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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q/A
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED: NOVEMBER 30, 1998
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: 1-13402
INPUT/OUTPUT, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 22-2286646
(STATE OR OTHER JURISDICTION OF (IRS EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
11104 WEST AIRPORT BLVD., STAFFORD, TEXAS 77477
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
Registrant's telephone number, including area code: (281) 933-3339
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 [ ]
At November 30, 1998 there were 50,395,434 shares of common stock, par value
$0.01 per share, outstanding.
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INPUT/OUTPUT, INC. AND SUBSIDIARIES
INDEX TO FORM 10-Q/A
FOR THE QUARTER ENDED NOVEMBER 30, 1998
PART I. Financial Information.
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Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition . . . . . . . . . . . . . . . . . . . . 1
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
RESULTS OF OPERATIONS
INTRODUCTION. The Company's net sales are directly related to the
level of worldwide oil and gas exploration activities and the profitability
and cash flows of oil and gas companies and seismic contractors, which in
turn are affected by expectations regarding the supply and demand for oil and
natural gas, energy prices and finding and development costs. Oil and gas
supply and demand and pricing, in turn, are influenced by numerous factors
including, but not limited to, those described below in "Cautionary Statement
for Purposes of Forward-Looking Statements - Uncertainty of Energy Industry
Conditions" and "-Risk From Significant Amount of Foreign Sales." The Company
believes that when significant decreases in worldwide oil production were not
evident by the summer of 1998, the Company's customers anticipated a
continuation of low prices for an extended period and began to reduce their
intended levels of expenditures for seismic equipment. Until confidence in
future oil prices above current levels is restored, orders for the Company's
equipment are expected to remain at lower levels than experienced in fiscal
1998. Additional declines in oil prices or prolonged expectations for little
or no improvement in prices could cause the Company's customers to further
reduce their spending and further adversely affect the Company's results of
operation and financial condition. Although order cancellations and defaults
on financed sales have to date been minimal, the risk of such cancellations
and defaults exists, which could deteriorate the Company's anticipated
performance and future financial condition.
NET SALES. The Company's second quarter net sales decreased $29.8
million, or 28.7%, to $73.9 million as compared to the prior year's second
quarter net sales of $103.7 million. The decrease in net sales was primarily
due to lower sales levels of the Company's land systems and components. The
decline in sales of land systems and components is primarily attributable to
the decrease in oil prices resulting in delayed or reduced capital or
exploration spending by oil and gas companies during the quarter, which
caused several projects to be postponed or canceled. See "INTRODUCTION"
above. During fiscal 1999's second quarter, five System 2000 land systems and
two MSX marine system were sold, along with other seismic data acquisition
recording equipment and components (representing a total channel count of
5,928 land and 4,496 marine channels); the prior year's second quarter sales
consisted of 17 I/O SYSTEM TWO-Registered Trademark- land systems and one MSX
marine system and other recording equipment and components (for a total
channel count of 33,720 land and 3,838 marine channels).
Net sales for the first six months of the current year decreased $45.7
million, or 24.5%, to $140.9 million as compared to the prior year's first
six months net sales of $186.7 million. The decrease in net sales was
primarily due to lower sales levels of the Company's land systems and
components, primarily attributable to the decrease in oil prices resulting in
delayed or reduced exploration spending by oil and gas companies during the
first six months of the current fiscal year, which caused several projects to
be postponed or canceled. Sales of seven I/O SYSTEM TWO and System 2000 land
systems and three MSX marine systems were recorded
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during the first six months of fiscal 1999 compared to 31 I/O SYSTEM TWO land
systems and two MSX marine systems for the prior year's first six months.
GROSS PROFIT MARGIN. The Company's gross profit margin decreased for
the second quarter and year-to-date compared to the prior year periods, from
40.3% to 37.9%, and 40.2% to 35.4% respectively. Reduced demand for
higher-margin land seismic equipment and instrumentation was the major
contributing factor to the decreased gross profit margins. The Company's
gross profit margin for any particular reporting period is dependent on the
product mix sold and the pricing scheme for the products sold for that
period, and may vary materially from period to period.
OPERATING EXPENSES. Operating expenses increased $2.7 million, or
12.7%, for fiscal 1999's second quarter over the prior year's second quarter
operating expenses. Research and development expenses increased $1.8 million,
or 22.2%, compared to the prior year's second quarter, primarily resulting
from increased product development expenses and expenses related to recent
acquisitions, offset in part by decreased accruals for bonus and related
compensation expenses. Marketing and sales expenses increased $255,000, or
6.9%, compared to the prior year's second quarter primarily due to expenses
related to recent acquisitions, offset in part by decreased accruals for
bonus and related compensation expenses and decreased expense for third party
commissions on sales. General and administrative expenses decreased $342,000,
or 4.1%. Amortization of intangibles increased $997,000, or 81.1%, primarily
due to increased goodwill expense resulting from recent acquisitions.
Operating expenses for the first six months of the current year were
$6.4 million, or 16.4%, above the amount of operating expenses for the first
six months of the prior year. Research and development expenses increased
$3.5 million, or 22.4%, primarily resulting from increased product
development expenses and expenses related to recent acquisitions, offset in
part by decreased accruals for bonus and related compensation expenses.
Marketing and sales expenses increased $1.3 million, or 20.2%, compared to
the prior year's first six months primarily due to expenses related to recent
acquisitions and increased convention and exhibit expenses, offset in part by
decreased accruals for bonus and related compensation expense and decreased
expense for third party commissions on sales. General and administrative
expenses decreased $75,000, or 0.5%, compared to the prior year's first six
months. Amortization of intangibles increased $1.6 million, or 47.2%,
compared to the prior year's first six months primarily due to increased
goodwill expense resulting from recent acquisitions.
INTEREST EXPENSE. Interest expense for the second quarter and the
first six months of the current year (related to the ten-year term facilities
financing) was $217,000 and $459,000, respectively. See "Note (5) - Long-term
Debt" of the Notes to Consolidated Financial Statements. Interest expense for
the prior year's second quarter and first six months was $258,000 and
$580,000, respectively, also representing interest on this facility.
INCOME TAX EXPENSE. The Company's effective income tax rate was
approximately 32%, both for the second quarters and the first six months of
fiscal 1999 and fiscal 1998.
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LIQUIDITY AND CAPITAL RESOURCES
GENERAL. The Company has traditionally financed its operations from
internally generated cash flows, funds from equity financings and its credit
facilities. Cash flows from operating activities before changes in working
capital items were $15.7 million for the six months ended November 30, 1998.
Cash flows from operating activities after changes in working capital items
were a negative $17.6 million for the six months ended November 30, 1998,
primarily due to decreases in accounts payable and accrued expenses (which
represented a use of cash), increased income tax payments (primarily due to
foreign subsidiaries settling prior years' tax liabilities) and increased
inventories (primarily due to the lower sales level). As of November 30,
1998, no amounts of indebtedness were outstanding under the Company's Credit
Agreement and the Company had approximately $49.8 million available for
borrowings under the Credit Agreement.
The Company had outstanding long-term indebtedness of $9.5 million as of
November 30, 1998 secured by the land, buildings and improvements housing the
Company's executive offices, research and development headquarters and
electronics manufacturing facility in Stafford, Texas. The loan bears
interest at the rate of 7.875% per annum and is repayable in equal monthly
installments of principal and interest of $151,439. The promissory note,
which matures on September 1, 2006, contains prepayment penalties. See "Note
(5) - Long-term Debt" of the Notes to Consolidated Financial Statements.
Capital expenditures for plant, property and equipment totaled $8.3
million for the first six months of fiscal 1999. Total capital expenditures
are currently expected to aggregate $13.0 million for fiscal 1999. The
Company believes that the combination of its existing working capital, unused
credit available under its revolving credit facility, internally generated
cash flows and access to other financing sources will be adequate to meet its
anticipated capital and liquidity requirements for the foreseeable future.
CREDIT AGREEMENT. In February 1998, the Company entered into a Credit
Agreement with certain lenders, including Bank One, Texas, N.A., as
administrative agent for the lenders, replacing the Company's former
revolving working capital line of credit. The maximum amount available for
borrowings under the Credit Agreement is $50 million. In addition, up to $15
million of credit available under the Credit Agreement may be used, as
needed, by the Company for letters of credit. Indebtedness under the Credit
Agreement will mature on February 27, 2001. Borrowings under the Credit
Agreement may be made to finance the Company's working capital, capital
expenditures, acquisitions permitted under the Credit Agreement and for
general corporate purposes. Outstanding indebtedness under the Credit
Agreement will bear interest, at the Company's option, at fluctuating
interest rates based upon a prime rate or a eurodollar rate plus a credit
margin that fluctuates depending upon the Company's ratio of funded debt to
capitalization. In addition, the Company must pay a commitment fee for unused
amounts available under the credit facility, in an amount also based upon the
Company's ratio of funded debt to capitalization.
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The obligations of the Company under the Credit Agreement are unsecured,
except for a first lien pledge of the capital stock of certain wholly owned
subsidiaries of the Company that the lenders consider to be "material
subsidiaries". Additionally, certain of these wholly owned subsidiaries have
guaranteed the Company's obligations under the Credit Agreement.
ACQUISITION. On September 30, 1998, the Company and The Laitram
Corporation entered into a definitive merger agreement for the Company's
acquisition of DigiCourse, Inc., a wholly owned subsidiary of The Laitram
Corporation. Under the terms of the agreement, the Company acquired for
5,794,000 shares of Company common stock, all of the capital stock of
DigiCourse, Inc. The Company closed the transaction on November 16, 1998. As
a result of the transaction, The Laitram Corporation beneficially owns
approximately 11.7% of the outstanding common stock of the Company. The
transaction was accounted for as a purchase business combination. The
amortization life of the resulting goodwill will be 17 years. The proforma
effects of the acquisition are not considered material.
YEAR 2000. Many currently installed computer systems and software
products are coded to accept only two-digit entries in the date code field
and cannot distinguish 21st century dates from 20th century dates. These date
code fields will need to distinguish 21st century dates from 20th century
dates and, as a result, many companies' software and computer systems may
need to be upgraded or replaced in order to comply with such "Year 2000"
requirements. The Company is currently working to resolve the potential
impact of the Year 2000 issue on the computerized systems it utilizes
internally, and with regard to its products and customers.
STATE OF READINESS. The Company is in the process of evaluating the Year
2000 readiness of the hardware and software products sold by it ("products"),
the information technology systems used in its operations ("IT Systems"), and
its non-IT Systems, such as building security, voice mail and other systems.
The Company has substantially completed its assessment of its IT Systems used
in the United States, which have been tested to be Year 2000 compliant.
Beginning in calendar 1996, the Company commenced replacement of its then
current U.S. IT System with a new system. This replacement, which was
substantially completed in fiscal 1998, was required in order to meet current
and future needs of the Company's business as well as to make more efficient
various administrative and operating functions. Because the Company did not
undertake this replacement for reasons of Year 2000 compliance (the Company
understands that its previous IT system was also Year 2000 compliant), the
costs of this conversion have not been identified as Year 2000 compliance
costs. The Company has not yet, however, completed its assessment of its IT
Systems at its European locations. It is currently planned that these systems
will be replaced with a version of the Company's current U.S. IT System or a
smaller-scale Year 2000-compliant system by late calendar year 1999. The
Company's Year 2000 IT/facilities compliance program is expected to cover the
following phases: (i) inventory of all non-tested IT Systems and non-IT
Systems; (ii) assessment of repair or replacement requirements; (iii)
planning and remediation; (iv) testing; and (v) implementation.
With regard to its products, the Company is continuing its testing
procedures to determine the nature and extent of their Year 2000 compliance.
The Company's cross-functional focus team has continued to review these
issues and to assist its customers and suppliers in identifying and
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resolving Year 2000 issues. The Company believes that its products will be
Year 2000 compliant by mid-1999; however, the overall assessment of the
operational status of the Company's products will depend, in large part, on
the Year 2000 compliance of the products' components, many of which are
supplied by parties other than the Company. Year 2000 testing work on the
Company's products, which commenced in early 1998, is ongoing and expected to
be completed in April 1999. Prior to the end of April 1999, the Company
intends to (i) complete its internal review of the Year 2000 compliance of
its products and (ii) assimilate information from a questionnaire circulated
to vendors and customers in order to obtain information regarding their Year
2000 compliance. Until this additional information is obtained and evaluated,
the Company will not be able to effectively evaluate whether further
remediation efforts will be required with respect to its products.
The Company also relies, both domestically and internationally, upon
various vendors, governmental agencies, utility companies, telecommunications
service companies, delivery service companies and other service providers,
which are outside of the Company's control. There is no assurance that such
parties will not suffer a Year 2000 business disruption, which could have a
material adverse effect on the Company's financial condition and results of
operations.
COSTS. To date, the Company has not incurred any material expenditures
in connection with identifying, evaluating or remediating Year 2000
compliance issues. The Company has not retained an outside consultant to
assist it in its review and assessment of its Year 2000 issues. Most of its
expenditures have related to the opportunity cost of time spent by employees
of the Company in evaluating the Company's Year 2000 issues for its IT
Systems, its non-IT Systems and its products. While the Company has not yet
completed its evaluation of the estimated costs required to remediate the
Year 2000 issues concerning its products and internal systems (primarily
expected to be costs in connection with replacing systems and modifying
software), management currently believes that these expenditures will not
have a material adverse effect on its operations, results of operations or
financial condition. However, no assurances can be given that until the
Company fully completes its cost evaluation, the economic effects of these
remediation efforts will not have a material adverse effect on its
operations, results of operations or financial condition.
A portion of the Company's Year 2000 compliance expenditures expected to
be incurred relate to the Company's limited warranty coverage. As of November
30, 1998, no specific amounts have been accrued to the warranty reserve for
such costs, as the Company has not been able to make an estimate of such
costs based on its current level of assessment. For instances in which the
limited warranty has expired or there was no warranty coverage, the Company
will offer, on a fee basis, upgrades (if technically achievable) to those
products to render them Year 2000 compliant. In general, the Company is
constantly upgrading the systems and software incorporated into its products
in connection with its ongoing customer service efforts. As a result of these
efforts, the Company identifies and remediates certain Year 2000 problems.
The Company believes that internally generated funds or available cash will
be sufficient to cover the projected costs associated with its Year 2000
remediation requirements.
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RISKS. The Company does not yet possess the information necessary to
estimate the potential impact of Year 2000 compliance issues relating to its
products or vendors if such products or vendors were not Year 2000 compliant.
In addition, a relatively small number of customers have traditionally
accounted for most of the Company's net sales from fiscal year to fiscal
year, although the degree of sales concentration with any one customer has
varied. The loss of any significant customer due to reasons related to Year
2000 non-compliance of the Company's products could have a material adverse
impact on the Company's operations, results of operations or financial
position.
Failure to timely reprogram or replace the Company's European financial
and accounting software could, in a worse case scenario, result in the
Company's inability to process accounting and financial data in Europe. At
this time, the Company does not possess all of the information necessary to
estimate the potential impact of Year 2000 compliance issues relating to its
European IT Systems, its non-IT Systems, its products, its vendors and its
customers. Such impact, including the effect of a Year 2000 business
disruption, would not be expected to have a material adverse effect on the
Company's financial condition and results of operations.
CONTINGENCY PLAN. The Company has not yet developed a Year 2000 specific
contingency plan. The Company intends to prepare a contingency plan with
respect to its financial and accounting software and its products no later
than mid-calendar 1999. In addition, if further Year 2000 compliance issues
are discovered, the Company then will evaluate the need for one or more
contingency plans relating to those particular issues.
OTHER. Demand for the Company's products is dependent upon the level of
worldwide oil and gas exploration and development activity. Such activity in
turn is primarily dependent upon oil and gas prices, which have been subject
to wide fluctuation in recent years. Since the beginning of fiscal 1999,
worldwide oil prices have been at their lowest levels since 1986. Continuing
low prices for hydrocarbon production have in certain instances resulted in
lower exploration budgets by oil companies, which situation during the first
six months of fiscal 1999 resulted in a reduction in demand for the Company's
seismic data acquisition equipment and services.
A continuation of depressed prices for hydrocarbon production and
reduced demand for the services of the Company's customers may further strain
the revenues and cash resources of the customers of the Company, thereby
resulting in a higher likelihood of defaults in the customers' timely payment
of their obligations under the Company's financed sales arrangements.
Increased levels of payment defaults with respect to the Company's financed
sales arrangements could have a material adverse effect of the Company's
results of operations.
In addition, during 1999 there has been considerable turmoil and
uncertainty in the Russian financial markets, prompted in large part by the
crisis in the Asian financial markets, and the economic and political
problems being experienced by a number of Asian countries. The Russian ruble
has been under significant pressure, requiring the Russian government to
raise interest rates substantially, and to seek special assistance from the
International Monetary Fund in order to defend its currency. At the present
time, it is not possible to predict whether the
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Russian government will be successful in avoiding another devaluation of the
ruble, or when stability will return to its financial markets. Any
devaluation of the ruble could exacerbate existing economic problems in
Russia. Historically, customers in Russia and other Former Soviet Union
countries have accounted for approximately 5-9% of the Company's net sales.
The Company's combined trade accounts receivable and trade notes receivable
balance from customers in Russia and other Former Soviet Union countries as
of November 30, 1998 was approximately $27.6 million; these receivables are
denominated in US dollars. To the extent that economic conditions in the
Former Soviet Union or in Asia negatively affect future sales to the
Company's customers in those regions or the collectibility of the Company's
existing receivables, such conditions may adversely effect the Company's
future results of operations, liquidity and financial condition.
In January 1999, the Company paid $1,661,000 to a creditor of a Company
customer in satisfaction of the Company's obligations under a guaranty with
respect to a defaulted equipment lease between the customer and that creditor.
See "Cautionary Statement for Purposes of Forward-Looking Statements
- -Uncertainty of Energy Industry Conditions," "- Credit Risks from Sales
Arrangements" and "- Risk from Significant Amount of Foreign Sales".
CAUTIONARY STATEMENT FOR PURPOSES OF FORWARD-LOOKING STATEMENTS
Certain information contained in this Quarterly Report on Form 10-Q as
well as other written and oral statements made or incorporated by reference
from time to time by the Company and its representatives in other reports,
filings with the Securities and Exchange Commission, press releases,
conferences, or otherwise, may be deemed to be forward-looking statements
within the meaning of Section 21E of the Securities Exchange Act of 1934 and
are subject to the "Safe Harbor" provisions of that section. This information
includes, without limitation, statements concerning future operations, future
revenues, future earnings, future costs, future margins and future expenses;
anticipated product releases and technological advances; the future mix of
business and future asset recoveries; contingent liabilities; Year 2000
issues; the inherent unpredictability of adversarial proceedings; and future
demand for the Company's products, future capital expenditures and future
financial condition of the Company; energy industry conditions; and economic
conditions in Asia and Former Soviet Union countries. These statements are
based on current expectations and involve a number of risks and
uncertainties, including those set forth below and elsewhere in this
Quarterly Report on Form 10-Q. Although the Company believes that the
expectations reflected in such forward-looking statements are reasonable, it
can give no assurance that such expectations will prove to be correct.
When used in this report, the words "anticipate," "estimate," "expect,"
"may," "project" and similar expressions are intended to be among the
statements that identify forward-looking statements. Important factors which
could affect the Company's actual results and cause actual results to differ
materially from those results which might be projected, forecast, estimated
or budgeted by the Company in such forward-looking statements include, but
are not limited to, the following:
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RISKS RELATED TO PRODUCTS AND TECHNOLOGICAL CHANGE. The markets for the
Company's product lines are characterized by rapidly changing technology and
frequent product introductions. Whether the Company can develop and produce
successfully, on a timely basis, new and enhanced products that embody new
technology, meet evolving industry standards and practice, and achieve levels
of capability and price that are acceptable to its customers, will be
significant factors in the Company's ability to compete in the future. There
can be no assurance that the Company will not encounter resource constraints
or technical or other difficulties that could delay introduction of new
products in the future. If the Company is unable, for technological or other
reasons, to develop competitive products in a timely manner in response to
changes in the seismic data acquisition industry or other technological
changes, its business and operating results will be materially and adversely
affected. In addition, the Company's continuing development of new products
inherently carries the risk of inventory obsolescence with respect to its
older products.
UNCERTAINTY OF ENERGY INDUSTRY CONDITIONS. Demand for the Company's
products is dependent upon the level of worldwide oil and gas exploration and
development activity. Such activity in turn is primarily dependent upon oil
and gas prices, which have been subject to wide fluctuation in recent years
in response to relatively minor changes in the supply and demand for oil and
natural gas, market uncertainty and a variety of additional factors that are
beyond the control of the Company. Recent worldwide oil prices have been at
their lowest levels since 1986. Continuing low prices for hydrocarbon
production have resulted in lower exploration budgets by oil companies, which
has resulted in reduced demand for the Company's seismic data acquisition
equipment. It is impossible to predict future oil and natural gas price
movements or the duration of the current environment of lower oil and natural
gas prices with any certainty. No assurances can be given as to future levels
of worldwide oil and natural gas prices, the future level of activity in the
oil and gas exploration and development industry and their relationship(s) to
the demand for the Company's products.
CREDIT RISK FROM SALES ARRANGEMENTS. The Company sells to many
customers on extended-term arrangements. Moreover, in connection with certain
sales of its systems and equipment, the Company has guaranteed certain loans
from unaffiliated parties to purchasers of such systems and equipment. In
addition, the Company has sold contracts and leases to third-party financing
sources, the terms of which often obligate the Company to repurchase the
contracts and leases in the event of a customer default or upon certain other
occurrences. Performance of the Company's obligations under these
arrangements could have a material adverse effect on the Company's financial
condition. Significant payment defaults by customers could have a material
adverse effect on the Company's financial position and results of operations.
See also Note 9 of Notes to Consolidated Financial Statements - Commitments
and Contingencies - Credit Risk.
RELIANCE ON SIGNIFICANT CUSTOMERS. A relatively small number of
customers have accounted for most of the Company's net sales, although the
degree of sales concentration with any one customer has varied from fiscal
year to year. During fiscal 1998, 1997 and 1996 the two largest customers in
each of those years accounted for 35%, 45% and 42%, respectively, of the
Company's net sales. The loss of these customers could have a material
adverse effect on the
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Company's net sales.
RISK FROM SIGNIFICANT AMOUNT OF FOREIGN SALES. Sales outside the United
States have historically accounted for a significant part of the Company's
net sales. Foreign sales are subject to special risks inherent in doing
business outside of the United States, including the risk of war, civil
disturbances, embargo and government activities, which may disrupt markets
and affect operating results. Foreign sales are also generally subject to the
risks of compliance with additional laws, including tariff regulations and
import/export restrictions. The Company is, from time to time, required to
obtain export licenses and there can be no assurance that it will not
experience difficulty in obtaining such licenses as may be required in
connection with export sales.
Demand for the Company's products from customers in developing countries
(including Russia and other Former Soviet Union countries as well as certain
Asian countries) is difficult to predict and can fluctuate significantly from
year to year. The Company believes that these changes in demand result
primarily from the instability of economies and governments in certain
developing countries, changes in internal laws and policies affecting trade
and investment, and because those markets are only beginning to adopt new
technologies and establish purchasing practices. These risks may adversely
affect the Company's future operating results and financial position. In
addition, sales to customers in developing countries on extended terms can
present heightened credit risks for the Company, for the reasons discussed
above. See, in particular above, "Liquidity and Capital Resources - Other"
for further information concerning these risks in those countries.
RISKS RELATED TO TIMING OF PRODUCT SHIPMENTS. Due to the relatively high
sales price of the Company's products and relatively low unit sales volume,
the timing in the shipment of systems and the mix of products sold can
produce fluctuations in quarter-to-quarter financial performance. One of the
factors which may affect the Company's operating results from time to time is
that a substantial portion of its net sales in any period may result from
shipments during the latter part of a period. Because the Company establishes
its sales and operating expense levels based on its operational goals, if
shipments in any period do not meet goals, net sales and net earnings may be
adversely affected. The Company believes that factors which could affect such
timing in shipments include, among others, seasonality of end-user markets,
availability of purchaser financing, manufacturing lead times and shortages
of system components. In addition, because the Company typically operates,
and expects to continue to operate, without a significant backlog of orders
for its products, the Company's manufacturing plans and expenditure levels
are based principally on sales forecasts, which could result in inventory
excesses and imbalances from time to time.
RISKS RELATED TO YEAR 2000 ISSUES. While the Company is currently
assessing aspects of the potential impact of the Year 2000 issue, it has not
yet completed its review. The problems actually encountered by the Company in
addressing its Year 2000 issues may be more pervasive than anticipated by
management, and if so, could have adverse effects on the Company's
operations, results of operations or financial condition. See " - Liquidity
and Capital Resources - Year 2000."
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RISKS RELATED TO GROSS MARGIN. The Company's gross margin percentage is
a function of the product mix sold in any period. Continuing increased
percentages of lower margin marine seismic equipment and related components
in the overall sales mix may result in margins remaining below their
historically higher levels. Other factors, such as unit volumes, inventory
obsolescence, heightened price competition, changes in sales and distribution
channels, shortages in components due to untimely supplies or inability to
obtain items at reasonable prices, and unavailability of skilled labor, may
also continue to affect the cost of sales and the fluctuation of gross margin
percentages in future periods.
COMPETITION. The design, manufacture and marketing of seismic data
acquisition systems are highly competitive and are characterized by continual
and rapid changes in technology. The Company's current principal competitor
for land seismic equipment is Societe d'Etudes Recherches et Construction
Electroniques, an affiliate of Compagnie General de Geophysique which, unlike
the Company, possesses the advantage of being able to sell to an affiliated
seismic contractor.
Competition in the industry is expected to intensify and could adversely
affect the Company's future results. Several of the Company's competitors
have greater name recognition, more extensive engineering, manufacturing and
marketing capabilities, and greater financial, technological and personnel
resources than those available to the Company. In addition, certain companies
in the industry have expanded their product lines or technologies in recent
years as a result of acquisitions. There can be no assurance that the Company
will be able to compete successfully in the future with existing or new
competitors. Pressures from competitors offering lower-priced products or
products employing new technologies could result in future price reductions
for the Company's products.
A continuing trend toward consolidation, concentrating buying power, in
the oil field services industry may have the effect of adversely affecting
the prices and demand for the Company's products and services.
DISRUPTION IN VENDOR SUPPLIES. The Company's manufacturing process
requires a high volume of quality components. Certain components used by the
Company are currently provided by only one supplier. In the future, the
Company may, from time to time, experience supply or quality control problems
with its suppliers, and such problems could significantly affect its ability
to meet production and sales commitments. The Company's reliance on certain
suppliers, as well as industry supply conditions generally, involve several
risks, including the possibility of a shortage or a lack of availability of
key components, increases in component costs and reduced control over
delivery schedules, any of which could adversely affect the Company's future
financial results.
PROTECTION OF INTELLECTUAL PROPERTY. The Company believes that
technology is the primary basis of competition in the industry. Although the
Company currently holds certain intellectual property rights relating to its
product lines, there can be no assurance that these rights will not be
challenged by third parties or that the Company will obtain additional
patents or other intellectual property rights in the future. Additionally,
there can be no assurance that the
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Company's efforts to protect its trade secrets will be successful or that
others will not independently develop products similar to the Company's or
design around any of the intellectual property rights owned by the Company.
DEPENDENCE ON PERSONNEL. The Company's success depends upon the
continued contributions of its personnel, many of whom would be difficult to
replace. The success of the Company will depend on the ability of the Company
to attract and retain skilled employees. Changes in personnel, therefore,
could adversely affect operating results.
RISKS RELATED TO GOVERNMENT REGULATIONS AND PRODUCT CERTIFICATION. The
Company's operations are also subject to laws, regulations, government
policies, and product certification requirements worldwide. Changes in such
laws, regulations, policies, or requirements could affect the demand for the
Company's products or result in the need to modify products, which may
involve substantial costs or delays in sales and could have an adverse effect
on the Company's future operating results.
RISKS OF STOCK VOLATILITY AND ABSENCE OF DIVIDENDS. In recent years, the
stock market in general and the market for energy and technology stocks in
particular, including the Company's common stock, have experienced extreme
price fluctuations. The sales price for the Company's Common Stock has
declined from $25 7/8 per share at November 28, 1997 to $8 3/16 per share at
November 30, 1998 (based on New York Stock Exchange composite tape closing
sales prices). There is a risk that stock price fluctuation could impact the
Company's operations. Changes in the price of the Company's common stock
could affect the Company's ability to successfully attract and retain
qualified personnel or complete desirable business combinations or other
transactions in the future. The Company has historically not paid, and does
not intend to pay in the foreseeable future, cash dividends on its capital
stock.
RISKS RELATED TO ACQUISITIONS. To implement its business plans, the
Company may make further acquisitions in the future. Acquisitions require
significant financial and management resources both at the time of the
transaction and during the process of integrating the newly acquired business
into the Company's operations. The Company's operating results could be
adversely affected if it is unable to successfully integrate such new
companies into its operations. Certain acquisitions or strategic transactions
may be subject to approval by the other party's shareholders, United States
or foreign governmental agencies, or other third parties. Accordingly, there
is a risk that important acquisitions or transactions could fail to be
concluded as planned. Future acquisitions by the Company could also result in
issuances of equity securities or the rights associated with the equity
securities, which could potentially dilute earnings per share. In addition,
future acquisitions could result in the incurrence of additional debt, taxes,
or contingent liabilities, and amortization expenses related to goodwill and
other intangible assets. These factors could adversely affect the Company's
future operating results and financial position.
OIL AND GAS OPERATIONS. The Company's oil and gas operations are subject
to the economic risks typically associated with exploration, development, and
production activities. In conducting exploration and development activities,
the Company may drill unsuccessful wells
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and experience losses and charges to earnings. Historically, the markets for
oil and natural gas have been volatile and are likely to continue to be
volatile in the future. The nature of the oil and gas business involves
certain operating hazards such as well blowouts, cratering, explosions,
uncontrollable flows of oil, natural gas or well fluids, fires, formations
with abnormal pressures, pollution, releases of toxic gas and other
environmental hazards and risks, any of which could result in losses to the
Company. While the Company's current practice is not to act as operator of
any drilling prospect, and while the Company does maintain insurance in
accordance with customary industry practices under the circumstances against
some, but not all, of such risks and losses, the occurrence of such an event
not fully covered by insurance could have a material adverse affect on the
Company's financial position and results of operation.
The foregoing review of factors pursuant to the Private Securities
Litigation Reform Act of 1995 should not be construed as exhaustive. In
addition to the foregoing, the Company wishes to refer readers to other
factors discussed elsewhere in this report as well as the Company's other
filings and reports with the Securities and Exchange Commission, including
its most recent Annual Report on Form 10-K, for a further discussion of risks
and uncertainties which could cause actual results to differ materially from
those contained in forward-looking statements. The Company undertakes no
obligation to publicly release the result of any revisions to any such
forward-looking statements which may be made to reflect the events or
circumstances after the date hereof or to reflect the occurrence of
unanticipated events.
<PAGE>
SIGNATURE
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THE
REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED THEREUNTO DULY AUTHORIZED.
INPUT/OUTPUT, INC.
By: /s/ Ronald A. Harris
-------------------------------------
Ronald A. Harris
Vice President and Controller
(Chief Accounting Officer)
Dated: January 27, 1999
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