,572 $ 109,151 ================= ==================
(5) PROPERTY, PLANT AND EQUIPMENT A summary of property, plant and equipment follows (in thousands):
DECEMBER 31, DECEMBER 31, 1999 1998 ----------------- ------------------ Land and land improvements $ 2,823 $ 2,910 Buildings 8,169 7,731 Machinery and equipment 48,041 46,965 ----------------- ------------------ 59,033 57,606 Less accumulated depreciation (13,336) (8,414) ----------------- ------------------ Property, plant and equipment, net $ 45,697 $ 49,192 ================= ==================
Machinery and equipment includes capitalized lease assets of $1,119,000 at December 31, 1999 and 1998. (6) NOTES PAYABLE In connection with the acquisitions described in note 3, the Company entered into a $65.0 million senior secured term loan facility due in quarterly installments beginning June 30, 1997 through March 31, 2002 and a $31.0 million interim senior subordinated increasing rate note due March 31, 1998. Amounts outstanding under these notes were repaid with proceeds from the Company's initial public offering in November 1997. The extinguishment of this debt resulted in an extraordinary charge of $1,512,000 consisting of unamortized financing costs of $2,353,000 and income tax benefit of $841,000. The Company had a $9.7 million revolving credit facility with a maturity date of March 31, 2000. Amounts outstanding under the revolving credit facility were secured by substantially all of the assets of the Company and accrued interest at a rate per annum equal to the one, two, three or six-month LIBOR plus 2-3/4%. The revolving credit facility agreement contained provisions, among others, that restricted incurrence of indebtedness, guarantees, acquisitions, and distributions to shareholders, and required the Company to meet specified financial maintenance tests. F-12 41 IRI INTERNATIONAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED On December 29, 1999, the revolving credit facility was replaced with a new $10.0 million revolving credit facility, which matures on December 28, 2000 and provides exclusively for bank guarantees and commercial and standby letters of credit. The new revolving credit facility agreement contains provisions, among others, that limit liens on accounts receivables, inventory and related general intangibles and that require the Company to meet specified financial maintenance tests. At December 31, 1999, approximately $5.9 million was available for bank guarantees and letters of credit under the new revolving credit facility. The Company had no outstanding indebtedness at December 31, 1999. (7) SHAREHOLDERS' EQUITY On October 14, 1997, the Company merged into ESI. ESI was the surviving corporation and changed its name to IRI International Corporation. At the time of the merger, ESI had 100 common shares issued and outstanding, no liabilities and its sole asset was its investment in the Company. As a result of the merger, each share of common stock of ESI was converted into 300,000 shares of the surviving corporation, each treasury share of common stock was canceled and each share of preferred stock of the Company, including accrued and unpaid dividends thereon, was canceled. The authorized capital stock of the Company was increased to 100,000,000 common shares and 25,000,000 preferred shares. The consolidated financial statements, including all references to the number of shares of common and preferred stock and all per share information, have been adjusted to reflect the merger and the other changes in capital structure on a retroactive basis. (8) COMPREHENSIVE INCOME (LOSS) The accumulated balances for each classification of comprehensive income (loss) are as follows (in thousands):
ACCUMULATED FOREIGN MINIMUM OTHER CURRENCY PENSION COMPREHENSIVE ITEMS LIABILITY INCOME (LOSS) ------------------ ----------------- ----------------------- Beginning balance $ 26 $ (1,988) $ (1,962) Current period change (412) 1,988 1,576 ------------------ ---------------- ----------------------- Ending balance $ (386) $ - $ (386) ================== ================= =======================
(9) STOCK OPTIONS Prior to its initial public stock offering, the Company granted its Directors and certain of its officers and employees an aggregate of 1,933,000 options to purchase shares of common stock. Directors not employed by the Company received options to purchase an aggregate of 160,000 shares of common stock having an exercise price equal to the initial public offering price. The options granted to Directors not employed by the Company vest as to one-half of the option shares on the effective date of the Offering and as to a further one-quarter of the option shares on the first and second anniversaries of the effective date of the Offering. Certain executive officers and employees F-13 42 IRI INTERNATIONAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED received options to purchase an aggregate of 1,773,000 shares of common stock having an exercise price equal to the greater of the initial public offering price and the fair market value of the option shares on the date such options vest. The options granted to certain executive officers and employees generally vest as to one-third of the option shares upon the effective date of the Offering and as to a further one-third of the option shares on the first and second anniversaries of the effective date of the Offering. During 1998, the Company cancelled 1,931,000 outstanding stock options and granted 1,645,000 new options with an exercise price equal to the fair market value of the common stock at grant date. During 1999, the Company granted an aggregate of 901,000 options with an exercise price equal to the fair market value of the common stock at grant date to certain executive officers and employees. In addition, 70,000 options were forfeited by employees that terminated their employment with the Company. A summary of the status of the Company's fixed stock option plan as of December 31, 1999 and 1998 and changes during the years then ended is presented below:
WEIGHTED SHARES AVERAGE FIXED OPTIONS (000) EXERCISE PRICE -------------------------------------------------- -------------- --------------------- Outstanding at December 31, 1996 - $ - Granted 1,933 18.00 Forfeited (2) 18.00 -------------- --------------------- Outstanding at December 31, 1997 1,931 18.00 Granted 1,645 3.56 Cancelled (1,931) (18.00) -------------- --------------------- Outstanding at December 31, 1998 1,645 3.56 Granted 901 3.97 Forfeited (70) (3.56) ============== ===================== Outstanding at December 31, 1999 2,476 $ 3.71 ============== ===================== Options exercisable at December 31, 1999 1,526 $ 3.66 ============== ===================== Weighted average fair value of options granted during 1999 $ 3.97 =====================
The weighted average remaining contracted life of stock options at December 31, 1999 was approximately nine years. F-14 43 The Company applies APB Opinion 25 in accounting for its stock option plan. Accordingly, no compensation cost has been recognized for stock options granted to employees. Compensation expense is recorded for options granted to nonemployee directors based on the estimated fair value of the options on the date of grant. The compensation cost that has been charged against income for nonemployee director options granted was $370,000 and $499,000 for the years ended December 31, 1999 and 1998, respectively. Had compensation cost for the Company's stock option plans been determined based on the fair value at the grant dates for awards to employees under the Plan consistent with the method of SFAS No. 123, the Company's net income (loss) and income (loss) per common share for the years ended December 31, 1999, 1998 and 1997 would have been reduced to the pro forma amounts indicated below (in thousands except per share amounts):
1999 1998 1997 ----------------- ----------------- ------------------ Net income (loss): As reported $ (10,905) $ 12,382 $ 11,023 ================= ================= ================== Pro forma $ (12,627) $ 11,199 $ 7,216 ================= ================= ================== Basic and diluted income (loss) per common share: As reported $ (0.27) $ 0.31 $ 0.35 ================= ================= ================== Pro forma $ (0.32) $ 0.28 $ 0.23 ================= ================= ==================
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:
1999 1998 1997 ----------------- ----------------- ------------------ Expected life (years) 5 5 3.3 Risk-free interest rate 6.34% 4.42% 6.20% Volatility 70.00% 70.00% 30.00% Dividend yield 0.00% 0.00% 0.00%
F-15 44 IRI INTERNATIONAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED (10) INCOME TAXES Income tax expense (benefit) attributable to income (loss) before extraordinary item consists of the following (in thousands):
YEARS ENDED DECEMBER 31, ------------------------------------------------------- 1999 1998 1997 ----------------- ---------------- -------------- Current: U. S. Federal $ (3,539) $ 2,609 $ 1,965 State - 425 312 Foreign 400 249 509 ----------------- ---------------- -------------- (3,139) 3,283 2,786 ----------------- ---------------- -------------- Deferred: U. S. Federal (5,333) - - State - - - Foreign - - - ----------------- ---------------- -------------- (5,333) - - ----------------- ---------------- -------------- Total income tax expense (benefit) $ (8,472) $ 3,283 $ 2,786 ----------------- ---------------- --------------
Income tax expense (benefit) differs from the amount computed by applying the statutory rate of 35% to income (loss) before income taxes as follows (in thousands):
YEARS ENDED DECEMBER 31, ------------------------------------------------------------- 1999 1998 1997 ---------------- ---------------- --------------------- Computed "expected" tax expense (benefit) $ (6,782) $ 5,483 $ 5,362 Change in the valuation allowance (1,029) (998) (1,291) Amortization of negative goodwill (1,409) (1,879) (1,879) Amortization of goodwill 439 442 308 State income taxes, net of federal benefit - 276 203 Foreign taxes and other 309 (41) 83 ---------------- ---------------- --------------------- $ (8,472) $ 3,283 $ 2,786 ---------------- ---------------- ---------------------
F-16 45 IRI INTERNATIONAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED The tax effects of temporary differences that give rise to significant portions of the deferred federal income tax assets and liabilities as of December 31, 1999 and 1998, are as follows (in thousands):
DECEMBER 31, ----------------------------------------------- 1999 1998 --------------------- ----------------------- Deferred income tax assets: Capital loss carryforward $ 841 $ 690 Basis in inventories 3,758 4,201 Unrealized loss on marketable equity securities - 260 Employee benefits 1,002 1,102 Net operating loss carryforwards 8,145 1,050 Other, principally accrued liabilities 249 378 --------------------- --------------------- Total gross deferred income tax assets 13,995 7,681 Less valuation allowance 2,351 3,380 --------------------- --------------------- Net deferred income tax assets 11,644 4,301 --------------------- --------------------- Deferred income tax liabilities: Costs and estimated earnings in excess of billings on uncompleted contracts 1,270 1,917 Basis in and depreciation of property, plant and equipment 4,604 2,384 Unrealized gain on marketable equity securities 437 - --------------------- --------------------- Total gross deferred income tax liabilities 6,311 4,301 --------------------- --------------------- Net deferred income tax assets $ 5,333 $ - ===================== =====================
The Company has provided a valuation allowance for deferred tax assets of $2,351,000 and $3,380,000 at December 31, 1999 and December 31, 1998, respectively. The valuation allowance decreased $1,029,000 during the year ended December 31, 1999 and $998,000 during the year ended December 31, 1998. In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. Under the Internal Revenue Code of 1986, in general, a change of more than 50% in the composition of a company's equity owners during any three years results in a limitation on such company's ability to utilize its loss carryforwards in subsequent years. The Company has undergone such an ownership change as a result of the sale described in note 1; accordingly, the amount of the Company's preacquisition net operating loss carryforwards that may be utilized per year is limited to approximately $300,000 (aggregate $3,000,000 available at December 31, 1999) expiring from 2003 through 2009. To the extent such carryforwards are not utilized in a year, they may be utilized in subsequent years. F-17 46 IRI INTERNATIONAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED In addition, at December 31, 1999, after carryback, the Company has a net operating loss carryforward of $20,300,000 which will expire in 2020, if unused. (11) LEASES At December 31, 1999, minimum future annual payments required under a capital lease together with the present value of the net minimum lease payments and noncancelable operating leases, primarily for repair facilities and offices and office equipment, were as follows (in thousands):
OPERATING CAPITAL LEASES LEASES ----------------- ------------------ 2000 $ 1,071 $ 316 2001 580 - 2002 133 - 2003 40 - 2004 1 - ----------------- ------------------ Total minimum lease payments $ 1,825 316 ----------------- Less amount representing interest 17 ------------------ Present value of minimum lease payments $ 299 ------------------
Total rental expense was $2,555,000, $2,751,000 and $2,142,000 for the years ended December 31, 1999, 1998 and 1997, respectively. (12) PENSION AND OTHER POSTRETIREMENT PLANS The Company has a noncontributory defined pension benefit plan, which covers substantially all employees. Employees with 10 or more years of service are entitled to pension benefits beginning at normal retirement age (65) based on years of service and the employees' compensation for the 60 consecutive month period in which his compensation is the highest. The plan incorporates provisions for early retirement, the privilege to elect a life annuity, surviving spouse benefits, and disability benefits. Employees of the Company who were employees of Ingersoll-Rand Oilfield Products Company or the Ideco Division of Dresser Industries, Inc., immediately prior to becoming employees of IRI, are entitled to uninterrupted service tenure for purposes of retirement benefit calculations. Benefits payable under the IRI retirement plan are offset by benefits payable under the retirement plans of Dresser and Ingersoll-Rand Oilfield Products Company. F-18 47 IRI INTERNATIONAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED The Company uses the accrued benefit cost method to compute the annual contributions to the plan, with minimum and maximum contributions determined on a cumulative basis and the Company having the flexibility to choose which contribution to make and which can vary from one period to the next. The accrued benefit cost includes a normal cost which is computed as the present value of the pro rata portion for the benefit accrual during the year being valued and a past service cost which is the present value of that portion of the projected benefit which has been accrued up to the valuation date. The unfunded past-service cost may be liquidated over a period of between 10 and 30 years. In addition to the Company's defined benefit pension plan, the Company sponsors a defined benefit health care plan that provides postretirement medical benefits to retirees or full-time employees who retire attaining age 55 with at least 10 years of service as of September 1, 1996. Current retirees receive benefits for life while full time employees (future retirees) only receive benefits until age 65. This plan is a contributory, with retirees contributing 20% of the health care costs. The Company's contribution is capped at a 5% annual increase in health care costs, with the remaining increases to be paid by the employee. The Company's policy is to fund the cost of medical benefits in amounts determined at the discretion of management. F-19 48 IRI INTERNATIONAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED The funded status and the amounts recognized in the balance sheets as of December 31, 1999, 1998 and 1997, the date of the last actuarial valuation are as follows (in thousands):
PENSION BENEFITS OTHER BENEFITS ----------------------------------- ------------------------------------ 1999 1998 1997 1999 1998 1997 --------- ---------- ---------- ---------- ---------- ---------- CHANGE IN BENEFIT OBLIGATION: Benefit obligation at beginning of year $ 8,435 $ 8,061 $ 7,289 $ 1,829 $ 1,841 $ 1,821 Service cost 107 106 108 - - - Interest cost 536 520 571 134 134 144 Plan participants' contributions - - - 26 27 30 Actuarial (gain) loss (1,361) 322 691 157 (28) 44 Benefits paid (771) (574) (598) (263) (145) (198) --------- ---------- ---------- ---------- ---------- ---------- Benefit obligation at end of year 6,946 8,435 8,061 1,883 1,829 1,841 --------- ---------- ---------- ---------- ---------- ---------- CHANGE IN PLAN ASSETS: Fair value of plan assets at beginning of year 6,849 7,122 7,321 - - - Actual return on plan assets 1,625 301 399 - - - Employer contribution - - - 231 118 168 Plan participants' contributions - - - 26 27 30 Benefits paid (771) (574) (598) (257) (145) (198) --------- ---------- ---------- ---------- ---------- ---------- Fair value of plan assets at end of year 7,703 6,849 7,122 - - - --------- ---------- ---------- ---------- ---------- ---------- Funded status 757 (1,586) (939) (1,883) (1,829) (1,841) Unrecognized actuarial loss (536) 1,988 1,457 456 323 360 --------- ---------- ---------- ---------- ---------- ---------- Net amount recognized $ 221 $ 402 $ 518 $(1,427) $(1,506) $(1,481) --------- ---------- ---------- ---------- ---------- ---------- Amounts recognized in the statement of financial position consist of: Prepaid benefit cost $ 221 $ - $ - $ - $ - $ - Accrued benefit liability - (1,586) (939) (1,427) (1,506) (1,481) Accumulated other comprehensive loss - 1,988 1,457 - - - --------- ---------- ---------- ---------- ---------- ---------- Net amount recognized $ 221 $ 402 $ 518 $(1,427) $(1,506) $(1,481) --------- ---------- ---------- ---------- ---------- ---------- WEIGHTED-AVERAGE ASSUMPTIONS AS OF DECEMBER 31: Discount rate 7.75% 6.75% 7.30% 7.75% 6.75% 7.30% Expected return on plan assets 8.00% 8.00% 8.00% N/A N/A N/A Rate of compensation increase N/A N/A N/A N/A N/A N/A
F-20 49 IRI INTERNATIONAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED The assumed health care cost trend rate was 10% in 1995 graded down to 5% after 12 years. Because health care cost increases over 5% annually are borne by the employees, the amounts reported (in thousands) are not affected by increases in the assumed health care cost trend rate.
PENSION BENEFITS OTHER BENEFITS ---------------------------------- ------------------------------------ COMPONENTS OF NET PERIODIC BENEFIT COST: 1999 1998 1997 1999 1998 1997 -------- ---------- ---------- ---------- ---------- ---------- Service cost $ 107 106 108 - - - Interest cost 536 520 571 134 134 144 Expected return on plan assets (534) (557) (570) - - - Amortization of prior service cost - - - - - - Amortization of transition asset - - - - - - Recognized net actuarial loss 72 9 7 19 45 -
The projected benefit obligation, accumulated benefit obligation, and fair value of plan assets for the pension plan with accumulated benefit obligations in excess of plan assets were $6,946,000, $6,946,000, and $7,703,000, respectively, as of December 31, 1999 and $8,435,000, $8,435,000 and $6,849,000, respectively, as of December 31, 1998. As of September 1, 1995, the pension plan was frozen insofar as future accrual of pension benefits. Because the plan amendment to freeze the plan was planned in conjunction with the ESI acquisition discussed in note 1, the resulting curtailment gain was taken into consideration in remeasuring the Company's projected benefit obligation and the date of the acquisition. The Pension Guaranty Corporation provides protection to plan participants by assuring employees that the fixed commitment of the Company for funding vested accrued benefits of the plan will be paid up to specified maximum amounts should the Company be unable to fund the fixed commitment. The pension plan is administered by the Pension Committee which is appointed by IRI's Board of Directors. On August 11, 1995, the defined benefit health care plan was amended to terminate all employees from the plan except those eligible to retire on June 30, 1995 and all current retirees. In addition under the amended plan, active employees eligible to retire will, after the age of 65, receive through the retirement plan, 80% of the cost of medical insurance with a 5% cap over a base year premium of calendar 1996. Because it was expected that the plan would be terminated in conjunction with the ESI acquisition discussed in note 1, the effects were considered in measuring the Company's accumulated post retirement benefit obligation as of the acquisition date. The Company also has a defined contribution plan which covers most of its employees. The plan provides mandatory minimum contributions from the Company to eligible employees in the plan equal to 7-1/2% of their annual pay. Plan participants become fully vested in contributions made by the Company following three years of credited service. The Company recognized expense associated with the plan of approximately $892,000, $1,289,000 and $1,076,000 for the years ended December 31, 1999, 1998 and 1997, respectively. F-21 50 IRI INTERNATIONAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED (13) RESTRUCTURING CHARGE On October 8, 1998, the Company announced a restructuring program in which the workforce would be reduced by up to 315 employees. During 1999, the Company continued its restructuring program. Accordingly, the Company consolidated manufacturing operations, closing two plants, and further reduced its workforce by 122 employees in addition to the 315 employees originally estimated. Expenses incurred in connection with the restructuring program have been reported as a restructuring charge of $1,779,000 in 1999 and $590,000 in 1998. Substantially all amounts were paid as of December 31, 1999. (14) BUSINESS SEGMENTS In the fourth quarter of 1998, the Company adopted SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information. The Company's reportable segments are strategic business units that offer different products and services. They are managed separately because each business requires different technology and marketing strategies. Financial data for periods reported prior to the year ended 1998 have been restated to conform to the presentation according to SFAS No. 131. The Company operates through three business segments consisting of Oilfield Equipment, Downhole Products, and Specialty Steel. The Oilfield Equipment segment is principally engaged in the design and manufacture of drilling and well servicing rigs and components for use on land and offshore drilling platforms. The Company specializes in providing small truck-mounted rigs to stationary land deep drilling rigs to meet the functional requirements of customers drilling in remote and harsh environments. The Downhole Products segment designs, manufactures, sells and rents fishing and drilling tools. The Company's Specialty Steel segment manufactures premium carbon, alloy and specialty steel for use in commercial and military products as well as for the manufacture of oilfield equipment products. IRI's steel products are also used in the petroleum, aircraft and power generation industries. The accounting policies of the segments are the same as those described in the summary of significant accounting policies. The Company evaluates performance based on operating income or loss before income taxes excluding nonrecurring gains and losses and foreign exchange gains and losses. F-22 51 IRI INTERNATIONAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED Financial information by industry segment is summarized below (in thousands):
OILFIELD DOWNHOLE SPECIALTY CORPORATE EQUIPMENT PRODUCTS STEEL AND OTHER ELIMINATIONS TOTAL -------------- ----------- --------- ---------- ------------- ---------- YEAR ENDED DECEMBER 31, 1999 Sales to unaffiliated customers $ 44,365 $ 42,892 $ 4,933 $ - $ - $ 92,190 Operating income (loss) (5,850) 2,543 722 (17,991) - (20,576) Identifiable assets 48,659 95,201 7,165 66,068 - 217,093 Depreciation and amortization 562 3,248 42 1,217 - 5,069 Amortization of goodwill - - - 1,254 - 1,254 Amortization of negative goodwill - - - 4,026 - 4,026 Capital expenditures 13 2,165 - - - 2,178 YEAR ENDED DECEMBER 31, 1998: Sales to unaffiliated customers $ 88,395 $ 76,249 $10,401 $ - $ - $ 175,045 Operating income (loss) 13,533 17,186 1,668 (15,084) - 17,303 Identifiable assets 72,237 108,277 8,047 50,605 - 239,166 Depreciation and amortization 379 3,283 69 301 - 4,032 Amortization of goodwill - - - 1,255 - 1,255 Amortization of negative goodwill - - - 5,367 - 5,367 Capital expenditures 745 8,836 214 210 - 10,005 YEAR ENDED DECEMBER 31, 1997: Sales to unaffiliated customers $ 106,529 $ 65,336 $13,501 $ - $ - $ 185,366 Operating income (loss) 15,617 11,869 4,503 (9,370) - 22,619 Identifiable assets 94,011 86,030 9,457 61,576 - 251,074 Depreciation and amortization 248 3,493 30 1,100 - 4,871 Amortization of goodwill - - - 880 - 880 Amortization of negative goodwill - - - 5,367 - 5,367 Capital expenditures 2,216 1,649 314 1,885 - 6,064
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):
YEARS ENDED DECEMBER 31, --------------------------------------------------------------- 1999 1998 1997 ------------------ ------------------- ------------------ Russia $ 4,522 $ 22,137 $ 47,375 Europe (excluding Russia) 6,937 12,649 12,783 Asia (excluding Russia) 7,928 17,831 11,113 South America 1,014 15,829 9,166 Africa 25,732 17,469 14,432 Other 3,545 1,869 6,665 ------------------ ------------------- ------------------ Total export sales 49,678 87,784 101,534 Domestic sales 42,512 87,261 83,832 ------------------ ------------------- ------------------ Total sales $ 92,190 $ 175,045 $ 185,366 ------------------ ------------------- ------------------
F-23 52 IRI INTERNATIONAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED In 1999, one customer accounted for 16.9% of revenues. For the year ended December 31, 1998, no one customer accounted for more than 10% of revenues. (15) COMMITMENTS AND CONTINGENCIES The Company has contract commitments aggregating $41.0 million at December 31, 1999 for the manufacture and delivery of drilling and workover rigs during fiscal year 2000. At December 31, 1999, the Company was contingently liable for approximately $4.1 million in letters of credit which guarantee the Company's performance for payment to third parties in accordance with specified contractual terms and conditions. These letters of credit are primarily secured by the Company's cash, accounts receivable and inventory. Management does not expect any material losses to result from these off-balance-sheet instruments as it anticipates full performance on the related contracts. Various federal, state and local laws, regulations and ordinances govern the removal, encapsulation or disturbance of asbestos containing materials (ACMs). Such laws and regulations may impose liability for the release of ACMs and may provide for third parties to seek recovery from owners or operators of facilities at which ACMs were or are located for personal injury associated with exposure to ACMs. The Company is aware of the presence of ACMs at its facilities, but it believes that such materials are in acceptable condition at this time. The Company believes that any future costs related to remediation of ACMs at these sites will not be material, either on an annual basis or in the aggregate, although there can be no assurance with respect thereto. The Company has sought to reduce the impact of costs arising from or related to actual or potential environmental conditions at the Bowen Tools Division facilities caused or created by Bowen or its predecessors in title through the Company's contractual arrangements with Air Liquide America Corporation (Air Liquide). Pursuant to such arrangements, Air Liquide and Bowen agreed to indemnify the Company for such costs. Air Liquide provided the Company with certain environmental assessments with respect to most of the Bowen properties conveyed to the Company. In some cases, these initial assessments recommended the performance of further investigation to evaluate the need for and to determine the extent of the removal or remediation of hazardous substances required to address historical operations of Bowen. Air Liquide is conducting a further environmental review of the Bowen Tools Division facilities to determine the potential scope of remeditaion to be conducted at such facilities by Air Liquide or Bowen. There can be no assurance that Air Liquide or Bowen will meet its obligations under the indemnification arrangements or that there will not be future contamination for which the Company might be fully liable and that may require the Company to incur significant costs that could have a material adverse effect on the Company's financial conditions and results of operations. Although the Company believes that it is in substantial compliance with existing laws and regulations, there can be no assurance that substantial costs for compliance will not be incurred in the future. Moreover, it is possible that other developments, such as stricter environmental laws, regulations and enforcement policies thereunder, could result in additional, presently unquantifiable, costs or liabilities to the Company. F-24 53 IRI INTERNATIONAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED The Company is involved in various other claims and legal actions arising in the ordinary course of business. In the opinion of management, the ultimate disposition of these matters will not have a material adverse effect on the Company's consolidated financial disposition, results of operations or liquidity. (16) QUARTERLY FINANCIAL DATA (IN THOUSANDS EXCEPT PER SHARE AMOUNTS) (UNAUDITED)
QUARTER ENDED QUARTER ENDED QUARTER ENDED QUARTER ENDED 1999 MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, - ----------------------------------- ---------------- ----------------- ---------------- ----------------- Revenues $ 22,543 $ 19,877 $ 26,102 $ 23,668 Gross profit 6,715 (4,128)(a) 7,220 (773)(b) Net income (loss) (1,502)(d) (9,590)(c)(d) 2,346(d) (2,159) Basic and diluted income (loss) per common share (0.04) (0.24) 0.06 (0.05) 1998 - ----------------------------------- Revenues $ 47,232 $ 51,399 $ 40,650 $ 35,764 Gross profit 12,849 15,468 11,064 9,038 Net income (loss) 4,372 5,525 2,799(d) (314)(d) Basic and diluted income (loss) per common share 0.11 0.14 0.07 (0.01) 1997 - ----------------------------------- Revenues $ 16,594 $ 41,191 $ 54,345 $ 73,236 Gross profit 4,142 8,519 12,653 20,848 Net income (loss) 1,657 (1,236) 2,530 8,072 Basic and diluted income (loss) per common share 0.06 (0.04) 0.08 0.23
The Company acquired the business and operations of the Bowen Tools Division on March 31, 1997 and Cardwell International, Ltd. on April 17, 1997 (see note 3). (a) Includes pre-tax charges of $6.8 million, consisting of a $2.0 million increase in the inventory obsolescence reserve, $2.1 million write-off of pre-contract engineering and design costs incurred for a contract that did not materialize, a $2.2 million charge for contract adjustments and other charges. (b) Includes pre-tax inventory valuation charges of $5.9 million. (c) Includes pre-tax charges of $1.3 million relating to provision for bad debt and software implementation. (d) Includes restructuring charges of $805,000, $653,000 and $321,000 incurred during the first three quarters of 1999 and $429,000 and $161,000 during the third and fourth quarter of 1998, respectively (see note 13). F-25 EX-10.3 2 CREDIT AGREEMENT 1 CREDIT AGREEMENT THIS CREDIT AGREEMENT, dated as of December 29, 1999, is between IRI INTERNATIONAL CORPORATION, a Delaware corporation ("Borrower"), and BANK ONE, TEXAS, N.A., a national banking association ("Lender"). R E C I T A L S: Borrower has requested Lender to extend credit to Borrower in the form of commercial and standby letters of credit and bank guarantees not to exceed an aggregate principal amount of Ten Million and No/100 Dollars ($10,000,000.00) at any time outstanding. Lender is willing to make such extensions of credit to Borrower upon the terms and conditions hereinafter set forth. NOW THEREFORE, in consideration of the premises and the mutual covenants herein contained, the parties hereto agree as follows: ARTICLE I Definitions Section 1.1 Definitions. As used in this Agreement, the following terms have the following meanings: "Advance" means a funding of a Bank Guarantee or a Letter of Credit, as applicable, pursuant to Article III. "Affiliate" means, as to any Person, any other Person (i) that directly or indirectly, through one or more intermediaries, controls or is controlled by, or is under common control with, such Person; (ii) that directly or indirectly beneficially owns or holds five percent (5%) or more of any class of voting stock of such Person; or (iii) five percent (5%) or more of the voting stock of which is directly or indirectly beneficially owned or held by the Person in question. The term "control" means the possession, directly or indirectly, of the power to direct or cause direction of the management and policies of a Person, whether through the ownership of voting securities, by contract, or otherwise; provided, however, in no event shall Lender be deemed an Affiliate of Borrower or any of its Subsidiaries. "Bank Guarantee Application" means an application for a bank guarantee and reimbursement agreement, in a form acceptable to Lender, properly completed and signed by Borrower. "Bank Guarantee Liabilities" means, at any time, the aggregate face amount of all outstanding Bank Guarantees. "Bank Guarantee" means a Guaranty provided by the Lender or a Lending Installation for the benefit of Borrower pursuant to Article II. 2 "Business Day" means any day on which commercial banks are not authorized or required to close in Houston, Texas. "Capitalization" means, at any particular time, all amounts which, in conformity with GAAP, would be included as debt and equity on a consolidated balance sheet of Borrower and its Subsidiaries. "Chinese Petroleum Corp. Letter of Credit" means that certain letter of credit issued by Lender to Chinese Petroleum Corp. in the amount of $48,781.00, expiring September, 2001. "Code" means the Internal Revenue Code of 1986, as amended, and the regulations promulgated and rulings issued thereunder. "Commercial Letter of Credit" means a commercial letter of credit issued by Lender for the account of Borrower pursuant to Article II. "Commitment" means the obligation of Lender to issue Letters of Credit and provide Bank Guarantees hereunder in an aggregate principal amount at any time outstanding up to but not exceeding Ten Million and No/100 Dollars ($10,000,000.00). "Consolidated Tangible Net Worth" means, at any particular time, all amounts which, in conformity with GAAP, would be included as stockholders' equity on a consolidated balance sheet of Borrower and the Subsidiaries; provided, however, there shall be subtracted therefrom: (i) any amount at which shares of capital stock of Borrower appear as an asset on Borrower's balance sheet, (ii) goodwill, including any amounts, however designated, that represent the excess of the purchase price paid for assets or stock over the value assigned thereto, (iii) patents, trademarks, trade names, and copyrights, (iv) deferred expenses, (v) loans and advances to any stockholder, director, officer, or employee of Borrower or any Subsidiary or any Affiliate, and (vi) all other assets which are properly classified as intangible assets. "Debt" means as to any Person at any time (without duplication): (i) all obligations of such Person for borrowed money, (ii) all obligations of such Person evidenced by bonds, notes, debentures, or other similar instruments, (iii) all obligations of such Person to pay the deferred purchase price of property or services, except trade accounts payable of such Person arising in the ordinary course of business which are not past due by more than ninety (90) days unless such trade accounts payable are being contested in good faith by appropriate proceedings, (iv) all obligations of such Person under any lease which, in conformity with GAAP, is required to be capitalized for balance sheet purposes, (v) all obligations of such Person under guaranties, endorsements (other than for collection or deposit in the ordinary course of business), assumptions or other contingent obligations, in respect of, or to purchase or otherwise acquire, any Debt, -2- 3 (vi) all obligations secured by a Lien existing on property owned by such Person, whether or not the obligations secured thereby have been assumed by such Person or are non-recourse to the credit of such Person, (vii) all reimbursement obligations of such Person (whether contingent or otherwise) in respect of letters of credit, bankers' acceptances, surety or other bonds and similar instruments, and (viii) the Commitment. "Default Rate" means the lesser of (a) the Maximum Rate or, (b) the sum of the Prime Rate in effect from day to day plus one and one-half percent (1-1/2 %). "Dollars" and "$" mean lawful money of the United States of America. "Environmental Laws" means any and all federal, state, and local laws, regulations, and requirements pertaining to health, safety, or the environment, including, without limitation, the Comprehensive Environmental Response, Compensation and Liability Act of 1980, 42 U.S.C. Section 9601 et seq., the Resource Conservation and Recovery Act of 1976, 42 U.S.C. Section 6901 et seq., the Occupational Safety and Health Act, 29 U.S.C. Section 651 et seq., the Clean Air Act, 42 U.S.C. Section 7401 et seq., the Clean Water Act, 33 U.S.C. Section 1251 et seq., the Toxic Substances Control Act, 15 U.S.C. Section 2601 et seq., and all similar laws, regulations, and requirements of any governmental authority or agency having jurisdiction over Borrower or any Subsidiary or any of their respective properties or assets, as such laws, regulations, and requirements may be amended or supplemented from time to time. "ERISA" means the Employee Retirement Income Security Act of 1974, as amended from time to time, and the regulations and published interpretations thereunder. "ERISA Affiliate" means any corporation or trade or business which is a member of the same controlled group of corporations (within the meaning of Section 414(b) of the Code) as Borrower or is under common control (within the meaning of Section 414(c) of the Code) with Borrower. "Event of Default" has the meaning specified in Section 12.1. "GAAP" means generally accepted accounting principles, applied on a consistent basis, as set forth in Opinions of the Accounting Principles Board of the American Institute of Certified Public Accountants and/or in statements of the Financial Accounting Standards Board and/or their respective successors and which are applicable in the circumstances as of the date in question. Accounting principles are applied on a "consistent basis" when the accounting principles observed in a current period are comparable in all material respects to those accounting principles applied in a preceding period (other than any change in accounting principles required or suggested in Opinions of the Accounting Principles Board of the American Institute of Certified Public Accountants and/or in statements of the Financial Accounting Standards Board and/or -3- 4 their respective successors and which are applicable in the circumstances as of the date in question.) "Hazardous Substance" means any substance, product, waste, pollutant, material, chemical, contaminant, constituent, or other material which is or becomes listed, regulated, or addressed under any Environmental Law, including, without limitation, asbestos, petroleum, and polychlorinated biphenyls. "Lending Installation" means the office, branch, subsidiary or affiliate of Lender selected by Lender pursuant to Section 2.6. "Letter of Credit" means any Commercial Letter of Credit or Standby Letter of Credit. "Letter of Credit Liabilities" means, at any time, the aggregate face amount of all outstanding Letters of Credit. "Letter of Credit Master Agreement" means the Standby Letter of Credit Master Agreement and the Commercial Letter of Credit Master Agreement from time to time entered into by the Borrower and the Lender, each substantially in the form attached hereto as Exhibit "C" and Exhibit "D," except as modified by Section 11.4 hereof. "Letter of Credit Request Form" means a certificate, in substantially the form of Exhibit B hereto, properly completed and signed by Borrower requesting issuance of a Letter of Credit, together with such applications and agreements as Lender shall customarily use in connection with issuance of letters of credit. "Lien" means any lien, mortgage, security interest, tax lien, financing statement, pledge, charge, hypothecation, assignment, preference, priority, or other encumbrance of any kind or nature whatsoever (including, without limitation, any conditional sale or title retention agreement), whether arising by contract, operation of law, or otherwise. "Loan Documents" means this Agreement and all promissory notes, security agreements, deeds of trust, assignments, bank guarantees, letters of credit, guaranties, and other instruments, documents, and agreements executed and delivered pursuant to or in connection with this Agreement, as such instruments, documents, and agreements may be amended, modified, renewed, extended, or supplemented from time to time. "Material Adverse Effect" means a material adverse effect (i) on the consolidated business operations, financial condition or properties of the Borrower and its Subsidiaries, taken as a whole, and (ii) on the ability of Borrower to pay and perform its obligations under the Loan Documents to which it is a party. "Maximum Rate" means the maximum rate of nonusurious interest permitted from day to day by applicable law, including as to Chapter 346 of the Texas Finance -4- 5 Code (and as the same may be incorporated by reference in other Texas statutes), but otherwise without limitation, that rate based upon the "indicated rate ceiling" and calculated after taking into account any and all relevant fees, payments, and other charges in respect of the Loan Documents which are deemed to be interest under applicable law. "Multiemployer Plan" means a multiemployer plan defined as such in Section 3(37) of ERISA to which contributions have been made by Borrower or any ERISA Affiliate and which is covered by Title IV of ERISA. "Note" means the promissory note of Borrower payable to the order of Lender, in substantially the form of Exhibit A hereto, and all extensions, renewals and modifications thereof. "Obligated Party" means or any Person who is or becomes a party to any agreement that guarantees or secures payment and performance of the Obligations or any part thereof. "Obligations" means all obligations, indebtedness, and liabilities of Borrower to Lender, now existing or hereafter arising, whether direct, indirect, related, unrelated, fixed, contingent, liquidated, unliquidated, joint, several, or joint and several, arising under this Agreement and the other Loan Documents (including, without limitation, Borrower's contingent reimbursement obligations in respect of Bank Guarantees and Letters of Credit), and all interest accruing thereon and all attorneys' fees and other expenses incurred in the enforcement or collection thereof. "PBGC" means the Pension Benefit Guaranty Corporation or any entity succeeding to all or any of its functions under ERISA. "Person" means any individual, corporation, business trust, association, company, partnership, joint venture, governmental authority, or other entity. "Plan" means any employee benefit or other plan established or maintained by Borrower or any ERISA Affiliate and which is covered by Title IV of ERISA. "Prime Rate" means a rate per annum equal to the prime rate of interest announced from time to time by Lender or its parent (which is not necessarily the lowest rate charged to any customer), changing when and as said prime rate changes. "Prohibited Transaction" means any transaction set forth in Section 406 of ERISA or Section 4975 of the Code. "Reportable Event" means any of the events set forth in Section 4043 of ERISA. "Regulatory Change" means, with respect to Lender, any change after the date of this Agreement in United States federal, state, or foreign laws or regulations (including -5- 6 Regulation D) or the adoption or making after such date of any interpretations, directives, or requests applying to a class of banks including Lender of or under any United States federal or state, or any foreign, laws or regulations (whether or not having the force of law) by any court or governmental or monetary authority charged with the interpretation or administration thereof. "Regulation D" means Regulation D of the Board of Governors of the Federal Reserve System as the same may be amended or supplemented from time to time. "RICO" means the Racketeer Influenced and Corrupt Organization Act of 1970, as amended from time to time. "Standby Letter of Credit" means standby letters of credit issued by Lender for the account of Borrower pursuant to Article II. "Subsidiary" means any corporation or entity of which more than fifty percent (50%) of (i) the issued and outstanding securities having ordinary voting power for the election of a majority of directors, or (ii) in the case of an entity that is not a corporation, of the equity interests is owned or controlled, directly or indirectly, by Borrower, by Borrower and one or more other Subsidiaries, or by one or more other Subsidiaries. "Termination Date" means 11:00 A.M. Houston, Texas time on December 29, 2000, or such earlier date on which the Commitment terminates as provided in this Agreement. Section 1.2 Other Definitional Provisions. All definitions contained in this Agreement are equally applicable to the singular and plural forms of the terms defined. The words "hereof," "herein," and "hereunder" and words of similar import referring to this Agreement refer to this Agreement as a whole and not to any particular provision of this Agreement. Unless otherwise specified, all Article and Section references pertain to this Agreement. All accounting terms not specifically defined herein shall be construed in accordance with GAAP. Terms used herein that are defined in the Uniform Commercial Code as adopted by the State of Texas, unless otherwise defined herein, shall have the meanings specified in the Uniform Commercial Code as adopted by the State of Texas. ARTICLE II Bank Guarantees and Letters of Credit Section 2.1 Bank Guarantees and Letters of Credits. (a) Subject to the terms and conditions of this Agreement, Lender agrees to issue one or more Letters of Credit and agrees to cause a Lending Installation to issue one or more Bank Guarantees for the account of Borrower from time to time from the -6- 7 date hereof to and including the Termination Date; provided, however, that the aggregate amount of the outstanding Bank Guarantee Liabilities and the Letter of Credit Liabilities shall not at any time exceed an amount equal to the Commitment. (b) Each Commercial Letter of Credit shall have an expiration date not to exceed one year and each Standby Letter of Credit shall have an expiration date not to exceed one and a half years, no Letter of Credit shall have an expiration date beyond six months after the Termination Date (except for the Chinese Petroleum Corp. Letter of Credit), must support a transaction that is entered into in the ordinary course of Borrower's business, must otherwise be satisfactory in form and substance to Lender, and shall be issued pursuant to such documents and instruments (including, without limitation, Lender's standard application for issuance of letters of credit as then in effect) as Lender may require. Notwithstanding the foregoing, Letters of Credit in the aggregate of up to $500,000 may be issued with expiration dates later than six months beyond the Termination Date, with customary evergreen provisions, provided however that such Letters of Credit shall be cash collateralized as of the Termination Date. (c) Each Bank Guarantee shall have an expiration date not to exceed one year, shall not have an expiration date beyond six months after the Termination Date must support a transaction that is entered into in the ordinary course of Borrower's business, must otherwise be satisfactory in form and substance to the applicable Lending Installation, and shall be issued pursuant to such documents and instruments (including, without limitation, the applicable Lending Installation's standard application for issuance of bank guarantees as then in effect) as the applicable Lending Installation may require. Section 2.2 Procedure for Issuing Bank Guarantees and Letters of Credit. Each Bank Guarantee and Letter of Credit shall be issued on at least three Business Days' prior notice from Borrower to Lender by means of a Bank Guarantee Application or Letter of Credit Request Form, as applicable, describing the transaction proposed to be supported thereby and specifying (a) the date on which such Bank Guarantee or Letter of Credit, as applicable, is to be issued (which shall be a Business Day) and the face amount thereof, (b) the name and address of the beneficiary, (c) the expiration date of such Bank Guarantee or Letter of Credit and (d) and if a Letter of Credit, (i) whether such Letter of Credit shall permit a single drawing or multiple drawings, (ii) the conditions permitting the drawing or drawings thereunder, (iii) whether the draft thereunder shall be a sight or time draft and, if the latter, the date when the draft shall be payable, and (iv) the form of the draft and any other documents required to be presented at the time of any drawing (such notice to set forth the exact wording of such documents or to attach copies thereof). Lender at its option may accept telephonic requests for Bank Guarantees or Letters of Credit, provided that such acceptance shall not constitute a waiver of Lender's right to require delivery of a Bank Guarantee Application or Letter of Credit Request Form, as applicable, in connection with subsequent Bank Guarantees or Letters of Credit provided hereunder. Any telephonic request for a Bank Guarantee or Letter of Credit by Borrower shall be promptly confirmed by submission of a properly completed Bank Guarantee Application or Letter of Credit Request Form, as applicable, to Lender. Upon fulfillment of the applicable -7- 8 conditions precedent in Article VI, Lender shall make, or shall cause a Lending Installation to make, if applicable, the applicable Bank Guarantee or Letter of Credit available to Borrower or, if so requested by Borrower, to the beneficiary of such Bank Guarantee or Letter of Credit. Section 2.3 Fees. (a) Bank Guarantee and Commercial Letter of Credit Fees. Borrower shall pay to Lender a Bank Guarantee fee or Commercial Letter of Credit fee equal to the greater of (i) $250; or (ii) an amount equal to seventy-five hundredths of one percent (.75%) per annum of the stated amount of such Bank Guarantee or Commercial Letter of Credit, for the period during which such Bank Guarantee or Commercial Letter of Credit will remain outstanding, based on a 365 day year and the actual number of days elapsed, plus all expenses incurred by the Lender arising from the issuance thereunder. Said fees shall be payable quarterly in arrears on the 29th day of each March, June, September and December during the term hereof. (b) Standby Letter of Credit Fee. Borrower shall pay to Lender a Standby Letter of Credit fee equal to the greater of (i) $300; or (ii) an amount equal to seventy-five hundredths of one percent (.75%) per annum of the stated amount of such Standby Letter of Credit, for the period during which such Standby Letter of Credit will remain outstanding, based on a 365 day year and the actual number of days elapsed, plus all expenses incurred by the Lender arising from the issuance thereunder. Said fees shall be payable quarterly in arrears on the 29th day of each March, June, September and December during the term hereof. (c) Customary Fees and Expenses. Borrower shall pay to Lender all customary fees and expenses incurred by the Lender or a Lending Installation, as applicable, related to the issuance and/or Advance of all Bank Guarantees and Letters of Credit, which fees and expenses shall be billed by Lender to Borrower quarterly, and due within 30 days of receipt thereof. Section 2.4 Obligations Absolute. The obligations of Borrower under this Agreement and the other Loan Documents (including without limitation the obligation of Borrower to reimburse Lender for draws under any Bank Guarantee or Letter of Credit) shall be absolute, unconditional, and irrevocable, and shall be performed strictly in accordance with the terms of this Agreement and the other Loan Documents under all circumstances whatsoever, including without limitation the following circumstances: (a) Any lack of validity or enforceability of any Bank Guarantee or Letter of Credit or any other Loan Document; (b) Any amendment or waiver of or any consent to departure from any Loan Document; -8- 9 (c) The existence of any claim, set-off, counterclaim, defense or other rights which Borrower, any Obligated Party, or any other Person may have at any time against any beneficiary of any Bank Guarantee or Letter of Credit, Lender, or any other Person, whether in connection with this Agreement or any other Loan Document or any unrelated transaction; (d) Any statement, draft, or other document presented under any Bank Guarantee or Letter of Credit proving to be forged, fraudulent, invalid, or insufficient in any respect or any statement therein being untrue or inaccurate in any respect whatsoever; (e) Payment by Lender under any Bank Guarantee or Letter of Credit against presentation of a draft or other document which does not comply with the terms of such Bank Guarantee or Letter of Credit; or (f) Any other circumstance or happening whatsoever, whether or not similar to any of the foregoing. Section 2.5 Limitation of Liability. Borrower assumes all risks of the acts or omissions of any beneficiary of any Bank Guarantee or Letter of Credit with respect to its use of such Bank Guarantee or Letter of Credit. Neither Lender nor a Lending Installation nor any of their officers or directors shall have any responsibility or liability to Borrower or any other Person for: (a) the failure of any draft to bear any reference or adequate reference to any Bank Guarantee or Letter of Credit, or the failure of any documents to accompany any draft at negotiation, or the failure of any Person to surrender or to take up any Bank Guarantee or Letter of Credit or to send documents apart from drafts as required by the terms of any Bank Guarantee or Letter of Credit, or the failure of any Person to note the amount of any instrument on any Bank Guarantee or Letter of Credit, each of which requirements, if contained in any Bank Guarantee or Letter of Credit itself, it is agreed may be waived by Lender or a Lending Installation, as applicable, (b) errors, omissions, interruptions, or delays in transmission or delivery of any messages, (c) the validity, sufficiency, or genuineness of any draft or other document, or any endorsement(s) thereon, even if any such draft, document or endorsement should in fact prove to be in any and all respects invalid, insufficient, fraudulent, or forged or any statement therein is untrue or inaccurate in any respect, (d) the payment by the Lender or a Lending Installation, as applicable, to the beneficiary of any Bank Guarantee or Letter of Credit against presentation of any draft or other document that does not comply with the terms of the Bank Guarantee or Letter of Credit, or (e) any other circumstance whatsoever in making or failing to make any payment under a Bank Guarantee or Letter of Credit. Borrower shall have a claim against Lender or a Lending Installation, as applicable, and Lender or a Lending Installation, as applicable, shall be liable to Borrower, to the extent of any direct, but not consequential, damages suffered by Borrower which Borrower proves in a final nonappealable judgment were caused by (i) Lender's or a Lending Installation's, as applicable, willful misconduct or gross negligence in determining whether documents presented under any Bank Guarantee or Letter of Credit complied with the terms thereof or (ii) Lender's or a Lending -9- 10 Installation's, as applicable, willful failure to pay under any Bank Guarantee or Letter of Credit or after presentation to it of documents strictly complying with the terms and conditions of such Bank Guarantee or Letter of Credit. Lender or a Lending Installation, as applicable, may accept documents that appear on their face to be in order, without responsibility for further investigation, regardless of any notice or information to the contrary. Section 2.6 Lending Installations. Lender may book any Bank Guarantees and Letters of Credit at any Lending Installation selected by Lender and change its Lending Installations from time to time. All terms of this Agreement shall apply to any such Lending Installation and the Bank Guarantees, Letters of Credit, and the Note shall be held by the Lender for the benefit of the Lending Installation, as applicable. Lender may designate replacement or additional Lending Installations through which Bank Guarantees or Letters of Credit may be issued and for whose accounts payments on Advances with respect to such Bank Guarantees or Letters of Credit are to be made. Section 2.7 Account with Lender. During the term of this Agreement, Borrower shall maintain its primary deposit accounts and cash management services with Lender. ARTICLE III Advances Section 3.1 Advances. (a) Each payment by Lender pursuant to a drawing under a Bank Guarantee or Letter of Credit shall constitute and be deemed an Advance by Lender to Borrower under the Note and this Agreement as of the day and time such payment is made by Lender and in the amount of such payment. (b) Borrower will be deemed to have made an Advance if at the Termination Date there are any Letters of Credit or Bank Guarantees outstanding that have an expiration beyond the Termination Date and that have not been cash collateralized. (c) Subject to the terms and provisions of this Agreement, Borrower may borrow (by way of Advances pursuant to subsections (a) and (b) above), repay, and reborrow (by way of Advances pursuant to subsections (a) and (b) above) hereunder. Section 3.2 Repayment of Advances. Borrower shall repay the unpaid principal amount of all Advances on demand, and if not demanded by the Lender, at the Termination Date Section 3.3 Interest. The unpaid principal amount of the Advances shall bear interest prior to maturity at a varying rate per annum equal from day to day to the lesser of (a) the Maximum Rate, or (b) the Prime Rate, each such change in the rate of interest charged on the Advances to become effective, without notice to Borrower, on the effective date of each change in the Prime Rate or the Maximum Rate, as the case may be; provided, however, if at any time the rate of interest specified in clause (b) preceding shall exceed the Maximum Rate, thereby -10- 11 causing the interest on the Advances to be limited to the Maximum Rate, then any subsequent reduction in the Prime Rate shall not reduce the rate of interest on the Advances below the Maximum Rate until the aggregate amount of interest accrued on the Advances equals the aggregate amount of interest which would have accrued on the Advances if the interest rate specified in clause (b) preceding had at all times been in effect. If repayment of any Advance is not made within 10 days of the demand therefor pursuant to Section 3.3 hereof, the unpaid principal amount of such Advance shall bear interest at the Default Rate. ARTICLE IV Payments Section 4.1 Method of Payment. All payments of principal, interest, and other amounts to be made by Borrower under this Agreement, the Note, and the other Loan Documents shall be made to Lender at its office at Bank One Center, 910 Travis, Houston, Texas 77002, without setoff, deduction, or counterclaim, in Dollars and in immediately available funds. Borrower shall, at the time of making each such payment, specify to Lender the sums payable by Borrower under this Agreement, the Note, or other Loan Document to which such payment is to be applied (and in the event Borrower fails to so specify, or if an Event of Default has occurred and is continuing, Lender may apply such payment to the Obligations in such order and manner as it may elect in its sole discretion). Whenever any payment under this Agreement, the Note, or any other Loan Document shall be stated to be due on a day that is not a Business Day, such payment may be made on the next succeeding Business Day, and such extension of time shall in such case be included in the computation of the payment of interest and commitment fee, as the case may be. Section 4.2 Computation of Interest. Interest on the indebtedness evidenced by the Note shall be computed on the basis of a year of 365 days and the actual number of days elapsed (including the first day but excluding the last day) unless such calculation would result in a usurious rate, in which case interest shall be calculated on the basis of a year of 365 or 366 days, as the case may be. Section 4.3 Capital Adequacy. If, after the date hereof, Lender shall have determined that the adoption of any applicable law, rule or regulation regarding capital adequacy, or any change therein, or any change in the interpretation or administration thereof by any governmental authority, central bank or comparable agency charged with the interpretation or administration thereof, or compliance by Lender (or its parent) with any request or directive regarding capital adequacy (whether or not having the force of law) of any such authority, central bank or comparable agency, has or would have the effect of reducing the rate of return on Lender's (or its parent's) capital as a consequence of its obligations hereunder or the transactions contemplated hereby to a level below that which Lender (or its parent) could have achieved but for such adoption, change or compliance (taking into consideration Lender's policies with respect to capital adequacy) by an amount deemed by Lender to be material, then from time to time, within ten (10) Business Days after demand by Lender, Borrower shall pay to Lender such -11- 12 additional amount or amounts as will compensate Lender (or its parent) for such reduction. A certificate of Lender claiming compensation under this Section and setting forth the additional amount or amounts to be paid to it hereunder shall be conclusive, provided that the determination thereof is made on a reasonable basis. In determining such amount or amounts, Lender may use any reasonable averaging and attribution methods. Section 4.4 Additional Costs in Respect of Letters of Credit. If as a result of any Regulatory Change there shall be imposed, modified, or deemed applicable any tax, reserve, special deposit, or similar requirement against or with respect to or measured by reference to Letters of Credit issued or to be issued hereunder or Lender's Commitment to issue Letters of Credit hereunder, and the result shall be to increase the cost to Lender of issuing or maintaining any Letter of Credit or its Commitment to issue Letters of Credit hereunder or reduce any amount receivable by Lender hereunder in respect of any Letter of Credit (which increase in cost, or reduction in amount receivable, shall be the result of Lender's reasonable allocation of the aggregate of such increases or reductions resulting from such event), then, upon demand by Lender, Borrower agrees to pay Lender, from time to time as specified by Lender, such additional amounts as shall be sufficient to compensate Lender for such increased costs or reductions in amount. A statement as to such increased costs or reductions in amount incurred by Lender, submitted by Lender to Borrower, shall be conclusive as to the amount thereof, provided that the determination thereof is made on a reasonable basis. ARTICLE V Conditions Precedent Section 5.1 Initial Bank Guarantee or Letter of Credit. The obligation of Lender to provide an initial Bank Guarantee or Letter of Credit is subject to the condition precedent that Lender shall have received on or before the day of such Bank Guarantee or Letter of Credit, all of the following, each dated (unless otherwise indicated) the date hereof, in form and substance satisfactory to Lender: (a) Resolutions. Resolutions of the Board of Directors of Borrower certified by its Secretary or an Assistant Secretary which authorize the execution, delivery, and performance by Borrower of this Agreement and the other Loan Documents to which Borrower is or is to be a party; (b) Incumbency Certificate. A certificate of incumbency certified by the Secretary or an Assistant Secretary of Borrower certifying the names of the officers of Borrower authorized to sign this Agreement and each of the other Loan Documents to which Borrower is or is to be a party (including the certificates contemplated herein) together with specimen signatures of such officers; (c) Articles of Incorporation. The articles of incorporation of Borrower certified by the Secretary of State of state of incorporation of Borrower and dated within -12- 13 ten (10) days prior to the date of such initial Bank Guarantee or Letter of Credit. (d) Bylaws. The bylaws of Borrower certified by the Secretary or an Assistant Secretary of Borrower; (e) Governmental Certificates. Certificates of the appropriate government officials of the state of incorporation of Borrower as to the existence and good standing of Borrower, each dated within 10 days prior to the date of the initial Advance; (f) Note. The Note executed by Borrower; (g) UCC Search. The results of a Uniform Commercial Code search showing all financing statements and other documents or instruments on file against Borrower in the office of the Secretary of State of Delaware and the Secretary of State of Texas, such search to be as of a date no more than ten (10) days prior to the date of the initial Bank Guarantee or Letter of Credit; and (h) Attorneys' Fees and Expenses. Evidence that the costs and expenses (including attorneys' fees) referred to in Section 11.1, to the extent incurred, shall have been paid in full by Borrower. Section 5.2 All Bank Guarantees or Letters of Credit. The obligation of Lender to provide any Bank Guarantee or issue any Letter of Credit, (including the initial Bank Guarantee and the initial Letter of Credit) is subject to the following additional conditions precedent: (a) Request for Bank Guarantee or Letter of Credit. Lender shall have received in accordance with Section 2.2, a Bank Guarantee Application or Letter of Credit Request Form, dated the date of such Bank Guarantee or Letter of Credit, and executed by an authorized officer of Borrower, all of the statements in which shall be true and correct on and as of such date; and (b) Additional Documentation. Lender shall have received such additional approvals, opinions, or documents as Lender or its legal counsel, Winstead Sechrest & Minick P.C., may request. ARTICLE VI Representations and Warranties To induce Lender to enter into this Agreement, Borrower represents and warrants to Lender that: Section 6.1 Corporate Existence. Borrower and each Subsidiary (a) is a corporation duly organized, validly existing, and in good standing under the laws of the jurisdiction of its -13- 14 incorporation; (b) has all requisite corporate power and authority to own its assets and carry on its business as now being or as proposed to be conducted; and (c) is qualified to do business in all jurisdictions in which the nature of its business makes such qualification necessary and where failure to so qualify would reasonably be expected to have a Material Adverse Effect. Borrower has the corporate power and authority to execute, deliver, and perform its obligations under this Agreement and the other Loan Documents to which it is or may become a party. Section 6.2 Financial Statements. Borrower has delivered to Lender audited consolidated financial statements of Borrower and its Subsidiaries as at and for the fiscal year ended December 31, 1998, and unaudited consolidated financial statements of Borrower and its Subsidiaries for the nine-month period ended September 30, 1999. Such financial statements are true and correct, have been prepared in accordance with GAAP (except as disclosed therein), and fairly and accurately present, on a consolidated basis, the financial condition of Borrower and its Subsidiaries as of the respective dates indicated therein and the results of operations for the respective periods indicated therein. Neither Borrower nor any of its Subsidiaries has any material contingent liabilities, liabilities for taxes, material forward or long-term commitments, or unrealized or anticipated losses from any unfavorable commitments not reflected in such financial statements. There has been no material adverse change in the business, condition (financial or otherwise), operations, prospects, or properties of Borrower or any of its Subsidiaries since the effective date of the most recent financial statements referred to in this Section. Section 6.3 Corporate Action; No Breach. The execution, delivery, and performance by Borrower of this Agreement and the other Loan Documents to which Borrower is or may become a party have been duly authorized by all requisite action on the part of Borrower and do not and will not violate or conflict with the articles of incorporation or bylaws of Borrower or any law, rule, or regulation or any order, writ, injunction, or decree of any court, governmental authority, or arbitrator, and do not and will not conflict with, result in a breach of, or constitute a default under, or result in the creation or imposition of any Lien upon any of the revenues or assets of Borrower or any Subsidiary pursuant to the provisions of any indenture, mortgage, deed of trust, security agreement, franchise, permit, license, or other instrument or agreement by which Borrower or any Subsidiary or any of their respective properties is bound, except for violations, conflicts, breaches or defaults which would not reasonably be expected to have a Material Adverse Effect. Section 6.4 Operation of Business. Borrower and each of its Subsidiaries possess all licenses, permits, franchises, patents, copyrights, trademarks, and trade names, or rights thereto, to conduct their respective businesses substantially as now conducted and as presently proposed to be conducted except where failure to have such licenses, permits, franchises, patents, copyrights, trademarks and tradenames and rights thereto would not reasonably be expected to have a Material Adverse Effect, and Borrower and each of its Subsidiaries are not in violation of any valid rights of others with respect to any of the foregoing, except where such violation would not reasonably be expected to have a Material Adverse Effect. -14- 15 Section 6.5 Litigation and Judgments. Except as disclosed on Schedule 1 hereto, there is no action, suit, investigation, or proceeding before or by any court, governmental authority, or arbitrator pending or, to the knowledge of Borrower, threatened against or affecting Borrower or any Subsidiary, that would, if adversely determined (taking into account the probable nature and scope of the remedy therein), be reasonably expected to have a Material Adverse Effect. There are no outstanding judgments against Borrower or any Subsidiary. Section 6.6 Rights in Properties; Liens. Borrower and each Subsidiary have good and indefeasible title to or valid leasehold interests in their respective properties and assets, real and personal, including the properties, assets, and leasehold interests reflected in the financial statements described in Section 6.2, except for encumbrances including covenants, restrictions, rights, easements and minor irregularities in title which would not reasonably be expected to have a Material Adverse Effect, and none of the properties, assets, or leasehold interests of Borrower or any Subsidiary is subject to any Lien that is prohibited by Section 8.1. Section 6.7 Enforceability. This Agreement constitutes, and the other Loan Documents to which Borrower is party, when delivered, shall constitute the legal, valid, and binding obligations of Borrower, enforceable against Borrower in accordance with their respective terms, except as limited by bankruptcy, insolvency, or other laws of general application relating to the enforcement of creditors' rights. Section 6.8 Approvals. No authorization, approval, or consent of, and no filing or registration with, any court, governmental authority, or third party is or will be necessary for the execution, delivery, or performance by Borrower of this Agreement and the other Loan Documents to which Borrower is or may become a party or the validity or enforceability thereof. Section 6.9 Debt. Borrower and its Subsidiaries have no Debt, except as disclosed on Schedule 2 hereto. Section 6.10 Taxes. (a) Borrower and each Subsidiary have filed all tax returns (federal, state, and local) required to be filed, including all income, franchise, employment, property, and sales taxes, and have paid all of their respective liabilities for taxes, assessments, governmental charges, and other levies that are due and payable, and (b) Borrower knows of no pending investigation of Borrower or any Subsidiary by any taxing authority or of any pending but unassessed tax liability of Borrower or any Subsidiary except where failure to file such returns, pay such liabilities or where such pending investigation (taking into account the probable nature and scope of the remedy), would result in a pending unassessed tax liability, the amount of which would not reasonably be expected to have a Material Adverse Effect. The federal income tax liability of Borrower and its Subsidiaries has been audited by the Internal Revenue Service and has been finally determined and satisfied for all taxable years up to and including the taxable year ending December 31, 1998. Section 6.11 Use of Proceeds; Margin Securities. Neither Borrower nor any Subsidiary is engaged principally, or as one of its important activities, in the business of extending credit for -15- 16 the purpose of purchasing or carrying margin stock (within the meaning of Regulations T, U, or X of the Board of Governors of the Federal Reserve System), and no part of the proceeds of any extension of credit under this Agreement will be used to purchase or carry any such margin stock or to extend credit to others for the purpose of purchasing or carrying margin stock. Section 6.12 ERISA. Borrower and each Subsidiary have complied with all applicable minimum funding requirements and all other applicable and material requirements of ERISA and there are no existing conditions that would reasonably be expected to have a Material Adverse Effect. No Reportable Event has occurred in connection with any Plan that might constitute grounds for the termination thereof by the PBGC or for the appointment by the appropriate United States District Court of a trustee to administer such Plan. Section 6.13 Disclosure. No statement, information, report, representation, or warranty made by Borrower in this Agreement or in any other Loan Document or furnished to Lender in writing in connection with this Agreement or any transaction contemplated hereby contains any untrue statement of a material fact or omits to state any material fact necessary to make the statements herein or therein not misleading. Section 6.14 Subsidiaries. Borrower has no Subsidiaries other than those listed on Schedule 3 hereto, and Schedule 3 sets forth the jurisdiction of incorporation of each Subsidiary and the percentage of Borrower's ownership of the outstanding voting stock of each Subsidiary. All of the outstanding capital stock of each Subsidiary has been validly issued, is fully paid, and is nonassessable. Section 6.15 Agreements. Neither Borrower nor any Subsidiary is a party to any indenture, loan, or credit agreement, or to any lease or other agreement or instrument, or subject to any charter or corporate restriction which could have a Material Adverse Effect. Neither Borrower nor any Subsidiary is in default in any respect in the performance, observance, or fulfillment of any of the obligations, covenants, or conditions contained in any agreement or instrument material to its business to which it is a party where such default would reasonably be expected to have a Material Adverse Effect. Section 6.16 Compliance with Laws. Neither Borrower nor any Subsidiary is in violation in any material respect of any law, rule, regulation, order, or decree of any court, governmental authority, or arbitrator where such violation would reasonably be expected to have a Material Adverse Effect. Section 6.17 Investment Company Act. Neither Borrower nor any Subsidiary is an "investment company" within the meaning of the Investment Company Act of 1940, as amended. Section 6.18 Public Utility Holding Company Act. Neither Borrower nor any Subsidiary is a "holding company" or a "subsidiary company" of a "holding company" or an "affiliate" of a "holding company" or a "public utility" within the meaning of the Public Utility -16- 17 Holding Company Act of 1935, as amended. Section 6.19 Environmental Matters. (a) To the best of the Borrower's knowledge, Borrower, each Subsidiary, and all of their respective properties, assets, and operations are in full compliance with all Environmental Laws except where such compliance would not reasonably be expected to have a Material Adverse Effect. Borrower is not aware of, nor has Borrower received notice of, any past, present, or future conditions, events, activities, practices, or incidents which may interfere with or prevent the compliance or continued compliance of Borrower and the Subsidiaries with all Environmental Laws. (b) Borrower and each Subsidiary have obtained all permits, licenses, and authorizations which are required under Environmental Laws and the failure to obtain which would reasonably be expected to have a Material Adverse Effect. (c) No Hazardous Substances exist on, about, or within or have been used, generated, stored, transported, disposed of on, or released from any of the properties or assets of Borrower or any Subsidiary in violation of any Environmental Law if such violation would reasonably be expected to have a Material Adverse Effect. The use which Borrower and the Subsidiaries make and intend to make of their respective properties and assets will not result in the use, generation, storage, transportation, accumulation, disposal, or release of any Hazardous Substance on, in, or from any such properties or assets in violation of any Environmental Law if such violation would reasonably be expected to have a Material Adverse Effect. (d) There is no action, suit, proceeding, investigation, or inquiry before any court, administrative agency, or other governmental authority pending or, to the knowledge of Borrower, threatened against Borrower or any Subsidiary relating in any way to any Environmental Law. Neither Borrower nor any Subsidiary has (i) any liability for remedial action under any Environmental Law, (ii) received any request for information by any governmental authority with respect to the condition, use, or operation of any of its properties or assets, or (iii) received any notice from any governmental authority or other Person with respect to any violation of or liability under any Environmental Law. (e) No Lien arising under any Environmental Law has attached to any of the properties or assets of Borrower or any of its Subsidiaries. Section 6.20 Year 2000 Provisions. Borrower represents and warrants as follows to Lender that: (i) as of the date of any request for a Letter of Credit or a Bank Guarantee hereunder; (ii) as of the date of any renewal, extension or modification of this Agreement; and (iii) at all times this Agreement or Lender's commitment to make Advances under this Agreement is outstanding: -17- 18 (a) All devices, systems, machinery, information technology, computer software and hardware, and other date sensitive technology (jointly and severally the "Systems") necessary for Borrower to carry on its business as presently conducted and as contemplated to be conducted in the future are Year 2000 Compliant or will be Year 2000 Compliant within a period of time reasonably expected to result in no material disruption of any of Borrower's business operations. For purposes of these provisions, "Year 2000 Compliant" means that such Systems are designed to be used prior to, during and after the Gregorian calendar year 2000 A.D. and will operate during each such time period without error relating to date data, specifically including any error relating to, or the product of, date data which represents or references different centuries or more than one century. (b) Borrower has: (1) undertaken a detailed inventory, review, and assessment of all areas within its business and operations that could be materially adversely affected by the failure of Borrower to be Year 2000 Compliant on a timely basis; (2) developed a detailed plan and time line for becoming Year 2000 Compliant on a timely basis, and (3) to date, implemented that plan in accordance with that timetable in all material respects. (c) Borrower has made written inquiry of each of its key suppliers, vendors, and customers, as to whether such persons have initiated programs to become Year 2000 Compliant and on the basis of such inquiries, Borrower reasonably believes that all such persons will be or become so compliant. For purposes hereof, "key suppliers, vendors, and customers" refers to those suppliers, vendors, and customers of Borrower whose business failure would reasonably be expected to have a Material Adverse Effect. For purposes of this paragraph, Lender, as a lender of funds under the terms of this Agreement, confirms to Borrower that Lender has initiated its own corporate-wide Year 2000 program with respect to its lending activities. ARTICLE VII Positive Covenants Borrower covenants and agrees that, as long as the Obligations or any part thereof are outstanding or Lender has any Commitment hereunder, Borrower will perform and observe the following positive covenants, unless Lender shall otherwise consent in writing: Section 7.1 Reporting Requirements. Borrower will furnish to Lender: (a) Annual Financial Statements. (i) As soon as available, and in any event within 90 days after the end of each fiscal year of Borrower, beginning with the fiscal year ending December 31, 1999, a copy of the Form 10-K Annual Report of Borrower and the Subsidiaries for such fiscal year; (ii) as soon as available, and in any event within 45 days after the end of each of the quarters of each fiscal year of Borrower, a copy of the -18- 19 Form 10-Q of Borrower and the Subsidiaries as of the end of such fiscal quarter and for the portion of the fiscal year then ended; and (iii) as soon as available, one copy of any other financial statement, report, notice or proxy statement sent by Borrower or any Subsidiary to its stockholders generally and one copy of any other regular, periodic or special report, registration statement, or prospectus filed by Borrower or any Subsidiary with any securities exchange or the Securities and Exchange Commission or any successor agency. (b) Annual Projections. By December 31 of each year, annual projections of Borrower for the subsequent fiscal year. (c) Management Letters. Promptly upon receipt thereof, a copy of any management letter or written report submitted to Borrower or any Subsidiary by independent certified public accountants with respect to the business, condition (financial or otherwise), operations, or properties of Borrower or any Subsidiary; (d) Notice of Litigation. Promptly after the commencement thereof, notice of all actions, suits, and proceedings before any court or governmental department, commission, board, bureau, agency, or instrumentality, domestic or foreign, affecting Borrower or any Subsidiary which, if determined adversely to Borrower or such Subsidiary, would reasonably be expected to have a Material Adverse Effect; (e) Notice of Default. As soon as possible and in any event within five days after the occurrence of each Event of Default and each event which, with the giving of notice or lapse of time or both, would constitute an Event of Default, a written notice setting forth the details of such Event of Default or event and the action which Borrower has taken and proposes to take with respect thereto; (f) ERISA Reports. Promptly after the filing or receipt thereof, copies of all reports, including annual reports, and notices which Borrower or any Subsidiary files with or receives from the PBGC or the U.S. Department of Labor under ERISA; and as soon as possible and in any event within five days after Borrower or any Subsidiary knows or has reason to know that any Reportable Event or Prohibited Transaction has occurred with respect to any Plan or that the PBGC or Borrower or any Subsidiary has instituted or will institute proceedings under Title IV of ERISA to terminate any Plan, a certificate of the chief financial officer of Borrower setting forth the details as to such Reportable Event or Prohibited Transaction or Plan termination and the action that Borrower proposes to take with respect thereto; (g) Reports to Other Creditors. Promptly after the furnishing thereof, copies of any statement or report furnished to any other party pursuant to the terms of any indenture, loan, or credit or similar agreement and not otherwise required to be furnished to Lender pursuant to any other clause of this Section; -19- 20 (h) Notice of Environmental Law Violation. As soon as possible and in any event within five days after the occurrence thereof, written notice of any violation of any Environmental Law that Borrower or any Subsidiary reports or is required to report to any governmental authority; (i) Notice of Material Adverse Effect. As soon as possible and in any event within five days after the occurrence thereof, written notice of any matter that would reasonably be expected to have a Material Adverse Effect; (j) General Information. Promptly, such other information concerning Borrower or any Subsidiary as Lender may from time to time reasonably request. Section 7.2 Maintenance of Existence; Conduct of Business. Except for mergers, consolidations, liquidations or amalgamations not otherwise prohibited by this Agreement, Borrower will preserve and maintain, and, will cause each Subsidiary to preserve and maintain, its corporate existence and all of its leases, privileges, licenses, permits, franchises, qualifications and rights that are necessary or desirable in the ordinary conduct of its business, and conduct, and cause each Subsidiary to conduct, its business as presently conducted in an orderly and efficient manner in accordance with good business practices. Section 7.3 Maintenance of Properties. Borrower will maintain, keep, and preserve, and cause each Subsidiary to maintain, keep, and preserve, all of its properties (tangible and intangible) necessary or useful in the proper conduct of its business in good working order and condition, except where the failure to so maintain, keep or preserve would not reasonably be expected to have a Material Adverse Effect. Section 7.4 Taxes and Claims. Borrower will pay or discharge, and will cause each Subsidiary to pay or discharge, at or before maturity or before becoming delinquent (i) all material taxes, levies, assessments, and governmental charges imposed on it or its income or profits or any of its property, and (ii) all lawful claims for labor, material, and supplies, which, if unpaid, might become a Lien prohibited by Section 8.1 upon any of its property; provided, however, that neither Borrower nor any Subsidiary shall be required to pay or discharge any tax, levy, assessment, or governmental charge which is being contested in good faith by appropriate proceedings diligently pursued, and for which adequate reserves have been established. Section 7.5 Insurance. Borrower will maintain, and will cause each Subsidiary to maintain, with financially sound and reputable insurance companies workmen's compensation insurance, liability insurance, and insurance on its property, assets, and business at least in such amounts and against such risks as are usually insured against by Persons engaged in similar businesses. Section 7.6 Inspection Rights. At any reasonable time and from time to time, Borrower will permit, and will cause each Subsidiary to permit, representatives of Lender to examine and make copies of the books and records of, and visit and inspect the properties of -20- 21 Borrower and any Subsidiary, and to discuss the business, operations, and financial condition of Borrower and the Subsidiaries with their respective officers and employees and with their independent certified public accountants. Section 7.7 Keeping Books and Records. Borrower will maintain, and will cause each Subsidiary to maintain, proper books of record and account in which full, true, and correct entries in conformity with GAAP shall be made of all dealings and transactions in relation to its business and activities. Section 7.8 Compliance with Laws. Borrower will comply, and will cause each Subsidiary to comply, in all material respects with all applicable laws, rules, regulations, and orders of any court, governmental authority, or arbitrator, including, without limitation, any directives or regulations issued by the U.S. Department of Treasury, Office of Foreign Assets Control, except where the failure to comply would not reasonably be expected to have a Material Adverse Effect. The Borrower shall not serve under or enter into any contract with, a Person included within the definition of (i) "national" of a "designated foreign country," or "specially designated national" of a "designated foreign county," in the Foreign Assets Control Regulations or the Cuban Assets Control Regulations of the United States Treasury Department, 31 C.F.R. Parts 500 and 515, in each case as amended, (ii) "Government of Libya," "entity of the Government of Libya" or "Libyan entity" in the Libyan Sanctions Regulations of the United States Treasury Department, 31 C.F.R Part 550, as amended, or (iii)"Government of Iraq," "entity of the Government of Iraq" or "Iraqi Government entity" in the Iraqi Sanctions Regulations, 31 C.F.R Part 575, as amended, all within the meaning of said Regulations or of any regulations, interpretations or rulings issued thereunder, or engage in any transaction that violates any provision of said Regulations or that violates any provision of the Iranian Transactions Regulations, 31 C.F.R. Part 560, as amended, the Transaction Control Regulations, 31 C.F.R. Part 505, as amended, the Foreign Assets Control Regulations, 31 C.F.R. Part 500, as amended, or Executive Orders 12810 and 12831; provided however that to the extent any of the foregoing regulations are repealed and not replaced by similar regulations, restrictions or sanctions, the prohibitions herein shall not apply as they pertain to such regulations. Section 7.9 Compliance with Agreements. Borrower will comply, and will cause each Subsidiary to comply, in all material respects with all contracts, agreements, and instruments binding on it or affecting its properties or business, except where the failure to comply would not reasonably be expected to have a Material Adverse Effect. Section 7.10 Further Assurances. Borrower will execute and deliver, and will cause each Subsidiary to execute and deliver, such further instruments as may be requested by Lender to carry out the provisions and purposes of this Agreement and the other Loan Documents. Section 7.11 ERISA. Borrower will comply, and will cause each Subsidiary to comply, with all minimum funding requirements, and all other material requirements, of ERISA, except -21- 22 where the failure to comply would not reasonably be expected to have a Material Adverse Effect. Section 7.12 Year 2000 Compliance. Borrower covenants and agrees with Lender that, while any Letter of Credit or Bank Guarantee is in effect, Borrower will: (a) At all times prior to January 1, 2000, furnish such additional information, statements and other reports with respect to Borrower's activities, course of action and progress towards becoming Year 2000 Compliant as Lender may request from time to time. (b) In the event of any change in circumstances that causes or will likely cause any of Borrower's representations and warranties with respect to its being or becoming Year 2000 Compliant to no longer be true (hereinafter, referred to as a "Change in Circumstances") then Borrower shall promptly, and in any event within ten days of receipt of information regarding a Change in Circumstances, provide Lender with written notice (the "Notice") that describes in reasonable detail the Change in Circumstances and how such Change in Circumstances caused or will likely cause Borrower's representations and warranties with respect to being or becoming Year 2000 Compliant to no longer be true. Borrower shall, within 10 days of a request, also provide Lender with any additional information Lender requests of Borrower in connection with the Notice and/or a Change in Circumstances. (c) Give any representative of Lender access during all business hours, upon reasonable prior notice to Borrower, to, and permit such representative to examine, copy or make excerpts from, any and all books, records and documents in the possession of Borrower and relating to its affairs, and to inspect any of the properties and Systems of Borrower, all at the sole cost and expense of Lender. Section 7.13 Accounts with Lender. Borrower shall transfer all of its primary operating accounts and treasury management to Lender by March 31, 2000. ARTICLE VIII Negative Covenants Borrower covenants and agrees that, as long as the Obligations or any part thereof are outstanding or Lender has any Commitment hereunder, Borrower will perform and observe the following negative covenants, unless Lender shall otherwise consent in writing: Section 8.1 Limitation on Liens. Borrower will not incur, create, assume, or permit to exist, and will not permit any Subsidiary to incur, create, assume, or permit to exist, any Lien upon any of its accounts, accounts receivable, inventory or related general intangibles, whether now owned or hereafter acquired, unless Lender has entered into an intercreditor agreement with the prospective holder of the Lien, in form and substance acceptable to Lender. -22- 23 Nothing in the foregoing section shall prohibit: (a) Liens on equipment or inventory of Borrower created by a purchase money security interest; (b) undetermined or inchoate liens arising or potentially arising under statutory provisions that have not at the time been filed or registered in accordance with applicable law or of that written notice has not been duly given in accordance with applicable law or that, although filed or registered, relate to obligations not due or delinquent; (c) Liens (i) of landlords and carriers, warehousemen, mechanics, suppliers, sellers, materialmen or repairmen, or other similar Liens arising by operation of law, and (ii) Liens that have not been registered in accordance with applicable law, in each case arising in the ordinary course of business and with respect to amounts not yet delinquent or that are being contested in good faith by appropriate proceedings diligently pursued and diligently conducted and for which adequate reserves have been established; (d) Liens on a property of a Person which Liens are existing at the time such Person is merged into or consolidated with the Borrower and Liens on property existing at the time of acquisition thereof by the Borrower; provided that such Liens were not placed on such property in contemplation of the consummation of such merger, consolidation or acquisition and do not extend to any assets other than those of the Person merged into or consolidated with the Borrower, or the property so acquired, and proceeds and products of any of the foregoing; (e) Liens in favor of customs and revenue authorities arising as a matter of law to secure payment of customs duties in connection with the importation of goods; (f) Liens arising out of conditional sale, title retention, consignment or similar arrangements for the sale of goods entered into by the Borrower in the ordinary course of business of the Borrower; (g) Liens extending, renewing or replacing any of the foregoing Liens, provided that the principal amount of the indebtedness or other obligation secured by such Lien is not increased or the maturity thereof shortened and such Lien is not extended to cover any additional indebtedness, obligations or property, other than like obligations and the substitution of like property (or categories of property to the extent the terms of the Lien being extended, renewed or replaced, extended to or covered such categories of property) or the proceeds or products of the property subject thereto; and -23- 24 (h) Liens on any proceeds (including, without limitation, insurance, condemnation and eminent domain proceeds) or products of any collateral a Lien over which is permitted by clauses (a) to and including (g) above. ARTICLE IX Financial Covenants Borrower covenants and agrees that, as long as the Obligations or any part thereof are outstanding or Lender has any Commitment hereunder, Borrower will observe and perform the following financial covenants, unless Lender shall otherwise consent in writing: Section 9.1 Debt to Capitalization Ratio. Borrower will at all times maintain a ratio Debt to Capitalization of at least 1.0 to 4.0. Section 9.2 Consolidated Tangible Net Worth. Borrower will at all times maintain Consolidated Tangible Net Worth in an amount not less than One Hundred Eighty-One Million and No/100 Dollars ($181,000,000.00). ARTICLE X Default Section 10.1 Events of Default. Without in any manner impairing the demand nature of the Note, each of the following shall be deemed an "Event of Default": (a) Borrower shall fail to pay when due the principal on any Advances or any part thereof, or the Borrower shall fail to pay within 5 Business Days when due any other monetary obligation hereunder other than principal on Advances. (b) Any representation or warranty made or deemed made by Borrower or any Obligated Party (or any of their respective officers) in any Loan Document or in any certificate, report, notice, or financial statement furnished at any time in connection with this Agreement shall be false, misleading, or erroneous in any material respect when made or deemed to have been made. (c) Borrower or any Obligated Party shall fail to perform, observe, or comply with any covenant, agreement, or term contained in this Agreement or any other Loan Document. (d) Borrower, any Subsidiary, or any Obligated Party shall commence a voluntary proceeding seeking liquidation, reorganization, or other relief with respect to itself or its debts under any bankruptcy, insolvency, or other similar law now or hereafter -24- 25 in effect or seeking the appointment of a trustee, receiver, liquidator, custodian, or other similar official of it or a substantial part of its property or shall consent to any such relief or to the appointment of or taking possession by any such official in an involuntary case or other proceeding commenced against it or shall make a general assignment for the benefit of creditors or shall generally fail to pay its debts as they become due or shall take any corporate action to authorize any of the foregoing. (e) An involuntary proceeding shall be commenced against Borrower, any Subsidiary, or any Obligated Party seeking liquidation, reorganization, or other relief with respect to it or its debts under any bankruptcy, insolvency, or other similar law now or hereafter in effect or seeking the appointment of a trustee, receiver, liquidator, custodian or other similar official for it or a substantial part of its property, and such involuntary proceeding shall remain undismissed and unstayed for a period of 30 days. (f) Borrower, any Subsidiary, or any Obligated Party shall fail to discharge within a period of 30 days after the commencement thereof any attachment, sequestration, or similar proceeding or proceedings involving an aggregate amount in excess $1,000,000 against any of its assets or properties. (g) Borrower, any Subsidiary, or any Obligated Party shall fail to satisfy and discharge promptly any judgment or judgments against it for the payment of money in an aggregate amount in excess of $1,000,000. (h) Borrower, any Subsidiary, or any Obligated Party shall fail to pay when due any principal of or interest on any Debt (other than the Obligations) in an aggregate amount in excess of $1,000,000, or the maturity of any such Debt shall have been accelerated, or any such Debt shall have been required to be prepaid prior to the stated maturity thereof, or any event shall have occurred that permits (or, with the giving of notice or lapse of time or both, would permit) any holder or holders of such Debt or any Person acting on behalf of such holder or holders to accelerate the maturity thereof or require any such prepayment. (i) This Agreement or any other Loan Document shall cease to be in full force and effect or shall be declared null and void or the validity or enforceability thereof shall be contested or challenged by Borrower, any Subsidiary, any Obligated Party or any of their respective shareholders, or Borrower or any Obligated Party shall deny that it has any further liability or obligation under any of the Loan Documents. (j) Any of the following events shall occur or exist with respect to Borrower or any ERISA Affiliate: (i) any Prohibited Transaction involving any Plan; (ii) any Reportable Event with respect to any Plan; (iii) the filing under Section 4041 of ERISA of a notice of intent to terminate any Plan or the termination of any Plan; (iv) any event or circumstance that might constitute grounds entitling the PBGC to institute proceedings under Section 4042 of ERISA for the termination of, or for the appointment of a trustee -25- 26 to administer, any Plan, or the institution by the PBGC of any such proceedings; (v) complete or partial withdrawal under Section 4201 or 4204 of ERISA from a Multiemployer Plan or the reorganization, insolvency, or termination of any Multiemployer Plan; and in each case above, such event or condition, together with all other events or conditions, if any, have subjected or could in the reasonable opinion of Lender subject Borrower to any tax, penalty, or other liability to a Plan, a Multiemployer Plan, the PBGC, or otherwise (or any combination thereof) which in the aggregate exceed or could reasonably be expected to exceed $500,000. (k) Borrower, any of its Subsidiaries, or any Obligated Party, or any of their respective properties, revenues, or assets, shall become subject to an order of forfeiture, seizure, or divestiture (whether under RICO or otherwise) and the same shall not have been discharged within 30 days from the date of entry thereof. Section 10.2 Remedies Upon Default. If any Event of Default shall occur, Lender may without notice terminate its Commitment to make Advances, issue Letters of Credit, and create Acceptances hereunder and declare the Obligations or any part thereof to be immediately due and payable, and the same shall thereupon become immediately due and payable, without notice, demand, presentment, notice of dishonor, notice of acceleration, notice of intent to accelerate, notice of intent to demand, protest, or other formalities of any kind, all of which are hereby expressly waived by Borrower; provided, however, that upon the occurrence of an Event of Default under Section 10.1(d) or Section 10.1(e), the Commitment of Lender to make Advances, issue Letters of Credit, and create Acceptances shall automatically terminate, and the Obligations shall become immediately due and payable without notice, demand, presentment, notice of dishonor, notice of acceleration, notice of intent to accelerate, notice of intent to demand, protest, or other formalities of any kind, all of which are hereby expressly waived by Borrower. If any Event of Default shall occur, Lender may exercise all rights and remedies available to it in law or in equity, under the Loan Documents, or otherwise. Section 10.3 Bank Guarantees and Letters of Credit. If the Termination Date or any Event of Default shall occur, Borrower shall, if requested by Lender or otherwise required by the terms of this Agreement, immediately deposit with and pledge to Lender cash or cash equivalent investments in an amount equal to the outstanding Bank Guarantees and Letter of Credit Liabilities as security for the Obligations. Section 10.4 Performance by Lender. If Borrower shall fail to perform any covenant, duty, or agreement contained in any of the Loan Documents, Lender may perform or attempt to perform such covenant, duty, or agreement on behalf of Borrower. In such event, Borrower shall, at the request of Lender, promptly pay any amount expended by Lender in such performance or attempted performance to Lender, together with interest thereon at the Default Rate from the date of such expenditure until paid. Notwithstanding the foregoing, it is expressly agreed that Lender shall not have any liability or responsibility for the performance of any obligation of Borrower under this Agreement or any other Loan Document. -26- 27 ARTICLE XI Miscellaneous Section 11.1 Expenses of Lender. Borrower hereby agrees to pay Lender on demand: (i) all costs and expenses incurred by Lender in connection with the preparation, negotiation, and execution of this Agreement and the other Loan Documents and any and all amendments, modifications, renewals, extensions, and supplements thereof and thereto, including, without limitation, the fees and expenses of Lender's legal counsel, (ii) all costs and expenses incurred by Lender in connection with the enforcement of this Agreement or any other Loan Document, including, without limitation, the fees and expenses of Lender's legal counsel, and (iii) all other costs and expenses incurred by Lender in connection with this Agreement or any other Loan Document, including, without limitation, all costs, expenses, taxes, assessments, filing fees, and other charges levied by a governmental authority or otherwise payable in respect of this Agreement or any other Loan Document. Section 11.2 INDEMNIFICATION. BORROWER HEREBY INDEMNIFIES LENDER AND EACH AFFILIATE THEREOF AND THEIR RESPECTIVE OFFICERS, DIRECTORS, EMPLOYEES, ATTORNEYS AND AGENTS (EACH AN "INDEMNIFIED PERSON") FROM, AND HOLDS EACH OF THEM HARMLESS AGAINST, ANY AND ALL LOSSES, LIABILITIES, CLAIMS, DAMAGES, PENALTIES, JUDGMENTS, DISBURSEMENTS, COSTS, AND EXPENSES (INCLUDING ATTORNEYS' FEES) ("LOSSES") TO WHICH ANY OF THEM MAY BECOME SUBJECT IN CONNECTION WITH ANY CLAIM, INVESTIGATION, LITIGATION OR PROCEEDING (OR THE PREPARATION OF ANY DEFENSE IN CONNECTION THEREWITH) (COLLECTIVELY "PROCEEDINGS") (WHETHER OR NOT SUCH INDEMNIFIED PERSON IS A PARTY THERETO) INSOFAR AS SUCH LOSSES DIRECTLY ARISE OUT OF OR RELATE TO OR RESULT FROM, WHICH DIRECTLY OR INDIRECTLY ARISE FROM OR RELATE TO (I) THE NEGOTIATION, EXECUTION, DELIVERY, PERFORMANCE, ADMINISTRATION, OR ENFORCEMENT OF ANY OF THE LOAN DOCUMENTS, (II) ANY OF THE TRANSACTIONS CONTEMPLATED BY THE LOAN DOCUMENTS, (III) ANY BREACH BY BORROWER OF ANY REPRESENTATION, WARRANTY, COVENANT, OR OTHER AGREEMENT CONTAINED IN ANY OF THE LOAN DOCUMENTS, (IV) THE PRESENCE, RELEASE, THREATENED RELEASE, DISPOSAL, REMOVAL, OR CLEANUP OF ANY HAZARDOUS SUBSTANCE LOCATED ON, ABOUT, WITHIN, OR AFFECTING ANY OF THE PROPERTIES OR ASSETS OF BORROWER OR ANY SUBSIDIARY, (V) THE USE OR PROPOSED USE OF ANY LETTER OF CREDIT, ISSUED PURSUANT HERETO (VI) ANY AND ALL TAXES, LEVIES, DEDUCTIONS, AND CHARGES IMPOSED ON LENDER OR ANY OF LENDER'S CORRESPONDENTS IN RESPECT OF ANY LETTER OF CREDIT ISSUED PURSUANT HERETO, OR (VII) ANY INVESTIGATION, LITIGATION, OR OTHER PROCEEDING RELATING TO ANY OF THE FOREGOING AND ANY LEGAL PROCEEDING RELATING TO ANY COURT ORDER, INJUNCTION, OR OTHER PROCESS OR DECREE RESTRAINING OR SEEKING TO RESTRAIN LENDER OR ANY OF LENDER'S CORRESPONDENTS FROM PAYING ANY -27- 28 AMOUNT UNDER ANY LETTER OF CREDIT ISSUED PURSUANT HERETO. WITHOUT LIMITING ANY PROVISION OF THIS AGREEMENT OR OF ANY OTHER LOAN DOCUMENT, IT IS THE EXPRESS INTENTION OF THE PARTIES HERETO THAT EACH PERSON TO BE INDEMNIFIED UNDER THIS SECTION SHALL BE INDEMNIFIED FROM AND HELD HARMLESS AGAINST ANY AND ALL LOSSES, LIABILITIES, CLAIMS, DAMAGES, PENALTIES, JUDGMENTS, DISBURSEMENTS, COSTS, AND EXPENSES (INCLUDING ATTORNEYS' FEES) ARISING OUT OF OR RESULTING FROM THE SOLE OR CONTRIBUTORY NEGLIGENCE OF THE PERSON TO BE INDEMNIFIED BUT NOT FROM THE GROSS NEGLIGENCE OR WILFULL MISCONDUCT OF SUCH PERSON. Promptly after receipt by any Indemnified Person of notice of its involvement in any pending or threatened Proceeding as to which, or related to or arising out of any matter for which indemnification may be sought hereunder (an "Indemnified Proceeding"), such Indemnified Person shall, if a claim in respect thereof is to be made against Borrower under the Loan Documents, notify Borrower in writing of such involvement; provided, however, that the failure by such Indemnified Person to so notify Borrower shall not relieve Borrower from the obligation to indemnify or any other liability hereunder or otherwise except to the extent that such failure to provide notice prejudices Borrower in any material respect. In case any Indemnified Person's involvement in such Indemnified Proceeding shall be in any capacity other than as a witness, Borrower and its counsel shall be entitled to participate therein with such Indemnified Person and its counsel. To the extent Borrower wishes, Borrower also shall be entitled to assume the defense of any Indemnified Proceeding with counsel of Borrower's choice that is reasonably acceptable to the relevant Indemnified Person and after notice from Borrower to such Indemnified Person of Borrower's election so to assume the defense thereof, Borrower will not be liable to such Indemnified Person for the cost of defense thereof. Notwithstanding the foregoing, Borrower shall not be entitled to assume the defense of any Indemnified Proceeding, and the limitations in the preceding sentence on Borrower's liability to any Indemnified Person shall not apply, if counsel to any Indemnified Person reasonably determines, and Borrower reasonable concurs, that there are actual or potential conflicts of interest between such Indemnified Person and Borrower or that defenses available to such Indemnified Person may not be asserted by Borrower on the behalf of such Indemnified Person. In any event, notwithstanding the foregoing, Borrower shall not be required to indemnify any Indemnified Person for the settlement of any Indemnified Proceeding entered into without Borrower's prior written consent. If Borrower assumes the defense of any Indemnified Proceeding as provided above, Borrower shall not settle or compromise any such Indemnified Proceeding without the relevant Indemnified Person's prior written consent if the settlement or compromise involves performance by, or adverse admission of, such Indemnified Person. Only one counsel shall be retained by all Indemnified Persons with respect to any Indemnified Proceeding, unless counsel to any Indemnified Person reasonably determines, and the Borrower reasonably concurs, that there are actual or potential conflicts of interest between such Indemnified Person and other Indemnified Persons, in which case such Indemnified Person may retain separate counsel together with all other Indemnified Person subject to the same -28- 29 conflict of interest. Section 11.3 Limitation of Liability. Neither Lender nor any Affiliate, officer, director, employee, attorney, or agent of Lender shall have any liability with respect to, and Borrower hereby waives, releases, and agrees not to sue any of them upon, any claim for any special, indirect, incidental, or consequential damages suffered or incurred by Borrower in connection with, arising out of, or in any way related to, this Agreement or any of the other Loan Documents, or any of the transactions contemplated by this Agreement or any of the other Loan Documents. Borrower hereby waives, releases, and agrees not to sue Lender or any of Lender's Affiliates, officers, directors, employees, attorneys, or agents for punitive damages in respect of any claim in connection with, arising out of, or in any way related to, this Agreement or any of the other Loan Documents, or any of the transactions contemplated by this Agreement or any of the other Loan Documents. Section 11.4 Modification to Letter of Credit Master Agreements. The following modifications are hereby made to the Letter of Credit Master Agreements provided by Lender to the Borrower (and to the extent there are any discrepancies between such Letter of Credit Master Agreements and this Agreement, the provisions of this Agreement shall prevail): (a) Section 2 thereto is deleted in its entirety and replaced by the following: "Applicant agrees to pay such fees and interest as set forth in the Loan Agreement between Issuer and Applicant dated as of December 29, 1999 (hereinafter referred to as the "Loan Agreement")"; (b) Section 4(i) thereto is deleted in its entirety and replaced by the following: "Applicant is a corporation organized under the laws of the State of Delware"; (c) Section 4(iii) thereto is amended by adding the following clause at the beginning of said subsection: "To the best of Applicant's knowledge"; (d) Section 4(v) thereto is deleted in its entirety; (e) Section 5 thereto is deleted in its entirety; (f) Section 10 thereto is amended by adding the following clause at the beginning of said section: "During the continuance of an Event of Default,"; (g) Section 11(c) thereto is amended by deleting "three percentage points" and -29- 30 replacing it with "one and one-half percentage points" and by deleting "Base Rate" and replacing it with "Prime Rate, as defined in the Loan Agreement"; (h) Section 13 thereto is deleted in its entirety; (i) Section 14 thereto is amended by deleting the first clause of the first sentence to remove the reference to the deleted Section 13; and (j) Section 16 thereto is deleted in its entirety. Section 11.5 No Duty. All attorneys, accountants, appraisers, and other professional Persons and consultants retained by Lender shall have the right to act exclusively in the interest of Lender and shall have no duty of disclosure, duty of loyalty, duty of care, or other duty or obligation of any type or nature whatsoever to Borrower or any of Borrower's shareholders or any other Person. Section 11.6 Lender Not Fiduciary. The relationship between Borrower and Lender is solely that of debtor and creditor, and Lender has no fiduciary or other special relationship with Borrower, and no term or condition of any of the Loan Documents shall be construed so as to deem the relationship between Borrower and Lender to be other than that of debtor and creditor. Section 11.7 Equitable Relief. Borrower recognizes that in the event Borrower fails to pay, perform, observe, or discharge any or all of the Obligations, any remedy at law may prove to be inadequate relief to Lender. Borrower therefore agrees that Lender, if Lender so requests, shall be entitled to temporary and permanent injunctive relief in any such case without the necessity of proving actual damages. Section 11.8 No Waiver; Cumulative Remedies. No failure on the part of Lender to exercise and no delay in exercising, and no course of dealing with respect to, any right, power, or privilege under this Agreement shall operate as a waiver thereof, nor shall any single or partial exercise of any right, power, or privilege under this Agreement preclude any other or further exercise thereof or the exercise of any other right, power, or privilege. The rights and remedies provided for in this Agreement and the other Loan Documents are cumulative and not exclusive of any rights and remedies provided by law. Section 11.9 Successors and Assigns. This Agreement is binding upon and shall inure to the benefit of Lender and Borrower and their respective successors and assigns, except that Borrower may not assign or transfer any of its rights or obligations under this Agreement without the prior written consent of Lender. Section 11.10 Survival. All representations and warranties made in this Agreement or any other Loan Document or in any document, statement, or certificate furnished in connection with this Agreement shall survive the execution and delivery of this Agreement and the other Loan Documents, and no investigation by Lender or any closing shall affect the representations and warranties or the right of Lender to rely upon them. Without prejudice to the survival of any -30- 31 other obligation of Borrower hereunder, the obligations of Borrower under Sections11.1, and 11.2 shall survive repayment of the Note and termination of the Commitment and the Letters of Credit. Section 11.1 ENTIRE AGREEMENT; AMENDMENT. THIS AGREEMENT, THE NOTE, AND THE OTHER LOAN DOCUMENTS REFERRED TO HEREIN EMBODY THE FINAL, ENTIRE AGREEMENT AMONG THE PARTIES HERETO AND SUPERSEDE ANY AND ALL PRIOR COMMITMENTS, AGREEMENTS, REPRESENTATIONS, AND UNDERSTANDINGS, WHETHER WRITTEN OR ORAL, RELATING TO THE SUBJECT MATTER HEREOF AND MAY NOT BE CONTRADICTED OR VARIED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS OR DISCUSSIONS OF THE PARTIES HERETO. THERE ARE NO ORAL AGREEMENTS AMONG THE PARTIES HERETO. The provisions of this Agreement and the other Loan Documents to which Borrower is a party may be amended or waived only by an instrument in writing signed by the parties hereto. Section 11.12 Maximum Interest Rate. No provision of this Agreement or of any other Loan Document shall require the payment or the collection of interest in excess of the maximum permitted by applicable law. If any excess of interest in such respect is hereby provided for, or shall be adjudicated to be so provided, in any Loan Document or otherwise in connection with this loan transaction, the provisions of this Section shall govern and prevail and neither Borrower nor the sureties, guarantors, successors, or assigns of Borrower shall be obligated to pay the excess amount of such interest or any other excess sum paid for the use, forbearance, or detention of sums loaned pursuant hereto. In the event Lender ever receives, collects, or applies as interest any such sum, such amount which would be in excess of the maximum amount permitted by applicable law shall be applied as a payment and reduction of the principal of the indebtedness evidenced by the Note; and, if the principal of the Note has been paid in full, any remaining excess shall forthwith be paid to Borrower. In determining whether or not the interest paid or payable exceeds the Maximum Rate, Borrower and Lender shall, to the extent permitted by applicable law, (i) characterize any non-principal payment as an expense, fee, or premium rather than as interest, (ii) exclude voluntary prepayments and the effects thereof, and (iii) amortize, prorate, allocate, and spread in equal or unequal parts the total amount of interest throughout the entire contemplated term of the indebtedness evidenced by the Note so that interest for the entire term does not exceed the Maximum Rate. Section 11.13 Notices. All notices and other communications provided for in this Agreement and the other Loan Documents to which Borrower is a party shall be given or made by telex, telegraph, telecopy, cable, or in writing and telexed, telecopied, telegraphed, cabled, mailed by certified mail return receipt requested, or delivered to the intended recipient at the "Address for Notices" specified below its name on the signature pages hereof; or, as to any party, at such other address as shall be designated by such party in a notice to the other party given in accordance with this Section. Except as otherwise provided in this Agreement, all such communications shall be deemed to have been duly given when transmitted by telex or telecopy, subject to telephone confirmation of receipt, or delivered to the telegraph or cable office, subject -31- 32 to telephone confirmation of receipt, or when personally delivered or, in the case of a mailed notice, when duly deposited in the mails, in each case given or addressed as aforesaid; provided, however, notices to Lender pursuant to Articles II, III, and IV shall not be effective until received by Lender. Section 11.14 Applicable Law; Venue; Service of Process. This Agreement shall be governed by and construed in accordance with the laws of the State of Texas and the applicable laws of the United States of America. This Agreement has been entered into in Harris County, Texas, and it shall be performable for all purposes in Harris County, Texas. Any action or proceeding against Borrower under or in connection with any of the Loan Documents may be brought in any state or federal court in Harris County, Texas. Borrower hereby irrevocably (i) submits to the nonexclusive jurisdiction of such courts, and (ii) waives any objection it may now or hereafter have as to the venue of any such action or proceeding brought in any such court or that any such court is an inconvenient forum. Borrower agrees that service of process upon it may be made by certified or registered mail, return receipt requested, at its address specified or determined in accordance with the provisions of Section 11.13. Nothing herein or in any of the other Loan Documents shall affect the right of Lender to serve process in any other manner permitted by law or shall limit the right of Lender to bring any action or proceeding against Borrower or with respect to any of its property in courts in other jurisdictions. Any action or proceeding by Borrower against Lender shall be brought only in a court located in Harris County, Texas. Section 11.15 Demand Nature. Notwithstanding anything to the contrary contained herein or in any other Loan Document, Borrower's obligation to repay outstanding Advances and to pay accrued interest thereon shall at all times be a demand obligation, and Lender need not rely on or prove the existence of an Event of Default before making demand for the payment of any or all outstanding Advances and accrued and unpaid interest thereon. Section 11.16 Counterparts. This Agreement may be executed in one or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. Section 11.17 Severability. Any provision of this Agreement held by a court of competent jurisdiction to be invalid or unenforceable shall not impair or invalidate the remainder of this Agreement and the effect thereof shall be confined to the provision held to be invalid or illegal. Section 11.18 Headings. The headings, captions, and arrangements used in this Agreement are for convenience only and shall not affect the interpretation of this Agreement. Section 11.19 Non-Application of Chapter 303 of Texas Credit Code. The provisions of Chapter 303 of the Texas Finance Code are specifically declared by the parties hereto not to be applicable to this Agreement or any of the other Loan Documents or to the transactions contemplated hereby. -32- 33 Section 11.20 Participations. Lender shall have the right at any time and from time to time to grant participations in the Note and any other Loan Documents. Each actual or proposed participant shall be entitled to receive all information received by Lender regarding the creditworthiness of Borrower, including, without limitation, information required to be disclosed to a participant pursuant to Banking Circular 181 (Rev., August 2, 1984), issued by the Comptroller of the Currency (whether the actual or proposed participant is subject to the circular or not). Section 11.21 Construction. Borrower and Lender acknowledge that each of them has had the benefit of legal counsel of its own choice and has been afforded an opportunity to review this Agreement and the other Loan Documents with its legal counsel and that this Agreement and the other Loan Documents shall be construed as if jointly drafted by Borrower and Lender. Section 11.22 Arbitration. Any controversy or claim between or among the parties hereto including but not limited to those arising out of or relating to this Agreement or any related agreements or instruments, including any claim based on or arising from an alleged tort, shall be determined by binding arbitration in accordance with the Federal Arbitration Act (or if not applicable, the applicable state law), the Commercial Arbitration Rules of the American Arbitration Association ("AAA"), and the "Special Rules" set forth below. In the event of any inconsistency, the Special Rules shall control. Judgment upon any arbitration award may be entered in any court having jurisdiction. Any part to this Agreement may bring an action, including a summary or expedited proceeding, to compel arbitration of any controversy or claim to which this agreement applies in any court having jurisdiction over the action. (a) Special Rules. The arbitration shall be conducted in Houston, Texas and presided over by an arbitrator provided at the nearest location of Judicial Arbitration & Mediation Services ("JAMS") office, or if JAMS is not able or is legally precluded from providing an arbitrator, then the AAA. All arbitration will be commenced within 120 days of the demand for arbitration and the decision/award rendered within 30 days thereafter; further, the arbitrator shall only, upon showing of cause, be permitted to extend the commencement period of an additional 60 days. (b) Reservation of Rights. Nothing in this Agreement shall be deemed to (i) limit the applicability of any otherwise applicable statutes of limitation or repose and any waivers contained in this Agreement; or (ii) be a waiver by the Lender of the protection afforded to it by 12 U.S.C. Sec. 91 or any substantially equivalent state law; or (iii) limit the right of any party hereto (A) to exercise self help remedies such as (but not limited to) setoff, or (B) to foreclose against any real or personal property collateral, or (C) to obtain from a court provisional or ancillary remedies such as (but not limited to) injunctive relief or the appointment of a receiver. Any party may exercise such self help rights, foreclose upon such property, or obtain such provisional or ancillary remedies before, during or after the pendency of any arbitration proceeding brought pursuant to this Agreement. Neither exercise of self help remedies nor the institution or maintenance of an action for provisional or ancillary remedies shall constitute a waiver of the right of -33- 34 any party, including the claimant in any such action, to arbitrate the merits of the controversy or claim occasioning resort to such remedies. Section 11.23 WAIVER OF JURY TRIAL. TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, BORROWER HEREBY IRREVOCABLY AND EXPRESSLY WAIVES ALL RIGHT TO A TRIAL BY JURY IN ANY ACTION, PROCEEDING, OR COUNTERCLAIM (WHETHER BASED UPON CONTRACT, TORT, OR OTHERWISE) ARISING OUT OF OR RELATING TO ANY OF THE LOAN DOCUMENTS OR THE TRANSACTIONS CONTEMPLATED THEREBY OR THE ACTIONS OF LENDER IN THE NEGOTIATION, ADMINISTRATION, OR ENFORCEMENT THEREOF. IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement as of the day and year first above written. BORROWER: IRI INTERNATIONAL CORPORATION, a Delaware corporation By: Robert Hargrave Vice Chairman and Chief Financial Officer Address for Notices: 2400 Crockett Houston, Texas 77007 Fax No.: (713) 651-1526 Telephone No.: (713) 651-8002 Attention: Mr. Robert Hargrave LENDER: BANK ONE, TEXAS, N.A., a national banking association By: Karen Shouse First Vice President -34- 35 Address for Notices: 910 Travis, 7th Floor Houston, Texas 77002 Fax No.: (713) 751-6177 Telephone No.: (713) 751-3640 Attention: Ms. Karen Shouse -35- 36 INDEX TO EXHIBITS
Exhibit Description of Exhibit Section ------- ---------------------- ------- "A" Note 2.2 "B" Letter of Credit Request Form 3.2 "C" Standy Letter of Credit Master Agreement 1.1 "D" Commercial Letter of Credit Master Agreement 1.1 INDEX TO SCHEDULES Schedule Description of Schedule Section -------- ----------------------- ------- 1 Existing Litigation 7.5 2 Existing Debt 7.9 3 List of Subsidiaries 7.14
37 SCHEDULE 1 Existing Litigation None. 38 SCHEDULE 2 Existing Debt Master Lease Agreement No. 127 by and between Borrower and Data General Corporation dated December 26, 1995, with Lease Schedule attached dated February 1, 1996. 39 SCHEDULE 3 List of Subsidiaries
===================================================================================================================== PERCENTAGE OF NAME OF JURISDICTION OF VOTING STOCK OWNED SUBSIDIARY INCORPORATION BY BORROWER - --------------------------------------------------------------------------------------------------------------------- Bowen Mexicana, S.A. de Mexico 100% C.V. - --------------------------------------------------------------------------------------------------------------------- Bowen Tools, Ltd. Canada 100% - --------------------------------------------------------------------------------------------------------------------- Cardwell International, Ltd. Kansas 100% - --------------------------------------------------------------------------------------------------------------------- Cardwell Manufacturing Canada 100% Company, Ltd. - --------------------------------------------------------------------------------------------------------------------- Cardwell Exports, Ltd. U.S. Virgin Islands 100% - --------------------------------------------------------------------------------------------------------------------- IRI Energy Services Barbados 100% (Barbados) Limited - --------------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------------- =====================================================================================================================
40 ****************************************************************************** IRI INTERNATIONAL CORPORATION CREDIT AGREEMENT Dated as of December 29, 1999 $10,000,000 BANK ONE, TEXAS, N.A. ****************************************************************************** 41 TABLE OF CONTENTS
Page ---- ARTICLE I Definitions......................................................................................... 1 ----------- - Section 1.1 Definitions................................................................. 1 ----------- - Section 1.2 Other Definitional Provisions............................................... 6 ----------------------------- - ARTICLE II Bank Guarantees and Letters of Credit............................................................... 6 ------------------------------------- - Section 2.1 Bank Guarantees and Letters of Credits...................................... 6 -------------------------------------- - Section 2.2 Procedure for Issuing Bank Guarantees and Letters of Credit................. 7 ----------------------------------------------------------- - Section 2.3 Fees........................................................................ 8 ---- - Section 2.4 Obligations Absolute........................................................ 8 -------------------- - Section 2.5 Limitation of Liability..................................................... 9 ----------------------- - Section 2.6 Lending Installations....................................................... 10 --------------------- -- Section 2.7 Account with Lender......................................................... 10 ------------------- -- ARTICLE III Advances............................................................................................ 10 -------- -- Section 3.2 Repayment of Advances....................................................... 10 --------------------- -- Section 3.3 Interest.................................................................... 10 -------- -- ARTICLE IV Payments............................................................................................ 11 -------- -- Section 4.1 Method of Payment........................................................... 11 ----------------- -- Section 4.2 Computation of Interest..................................................... 11 ----------------------- -- Section 4.3 Capital Adequacy............................................................ 11 ---------------- -- Section 4.4 Additional Costs in Respect of Letters of Credit............................ 12 ------------------------------------------------ -- ARTICLE V Conditions Precedent................................................................................ 12 -------------------- -- Section 5.1 Initial Bank Guarantee or Letter of Credi.................................. 12 ------------------------------------------ -- Section 5.2 All Bank Guarantees or Letters of Credit.................................... 13 ---------------------------------------- -- ARTICLE VI Representations and Warranties...................................................................... 14 ------------------------------ -- Section 6.1 Corporate Existence......................................................... 14 ------------------- -- Section 6.2 Financial Statements........................................................ 14 -------------------- -- Section 6.3 Corporate Action; No Breach................................................. 14 --------------------------- -- Section 6.4 Operation of Business....................................................... 15 --------------------- -- Section 6.5 Litigation and Judgments.................................................... 15 ------------------------ -- Section 6.6 Rights in Properties; Liens................................................. 15 --------------------------- -- Section 6.7 Enforceability.............................................................. 15 -------------- -- Section 6.8 Approvals................................................................... 15 --------- -- Section 6.9 Debt........................................................................ 15 ---- -- Section 6.10 Taxes....................................................................... 15 ----- -- Section 6.11 Use of Proceeds; Margin Securities.......................................... 16 ---------------------------------- -- Section 6.12 ERISA....................................................................... 16 ----- --
-41- 42 ` TABLE OF CONTENTS (CONTINUED)
Page ---- Section 6.13 Disclosure.................................................................. 16 ---------- -- Section 6.14 Subsidiaries................................................................ 16 ------------ -- Section 6.15 Agreements.................................................................. 16 ---------- -- Section 6.16 Compliance with Laws........................................................ 17 -------------------- -- Section 6.17 Investment Company Act...................................................... 17 ---------------------- -- Section 6.18 Public Utility Holding Company Act.......................................... 17 ---------------------------------- -- Section 6.19 Environmental Matters....................................................... 17 --------------------- -- Section 6.20 Year 2000 Provisions........................................................ 18 -------------------- -- ARTICLE VII Positive Covenants.................................................................................. 19 ------------------ -- Section 7.1 Reporting Requirements...................................................... 19 ---------------------- -- Section 7.2 Maintenance of Existence; Conduct of Business............................... 20 --------------------------------------------- -- Section 7.3 Maintenance of Properties................................................... 20 ------------------------- -- Section 7.4 Taxes and Claims............................................................ 21 ---------------- -- Section 7.5 Insurance................................................................... 21 --------- -- Section 7.6 Inspection Rights........................................................... 21 ----------------- -- Section 7.7 Keeping Books and Records................................................... 21 ------------------------- -- Section 7.8 Compliance with Laws........................................................ 21 -------------------- -- Section 7.9 Compliance with Agreements.................................................. 22 -------------------------- -- Section 7.10 Further Assurances.......................................................... 22 ------------------ -- Section 7.11 ERISA....................................................................... 22 ----- -- Section 7.12 Year 2000 Compliance........................................................ 22 -------------------- -- Section 7.13 Accounts with Lender........................................................ 23 -------------------- -- ARTICLE VIII Negative Covenants.................................................................................. 23 ------------------ -- Section 8.1 Limitation on Liens......................................................... 23 ------------------- -- ARTICLE IX Financial Covenants................................................................................. 24 ------------------- -- Section 9.1 Debt to Capitalization Ratio................................................ 24 ---------------------------- -- Section 9.2 Consolidated Tangible Net Worth............................................. 24 ------------------------------- -- ARTICLE X Default............................................................................................. 25 ------- -- Section 10.1 Events of Default........................................................... 25 ----------------- -- Section 10.2 Remedies Upon Default....................................................... 26 --------------------- -- Section 10.3 Bank Guarantees and Letters of Credit....................................... 27 ------------------------------------- -- Section 10.4 Performance by Lender....................................................... 27 --------------------- -- ARTICLE XI Miscellaneous....................................................................................... 27 ------------- -- Section 11.1 Expenses of Lender.......................................................... 27 ------------------ --
-42- 43 TABLE OF CONTENTS (CONTINUED)
Page ---- Section 11.2 Indemnification.............................................................. 27 --------------- -- Section 11.3 Limitation of Liability...................................................... 29 ----------------------- -- Section 11.4 Modification to Letter of Credit Master Agreements........................... 29 -------------------------------------------------- -- Section 11.5 No Duty...................................................................... 30 ------- -- Section 11.6 Lender Not Fiduciary......................................................... 30 -------------------- -- Section 11.7 Equitable Relief............................................................. 31 ---------------- -- Section 11.8 No Waiver; Cumulative Remedies............................................... 31 ------------------------------ -- Section 11.9 Successors and Assigns....................................................... 31 ---------------------- -- Section 11.10 Survival..................................................................... 31 -------- -- Section 11.11 Entire Agreement; Amendment.................................................. 31 --------------------------- -- Section 11.12 Maximum Interest Rate........................................................ 31 --------------------- -- Section 11.13 Notices...................................................................... 32 ------- -- Section 11.14 Applicable Law; Venue; Service of Process.................................... 32 ----------------------------------------- -- Section 11.15 Demand Nature................................................................ 33 ------------- -- Section 11.16 Counterparts................................................................. 33 ------------ -- Section 11.17 Severability................................................................. 33 ------------ -- Section 11.18 Headings..................................................................... 33 -------- -- Section 11.19 Non-Application of Chapter 303 of Texas Credit Code.......................... 33 --------------------------------------------------- -- Section 11.20 Participations............................................................... 33 -------------- -- Section 11.21 Construction................................................................. 33 ------------ -- Section 11.23 WAIVER OF JURY TRIAL......................................................... 34 -------------------- --
-43- EX-23.1 3 CONSENT OF KPMG LLP 1 EXHIBIT 23.1 INDEPENDENT AUDITORS' CONSENT The Board of Directors IRI International Corporation: We consent to incorporation by reference in the Registration Statement No. 333-40525 of IRI International Corporation on Form S-8, of our report dated March 8, 2000, relating to the consolidated balance sheets of IRI International Corporation and Subsidiaries as of December 31, 1999 and 1998, and the related consolidated statements of operations, shareholders' equity and comprehensive income and cash flows for each of the years in the three-year period ended December 31, 1999, which report appears in the December 31, 1999 annual report on Form 10-K of IRI International Corporation. KPMG LLP Houston, Texas March 27, 2000 EX-24 4 POWER OF ATTORNEY 1 Exhibit 24 Power of Attorney Excerpts from Minutes of the Meeting of the Board of Directors of IRI International Corporation held on March 14, 2000 I, Abdallah Andrawos, Secretary of IRI International Corporation (the "Company"), hereby certify that the following resolutions were unanimously approved by all of the directors of the Company at the meeting of the Board of Directors of the Company held on March 14, 2000: RESOLVED that the officers of the Company be, and each of them individually hereby is, authorized to prepare and file with the Securities and Exchange Commission the Company's report on Form 10-K (including any amendments thereto on Form 10-K/A) for the fiscal year ended December 31, 1999; and FURTHER RESOLVED, that the officers of this Company be, and each of them individually hereby is, authorized to prepare, file with the New York Stock Exchange, and distribute to the Company's stockholders, the Annual Report to Stockholders for the year ended December 31, 1999; and FURTHER RESOLVED that Robert L. Hargrave be appointed as the true and lawful attorney-in-fact to sign on behalf of each of the directors of the Company, in their capacity as a director or officer, or both, as the case may be, of the Company, the Company's report on Form 10-K (including any amendments thereto on Form 10-K/A), and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, and FURTHER RESOLVED that the officers of the Company be, and each of them individually hereby is, authorized, for and on behalf of the Company, to execute, deliver, file, acknowledge and record any and all such documents and instruments, and to take or cause to be done any and all such other actions as they, or any of them, may deem necessary or desirable to effectuate and carry out the resolutions adopted hereby; and FURTHER RESOLVED that all actions previously taken by any officer, director, representative or agent of the Company in the name or on behalf of the Company or any of its affiliates in connection with the matters contemplated by the foregoing resolutions be, and each of same hereby is, adopted, ratified, confirmed and approved in all respects as the act and deed of the Company; and FURTHER RESOLVED that a fully executed copy of these resolutions be filed with the minutes of proceeds of the Board. /s/ Abdallah Andrawos --------------------------- Secretary EX-27.1 5 FINANCIAL DATA SCHEDULE
5 YEAR DEC-31-1999 JAN-01-1999 DEC-31-1999 35,688 14,686 16,216 (1,740) 92,572 164,169 59,033 (13,336) 217,093 14,320 0 0 0 399 200,901 217,093 92,190 92,190 83,156 29,610 (1,562) 0 363 (19,377) (8,472) (10,905) 0 0 0 (10,905) (0.27) (0.27)
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