<PAGE>
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED: FEBRUARY 28, 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: 1-13402
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 February 28, 1999 there were 50,499,898 shares of common stock, par value
$0.01 per share, outstanding.
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<PAGE>
INPUT/OUTPUT, INC. AND SUBSIDIARIES
INDEX TO FORM 10-Q
FOR THE QUARTER ENDED FEBRUARY 28, 1999
<TABLE>
<CAPTION>
PART I. Financial Information.
Page
----
<S> <C>
Item 1. Financial Statements.
Consolidated Balance Sheets
February 28, 1999 and May 31, 1998............................................... 2
Consolidated Statements of Operations
Three and nine months ended February 28, 1999 and 1998.......................... 3
Consolidated Statements of Cash Flows
Nine months ended February 28, 1999 and 1998.................................... 4
Notes to Consolidated Financial Statements......................................... 6
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition..................................................... 11
Item 3. Quantitative and Qualitative Disclosures about Market Risk................ 21
PART II. Other Information.
Item 1. Legal Proceedings......................................................... 21
Item 6. Exhibits and Reports on Form 8-K.......................................... 21
</TABLE>
1
<PAGE>
INPUT/OUTPUT, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
ASSETS FEBRUARY 28, May 31,
1999 1998
----------- ---------
<S> <C> <C>
Current assets:
Cash and cash equivalents.......................................... $ 36,859 $ 72,275
Trade accounts receivable, net..................................... 54,369 68,257
Trade notes receivable, net........................................ 26,456 38,987
Income taxes receivable............................................ 14,245 --
Inventories, net................................................... 99,591 120,206
Prepaid expenses................................................... 1,156 2,649
-------- --------
Total current assets....................................... 232,676 302,374
Long-term trade notes receivable................................... 20,051 32,487
Deferred income tax asset, net..................................... 26,032 2,896
Property, plant and equipment, net................................. 68,789 69,303
Goodwill, net...................................................... 94,136 68,414
Other assets....................................................... 14,165 14,189
-------- --------
$455,849 $489,663
-------- --------
-------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable, principally trade................................ $ 9,088 $ 33,107
Current installments of debt....................................... 1,046 986
Accrued expenses .................................................. 28,559 20,521
Income taxes payable............................................... -- 8,139
-------- --------
Total current liabilities.................................. 38,693 62,753
Long-term debt..................................................... 9,222 10,011
Other liabilities.................................................. 838 1,199
Stockholders' equity:
Preferred stock, $.01 par value; authorized 5,000,000 shares,
none issued...................................................... -- --
Common stock, $.01 par value; authorized 100,000,000 shares;
issued 50,499,898 shares at February 28, 1999 and 44,584,634
shares at May 31, 1998........................................... 505 446
Additional paid-in capital......................................... 287,489 240,746
Retained earnings.................................................. 122,713 177,885
Accumulated other comprehensive earnings (loss).................... (2,764) (2,063)
Unamortized restricted stock compensation.......................... (847) (1,314)
-------- --------
Total stockholders' equity................................. 407,096 415,700
-------- --------
$455,849 $489,663
-------- --------
-------- --------
</TABLE>
See accompanying notes to consolidated financial statements.
2
<PAGE>
INPUT/OUTPUT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS FOR THE NINE MONTHS
ENDED ENDED
FEBRUARY 28, FEBRUARY 28,
-------------------------- --------------------------
1999 1998 1999 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net sales $ 37,755 $ 95,266 $ 178,668 $ 281,919
Cost of sales............................... 83,649 54,455 174,617 166,003
----------- ----------- ----------- -----------
Gross profit (loss)............... (45,894) 40,811 4,051 115,916
----------- ----------- ----------- -----------
Operating expenses:
Research and development................. 12,493 8,122 31,606 23,738
Marketing and sales...................... 3,247 4,160 11,171 10,751
General and administrative............... 29,963 6,572 44,398 21,082
Amortization of intangibles.............. 3,771 1,628 7,857 4,044
----------- ----------- ----------- -----------
Total operating expenses.......... 49,474 20,482 95,032 59,615
----------- ----------- ----------- -----------
Earnings (loss) from operations............ (95,368) 20,329 (90,981) 56,301
Interest expense............................ (229) (262) (688) (842)
Other income ............................... 1,824 2,204 6,789 5,576
----------- ----------- ----------- -----------
Earnings (loss) before income taxes......... (93,773) 22,271 (84,880) 61,035
Income taxes................................ (32,553) 7,127 (29,708) 19,532
----------- ----------- ----------- -----------
Net earnings (loss)......................... $ (61,220) $ 15,144 $ (55,172) $ 41,503
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Basic earnings (loss) per common
share....................................... $ (1.21) $ 0.34 $ (1.15) $ 0.95
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Weighted average number of common
shares outstanding.......................... 50,499,898 44,157,319 47,848,166 43,758,807
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Diluted earnings (loss) per common share.... $ (1.21) $ 0.34 $ (1.15) $ 0.94
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Weighted average number of diluted
common shares outstanding................... 50,499,898 44,564,745 47,848,166 44,257,576
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
INPUT/OUTPUT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
FEBRUARY 28,
-----------------------
1999 1998
-------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net earnings (loss)....................................................... $(55,172) $ 41,503
Adjustments to reconcile net earnings (loss) to net cash (used in)
provided by operating activities:
Depreciation and amortization............................................. 15,662 12,096
Amortization of restricted stock compensation............................. 467 154
Deferred income taxes..................................................... (23,416) 865
Pension costs............................................................. (347) 277
Provision for inventory obsolescense...................................... 48,834 930
Provision for receivables................................................. 19,147 2,850
Provision for cancellation of redundant facility lease.................... 943 --
Impairment of fixed assets................................................ 1,874 --
Impairment of intangibles and other assets................................ 2,365 --
-------- ---------
10,357 58,675
Changes in assets and liabilities, net of effect of acquisitions and
above provisions:
Receivables............................................................... 26,144 (22,908)
Inventories............................................................... (14,451) (8,874)
Leased equipment.......................................................... 1,837 3,355
Accounts payable and accrued expenses..................................... (20,257) 18,016
Income taxes payable...................................................... (22,384) 5,059
Other..................................................................... 44 (569)
-------- ---------
Net cash (used in) provided by operating activities............... (18,710) 52,754
Cash flows from investing activities:
Purchases of property, plant and equipment................................ (9,446) (4,363)
Acquisition of net assets and business, net of cash acquired.............. (6,432) (10,803)
Investment in other assets................................................ (1,092) (324)
-------- ---------
Net cash used in investing activities............................. (16,970) (15,490)
</TABLE>
- continued -
4
<PAGE>
INPUT/OUTPUT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
<S> <C> <C>
Cash flows from financing activities:
Payments on debt......................................................... $ (729) $ (675)
Proceeds from exercise of stock options.................................. 495 10,857
Proceeds from issuance of stock for the
Employee Stock Purchase Plan......................................... 534 465
-------- ---------
Net cash provided by financing activities........................ 300 10,647
Effect of foreign currency exchange rates ............................... (36) (137)
-------- ---------
Net (decrease) increase in cash and cash equivalents..................... (35,416) 47,774
Cash and cash equivalents at beginning of year........................... 72,275 2,573
-------- ---------
Cash and cash equivalents at end of period....................... $ 36,859 $ 50,347
-------- ---------
-------- ---------
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE>
INPUT/OUTPUT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(1) GENERAL
The consolidated financial statements included herein have been
prepared by the Company, without audit, pursuant to the rules and regulations
of the Securities and Exchange Commission. The financial statements reflect
all adjustments (consisting of normal recurring accruals and the charges
described in Note 2) which are, in the opinion of management, necessary to
fairly present such information. Although the Company believes that the
disclosures are adequate to make the information presented not misleading,
certain information and footnote disclosures, including significant
accounting policies, normally included in financial statements prepared in
accordance with generally accepted accounting principles have been omitted
pursuant to such rules and regulations. It is suggested that these financial
statements be read in conjunction with the consolidated financial statements
and the notes thereto, as well as Item 7. "Management's Discussion and
Analysis of Results of Operations and Financial Condition," included in the
Company's Annual Report on Form 10-K for the year ended May 31, 1998, as
filed with the Securities and Exchange Commission.
(2) THIRD QUARTER CHARGES
During the third quarter of 1999, the Company recorded charges
totaling $85.7 million ($55.9 million after giving effect to income taxes, or
$1.11 per share) resulting from reduced customer demand for the Company's
equipment as a result of lower commodity prices and oil company mergers which
have delayed seismic data acquisition projects. This reduced demand has
created excess capacity within the Company's installed base, accelerating the
obsolescence of certain of its seismic equipment. The total charge of $85.7
million included an impairment of long-lived assets and certain identifiable
intangibles of $4.2 million included in operating expenses; an inventory
write-down of $47.3 million due to the conditions described above and planned
product revisions, included in cost of sales; charges for the early
termination of a facility lease and restructuring costs totaling $2.6
million, included in general and administrative expenses; an accounts and
notes receivable allowance of $17.6 million related to a customer's vessel
seizure followed by filing for creditor protection and management's
assessment of business risk relating to three North American customer notes
as a result of the depressed market environment, included in general and
administrative expenses (see related discussion at Note 10 - Credit Risk);
and a charge for warranty reserves and other product related contingencies of
$14.0 million included in cost of sales.
(3) INVENTORIES
Inventories are stated at the lower of cost (primarily first-in,
first-out) or market. A summary of inventories follows (in thousands):
<TABLE>
<CAPTION>
FEBRUARY 28, May 31,
1999 1998
------------ ---------
<S> <C> <C>
Raw materials............................... $ 70,631 $ 68,824
Work-in-process............................. 8,167 25,262
Finished goods.............................. 65,196 32,461
Inventory reserves.......................... (44,403) (6,341)
-------- --------
$ 99,591 $120,206
-------- --------
-------- --------
</TABLE>
6
<PAGE>
INPUT/OUTPUT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
(UNAUDITED)
(4) EARNINGS PER SHARE
The Company has adopted the Financial Accounting Standards Board
Statement of Financial Accounting Standards No. 128, "Earnings per Share". In
accordance with this pronouncement, basic earnings per share is computed by
dividing net earnings available to common stockholders by the weighted
average number of common shares outstanding during the period. Diluted
earnings per share is determined on the assumption that outstanding dilutive
stock options have been exercised and the aggregate proceeds as defined were
used to reacquire Company common stock using the average price of such common
stock for the period.
The following table summarizes the calculation of net earnings
(loss) available to common stockholders, weighted average number of common
shares outstanding and weighted average number of diluted common shares
outstanding for purposes of the computation of earnings per share.
<TABLE>
<CAPTION>
For the three months ended For the nine months ended
February 28, February 28,
-------------------------- ---------------------------
1999 1998 1999 1998
---------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
Net earnings (loss) available to common
stockholders (in thousands)........................ $ (61,220) $ 15,144 $ (55,172) $41,503
----------- ----------- ----------- ------------
----------- ----------- ----------- ------------
Weighted average number of common
shares outstanding................................. 50,499,898 44,157,319 47,848,166 43,758,807
Stock options...................................... -- 407,426 -- 498,769
----------- ----------- ----------- ------------
Weighted average number of diluted
common shares outstanding.......................... 50,499,898 44,564,745 47,848,166 44,257,576
----------- ----------- ----------- ------------
----------- ----------- ----------- ------------
Basic earnings (loss) per common share............. $(1.21) $0.34 $(1.15) $0.95
----------- ----------- ----------- ------------
----------- ----------- ----------- ------------
Diluted earnings (loss) per common share........... $(1.21) $0.34 $(1.15) $0.94
----------- ----------- ----------- ------------
----------- ----------- ----------- ------------
</TABLE>
At February 28, 1999 and 1998, there were 3,990,713 and 930,000,
respectively, of shares subject to stock options that were not included in
the calculation of diluted earnings (loss) per common share, because to do so
would have been antidilutive.
7
<PAGE>
INPUT/OUTPUT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
(UNAUDITED)
(5) STATEMENTS OF CASH FLOWS
The Company considers all highly liquid investments purchased with
an original maturity of three months or less to be cash equivalents. The
Company does not use or intend to use derivative instruments. Exchange rate
fluctuations have not had a material effect on the Company's Consolidated
Statements of Cash Flows.
Supplemental disclosures of cash flow information for the nine
months ended February 28, 1999 and 1998 follow (in thousands):
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Cash paid during the periods for:
Interest................................... $ 688 $ 892
------- ------
------- ------
Income taxes............................... $16,207 $7,947
------- ------
------- ------
</TABLE>
(6) LONG TERM DEBT
A Company subsidiary has a $12.6 million original principal amount,
ten-year term loan secured by certain of its land and buildings located in
Stafford, Texas which includes the Company's executive offices, research and
development headquarters, and electronics manufacturing facility. The term
loan, which the Company has guaranteed under a Limited Guaranty, bears
interest at a fixed rate of 7.875% per annum. The Company leases all of the
property from its subsidiary under a master lease, which lease has been
collaterally assigned to the lender as security for the term loan. The term
loan provides for penalties for prepayment prior to maturity.
(7) COMPREHENSIVE EARNINGS
Effective June 1, 1998, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive Income",
which establishes standards for reporting and display of comprehensive income
and its components in a full set of financial statements. Comprehensive
income includes all changes in a company's equity (except those resulting
from investments by and distributions to owners), including, among other
things, foreign currency translation adjustments, and unrealized gains
(losses) on marketable securities classified as available-for-sale. Total
comprehensive earnings (loss) for the nine months ended February 28, 1999 and
1998 follow (in thousands):
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Net earnings (loss).............................. $(55,172) $41,503
Foreign currency translation adjustments......... (701) (595)
-------- -------
Total comprehensive earnings (loss).............. $(55,873) $40,908
-------- -------
-------- -------
</TABLE>
8
<PAGE>
INPUT/OUTPUT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
(UNAUDITED)
(8) 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 proforma effects of the
acquisition are immaterial.
(9) NEW ACCOUNTING PRONOUNCEMENTS
In March 1998, the AICPA issued Statement of Position 98-1,
"Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use" (SOP 98-1), establishing accounting standards for such costs,
as defined therein. Accordingly, certain costs of computer software developed
or obtained for internal use will be capitalized and amortized over the
estimated useful life of the software. Effective June 1, 1998, the Company
adopted SOP 98-1.
The FASB issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information" ("SFAS No. 131"), in June 1997 which
establishes standards for reporting information about operating segments in
annual financial statements and requires that enterprises report selected
information about operating segments in interim reports issued to
shareholders. SFAS No. 131 is effective for financial statements for fiscal
years beginning after December 15, 1997. The adoption of SFAS No. 131 is not
expected to have a material impact on the Company's financial condition or
results of operations.
(10) COMMITMENTS AND CONTINGENCIES
LEGAL PROCEEDINGS. On September 24, 1997, a purported class action
lawsuit was filed against the Company, the former president and chief
executive officer of the Company, and an executive vice president of the
Company, in the U.S. District Court for the Southern District of Texas,
Houston Division. The action, styled NORMAN TOCK V. INPUT/OUTPUT, INC., GARY
D. OWENS AND ROBERT P. BRINDLEY, alleged violations of Sections 10(b) and
20(a) of the Securities Exchange Act of 1934, and state statutory and common
law fraud provisions. By Memorandum Opinion issued and Final Judgment entered
on December 31, 1998, the U.S. District Court for the Southern District of
Texas, Houston Division, ordered that the defendants' motion to dismiss the
amended complaint be granted, ordered that the federal securities fraud
claims be dismissed with prejudice, and denied the plaintiff's request for
leave to further amend the complaint. The period for appeal of this judgment
has expired. The state law claims were dismissed without prejudice to their
being refiled in the appropriate state court.
9
<PAGE>
INPUT/OUTPUT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
(UNAUDITED)
In the ordinary course of business, the Company has been named in
other various lawsuits. While the final resolution of these matters may have
an impact on the Company's consolidated financial results for a particular
reporting period, management believes that the ultimate resolution of these
matters will not have a material adverse impact on the Company's financial
position, results of operations or liquidity.
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.
To date, the Company has not incurred any material expenditures in
connection with identifying, evaluating or remediating Year 2000 compliance
issues. A portion of the Company's Year 2000 compliance expenditures
expected to be incurred relate to the Company's limited warranty coverage. As
of February 28, 1999, no specific amounts have been accrued to the warranty
reserve for such costs, since the Company has not yet been able to make a
firm estimate of such costs.
CREDIT RISK. The Company sells to many customers on extended-term
arrangements. Significant payment defaults by customers could have a material
adverse effect on the Company's financial position and results of operations.
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. At May 31, 1998, the Company had guaranteed
approximately $11,140,000 of trade notes receivable sold with recourse and
loans from unaffiliated parties to purchasers of the Company's seismic
equipment; however, at February 28, 1999, the amount of these guaranties
outstanding was only approximately $1,128,000. In January 1999, the Company
paid $1,661,000 to a creditor of a customer in satisfaction of the Company's
obligations under a guaranty with respect to a defaulted equipment lease
between the customer and that creditor. The $1,661,000 was billed to the
customer and was fully reserved as of February 28, 1999. All loans guaranteed
are collateralized by the seismic equipment.
10
<PAGE>
In October 1998, the Company made a significant sale of marine
seismic equipment to a customer for installation on two vessels; a
substantial portion of this sale was financed by the Company. In late
December 1998, one of the vessels on which a majority of this equipment was
installed was seized by a creditor of the customer. The Company has reserved
the $13,800,000 receivable to its net realizable value which is approximately
the Company's original cost of the equipment.
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 - Risk from Downturn in Energy
Industry Conditions" and "Risk From Significant Amount of Foreign Sales." The
Company believes that when worldwide oil production had not significantly
decreased 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. Consolidation within
the oil industry has also negatively affected demand for the Company's
products.
Until confidence in future oil prices above current levels is
restored, orders for the Company's equipment are expected to remain at
significantly lower levels than experienced in fiscal 1998. As a result, this
reduced demand has created excess capacity within the Company's installed
customer base, which, coupled with planned product revisions, has accelerated
the obsolescence of certain of its seismic equipment. Accordingly, the
Company has recognized special charges in the third quarter of $85.6 million
($55.7 million after federal income taxes) related to asset, inventory and
receivable write-downs; early termination of a facility lease; warranty
reserve and other product related contingencies and restructuring costs. See
"Note (2) - Third Quarter Charges" of Notes to Consolidated Financial
Statements. 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. Furthermore, future order
cancellations and additional customer defaults on Company financed sales
could further deteriorate the Company's anticipated performance and future
financial condition. In response to these trends, the Company has initiated
cost reduction and containment programs since the beginning of fiscal 1999,
including personnel reductions in force. Management plans to continue to seek
ways to reduce its costs as industry conditions dictate.
Most of the changes in the Company's financial condition and balance
sheet items as of February 28, 1999, compared to that of May 31, 1998, have
resulted from the reduced levels of net sales during fiscal 1999 and the
resulting decreases in cash and cash equivalents, receivables, inventories
and payables, in addition to the write-downs discussed in this quarterly
report. See "Net Sales", "- Gross Profit Margin" and "- Operating Expenses"
below. No assurances can be given that if industry conditions do not improve,
additional special charges and write-downs will not be incurred in the future.
11
<PAGE>
NET SALES. The Company's third quarter net sales decreased $57.5
million, or 60.4%, to $37.8 million as compared to the prior year's third
quarter net sales of $95.3 million. The decline in sales of systems and
components is primarily attributable to the decrease in oil prices resulting
in delayed or reduced 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 third quarter, four of the
Company's new System 2000 land systems were sold along with other seismic
data acquisition recording equipment and components (representing a total
channel count of 2,034 land and 304 marine); the prior year's third quarter
sales consisted of six I/O SYSTEM TWO-Registered Trademark- land systems
and two MSX marine system and other recording equipment and components (for a
total channel count of 25,356 land and 7,712 marine).
Net sales for the first nine months of the current year decreased
$103.3 million, or 36.6%, to $178.7 million as compared to the prior year's
first nine months net sales of $281.9 million. The decrease in net sales was
primarily due to lower sales levels of the Company's systems and components,
primarily attributable to the decrease in oil prices resulting in delayed or
reduced exploration spending by oil and gas companies. Sales of 11 I/O SYSTEM
TWO and System 2000 land systems and three MSX marine systems were recorded
during the first nine months of fiscal 1999 (representing a total channel
count of 13,104 land and 7,248 marine) compared to 37 I/O SYSTEM TWO land
systems and four MSX marine systems for the prior year's first nine months
(for a total channel count of 82,872 land and 13,328 marine).
GROSS PROFIT MARGIN. The Company's gross profit margin decreased for
the third quarter and year-to-date compared to the prior year periods, from
42.8% in 1998 to (121.6%) in 1999, and 41.1% in 1998 to 2.3% in 1999. This
decrease was primarily due to the inventory write down totaling $47.3 million
due to reduced customer demand for the Company's products as a result of
prevailing industry conditions and the result of products rendered obsolete
due to planned product revisions. Also in the third quarter, a charge of
$14.0 million relating to certain warranty reserves and other product related
contingencies was incurred. The gross profit margin excluding special charges
for the third quarter and first nine months would have been 40.6% and 36.5%
as compared to 42.8% and 41.1% in the prior year's third quarter and first
nine months, respectively. 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 $29.0 million, or
141.5%, for fiscal 1999's third quarter over the prior year's third quarter
operating expenses. Research and development expenses increased $4.4 million,
or 53.8%, compared to the prior year's third quarter, primarily resulting
from increased contract labor, outside engineering services, product
development expenses and expenses related to recent acquisitions. Marketing
and sales expenses decreased $913,000, or 21.9%, compared to the prior year's
third quarter, primarily due to decreased expenses for third party
commissions on sales, advertising and convention expense, offset in part by
expenses related to recent acquisitions. General and administrative expenses
increased $23.4 million, or 355.9%, compared to the prior year's third
quarter, mostly due to an increase in the allowance for doubtful accounts and
notes receivable of $17.6 million. This increase was primarily attributable
to the seizure of a customer's vessel equipped by the Company followed by the
creditor's filing for creditor protection and management's assessment of
business risk regarding three North American customer notes as a result of
the depressed market environment; reductions in force (302 employees
worldwide); early termination of a facility lease and impairment of fixed
assets. Amortization of intangibles increased $2.1 million, or 131.6%,
compared to the prior year's third quarter primarily due to increased
goodwill expense resulting from recent acquisitions and impairment of
goodwill related to acquisitions in previous years.
Operating expenses for the first nine months of the current year
were $35.4 million, or 59.4%, above the operating expenses for the first nine
months of the prior year. Research and development
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expenses increased $7.9 million, or 33.1%, compared to the prior year's first
nine months, primarily resulting from expenses related to recent acquisitions
and increased product development expenses. Marketing and sales expenses
increased $420,000, or 3.9%, compared to the prior year's first nine months.
General and administrative expenses increased $23.3 million, or 110.6%,
compared to the prior year's first nine months, primarily due to the increase
in allowance for doubtful accounts and notes receivable of $17.6 million, all
as discussed above. Amortization of intangibles increased $3.8 million, or
94.3%, compared to the prior year's first nine months, primarily due to
increased goodwill expense resulting from recent acquisitions and impairment
of goodwill related to acquisitions in previous years.
INTEREST EXPENSE. Interest expense for the third quarter and the
first nine months of the current fiscal year (related to the ten-year term
facilities financing) was $229,000 and $688,000, respectively. See "Note (6)
- - Long-term Debt" of the Notes to Consolidated Financial Statements. Interest
expense for the prior year's third quarter and first nine months was $262,000
and $842,000, respectively, also representing interest on this facility.
INCOME TAXES. The Company's effective income tax rate was
approximately 35% and 32%, for the third quarter and the first nine months of
fiscal 1999 and fiscal 1998, respectively.
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 $10.4 million for the nine months ended February 28, 1999
as compared to $58.7 million in the prior year's first nine months. Cash
flows from operating activities, after changes in working capital items, were
a negative $18.7 million for the nine months ended February 28, 1999,
primarily due to decreases in accounts payable and accrued expenses (which
represented a use of cash), increased income tax payments (primarily due to
certain foreign subsidiaries settling prior years' tax liabilities) and
increased inventories (primarily resulting from the lower sales level).
CREDIT AGREEMENT. As of February 28, 1999 the Company was in
violation of certain covenants under its revolving Credit Agreement due to
its third quarter results of operations and requested a waiver from its
lender. On March 16, 1999, the agent for the lenders delivered to the Company
a Notice of Default due to violation of two financial covenants. As of
February 28, 1999, no amounts of indebtedness for borrowed money were
outstanding under the Company's Credit Agreement. However, at that date, the
Company had standby and commercial letters of credit issued under the Credit
Agreement outstanding in the aggregate amount of $1.4 million. As a result of
the agent's delivery of the Notice of Default, the Company is currently
unable to draw funds under the Credit Agreement. The Company is currently
negotiating with the agent the terms of a replacement credit facility
appropriate for the Company's current financial condition. The obligations of
the Company under the Credit Agreement are secured by a first lien pledge of
the capital stock of certain wholly owned subsidiaries of the Company.
Additionally, certain of these wholly owned subsidiaries have guaranteed the
Company's obligations under the Credit Agreement.
The Notice of Default from the agent for the lenders provides that
if the defaults are not cured within 30 days, events of default under the
Credit Agreement will exist, and the lenders will have the rights to exercise
their remedies under the Credit Agreement and the collateral documents. The
terms of any new revolving credit arrangement for the Company with its
current lenders or any new lenders will likely not feature as advantageous
terms to the Company as the current Credit Agreement now provides. While no
assurances can be given, the Company believes that it can negotiate a new or
amended revolving credit or
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working capital facility, but this facility may have a lower maximum credit
amount than the $50 million maximum under the Credit Agreement.
The Company had outstanding long-term indebtedness of $9.2 million
as of February 28, 1999 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 (6) - Long-term Debt" of the Notes to Consolidated Financial Statements.
Capital expenditures for plant, property and equipment totaled $9.4
million for the first nine months of fiscal 1999. Total capital expenditures
are currently expected to aggregate $11.0 million for fiscal 1999. The
Company believes that the combination of its existing working capital and
internally generated cash flows will be adequate to meet its anticipated
near-term capital and liquidity needs. The Company also believes that it can
obtain a revolving credit facility or another form of capital infusion to
assist it in meeting its capital and liquidity requirements, which along with
its existing working capital and internally generated cash, should enable it
to meet its capital and liquidity requirements for the next 12 months.
However, no assurances can be given that the Company will be able to obtain a
revolving credit facility or such a capital infusion. In that event, the
Company may be forced to further significantly reduce its operating costs or
sell or restructure its assets. In addition, the Company can give no
assurances as to whether such a facility or infusion will be sufficient to
meet the Company's long-term capital and liquidity needs.
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 continues to carry out its Year 2000
compliance program for the hardware and software products sold by it
("products"), the information technology systems used in its operations ("IT
Systems"), and its non-IT Systems or embedded technology, such as building
security, voice mail and other systems. The Company's Year 2000 compliance
program covers the following phases: (i) inventory of all products, IT
Systems and non-IT Systems; (ii) assessment of repair or replacement
requirements; (iii) planning and remediation; (iv) testing; and (v)
implementation. The Company has completed the inventory phase for its
products, IT Systems and non-IT Systems, and anticipates the assessment phase
will be completed by April 30, 1999. Its land and marine product application
inspections are expected to be completed by June 30, 1999. The Company's
program calls for completion of all phases by October 1, 1999.
As a result of additional planned component testing, the Company
decided that some of its older products in the field, which it no longer
manufactures or sells, will not be made Year 2000 compliant and the Company
will not offer Year 2000 support for these products. These products are no
longer covered by the Company's product warranties. The remainder of the
Company's products, some of which supersede or replace discontinued products,
either manufactured or in the field, are already Year 2000 compliant, or
will be made Year 2000 compliant via remedial patches which will be made
available to customers or users. All products manufactured for sale by the
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Company since January 1, 1999 have been Year 2000 compliant. The Company
expects that a portion of the costs for bringing its products in the field
into Year 2000 compliance will be recorded as warranty expense.
The Company 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 to date have related to the opportunity cost of time spent by
employees of the Company in evaluating and remediating the Company's Year
2000 issues for its products, IT Systems and its non-IT Systems. Management
currently believes that Year 2000 expenditures will not have a material
adverse effect on the Company's 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 February 28, 1999, no specific amounts have been accrued to the warranty
reserve for such costs, as the Company has not yet been able to make a firm
estimate of such costs. However, the Company estimates that based on its
assessments to date, the Company's total estimated Year 2000
compliance-related expenses will be less than $300,000. These expenses
consist of estimated costs of bringing its European IT systems into Year 2000
compliance, and anticipated product warranty expense.
RISKS. The Company does not yet possess the information necessary to
estimate the potential impact of Year 2000 compliance issues relating to its
suppliers or customers' internal systems, if the suppliers or customers are
not Year 2000 compliant.
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 generally resulted in
lower exploration budgets by oil companies. Lower exploration budgets during
the first nine months of fiscal 1999 resulted in a severe 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 will 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
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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 fiscal 1999 there has been considerable turmoil
and uncertainty in the Russian financial markets, prompted in large part 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
Russian government will be successful in avoiding another devaluation of the
ruble, or when stability will return to its financial markets. Any further
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.
In addition, the Company sells its products to customers in Latin America,
which have also experienced economic problems and the effects of devaluations
within the last 12 months.
The Company's combined trade accounts receivable and trade notes
receivable balance as of February 28, 1999 from customers in Russia and other
Former Soviet Union countries was approximately $28.1 million and was
approximately $11.6 million from customers in Latin America. These
receivables are denominated in US dollars. To the extent that economic
conditions in the Former Soviet Union, Latin America or in Asia negatively
affect future sales to the Company's customers in those regions or the
collectibility of the Company's existing receivables, these conditions may
adversely affect 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. The $1,661,000 was billed to the customer and the total amount
was fully reserved as of February 28, 1999.
See "Note 10 - Commitments and Contingencies" to Notes to
Consolidated Financial Statements and "Cautionary Statement for Purposes of
Forward-Looking Statements - Risks from Downturn in Energy Industry
Conditions," "- Credit Risks from Sales Arrangements" and "- Risk from
Significant Amount of Foreign Sales".
CONVERSION TO THE EURO CURRENCY. On January 1, 1999, some members of
the European Union established fixed conversion rates between their existing
currencies and the European Union's common currency, the euro. The Company
owns facilities and manufactures components for its systems in two member
countries. The transition period for the introduction of the euro is between
January 1, 1999 and June 30, 2002. The Company is addressing the issues
involved with the introduction of the euro. The more important issues facing
the Company include: converting information technology systems; reassessing
currency risk and processing tax and accounting records.
Based on its progress to date in reviewing this matter, and the fact
that all Company sales to customers are denominated in US dollars, the
Company believes that the introduction of the euro will not have a
significant impact on the manner in which it conducts its business affairs
and processes its business and accounting records. Therefore, conversion to
the euro should not have a material effect on the Company's financial
condition or results of operations.
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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; the Company's
Year 2000 issues and their resolution; 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 world economic conditions including Former Soviet
Union, Latin American and Asian 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:
RISKS FROM DOWNTURN IN ENERGY INDUSTRY CONDITIONS. Demand for the
Company's products is dependent upon the level of worldwide oil and gas
exploration and development activity. This activity in turn is primarily
dependent upon oil and gas prices, which have been subject to wide
fluctuation in recent years in response to 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. Additionally,
no assurances can be given that the Company's efforts to reduce and contain
costs will be sufficient to offset the effect of these expected continued
lower levels of consolidated revenues.
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. During the third quarter of fiscal 1999, the Company announced that
it had completed three field tests of its new product, a multi-component
digital sensor. Further tests are planned and may increasingly involve
potential customers. There can be no assurance that the Company will not
encounter resource constraints or technical or other difficulties that could
delay introduction of this new product or other new products in the future.
If the Company is unable, for technological or other reasons, to
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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,
which happened in the third quarter of fiscal 1999 when the Company
wrote down inventory in part due to planned product revisions.
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 would have a material
adverse effect on the Company's financial position and results of operations.
See also Notes 2 and 10 of Notes to Consolidated Financial Statements and "-
Risk from Significant Amount of Foreign Sales" below.
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 or a significant reduction
in their equipment needs could have a material adverse effect on the
Company's net sales.
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, can sell to its parent, a seismic contractor. The Company's
principal competitor in the marine seismic systems market is GeoScience
Corporation, an affiliate of Tech-Sym Corporation.
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. 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.
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
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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 Latin American and 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. 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."
RISKS RELATED TO GROSS MARGIN. The Company's gross margin percentage
is a function of the product mix sold in any period. Increased sales of lower
margin equipment and related components in the overall sales mix may result
in lower gross margins. Other factors, such as unit volumes, inventory
obsolescence, increased warranty costs and other product related
contingencies, 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.
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 Company's efforts to protect its trade
secrets will be successful or that others will not independently develop
products similar to the Company's products or design around any of the
intellectual property rights owned by the Company, or that the Company will
be
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precluded by others' patent claims.
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.
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 $21 9/16 per share at February 27, 1998 to $5 5/8 per share at
February 26, 1999 (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 these new
companies into its operations. Structural changes in the Company's internal
organization which may result from acquisitions may not always produce the
desired financial or operational results.
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.
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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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is not yet required to provide the disclosures required
by Regulation S-K Item 305 pursuant to General Instruction 1. to Paragraphs
305(a), 305(b), 305(c), 305(d), and 305(e) of Item 305. The Company's sales
and financial instruments are principally denominated in U.S. dollars and the
Company does not use or currently intend to use derivative financial
instruments or derivative commodity instruments.
PART II - OTHER INFORMATION.
ITEM 1. LEGAL PROCEEDINGS
On September 24, 1997, a purported class action lawsuit was filed
against the Company and the former president and chief executive officer, and
an executive vice president, of the Company, in the U.S. District Court for
the Southern District of Texas, Houston Division. The action, styled NORMAN
TOCK V. INPUT/OUTPUT, INC., GARY D. OWENS AND ROBERT P. BRINDLEY, alleged
violations of Sections 10(b) and 20(a) of the Securities Exchange Act of
1934, and state statutory and common law fraud provisions. By Memorandum
Opinion issued and Final Judgment entered on December 31, 1998, the U.S.
District Court for the Southern District of Texas, Houston Division ordered
that the defendants' motion to dismiss the amended complaint be granted,
ordered that the federal securities fraud claims be dismissed with prejudice,
and denied the plaintiff's request for leave to further amend the complaint.
The period for appeal of this judgment has expired. The state law claims were
dismissed without prejudice to their being refiled in the appropriate state
court.
In the ordinary course of business, the Company has been named in
other various lawsuits or threatened actions. While the final resolution of
these matters may have an impact on the Company's consolidated financial
results for a particular reporting period, management believes that the
ultimate resolution of these matters will not have a material adverse impact
on the Company's financial position, results of operations or liquidity.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
List of documents filed as Exhibits.
(a) 27.1 - Financial Data Schedule (included in EDGAR copy only)
(b) Reports on Form 8-K
No Current Reports on Form 8-K were filed during the three
month period ended February 28, 1999.
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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: April 14, 1999
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<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S UNAUDITED FINANCIAL STATEMENTS FOR THE THIRD QUARTER ENDED
FEBRUARY 28, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> MAY-31-1999
<PERIOD-START> JUN-01-1998
<PERIOD-END> FEB-28-1999
<CASH> 36,859
<SECURITIES> 0
<RECEIVABLES> 80,825
<ALLOWANCES> 0
<INVENTORY> 99,591
<CURRENT-ASSETS> 232,676
<PP&E> 68,789
<DEPRECIATION> 0
<TOTAL-ASSETS> 455,849
<CURRENT-LIABILITIES> 38,693
<BONDS> 0
0
0
<COMMON> 505
<OTHER-SE> 406,591
<TOTAL-LIABILITY-AND-EQUITY> 455,849
<SALES> 178,668
<TOTAL-REVENUES> 178,668
<CGS> 174,617
<TOTAL-COSTS> 95,032
<OTHER-EXPENSES> (6,789)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 688
<INCOME-PRETAX> (84,880)
<INCOME-TAX> (29,708)
<INCOME-CONTINUING> (55,172)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (55,172)
<EPS-PRIMARY> (1.15)
<EPS-DILUTED> (1.15)
</TABLE>
