<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 29, 2000
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 29, 2000 there were 50,779,580 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 29, 2000
<TABLE>
<CAPTION>
PART I. Financial Information. Page
----
<S> <C>
Item 1. Financial Statements.
Consolidated Balance Sheets
February 29, 2000 and May 31, 1999............................................................... 2
Consolidated Statements of Operations
Three and nine months ended February 29, 2000 and February 28, 1999............................. 3
Consolidated Statements of Cash Flows
Nine months ended February 29, 2000 and February 28, 1999....................................... 4
Notes to Consolidated Financial Statements......................................................... 5
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition..................................................................... 12
Item 3. Quantitative and Qualitative Disclosures about Market Risk.................................. 24
PART II. Other Information.
Item 1. Legal Proceedings........................................................................... 24
Item 6. Exhibits and Reports on Form 8-K............................................................ 24
</TABLE>
1
<PAGE>
INPUT/OUTPUT, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
ASSETS FEBRUARY 29, MAY 31,
2000 1999
----------------- ----------------
<S> <C> <C>
Current assets:
Cash and cash equivalents................................................. $79,358 $75,140
Trade accounts receivable, net............................................ 30,044 21,617
Trade notes receivable, net............................................... 16,077 21,907
Income taxes receivable................................................... -- 15,000
Inventories, net.......................................................... 81,509 95,825
Deferred income tax asset, net............................................ 13,690 27,568
Prepaid expenses.......................................................... 1,146 1,495
-------- --------
Total current assets.............................................. 221,824 258,552
Long-term trade notes receivable, net..................................... 16,577 17,616
Deferred income tax asset, net............................................ 40,046 18,739
Property, plant and equipment, net........................................ 61,292 62,979
Goodwill, net............................................................. 82,599 87,558
Other assets.............................................................. 4,963 6,304
-------- --------
Total assets...................................................... $427,301 $451,748
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable, principally trade...................................... $8,697 $10,526
Current installments of long-term debt................................... 1,131 1,067
Accrued expenses ........................................................ 19,378 33,347
Income taxes payable..................................................... 950 --
-------- --------
Total current liabilities......................................... 30,156 44,940
Long-term debt........................................................... 8,091 8,947
Other liabilities........................................................ 451 887
Commitments and contingencies
Stockholders' equity:
Cumulative convertible preferred stock, $.01 par value; authorized 5,000,000
shares, issued and outstanding 55,000 shares at February 29, 2000 and 40,000
shares at May 31, 1999 (liquidation value of $55.1 million)........... 1 --
Common stock, $.01 par value; authorized 100,000,000 shares; issued
50,779,580 shares at February 29, 2000 and 50,663,358shares at May 31,
1999.................................................................. 509 507
Additional paid-in capital............................................... 346,881 327,845
Retained earnings........................................................ 46,034 72,455
Accumulated other comprehensive loss..................................... (3,903) (3,549)
Treasury stock........................................................... (718) --
Unamortized restricted stock compensation................................ (201) (284)
--------- ---------
Total stockholders' equity........................................ 388,603 396,974
-------- --------
Total liabilities and stockholders' equity........................ $427,301 $451,748
======== ========
</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>
THREE MONTHS ENDED NINE MONTHS ENDED
FEBRUARY 29, February 28, FEBRUARY 29, February 28,
------------------------------- ----------------------------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales.......................................... $33,424 $37,755 $87,841 $178,668
Cost of sales...................................... 33,813 83,420 76,972 173,666
---------- ---------- ---------- ----------
Gross profit (loss)...................... (389) (45,665) 10,869 5,002
---------- ---------- ---------- ----------
Operating expenses:
Research and development........................ 7,489 12,624 21,560 32,152
Marketing and sales............................. 2,752 3,284 7,631 11,324
General and administrative...................... (2,858) 30,024 8,339 44,650
Amortization of intangibles..................... 2,042 3,771 5,883 7,857
---------- ---------- ---------- ----------
Total operating expenses................. 9,425 49,703 43,413 95,983
---------- ---------- ---------- ----------
Loss from operations............................... (9,814) (95,368) (32,544) (90,981)
Interest expense................................... (197) (229) (611) (688)
Other income....................................... 1,761 1,824 4,016 6,789
---------- ---------- ---------- ----------
Loss before income taxes........................... (8,250) (93,773) (29,139) (84,880)
Income tax (benefit) expense....................... 168 (32,553) (6,098) (29,708)
---------- ---------- ---------- ----------
Net loss........................................... (8,418) (61,220) (23,041) (55,172)
---------- ---------- ---------- ----------
Preferred stock dividend........................... 1,156 -- 3,380 --
---------- ---------- ---------- ----------
Net loss applicable to common stockholders......... $(9,574) $(61,220) $(26,421) $(55,172)
========== ========== ========== ==========
Basic and diluted loss per common share............ $(0.19) $(1.21) $(0.52) $(1.15)
========== ========== ========== ==========
Weighted average number of basic and
diluted common shares outstanding............... 50,779,580 50,499,898 50,714,648 47,848,166
========== ========== ========== ==========
</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 29, FEBRUARY 28,
--------------------------------------
2000 1999
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net loss.................................................................... $(23,041) $(55,172)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization............................................... 16,506 15,662
Amortization of restricted stock compensation............................... 83 467
Deferred income taxes....................................................... (7,429) (23,416)
Inventory obsolescense expense.............................................. 9,675 48,834
Bad debt expense (recoveries) and loan losses (recoveries), net............. (7,844) 19,147
Stock compensation expense.................................................. 248 --
Impairment of fixed assets.................................................. 434 1,874
Impairment of intangibles and other assets.................................. -- 2,365
Changes in assets and liabilities:
Accounts and notes receivable............................................... (2,178) 26,144
Inventories................................................................. 8,212 (14,451)
Leased equipment............................................................ -- 1,837
Accounts payable and accrued expenses....................................... (15,890) (19,661)
Income taxes payable/receivable............................................. 15,950 (22,384)
Other....................................................................... (24) 44
-------- --------
Net cash used in operating activities.................................. (5,298) (18,710)
Cash flows from investing activities:
Purchases of property, plant and equipment.................................. (4,432) (9,446)
Acquisition of net assets and business, net of cash acquired................ -- (6,432)
Investment in other assets.................................................. -- (1,092)
-------- --------
Net cash used in investing activities.................................. (4,432) (16,970)
Cash flows from financing activities:
Payments on long-term debt.................................................. (792) (729)
Purchase of treasury stock.................................................. (802) --
Proceeds from issuance of common stock to Employee Stock
Purchase Plan.............................................................. 973 534
Proceeds from exercise of stock options..................................... 136 495
Payments of preferred stock dividends....................................... (316) --
Net proceeds from preferred stock offering.................................. 14,794 --
-------- --------
Net cash provided by financing activities.............................. 13,993 300
Effect of change in foreign currency exchange rates on
cash and cash equivalents................................................... (45) (36)
-------- --------
Net increase (decrease) in cash and cash equivalents........................ 4,218 (35,416)
Cash and cash equivalents at beginning of period............................ 75,140 72,275
-------- --------
Cash and cash equivalents at end of period............................. $ 79,358 $ 36,859
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
4
<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 and
recoveries described in Notes (2) and (3)) which are, in the opinion of
management, necessary to fairly present such information. Certain amounts
previously reported in the consolidated financial statements have been
reclassified to conform to the current year presentation. 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, 1999, as filed with the Securities and Exchange Commission.
(2) FISCAL 2000 CHARGES AND RECOVERIES
FIRST QUARTER CHARGES
During the first quarter of fiscal 2000, the Company recorded pretax
charges totaling $4.7 million, comprised of $3.3 million primarily related to
employee severance arrangements and the closing of the Company's Ireland
facility (included in general and administrative expenses) and charges of
$1.4 million for product-related warranties (included in cost of sales).
These charges resulted from continued weak customer demand for the Company's
equipment due to the deterioration in energy industry conditions and, more
specifically, in the seismic services sector. This deterioration resulted
from, among other things, a widespread downturn in exploration activity due
to a decline in energy prices from October 1997 through February 1999, and
consolidation among energy producers. Despite the recovery in commodity
prices, energy producers' concerns over the sustainability of higher prices
for hydrocarbon production resulted in lower exploration budgets by energy
companies, which has resulted in reduced demand for the Company's seismic
data acquisition equipment.
THIRD QUARTER CHARGES AND RECOVERIES
During the third quarter of fiscal 2000, the Company recorded pretax
charges and recoveries totaling a net charge of $0.3 million, comprised of
$8.7 million of inventory charges (included in cost of goods sold) primarily
related to the Company's decision to commercialize VectorSeis(TM) digital
sensor products having higher technical standards than the products it had
previously produced. The Company had decided to commercialize these earlier
VectorSeis(TM) products which have since proven not to be commercially
feasible based on data gathered from recent VectorSeis(TM) digital sensor
surveys, the anticipated longer-term market recovery for new seismic
instrumentation and given current and expected market conditions. Other
charges were $2.4 million of bad debt expense related to a marine customer
(included in general and administrative expense); $1.3 million of charges
related to a 45-employee reduction in the Company's workforce worldwide
(included in general and administrative expense); and $0.7 million of charges
related to legal settlements (included in cost of goods sold - $0.3 million,
and in general and administrative expense - $0.4 million). These charges were
offset in part by $12.8 million of recoveries attributable to a more
favorable than anticipated resolution of a customer's bankruptcy settlement,
consisting of a $10.2 million reduction in the Company's allowance for loan
loss, resulting in a payment received in March 2000 (recorded as a
5
<PAGE>
INPUT/OUTPUT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
reduction to general and administrative expense) and a $2.6 million reversal
of warranty reserves based on the bankruptcy settlement (recorded as a
reduction to cost of goods sold).
As of February 29, 2000 there were approximately $637,000 of accrued
severance costs, all of which are to be paid by the end of December 2000 in
accordance with severance agreements.
(3) FISCAL 1999 CHARGES
During the third quarter of 1999, the Company recorded pretax charges
totaling $85.7 million resulting from reduced customer demand for the
Company's equipment as a result of lower commodity prices, oil company
mergers which delayed seismic data acquisition projects and the continued
deterioration of the financial condition of certain customers. This reduced
demand 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 totaling
$2.8 million based on projected net cash flows from those assets, which
declined due to the severe seismic services industry downturn (included in
general and administrative expense); an impairment of intangible assets
totaling $1.4 million based on projected net cash flow from the assets with
which the intangibles were identified, which also declined due to the severe
seismic services industry downturn (included in amortization of intangibles);
an inventory write-down of $21.6 million in domestic land inventory and $25.7
million in domestic marine inventory as a result of the severe decline in
current and projected sales due to the conditions described above and planned
product revisions (included in cost of sales); charges for the early
termination of a facility lease; employee severance arrangements and other
restructuring costs totaling $2.6 million (included in general and
administrative expense); an accounts and notes receivable allowance of $17.6
million related to a customer's vessel seizure followed by its filing for
bankruptcy and management's assessment of business risk relating to three
North American customer notes receivable as a result of the depressed market
environment and their related deteriorated financial condition (included in
general and administrative expense); and a charge for warranty reserves and
other product related contingencies of $14.0 million (included in cost of
sales).
(4) 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 29, MAY 31,
2000 1999
------------ ------------
<S> <C> <C>
Raw materials............................................................. $ 51,069 $54,731
Work-in-process........................................................... 16,096 8,717
Finished goods............................................................ 29,638 48,624
-------- --------
96,803 112,072
Less inventory reserves................................................... 15,294 16,247
-------- --------
$ 81,509 $ 95,825
======== ========
</TABLE>
(5) TRADE NOTES RECEIVABLE
Trade notes receivable are generally secured by seismic equipment sold
by the Company, bearing interest at contractual rates up to 13% and are due
at various dates through 2001. The recorded investment in trade notes
receivable for which an impairment has been recognized at February 29, 2000
and May 31, 1999
6
<PAGE>
INPUT/OUTPUT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
was $37.3 million and $58.1 million, respectively. The activity in the
allowance for loan loss is as follows for the nine months ended February 29,
2000 (in thousands):
<TABLE>
<CAPTION>
FEBRUARY 29, 2000
-----------------
<S> <C>
Balance at beginning of period...................................................... $28,778
Provision for losses on notes receivable............................................ 5,747
Recoveries reducing costs and expenses.............................................. (17,923)
Writedowns charged against the allowance............................................ (14,379)
Reclassification of trade account receivable........................................ 11,988
------
Balance at the end of period........................................................ $14,211
=======
</TABLE>
In the first nine months of fiscal 2000, included in recoveries is a
$10.2 million reduction in the allowance for loan loss, attributable to a
more favorable than anticipated resolution of a customer's bankruptcy
settlement for a trade note receivable that had previously been reserved for,
and $4.9 million, representing the fair value of repossessed equipment,
resulting from customers' defaults on payments of trade notes receivable. The
$12.0 million reclassification resulted from the reclassification of a trade
account receivable balance, which had been provided for in the prior year, to
trade notes receivable.
(6) LOSS PER SHARE
Basic loss per common share is computed by dividing net loss
applicable to common stockholders by the weighted average number of common
shares outstanding during the period. If applicable, diluted earnings per
common share is determined on the assumption that outstanding dilutive stock
options and other common stock equivalents 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. Because all
periods presented reported a net loss applicable to common stockholders,
basic and diluted loss per common share are the same.
At February 29, 2000 and February 28, 1999, there were 3,962,950 and
3,990,713, respectively, of common stock shares subject to stock options that
were not included in the calculation of diluted loss per common share,
because to do so would have been anti-dilutive. In addition, the cumulative
convertible preferred stock has not been considered in the computation of
diluted loss per common share in fiscal 2000 because the effect would be
anti-dilutive.
(7) 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. As of February 29, 2000 and May 31, 1999, the
Company had approximately $0.3 million and $2.3 million, respectively, of
certificates of deposit with one month original maturities and other
short-term securities that were used to secure standby and commercial letters
of credit.
7
<PAGE>
INPUT/OUTPUT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Supplemental disclosures of cash flow information for the nine months
ended February 29, 2000 and February 28, 1999 follow (in thousands):
<TABLE>
<CAPTION>
2000 1999
--------------- ------------
<S> <C> <C>
Cash paid (received) during the period for:
Interest............................................................. $ 611 $ 688
======== =======
Income taxes......................................................... $(14,694) $16,207
======== =======
Non-cash financing activities:
Dividends on preferred stocks....................................... $ 3,064 $ --
======== =======
Repossession of equipment due to customers' defaulting on trade notes receivable
and related placement of equipment in rental equipment fleet:
Decrease in trade notes receivable................................. $ 4,893 $ --
Increase in property, plant and equipment........................ $ 4,893 $ --
======== =======
Repossession of equipment due to a customer's default on a trade note receivable
and related placement of equipment in inventories............
Decrease in trade notes receivable.................................. $ 3,571 $ --
Increase in inventories............................................. $ 3,571 $ --
======== =======
</TABLE>
(8) 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.
(9) COMPREHENSIVE LOSS
Comprehensive loss includes all changes in a company's equity (except
those resulting from investments by and distributions to owners). With
respect to the Company, comprehensive loss includes net loss and foreign
currency translation adjustments. Total comprehensive loss for the nine
months ended February 29, 2000 and February 28, 1999 follows (in thousands):
<TABLE>
<CAPTION>
FEBRUARY 29, FEBRUARY 28,
2000 1999
------------------ ------------------
<S> <C> <C>
Net loss.............................................................. $(23,041) $(55,172)
Foreign currency translation adjustments.............................. (354) (701)
--------- ---------
Total comprehensive loss......................................... $(23,395) $(55,873)
========= =========
</TABLE>
(10) SEGMENT INFORMATION
Late in fiscal 1999, the Company initiated a fundamental
reorganization of its internal structure. As a result of this reorganization,
the Company's management now evaluates and reviews results based on two
8
<PAGE>
INPUT/OUTPUT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
segments, Land and Marine. This segment structure permits increased
visibility and accountability of costs and more focused customer service and
product development. Prior to such time, the Company's management made
business decisions using consolidated financial information. The Company has
determined that it is impracticable to obtain all of the applicable
information for the three and nine months ended February 28, 1999 to report
its operating segments for that period in accordance with the new internal
reporting structure. However, in order to provide meaningful information
available for the three and nine months ended February 28, 1999, the Company
is able to disclose a measure of results of operations utilizing a gross
profit measure based on its current land and marine segments. Commencing in
the first quarter of fiscal year 2000, the Company is reporting operating
segment information by the Land and Marine segments, and is measuring the
operating results of these segments based on a measure of earnings (loss)
from operations excluding unallocated corporate expenses and is able to
provide asset information at February 29, 2000 and May 31, 1999 based on the
current land and marine segments. The following summarizes this information
(in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
FEBRUARY 29, FEBRUARY 28, FEBRUARY 29, FEBRUARY 28,
2000 1999 2000 1999
---------------- ---------------- ---------------- ----------------
Net sales:
Land........................................ $ 14,996 $ 17,374 $ 51,102 $ 88,988
Marine...................................... 18,428 20,381 36,739 89,680
-------- -------- -------- --------
$33,424 $ 37,755 $ 87,841 $178,668
======== ======== ======== ========
Gross profit (loss):
Land........................................ $ (5,538) $(18,080) $ 1,653 $ 5,559
Marine...................................... 5,149 (27,585) 9,216 (557)
-------- -------- -------- -------
$(389) $(45,665) $ 10,869 $ 5,002
======== ======== ======== ========
Earnings (loss) from operations:
Land........................................ $(11,827) $(17,204)
Marine...................................... 8,517 1,891
Corporate expenses.......................... (6,504) (17,231)
-------- --------
$ (9,814) $(32,544)
======== ========
<CAPTION>
February 29, May 31,
2000 1999
---------------- ----------------
<S> <C> <C>
Total assets:
Land............................................................................. $118,658 $141,510
Marine........................................................................... 125,901 116,203
Corporate........................................................................ 182,742 194,035
-------- --------
$427,301 $451,748
======== ========
</TABLE>
Intersegment revenues are insignificant for all periods presented.
Corporate expenses not allocated to the operating segments include costs
related to corporate general and administrative personnel and activities and
costs related to certain research and development personnel and activities
not specifically identified with land or marine products. Corporate assets
include all assets specifically related to corporate personnel and
operations, substantially all cash and cash equivalents, all facilities and
manufacturing machinery and equip-
9
<PAGE>
INPUT/OUTPUT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
ment that are jointly utilized by segments and all income taxes
payable/receivable and deferred income tax assets. The depreciation expense
and facility expense related to all jointly utilized facilities and machinery
and equipment are allocated based on each segment's use of those assets.
(11) CHANGES IN CAPITAL STRUCTURE
On August 17, 1999, SCF-IV, L.P., a Delaware limited partnership
("SCF-IV"), exercised its option to purchase 15,000 shares of Series C
Preferred Stock, par value $0.01 per share (the "Series C Preferred Stock"),
under the option granted to SCF-IV by the Company in connection with SCF-IV's
purchase of 40,000 shares of Series B Preferred Stock in a privately
negotiated transaction in May 1999. The purchase price paid for the Series C
Preferred Stock was $1,000 per share, resulting in net proceeds of
approximately $14.8 million. The net cash proceeds are to be used to fund the
Company's research and development projects, to provide additional working
capital and for general corporate purposes. The issuance of the Series C
Preferred Stock and the underlying shares of Common Stock were exempt from
the registration requirements of Section 5 of the Securities Act of 1933 in
accordance with Section 4(2) of that Act. The Series C Preferred Stock has
substantially the same terms and conditions as the Series B Preferred Stock,
except that the fixed conversion price for the Series C Preferred Stock is
$8.50 per share, compared to $8.00 per share for the Series B Preferred Stock.
The holders of Series C Preferred Stock are entitled to receive
cumulative cash dividends of $10.00 per share, per annum (1% of the
liquidation preference) for each share of Series C Preferred Stock. Each
share of Series C Preferred Stock is entitled to a liquidation preference of
$1,000 per share, plus all accrued and unpaid dividends.
The Series C Preferred Stock is convertible at the holder's option
after the first to occur of any of the following (the "Initial Conversion
Date"): (i) May 7, 2002, (ii) the approval by the Board of Directors of the
Company of an agreement relating to a Business Combination (as defined) or
the consummation of a Business Combination, (iii) a tender offer for Common
Stock is approved or recommended by the Board of Directors of the Company or
(iv) the redemption, repurchase or reacquisition by the Company of rights
issued pursuant to the Company's Stockholder Rights Plan or any waiver of the
application of the Company's Stockholder Rights Plan to any beneficial owner
other than SCF-IV or its affiliates (except as approved by SCF-IV's
representative on the Board of Directors of the Company). After the Initial
Conversion Date and prior to the Mandatory Conversion Date (defined below),
the holders of Series C Preferred Stock will be entitled to convert their
shares into a number of fully paid and nonassessable shares of Common Stock
per share equal to, at the option of the holder, one of, or if not specified
by the holder, at the greater of, the following (such amount being referred
to as the "Conversion Ratio Amount"): (a) the quotient of $1,000 (plus any
accrued and unpaid dividends through the record date for determining
stockholders entitled to vote) divided by the fixed conversion price of $8.50
(as adjusted from time to time in accordance with certain anti-dilution
provisions) or (b) the quotient of $1,000 increased at a rate of eight
percent per annum from August 17, 1999, compounded quarterly, less the amount
of cash dividends actually paid through the applicable conversion date (the
"Adjusted Stated Value"), divided by the average market price for the Common
Stock during the ten trading day period prior to the date of conversion.
On May 7, 2004 (the "Mandatory Conversion Date"), each outstanding
share of Series C Preferred Stock shall, without any action on the part of
the holder, be converted automatically into a number of fully paid and
nonassessable shares of Common Stock equal to the Conversion Ratio Amount,
provided that a shelf
10
<PAGE>
INPUT/OUTPUT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
registration statement to be filed with the Securities and Exchange
Commission ("SEC") covering those shares of Common Stock has been declared
effective.
In the event of a conversion of Series C Preferred Stock pursuant to
which the Conversion Ratio Amount is determined using clause (b) above, then,
provided that full cumulative dividends have been paid or declared and set
apart for payment upon all outstanding shares of Series C Preferred Stock for
all past dividend periods, the Company may redeem for cash up to 50% (or such
greater percentage as the holders shall agree) of the shares of Series C
Preferred Stock surrendered for conversion at a redemption price per share
equal to the Adjusted Stated Value , in lieu of conversion.
For financial accounting purposes, based on the terms of the
outstanding Series B and C Preferred Stock, dividends will be recognized as a
charge to retained earnings at the rate of 8% per annum, compounded
quarterly. Such preferred dividends will reduce net earnings applicable to
common stockholders accordingly. The Company is permitted to pay dividends on
Common Stock as long as the Series B and C Preferred Stock dividends are
current.
(12) COMMITMENTS AND CONTINGENCIES
LEGAL PROCEEDINGS.
The Company, along with a former employee, has been named a
defendant in an action filed on May 21, 1999, in State District Court in
Harris County, Texas styled Coastline Geophysical, Inc. v. Input/Output, Inc.
et al. The plaintiffs' petition alleges a number of causes of action in
contract and tort arising out of a purchase of a marine seismic system
manufactured by the Company. Although the plaintiffs have not disclosed a
specific amount of damages, plaintiffs' responses to recent discovery
requests indicate that it may seek to recover costs in excess of $49 million.
The Company plans to vigorously defend against the plaintiffs' claims.
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.
CREDIT RISK
The Company sells to many customers on extended-term arrangements. In
connection with certain sales of its systems and equipment, the Company has
also guaranteed 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. At February 29, 2000 and May 31, 1999, the
Company had guaranteed approximately $543,000 and $948,000, respectively, of
trade notes receivable sold with recourse and loans from unaffiliated parties
to purchasers of the Company's seismic equipment. Continued depressed seismic
market demand could accelerate the deterioration of the financial condition
of certain customers. A number of significant payment defaults by customers
could have an adverse effect on the Company's financial position and results
of operations. All loans guaranteed are collateralized by
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INPUT/OUTPUT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
the seismic equipment. Due to the inherent uncertainties of guaranty
agreements, the Company cannot estimate the fair value of the guaranties as
of February 29, 2000.
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.
Demand for the Company's products from customers in developing
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.
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 activity 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 are influenced by numerous factors including,
but not limited to those described below under "Cautionary Statement for
Purposes of Forward-Looking Statements" - "Continuation of Downturn in Energy
Industry and Seismic Services Industry Conditions Will Adversely Affect
Results of Operations and Financial Condition", "Significant Payment Defaults
under Sales Arrangements Could Adversely Affect the Company" and "Risk from
Significant Amount of Foreign Sales Could Adversely Affect Results of
Operations". During fiscal 1999 and the first nine months of fiscal 2000, our
financial performance was adversely impacted by the deterioration in energy
industry conditions over the past 21 months and, more specifically, in the
seismic services sector. This deterioration resulted from, among other
things, a widespread downturn in exploration activity due to a decline in
energy prices from October 1997 to February 1999 and consolidation among
energy producers.
Despite the recovery in commodity prices during 1999 and 2000,
energy producers' continued concerns over the sustainability of higher prices
for hydrocarbon production resulted in lower exploration budgets by energy
companies, which has resulted in continued weak demand for the Company's
seismic data acquisition equipment. As a result of these continuing
prevailing conditions, we recorded pretax charges of $85.7 million and $53.3
million during the third and fourth quarters of fiscal 1999, related to
asset, inventory and receivable writedowns; early termination of a facility
lease; warranty reserve and other product-related contingencies; employee
severance arrangements and other restructuring costs. In determining the
fiscal 1999 writedowns of $21.6 million in domestic land inventory and $25.7
million in domestic marine inventory, management principally took into
account the following factors: the severe decline in projected sales, planned
product revisions and products that management decided the Company would not
support on a go-forward
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basis. The Company recorded pretax charges totaling $4.7 million during the
first quarter of fiscal 2000 related to employee severance arrangements, the
closing of a company facility and product-related warranties; pretax charges
totaling $4.4 million during the third quarter of fiscal 2000 related to
receivable writedowns and employee severance arrangements; and operating
losses during the first nine months of fiscal 2000. Also, during the third
quarter of fiscal 2000, the Company recorded $8.7 million of inventory
charges primarily related to the Company's decision to commercialize
VectorSeis(TM) digital sensor products having higher technical standards than
the products it had previously produced. The Company had decided earlier in
fiscal 2000 to commercialize these first-generation VectorSeis(TM) products,
which have since proven not to be commercially feasible based on data
gathered from recent VectorSeis(TM) digital sensor surveys, the anticipated
longer-term market recovery for new seismic instrumentation and the current
and expected future market conditions. The total fiscal 2000 third quarter
charges of $13.1 million were offset in part by $12.8 million of recoveries
attributable to a more favorable than anticipated resolution of a customer's
bankruptcy settlement, consisting of a $10.2 million reduction in the
Company's allowance for loan loss resulting in a payment received in March
2000 and a $2.6 million reversal of warranty reserves based on the bankruptcy
settlement. See "Note (2) - Fiscal 2000 Charges and Recoveries" and "Note (3)
- - Fiscal 1999 Charges" of the Notes to Consolidated Financial Statements.
In response to these industry conditions, we have concentrated on
lowering our cost structure, consolidating our product offerings and
reorganizing into a divisional structure to allow increased visibility and
accountability of costs, more focused customer service and product
development and minimization of the effects of future industry volatility on
our business. During the first and second quarters of fiscal year 2000, we
closed our cable manufacturing facility in Cork, Ireland and merged its
operation into our U.K. and U.S. facilities. This allowed us to address some
of our excess capacity issues in the depressed market. This action, together
with the reduction of 163 full-time employees worldwide, should result in an
estimated annual cost reduction of $9 million which should be realized in
part in the fourth quarter of fiscal 2000 and during fiscal 2001. Due to the
seismic services industry downturn being longer and more pervasive than
originally anticipated, the Company's initial restructuring and cost control
efforts did not achieve their anticipated results for the nine months ended
February 29, 2000. Therefore, the Company is in the process of evaluating
additional restructuring and cost control efforts with the goal of achieving
a net earnings position, currently anticipated to occur during fiscal year
2001. These evaluations could result in additional charges in the near term.
We presently believe that industry conditions will continue to
adversely impact demand for our products during the next 9 to 12 months.
However, we also believe that the initiatives discussed above will better
position the Company to return to profitability once industry conditions
improve.
NET SALES. The Company's third quarter fiscal 2000 land division net
sales decreased $2.4 million, or 13.7%, to $15.0 million as compared to the
prior year's third quarter land division net sales of $17.4 million. The
Company's third quarter fiscal 2000 marine division net sales decreased $2.0
million, or 9.6%, to $18.4 million as compared to the prior year's third
quarter marine division net sales of $20.4 million.
The Company's land division net sales for the first nine months of
fiscal 2000 decreased $37.9 million, or 42.6%, to $51.1 million as compared
to the land division's net sales of $89.0 million for the same period in the
prior year. The Company's marine division net sales for the first nine months
of fiscal 2000 decreased $52.9 million, or 59.0%, to $36.7 million as
compared to the marine division's net sales of $89.7 million for the same
period in the prior year. The decline in both the land and marine division
net sales for the third quarter and the first nine months of fiscal 2000 is
primarily attributable to the deterioration in the seismic service industry
over the past 21 months, resulting in weak demand for the Company's seismic
data acquisition equipment. See "INTRODUCTION" above.
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GROSS PROFIT MARGIN. The Company's land division gross loss for the
third quarter of fiscal 2000 compared to the prior year's third quarter,
decreased from $18.1 million in 1999 to $5.5 million in 2000. The land
division's gross loss for the third quarter of fiscal 1999 included $21.6
million in domestic land inventory writedowns as a result of the severe
decline in current and projected sales due to the reduced customer demand for
the Company's products and the result of products rendered obsolete due to
planned product revisions, plus charges of $1.8 million relating to certain
warranty reserves and other product related contingencies. See "Note (3) -
Fiscal 1999 Charges" of the Notes to Consolidated Financial Statements. The
land division's gross loss for the third quarter of fiscal 2000 included $8.7
million of inventory charges and $0.3 million of charges for legal
settlements. See "Note (2) - Fiscal 2000 Charges and Recoveries" of the Notes
to Consolidated Financial Statements. Excluding these charges, the land
division's third quarter fiscal 1999 and 2000 gross profit margins would have
been 30.5% and 23.2%, respectively.
The Company's marine division gross profit margin increased for the
third quarter of fiscal 2000 compared to the prior year's third quarter, from
a gross loss of $27.6 million in 1999 to gross profit of $5.1 million, or
27.9% of marine net sales, in 2000. The marine division's gross loss for the
third quarter of fiscal 1999 included $25.7 million in domestic marine
inventory writedowns as a result of the severe decline in current and
projected sales due to reduced customer demand for the Company's products and
the result of products rendered obsolete due to planned product revisions and
charges of $12.2 million relating to certain warranty reserves and other
product related contingencies. See "Note (3) Fiscal 1999 Charges" of the
Notes to Consolidated Financial Statements. The marine division gross profit
for the third quarter of fiscal 2000 included a $2.6 million recovery due to
the reversal of warranty reserves based on a customer's bankruptcy
settlement. See "Note (2) - Fiscal 2000 Charges and Recoveries" of the Notes
to Consolidated Financial Statements. Excluding these charges and recoveries,
the marine division's third quarter fiscal 1999 and 2000 gross profit margins
would have been 50.3% and 14.0%, respectively.
In the third quarter of 1999 and 2000, the land and marine division
gross profit margins were further adversely affected by pricing pressures
attributable to weak customer demand for the Company's products and
manufacturing under-absorption due to low production volumes as a result of
the prevailing industry conditions.
The Company's land division gross profit margin for the first nine
months of fiscal 2000 compared to the prior year, decreased from 6.2% in 1999
to 3.2% in 2000. The land division's gross margin for the first nine months
of fiscal 1999 was adversely affected by $21.6 million in domestic land
inventory writedowns and charges of $1.8 million relating to certain warranty
reserves and other product related contingencies, as discussed above. The
land division's gross margin for the first nine months of fiscal 2000 was
adversely affected by $8.7 million of inventory charges and $0.3 million of
charges for legal settlements, as discussed above. Excluding these charges,
the land division's gross profit margin for the first nine months of fiscal
1999 and 2000 would have been 32.5% and 20.9%, respectively.
The Company's marine division's gross profit margin increased for
the first nine months of fiscal 2000 compared to the prior year, from a gross
loss of $557,000 in 1999 to gross profit of $9.2 million, or 25.1% of marine
net sales, in 2000. The marine division's gross loss for the first nine
months of fiscal 1999 included $25.7 million in domestic marine inventory
writedowns and charges of $12.2 million relating to certain warranty reserves
and other product related contingencies, as discussed above. The marine
division's gross profit margin for the first nine months of fiscal 2000
included charges of $1.4 million for product-related warranties incurred
during the first quarter and third quarter recoveries of $2.6 million due to
the reversal of warranty reserves based on a customer's bankruptcy
settlement. See "Note (2) - Fiscal 2000 Charges and Recoveries" of the Notes
to Consolidated Financial Statements. Excluding these charges and recoveries,
the marine division's gross profit margin for the first nine months of fiscal
1999 and 2000 would have been 41.6% and 22.0%, respectively. The land and
marine division gross profit margins were adversely affected during the first
nine months of fiscal 1999 and 2000 by pricing pressures attributable to weak
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customer demand for the Company's products and manufacturing under-absorption
due to low production volumes as a result of the prevailing industry
conditions.
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 decreased $40.3 million, or
81.0%, for the third quarter of fiscal 2000 compared to the prior year's
third quarter operating expenses, primarily due to recording $24.4 million of
charges in the third quarter of 1999, a $10.2 million loan loss recovery in
the third quarter of 2000 and the Company's efforts to lower its costs. These
factors were offset in part by $4.1 million of current year charges.
Excluding these charges and recoveries, operating expenses for the third
quarter of fiscal 1999 and 2000 would have been $25.3 million and $15.6
million, respectively. Research and development expenses decreased $5.1
million, or 40.7%, compared to the prior year's third quarter, primarily due
to reduced costs and expenditures for salaries and other payroll related
items, contract labor, outside services and product development. Marketing
and sales expenses decreased $532,000, or 16.2%, compared to the prior year's
third quarter, primarily due to reduced costs and expenditures for salaries,
commissions and other payroll related items, offset in part by increased
third-party commissions. General and administrative expenses decreased $32.9
million, or 109.5%, compared to the prior year third quarter's, primarily due
to the prior year's third quarter expenses reflecting $23.1 million of
charges. These charges included (i) an accounts and notes receivable
allowance of $17.6 million related to a customer's vessel seizure followed by
its filing for bankruptcy and management's assessment of business risk
relating to three North American customer note receivables as a result of the
customer's deteriorated financial conditions, (ii) an impairment of
long-lived assets totaling $2.8 million based on the projected net cash flow
from those assets, which declined due to the severe seismic services industry
downturn and (iii) charges for the early termination of a facility lease,
employee severance arrangements and other restructuring costs totaling $2.6
million. See "Note (3) - Fiscal 1999 Charges" of the Notes to Consolidated
Financial Statements. Also, the current year's quarter reflects a $10.2
million loan loss recovery attributable to a more favorable than anticipated
resolution of a customer's bankruptcy settlement and lower expenditures for
salaries and other payroll-related items and outside services, offset in part
by a $2.4 million bad debt expense charge related to a marine customer, $1.3
million of charges related to a 45-employee reduction in the Company's
workforce worldwide and $0.4 million of charges related to legal settlements.
See "Note (2) - Fiscal 2000 Charges and Recoveries" of the Notes to
Consolidated Financial Statements. Amortization of intangibles decreased $1.7
million, or 45.8%, compared to the prior year's third quarter, primarily due
to the impairment of certain intangibles during fiscal 1999 based on the
projected net cash flow from the assets with which the intangibles were
identified, which declined due to the severe seismic services industry
downturn. See "Note (3) - Fiscal 1999 Charges" of the Notes to Consolidated
Financial Statements.
Operating expenses decreased $52.6 million, or 54.8%, for the first
nine months of fiscal 2000 compared to the prior year's first nine months.
This decrease was primarily attributable to the prior year's period
reflecting $24.4 million of charges, the current year's period reflecting
$17.9 million of loan loss recoveries primarily including $10.2 million loan
loss recovery attributable to a more favorable than anticipated resolution of
a customer's bankruptcy settlement and $4.9 million, representing the fair
value of repossessed equipment, resulting from customers' defaults on
payments of trade notes receivable, and the Company's continuing efforts to
lower its costs. These factors were offset in part by $7.4 million of current
year charges. Excluding charges and recoveries, operating expenses for the
first nine months of fiscal 1999 and 2000 would have been $71.5 million and
$53.9 million, respectively. Research and development expenses decreased
$10.6 million, or 32.9%, compared to the prior year, primarily due to reduced
costs and expenditures for salaries and other payroll related items, contract
labor, outside services and product development. Marketing and sales expenses
decreased $3.7 million, or 32.6%, compared to the prior year, primarily due
to reduced costs and expenditures for salaries, commissions and other payroll
related items,
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travel, advertising and conventions and exhibits. General and administrative
expenses decreased $36.3 million, or 81.3%, compared to the prior year,
primarily due to the prior year's period reflecting $23.1 million of charges,
the current year's period reflecting a $17.9 million of loan loss recoveries
as discussed above, and lower current year expenditures for salaries and
other payroll related items, outside services, insurance and other taxes.
This decrease in expenses has been offset in part by current year charges of
$7.4 million consisting of first quarter charges of $3.3 million related to
employee severance arrangements and the closing of the Company's Ireland
facility and third quarter charges of $4.1 million for a receivable writedown
and employee severance arrangements. See "Notes (2) - Fiscal 2000 Charges and
Recoveries" of the Notes to Consolidated Financial Statements. Amortization
of intangibles decreased $2.0 million, or 25.1%, compared to the prior year's
period, primarily due to the impairment of certain intangibles during fiscal
1999 based on the projected net cash flow from the assets with which the
intangibles were identified, which declined due to the severe seismic
services industry downturn, discussed above.
INTEREST EXPENSE. Interest expense for the third quarter and the
first nine months of fiscal 2000 (related to the ten-year term facilities
financing) was $197,000 and $611,000, respectively. See "Note (8) Long Term
Debt" of the Notes to Consolidated Financial Statements. Interest expense for
the prior year's third quarter and first nine months was $229,000 and
$688,000, respectively, also representing interest on this facility.
INCOME TAXES. The Company's effective income tax rate for the first
nine months of fiscal 2000 was approximately 20.9%. The Company recorded
income tax expense of $168,000 during the third quarter of fiscal 2000 due to
the reduction of the anticipated year-end effective tax rate from 30.0% to
20.9%. The Company's effective income tax rate for the prior year third
quarter was 34.7% and 35.0% for the first nine months of the prior year.
In assessing the realizability of deferred income tax assets,
management considers whether it is more likely than not that some portion or
all of the deferred income tax assets will be realized. The ultimate
realization of deferred income tax assets is dependent upon the generation of
future taxable income during the periods in which those deferred income tax
assets become deductible. Management considers the scheduled reversal of
deferred income tax liabilities and projected future taxable income in making
this assessment. In order to fully realize the net deferred income tax
assets, the Company will need to generate future taxable income of
approximately $154 million over the next 20 years. Although the Company
experienced a significant loss in fiscal 1999 and the first nine months of
fiscal 2000, the Company's taxable income for the fiscal years 1996 through
1998 aggregated approximately $128 million. Based on the level of historical
income prior to fiscal 1999 and the Company's projections of future taxable
income over the periods that the deferred income tax assets are deductible
and the expiration date of the net operating loss carry forward, management
believes it is more likely than not that the Company will realize the
benefits of the deferred income tax assets, net of the valuation allowance of
$5.0 million at February 29, 2000. The amount of deferred income tax asset
considered realizable, however, could be reduced in the near term if
estimates of future taxable income during the carry forward period are
reduced.
PREFERRED STOCK DIVIDENDS. Preferred stock dividends for the third
quarter and first nine months of fiscal 2000 are related to the outstanding
Series B and C Preferred Stock. Based on the terms of the Series B and C
Preferred Stock, the dividends are recognized as a charge to retained
earnings at the rate of 8% per annum, compounded quarterly. The preferred
stock dividend charge for the third quarter and first nine months of fiscal
2000 was $1.2 million and $3.4 million, respectively. There were no preferred
stock dividends for fiscal 1999. See "Note (11) - Changes in Capital
Structure" of the Notes to Consolidated Financial Statements.
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LIQUIDITY AND CAPITAL RESOURCES
GENERAL. The Company has traditionally financed its operations from
internally generated cash flows, funds from equity financing and its credit
facilities. The Company's cash and cash equivalents were $79.4 million at
February 29, 2000, an increase of $4.2 million as compared to May 31, 1999.
The increase is primarily due to the August 1999 sale of 15,000 shares of
Series C Preferred Stock in a privately negotiated transaction to SCF-IV LP,
for which the Company received net proceeds of approximately $14.8 million,
current year income tax refunds and reductions in inventories. The increase
in cash attributable to these items was offset in part by the purchase of
property, plant and equipment, a reduction in accounts payable and accrued
expenses and the operating losses for the first nine months of fiscal 2000.
Cash flows used in operating activities were $5.3 million for the
nine months ended February 29, 2000 primarily due to decreases in accounts
payable and accrued expenses and the operating losses for the first nine
months of fiscal 2000, offset in part by income tax refunds and decreased
inventories.
The Company had outstanding indebtedness of $9.2 million as of
February 29, 2000 under a mortgage loan 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
$151,437. The promissory note, which matures on September 1, 2006, contains
prepayment penalties. See "Note (8) - Long-term Debt" of the Notes to
Consolidated Financial Statements.
During March 2000, the Company announced its plans to repurchase up
to 200,000 shares of its common stock in the open market during April 2000
and in privately negotiated transactions. The repurchases will be made from
time to time as determined by the officers of the Company, subject to
prevailing market conditions. Shares repurchased will be held as treasury
shares, to be awarded as "matching" grants to certain employees of the
Company under a recently-adopted restricted stock plan and for other equity
benefit plans of the Company. The repurchases are expected to be funded form
the Company's currently available cash on hand and internally generated cash.
Capital expenditures for property, plant and equipment totaled $4.4
million for the first nine months of fiscal 2000. Total capital expenditures
are currently expected to aggregate $5.0 million for fiscal 2000. The Company
believes that the combination of its existing working capital, current cash
balances and access to other financing sources will be adequate to meet its
anticipated capital and liquidity requirements for the foreseeable future.
See however "-Cautionary Statement for Purposes of Forward-Looking
Statements" - "Continuation of Downturn in Energy Industry and Seismic
Services Industry Conditions Will Adversely Affect Results of Operations and
Financial Condition".
CREDIT AGREEMENT. The Company terminated its credit facility during
the first quarter of fiscal 2000. While the Company believes that it would be
able to negotiate a credit facility or facilities with similar lenders, the
Company believes that the terms currently available would not be as
advantageous as future terms may be when the Company may require a credit
facility. The Company does not anticipate the need for a credit facility at
the present time, but anticipates securing a facility or facilities in the
future at a time when the proposed terms are more likely to be more
advantageous for the Company.
YEAR 2000
The Company experienced no operational problems as a result of the
change over of the date 1999 to 2000. The Company has not incurred to date,
and does not expect to incur in the future, any material expenditures in
connection with identifying, evaluating or remediating Year 2000 compliance
issues. Most of its expenditures to date have related to the opportunity cost
of time spent by employees of the Company
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evaluating and remediating the Company's Year 2000 issues for the hardware
and software products sold by it, the information technology systems used in
its operations and its non-IT Systems or embedded technology, such as
building security, voice mail and other systems. The Company estimates that
less than $250,000 was spent in the aggregate on its Year 2000 compliance
efforts.
RECENT ACCOUNTING PRONOUNCEMENTS
Statement of Financial Accounting Standards No. 133, Accounting for
Derivative Instruments and Hedging Activities ("SFAS 133"), was issued by the
Financial Accounting Standards Board in June 1998. SFAS 133 standardizes the
accounting for derivative instruments, including certain derivative
instruments embedded in other contracts. Under the standard, entities are
required to carry all derivative instruments in the statement of financial
position at fair value. The Company will adopt SFAS 133 beginning in fiscal
year 2002. The Company does not expect the adoption of SFAS 133 to have a
material effect on its financial condition or results of operation because
the Company does not enter into derivative or other financial instruments for
trading or speculative purposes nor does the Company use or intend to use
derivative financial instruments or derivative commodity instruments.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101, REVENUE RECOGNITION IN FINANCIAL STATEMENTS
("SAB No. 101"). SAB No. 101 summarizes the SEC's staff's views in applying
generally accepted accounting principles to selected revenue recognition
issues. The Company understands that the SEC staff is preparing a document to
address significant implementation issues related to SAB No. 101. To the
extent that SAB No. 101 ultimately changes revenue recognition practices, the
Company will adopt SAB No. 101 beginning in the first quarter of fiscal year
2001 through a cumulative effect adjustment. The Company cannot determine the
potential impact that SAB No. 101 may have on its consolidated financial
position or results of operations at this time.
In March 2000, the FASB issued Interpretation No. 44, ACCOUNTING FOR
CERTAIN TRANSACTIONS INVOLVING STOCK COMPENSATION: AN INTERPRETATION OF APB
OPINION NO. 25. Among other issues, Interpretation No. 44 clarifies the
application of Accounting Principles Board Opinion No. 25 (APB No. 25)
regarding (a) the definition of employee for purposes of applying APB No. 25,
(b) the criteria for determining whether a plan qualifies as a
noncompensatory plan, (c) the accounting consequence of various modifications
to the terms of a previously fixed stock option or award, and (d) the
accounting for an exchange of stock compensation awards in a business
combination. The provisions of Interpretation No. 44 affecting the Company
are to be applied on a prospective basis effective July 1, 2000.
OTHER CONSIDERATIONS
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. During fiscal 1999 and the first nine
months of fiscal 2000, our financial performance was adversely impacted by
the deterioration in energy industry conditions over the past 21 months and,
more specifically, in the seismic services sector. This deterioration
resulted from, among other things, a widespread downturn in exploration
activity due to a decline in energy prices from October 1997 to February 1999
and consolidation among energy producers. Despite the recovery in commodity
prices, energy producers' continuing concerns over the sustainability of
higher prices for hydrocarbon production have resulted in lower exploration
budgets by energy companies, which has resulted in weak demand for the
Company's seismic data acquisition equipment.
CREDIT RISK. A continuation of weak demand for the services of the
Company's customers will further strain the revenues and cash resources of
customers of the Company, thereby resulting in a higher likelihood of
defaults in the customers' timely payment of their obligations under the
Company's credit sales
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arrangements. Increased levels of payment defaults with respect to the
Company's credit sales arrangements could have a material adverse effect on
the Company's results of operations.
During fiscal 1999 and the first nine months of fiscal 2000 there
was considerable turmoil and uncertainty in foreign financial markets. 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. In addition, the Company sells its products to customers in Latin
American countries, which have also experienced economic problems and the
effects of devaluations.
The Company's combined gross trade accounts receivable and trade
notes receivable balance as of February 29, 2000 from customers in Russia and
Former Soviet Union countries was approximately $16.0 million and was
approximately $10.0 million from customers in Latin American countries. As of
February 29, 2000 the total allowance for doubtful accounts (foreign and US)
was $3.1 million and the allowance for loan losses was $14.2 million. During
the first nine months of fiscal 2000, there were $12.6 million of sales to
customers in Russia and other Former Soviet Union countries (essentially all
based on cash sales backed by letters of credit) and $1.8 million of sales to
customers in Latin American countries. All terms of sale for these foreign
receivables are denominated in US dollars. To the extent that economic
conditions in the Former Soviet Union, Latin America or elsewhere negatively
affect future sales to the Company's customers in those regions or the
collectibility of the Company's existing receivables, the Company's future
results of operations, liquidity and financial condition may be adversely
affected.
See "Note (12) - Commitments and Contingencies" and "Note (5) -
Trade Notes Receivable" of the Notes to Consolidated Financial Statements and
"-Cautionary Statement for Purposes of Forward-Looking Statements
Continuation of Downturn in Energy Industry and Seismic Services Industry
Conditions Will Adversely Affect Results of Operations and Financial
Condition," "- Significant Payment Defaults Under Sales Arrangements Could
Adversely Affect the Company" and "- Risk from Significant Amount of Foreign
Sales Could Adversely Affect Results of Operations".
CONVERSION TO THE EURO CURRENCY. On January 1, 1999, certain 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, 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 is not
anticipated to have a material effect on the Company's financial condition or
results of operations.
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
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<PAGE>
information includes, without limitation, statements concerning future
results of operation (including the Company's anticipated return to
profitability during fiscal 2001); the ultimate realization of deferred
income tax assets; future revenues; future costs and expenses; future
margins; future writedowns, special charges and recoveries; the length of the
period of the downturn in demand for the Company's products; anticipated
product releases and technological advances; the future mix of business and
future asset recoveries; the resolution of contingent liabilities; the
Company's Year 2000 issues and their resolution; the inherent
unpredictability of adversarial proceedings; demand for the Company's
products; future capital expenditures and future financial condition of the
Company; energy industry and seismic services industry conditions; and world
economic conditions, including that in 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:
CONTINUATION OF DOWNTURN IN ENERGY INDUSTRY AND SEISMIC SERVICES
INDUSTRY CONDITIONS WILL ADVERSELY AFFECT RESULTS OF OPERATIONS AND FINANCIAL
CONDITION. 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. Worldwide oil
prices declined from October 1997 and remained at lower levels through
February 1999. Despite the recovery in commodity prices, energy producers'
continuing concerns over the sustainability of higher prices for hydrocarbon
production resulted in lower exploration budgets by energy companies, which
has resulted in weak demand for the Company's seismic data acquisition
equipment. Other factors which have negatively impacted demand for Company
products have been the weakened financial condition of many of the Company's
customers, consolidations among energy producers and oilfield service and
equipment providers, an oversupply in the market place of current-generation
seismic equipment, a current industry-wide oversupply of "spec" seismic data,
and the destabilized economies in many developing countries. Despite
relatively higher prices for oil and natural gas in recent months, it is
expected that any turnaround for the seismic equipment market will occur
later than for other sectors of the energy services industry.
It is impossible to predict the length of the downturn for the
seismic equipment market or future oil and natural gas prices with any
certainty. A further prolonged downturn in market demand for the Company's
products will have a material adverse effect on the Company's results of
operation and financial condition. 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 the expected continued lower
levels of Company net sales until industry conditions improve.
SIGNIFICANT PAYMENT DEFAULTS UNDER SALES ARRANGEMENTS COULD
ADVERSELY AFFECT THE COMPANY. 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.
20
<PAGE>
FAILURE TO DEVELOP PRODUCTS AND KEEP PACE WITH TECHNOLOGICAL CHANGE
WILL ADVERSELY AFFECT RESULTS OF OPERATIONS. 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 2000, the Company recorded $8.7 million of
inventory charges primarily related to the Company's decision to
commercialize VectorSeis(TM) digital sensor products having higher technical
standards than the products it had previously produced. The Company had
decided to commercialize these earlier VectorSeis(TM) products which have
since proven not to be commercially feasible based on data gathered from
recent VectorSeis(TM) digital sensor surveys, the anticipated longer-term
market recovery for new seismic instrumentation and given current and
expected market conditions.
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. No assurances can be given as to
whether any new products incorporating the VectorSeis(TM) digital sensor will
be commercially feasible or accepted in the marketplace by the Company's
present or future customers. 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. Changes in the Company's product offerings through newly
introduced products and product lines, whether internally developed or
obtained through acquisitions, carry with them the potential for customer
concerns of product reliability, which may have the effect of lessening
customer demand for those changed products.
PRESSURE FROM COMPETITORS COULD ADVERSELY AFFECT RESULTS OF
OPERATIONS. The market for seismic data acquisition systems and seismic
instrumentation is highly competitive and is characterized by continual and
rapid changes in technology. The Company's principal competitors for land
seismic equipment are, among others, Fairfield Industries; Geo-X Systems,
Limited; JGI Incorporated; OYO Geospace Corporation; and Societe d'etudes
Recherches et Construction Electroniques (Sercel), an affiliate of Compagnie
General de Geophysique (CGG). The Company's principal marine seismic
competitors are, among others, Bolt Technology Corporation; GeoScience
Corporation (GSI), an affiliate of CGG; Teledyne Brown Engineering, an
affiliate of Allegheny Teledyne Company; and Thomson Marconi Sonar P/L.
Unlike the Company, Sercel and GSI possess 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 and improved 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, will have the effect of adversely
affecting the demand for the Company's products and services.
RISK FROM SIGNIFICANT AMOUNT OF FOREIGN SALES COULD ADVERSELY AFFECT
RESULTS OF OPERATIONS. 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
21
<PAGE>
operating results. Foreign sales are also generally subject to the risks of
compliance with additional laws, including tariff regulations and
import/export restrictions. U.S. technology export restrictions may affect
the types and specifications of products the Company may export. The Company
is, from time to time, required to obtain export licenses and there can be no
assurance that it may not experience difficulty in obtaining such licenses as
may be required in connection with export sales. The Company is also required
to convert to the euro currency at Company facilities located in two of the
European Union member countries and although the Company does not currently
anticipate any problems with such conversion, there can be no assurances that
the problems actually encountered by the Company in the euro conversion will
not be more pervasive than those anticipated by management.
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, including China) 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 present heightened credit risks for the Company,
for the reasons discussed above. See, in particular above, "- Other
Considerations" for further information concerning these risks in those
countries.
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, particularly
the technical personnel, therefore, could adversely affect operating results.
In addition, continued changes in management personnel could have a
disruptive effect on employees which could, in turn, adversely affect
operating results.
LOSS OF SIGNIFICANT CUSTOMERS WILL ADVERSELY AFFECT THE COMPANY. 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 1999, 1998 and 1997 the
three largest customers in each of those years accounted for 52%, 43% and
50%, 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.
RISKS RELATED TO YEAR 2000 ISSUES. The problems actually encountered
by the Company with regards to Year 2000 issues may be more pervasive than
those encountered to date or anticipated by management, and if so, could have
adverse effects on the Company's operations, results of operations or
financial condition. See "- Year 2000."
FAILURE TO PROTECT INTELLECTUAL PROPERTY WILL ADVERSELY AFFECT THE
COMPANY'S OPERATIONS. 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 precluded by others' patent claims.
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
22
<PAGE>
overall sales mix may result in lower gross margins. Other factors, such as
heightened price competition, unit volumes, inventory obsolescence, increased
warranty costs and other product related contingencies, changes in sales and
distribution channels, shortages in components due to untimely supplies or
inability to obtain items at reasonable prices, unavailability of skilled
labor and manufacturing under-absorption due to low production volumes, may
also continue to affect the cost of sales and the fluctuation of gross margin
percentages in future periods.
DISRUPTION IN VENDOR SUPPLIES WILL AFFECT FINANCIAL RESULTS. 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, suppliers' Year
2000 non-compliance, increases in component costs and reduced control over
delivery schedules, any of which could adversely affect the Company's future
financial 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. Certain countries are subject to
restrictions, sanctions and embargoes imposed by the US Government. These
restrictions, sanctions and embargoes prohibit or limit the Company and its
domestic subsidiaries from participating in certain business activities in
those countries. These constraints may adversely affect the Company's
opportunities for business in those countries.
RISKS RELATED TO TIMING OF PRODUCT SHIPMENTS COULD RESULT IN
SIGNIFICANT QUARTERLY FLUCTUATIONS. Due to the relatively high sales price of
many 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. 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 result in inventory excesses and
imbalances from time to time.
STOCK VOLATILITY AND ABSENCE OF DIVIDENDS MAY ADVERSELY AFFECT THE
COMPANY'S STOCK PRICE. 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 $22 per share at
May 29, 1998 to $6 1/16 per share at February 29, 2000 (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. Continued
depressed prices for the Company's Common Stock (and further price declines)
could affect the Company's ability to successfully attract and retain
qualified personnel, complete desirable business combinations or accomplish
financing or similar transactions in the future. The Company has historically
not paid, and does not intend to pay in the foreseeable future, cash
dividends on its Common Stock.
23
<PAGE>
RISKS RELATED TO ACQUISITIONS. 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 issuance 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.
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 exposed to market risk, which is the potential loss
arising from adverse changes in market prices and rates. The Company does not
enter into derivative or other financial instruments for trading or
speculative purposes nor does the Company use or intend to use derivative
financial instruments or derivative commodity instruments. The Company's
market risk could arise from changes in foreign currency exchange rates. The
Company's sales and financial instruments are principally denominated in US
dollars.
PART II - OTHER INFORMATION.
ITEM 1. LEGAL PROCEEDINGS
The Company, along with a former employee, has been named a
defendant in an action filed on May 21, 1999, in State District Court in
Harris County, Texas styled Coastline Geophysical, Inc. v. Input/Output, Inc.
et al. The plaintiffs' petition alleges a number of causes of action in
contract and tort arising out of a purchase of a marine seismic system
manufactured by the Company. Although the plaintiffs have not disclosed a
specific amount of damages, plaintiffs' responses to recent discovery
requests indicate that it may seek to recover costs in excess of $49 million.
The Company plans to vigorously defend against the plaintiffs' claims.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) List of documents filed as Exhibits
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 29, 2000.
24
<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/ C. Robert Bunch
-----------------------------------
C. Robert Bunch
Vice President and Chief Financial
Officer
Dated: April 13, 2000
25
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S UNAUDITED FINANCIAL STATEMENTS FOR 3RD QTR. ENDED FEB. 29, 2000.
</LEGEND>
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<FISCAL-YEAR-END> MAY-31-2000
<PERIOD-START> JUN-01-1999
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