<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: NOVEMBER 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _____________ TO ____________
COMMISSION FILE NUMBER: 1-13402
INPUT/OUTPUT, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 22-2286646
(STATE OR OTHER JURISDICTION OF (IRS EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
11104 WEST AIRPORT BLVD., STAFFORD, TEXAS 77477
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
Registrant's telephone number, including area code: (281) 933-3339
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [ X ] No [ ]
At November 30, 1999 there were 50,701,525 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 NOVEMBER 30, 1999
<TABLE>
<CAPTION>
PART I. Financial Information.
Page
----
<S> <C>
Item 1. Financial Statements.
Consolidated Balance Sheets
November 30, 1999 and May 31, 1999..............................................................2
Consolidated Statements of Operations
Three and six months ended November 30, 1999 and 1998..........................................3
Consolidated Statements of Cash Flows
Six months ended November 30, 1999 and 1998....................................................4
Notes to Consolidated Financial Statements........................................................5
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition...................................................................13
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 NOVEMBER 30, May 31,
1999 1999
----------------- ----------------
<S> <C> <C>
Current assets:
Cash and cash equivalents .................................................... $ 76,106 $ 75,140
Trade accounts receivable, net ............................................... 23,097 21,617
Trade notes receivable, net .................................................. 13,647 21,907
Income taxes receivable ...................................................... 12,006 15,000
Inventories, net ............................................................. 95,020 95,825
Deferred income tax asset, net ............................................... 19,662 27,568
Prepaid expenses ............................................................. 1,071 1,495
--------- ---------
Total current assets ................................................. 240,609 258,552
Long-term trade notes receivable, net ........................................ 7,996 17,616
Deferred income tax asset, net ............................................... 32,704 18,739
Property, plant and equipment, net ........................................... 68,161 62,979
Goodwill, net ................................................................ 84,241 87,558
Other assets ................................................................. 5,446 6,304
--------- ---------
Total assets ......................................................... $ 439,157 $ 451,748
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable, principally trade .......................................... $ 7,626 $ 10,526
Current installments of long-term debt ....................................... 1,109 1,067
Accrued expenses ............................................................. 23,695 33,347
--------- ---------
Total current liabilities ............................................ 32,430 44,940
Long-term debt ............................................................... 8,382 8,947
Other liabilities ............................................................ 932 887
Commitments and contingencies
Stockholders' equity:
Cumulative convertible preferred stock, $.01 par value; authorized
5,000,000 shares, issued and outstanding 55,000 shares at November 30,
1999 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 50,701,525
shares at November 30, 1999 and 50,663,358
shares at May 31, 1999 ....................................................... 508 507
Additional paid-in capital ................................................... 345,542 327,845
Retained earnings ............................................................ 55,607 72,455
Accumulated other comprehensive loss ......................................... (3,257) (3,549)
Treasury stock ............................................................... (759) --
Unamortized restricted stock compensation .................................... (229) (284)
--------- ---------
Total stockholders' equity ........................................... 397,413 396,974
--------- ---------
Total liabilities and stockholders' equity ........................... $ 439,157 $ 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 SIX MONTHS ENDED
NOVEMBER 30, NOVEMBER 30,
------------------------------- -------------------------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales .................................... $ 24,438 $ 73,918 $ 54,417 $ 140,913
Cost of sales ................................ 19,165 45,530 43,159 90,246
------------ ------------ ------------ ------------
Gross profit ....................... 5,273 28,388 11,258 50,667
------------ ------------ ------------ ------------
Operating expenses:
Research and development .................. 6,868 10,286 14,071 19,528
Marketing and sales ....................... 1,999 4,027 4,879 8,040
General and administrative ................ 4,283 8,207 11,197 14,626
Amortization of intangibles ............... 1,915 2,226 3,841 4,086
------------ ------------ ------------ ------------
Total operating expenses ........... 15,065 24,746 33,988 46,280
------------ ------------ ------------ ------------
Earnings (loss) from operations .............. (9,792) 3,642 (22,730) 4,387
Interest expense ............................. (202) (217) (414) (459)
Other income ................................. 1,220 2,122 2,255 4,965
------------ ------------ ------------ ------------
Earnings (loss) before income taxes .......... (8,774) 5,547 (20,889) 8,893
Income tax (benefit) expense ................. (2,389) 1,775 (6,266) 2,846
------------ ------------ ------------ ------------
Net (loss) earnings .......................... (6,385) 3,772 (14,623) 6,047
------------ ------------ ------------ ------------
Preferred stock dividend ..................... 1,143 -- 2,224 --
------------ ------------ ------------ ------------
Net (loss) earnings applicable to common
stockholders ................................. $ (7,528) $ 3,772 $ (16,847) $ 6,047
============ ============ ============ ============
Basic (loss) earnings per common share ....... $ (0.15) $ 0.08 $ (0.33) $ 0.13
============ ============ ============ ============
Weighted average number of common
shares outstanding ........................... 50,697,358 48,459,101 50,682,183 46,522,301
============ ============ ============ ============
Diluted (loss) earnings per common share ..... $ (0.15) $ 0.08 $ (0.33) $ 0.13
============ ============ ============ ============
Weighted average number of diluted
common shares outstanding .................... 50,697,358 48,508,229 50,682,183 46,605,248
============ ============ ============ ============
</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>
SIX MONTHS ENDED
NOVEMBER 30,
---------------------------------
1999 1998
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net (loss) earnings ............................................................ $(14,623) $ 6,047
Adjustments to reconcile net (loss) earnings to net cash used in operating
activities:
Depreciation and amortization ............................................... 10,688 10,007
Amortization of restricted stock compensation ............................... 55 311
Deferred income tax benefit ................................................. (6,059) (237)
Inventory obsolescense expense .............................................. 340 940
Bad debt expense and loan losses ............................................ 404 1,625
Stock compensation expense .................................................. 190 --
Impairment of fixed assets .................................................. 287 --
Changes in assets and liabilities:
Accounts and notes receivable ............................................... 11,240 (1,669)
Inventories ................................................................. 465 (8,408)
Leased equipment ............................................................ -- 1,087
Accounts payable and accrued expenses ....................................... (12,644) (15,277)
Income taxes payable/receivable ............................................. 2,994 (10,086)
Other ....................................................................... 1,071 (1,930)
-------- --------
Net cash used in operating activities ................................. (5,592) (17,590)
Cash flows from investing activities:
Purchases of property, plant and equipment .................................. (7,530) (8,344)
Recovery of other assets .................................................... -- (608)
-------- --------
Net cash used in investing activities ................................. (7,530) (8,952)
Cash flows from financing activities:
Payments on long-term debt .................................................. (523) (480)
Purchase of treasury stock .................................................. (802) --
Proceeds from issuance of common stock to Employe Stock
Purchase Plan ............................................................. 659 534
Proceeds from exercise of stock options ..................................... 145 328
Payments of preferred stock dividends ....................................... (179) --
Net proceeds from preferred stock offering .................................. 14,794 --
-------- --------
Net cash provided by financing activities ............................. 14,094 382
Effect of change in foreign currency exchange rates on
cash and cash equivalents ................................................... (6) 100
-------- --------
Net increase (decrease) in cash and cash equivalents ........................ 966 (26,060)
Cash and cash equivalents at beginning of period ............................ 75,140 72,275
-------- --------
Cash and cash equivalents at end of period ............................ $ 76,106 $ 46,215
======== ========
</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 described
in Note 2) 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) FIRST QUARTER CHARGES
During the first quarter of fiscal 2000, the Company recorded pretax
charges totaling $4.7 million ($3.2 million after giving effect to income taxes,
or $0.06 per share), 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 over the past 18 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 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. As of November 30, 1999 there was approximately $397,000
of accrued severance costs, all of which will be paid by the end of December
2000 in accordance with severance agreements and $1.1 million of product-related
warranties which will be paid by the end of November 2000.
(3) INVENTORIES
Inventories are stated at the lower of cost (primarily first-in,
first-out) or market. A summary of inventories follows (in thousands):
NOVEMBER 30, MAY 31,
1999 1999
-------- --------
Raw materials ......................... $ 46,997 $ 54,731
Work-in-process ....................... 16,466 8,717
Finished goods ........................ 44,228 48,624
-------- --------
107,691 112,072
Less inventory reserves ............... 12,671 16,247
-------- --------
$ 95,020 $ 95,825
======== ========
5
<PAGE>
INPUT/OUTPUT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
-CONTINUED-
(4) 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 November 30, 1999 and May 31,
1999 was $45.3 million and $58.1 million, respectively. The activity in the
allowance for loan loss is as follows for the six months ended November 30, 1999
(in thousands):
NOVEMBER 30, 1999
-----------------
Balance at beginning of period ....................... $ 28,778
Provision for losses on notes receivable ............. 4,745
Recoveries reducing costs and expenses ............... (5,766)
Writedowns charged against the allowance ............. (9,389)
Reclassification of trade account receivable ......... 11,988
--------
Balance at the end of period ......................... $ 30,356
========
In the first six months of fiscal 2000, included in recoveries is $4.8
million, representing the fair value of repossessed equipment, due to a
customer's default on a trade note 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.
(5) EARNINGS PER SHARE
Basic (loss) earnings per common share is computed by dividing net
(loss) earnings applicable to common stockholders by the weighted average number
of common shares outstanding during the period. 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.
The following table summarizes the calculation of net (loss) earnings
applicable to common stockholders, weighted average number of common shares
outstanding and weighted average number of diluted common shares outstanding for
purposes of the computation of basic (loss) earnings per common share and
diluted (loss) earnings per common share (in thousands, except share and per
share amounts):
6
<PAGE>
INPUT/OUTPUT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
-CONTINUED-
<TABLE>
<CAPTION>
FOR THE THREE MONTHS FOR THE SIX MONTHS
ENDED NOVEMBER 30, ENDED NOVEMBER 30,
----------------------------------- ------------------------------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net (loss) earnings ............................ $ (6,385) $ 3,772 $ (14,623) $ 6,047
Preferred stock dividend ....................... 1,143 -- 2,224 --
------------ ------------ ------------ ------------
Net (loss) earnings applicable to common
stockholders ................................... $ (7,528) $ 3,772 $ (16,847) $ 6,047
============ ============ ============ ============
Weighted average number of common
shares outstanding ............................. 50,697,358 48,459,101 50,682,183 46,522,301
Stock options .................................. -- 49,128 -- 82,947
------------ ------------ ------------ ------------
Weighted average number of diluted
common shares outstanding ...................... 50,697,358 48,508,229 50,682,183 46,605,248
============ ============ ============ ============
Basic (loss) earnings per common share ......... $ (0.15) $ 0.08 $ (0.33) $ 0.13
============ ============ ============ ============
Diluted (loss) earnings per common share ....... $ (0.15) $ 0.08 $ (0.33) $ 0.13
============ ============ ============ ============
</TABLE>
At November 30, 1999 and 1998, there were 4,246,913 and 4,046,806, respectively,
of shares subject to stock options that were not included in the calculation of
diluted (loss) earnings per common share, because to do so would have been
antidilutive. In addition, the cumulative convertible preferred stock has not
been considered in the computation of diluted (loss) earnings per common share
in fiscal 2000 because the effect would be antidilutive.
(6) 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 November 30, 1999 and May 31, 1999, the Company had approximately
$9.2 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)
-CONTINUED-
Supplemental disclosures of cash flow information for the six months ended
November 30, 1999 and 1998 follow (in thousands):
<TABLE>
<CAPTION>
1999 1998
------- -------
<S> <C> <C>
Cash paid (received) during the periods for:
Interest .................................................................... $ 414 $ 459
======= =======
Income taxes ................................................................ $(2,471) $13,420
======= =======
Non-cash financing activities:
Dividends on preferred stock ................................................ $ 2,045 $ --
======= =======
Repossession of equipment due to a customer's default on a trade note receivable
and related placement of equipment in rental equipment fleet:
Decrease in trade notes receivable .......................................... $ 4,756 $ --
Increase in property, plant and equipment ................................... $ 4,756 $ --
======= =======
</TABLE>
(7) 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.
(8) COMPREHENSIVE (LOSS) EARNINGS
Comprehensive (loss) earnings 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) earnings includes net (loss)
earnings and foreign currency translation adjustments. Total comprehensive
(loss) earnings for the six months ended November 30, 1999 and 1998 follow (in
thousands):
1999 1998
---- ----
Net (loss) earnings .......................... $(14,623) $ 6,047
Foreign currency translation adjustments ..... 292 (34)
-------- --------
Total comprehensive (loss) earnings .......... $(14,331) $ 6,013
======== ========
8
<PAGE>
INPUT/OUTPUT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
-CONTINUED-
(9) 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 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 six months ended
November 30, 1998 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 six months ended November 30,
1998, 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 November 30, 1999 and May 31, 1999 based on the current
land and marine segments. The following summarizes this information (in
thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
NOVEMBER 30, NOVEMBER 30,
--------------------------- --------------------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales:
Land ............... $ 13,414 $ 30,411 $ 36,106 $ 71,614
Marine ............. 11,024 43,507 18,311 69,299
-------- -------- -------- --------
$ 24,438 $ 73,918 $ 54,417 $140,913
======== ======== ======== ========
Gross profit:
Land ............... $ 2,195 $ 8,211 $ 7,191 $ 23,639
Marine ............. 3,078 20,177 4,067 27,028
-------- -------- -------- --------
$ 5,273 $ 28,388 $ 11,258 $ 50,667
======== ======== ======== ========
Loss from operations:
Land ................ $ (2,694) $ (5,377)
Marine .............. (2,112) (6,627)
Corporate expenses (4,986) (10,726)
-------- --------
$ (9,792) $(22,730)
======== ========
</TABLE>
<TABLE>
<CAPTION>
NOVEMBER 30, MAY 31,
1999 1999
------------ --------
<S> <C> <C>
Total assets:
Land..................................................... $133,608 $141,510
Marine.................................................. 115,183 116,203
Corporate............................................... 190,366 194,035
------- -------
$439,157 $451,748
======== ========
</TABLE>
9
<PAGE>
INPUT/OUTPUT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
-CONTINUED-
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 equipment that are jointly utilized by segments and all income
taxes 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.
(10) 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
10
<PAGE>
INPUT/OUTPUT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
-CONTINUED-
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 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 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.
(11) COMMITMENTS AND CONTINGENCIES
LEGAL PROCEEDINGS. The Company, along with one of its subsidiaries, a
current executive officer and a former executive officer, has been named a
defendant in an action filed on December 28, 1998, in State District Court in
Fort Bend County, Texas styled Geoview, Inc., Geoview Services, Inc. and Ralph
E. Clements vs. Input/Output, Inc., et al. The plaintiffs' petition alleges a
number of causes of action in tort and contract arising out of a purchase of
certain assets by a subsidiary of the Company in 1996. The plaintiffs have
claimed actual damages of $60 million and exemplary damages of $180 million. The
Company plans to vigorously defend against the plaintiffs' claims.
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
plaintiff's 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, plaintiff's responses to recent discovery requests indicate that it may
seek to recover costs in excess of $22 million. The Company plans to vigorously
defend against the plaintiffs claims.
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INPUT/OUTPUT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
-CONTINUED-
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 November 30, 1999 and May 31,
1999, the Company had guaranteed approximately $678,000 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
the seismic equipment. Due to the inherent uncertainties of guaranty agreements,
the Company cannot estimate the fair value of the guaranties as of November 30,
1999.
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.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
RESULTS OF OPERATIONS
INTRODUCTION. The Company's net sales are directly related to the level
of worldwide oil and gas exploration 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 in "Cautionary Statement for Purposes of Forward-Looking
Statements" - "Continuation in 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
six months of fiscal 2000, our financial performance was adversely impacted by
the deterioration in energy industry conditions over the past 18 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' continued 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. As a result of these continuing prevailing conditions, we
recorded pre-tax charges totaling $4.7 million ($3.2 million after giving effect
to income taxes, or $0.06 per share) during the first quarter of fiscal 2000 and
operating losses during the first and second quarters of fiscal 2000.
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 and more focused customer service and product
development. We have also revised our credit policies and are implementing other
processes to better position the Company to manage through the downturn and
minimize the effects of future industry volatility on our business.
We currently believe that industry conditions will continue to
adversely impact demand for our products during the next 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 second quarter fiscal 2000 land division net
sales decreased $17.0 million, or 55.9%, to $13.4 million as compared to the
prior year's second quarter land division net sales of $30.4 million. The
Company's second quarter fiscal 2000 marine division net sales decreased $32.5
million, or 74.7%, to $11.0 million as compared to the prior year's second
quarter marine division net sales of $43.5 million. The decline in both the land
and marine division net sales is primarily attributable to the deterioration in
the seismic service industry over the past 18 months, resulting in weak demand
for the Company's seismic data acquisition equipment. See "INTRODUCTION" above.
The Company's land division net sales for the first six months of
fiscal 2000 decreased $35.5 million, or 49.6%, to $36.1 million as compared to
the land division's net sales of $71.6 million for the same period in the prior
year. The Company's marine division net sales for the first six months of fiscal
2000 decreased $51.0 million, or 73.6%, to $18.3 million as compared to the
marine division's net sales of $69.3 million for the same period in the prior
year. The decline in both the land and marine division net sales is primarily
attributable to the deterioration in the seismic service industry over the past
18 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 profit margin
decreased for the second quarter of fiscal 2000 compared to the prior year's
second quarter, from 27.0% in 1999 to 16.4% in 2000. The Company's marine
division gross profit margin decreased for the second quarter of fiscal 2000
compared to the prior year's second quarter, from 46.4% in 1999 to 27.9% in
2000. The decrease in both the land and marine division gross profit margin was
primarily due to pricing pressures attributable to weak customer demand for the
Company's products and manufacturing under-absorption due to low volumes as a
result of prevailing industry conditions.
The Company's land division gross profit margin decreased for the first
six months of fiscal 2000 compared to the prior year, from 33.0% in 1999 to
19.9% in 2000. The Company's marine division gross profit margin decreased for
the first six months of fiscal 2000 compared to the prior year, from 39.0% in
1999 to 22.2% in 2000. The decrease in both the land and marine division gross
profit margin was primarily due to pricing pressures attributable to weak
customer demand for the Company's products and manufacturing under-absorption
due to low volumes as a result of prevailing industry conditions; the marine
division gross profit margin decrease also reflected charges of $1.4 million for
product-related warranties incurred during the first quarter of fiscal 2000. The
marine division gross profit margin for the first six months of fiscal 2000
excluding these special charges would have been 30.0% as compared to 39.0% in
the prior year. 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 $9.7 million, or
39.1%, for the second quarter of fiscal 2000 compared to the prior year's second
quarter operating expenses primarily attributable to the Company's efforts to
lower its costs. Research and development expenses decreased $3.4 million, or
33.2%, compared to the prior year's second quarter, primarily due to reduced
costs and expenditures for salaries and other payroll related items, outside
services and product development. Marketing and sales expenses decreased $2.0
million, or 50.4%, compared to the prior year's second quarter, primarily due to
reduced costs and expenditures for salaries and other payroll related items,
third-party commissions, and conventions and exhibits. General and
administrative expenses decreased $3.9 million, or 47.8%, compared to the prior
year's second quarter, primarily due to reduced costs and expenditures for
salaries and other payroll related items, outside services, data processing, bad
debt expense and loan losses, insurance and state and local taxes. Amortization
of intangibles decreased $311,000, or 14.0%, compared to the prior year's second
quarter, primarily due to the impairment of certain intangibles during fiscal
1999.
Operating expenses decreased $12.3 million, or 26.6%, for the first six
months of fiscal 2000 compared to the prior year's first six months, primarily
attributable to the Company's efforts to lower its costs. Research and
development expenses decreased $5.5 million, or 27.9%, 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 $3.2 million, or 39.3%, compared to the
prior year, primarily due to reduced costs and expenditures for salaries and
other payroll related items, third-party commissions, advertising, travel, and
conventions and exhibits. General and administrative expenses decreased $3.4
million, or 23.4%, compared to the prior year, primarily due to reduced costs
and expenditures for salaries and other payroll items, outside services, data
processing, bad debt expense and loan losses, insurance and state and local
taxes, offset in part by $3.3 million of charges incurred in the first quarter
of fiscal 2000 related to employee severance arrangements and the closing of the
Company's Ireland facility. Amortization of intangibles decreased $245,000, or
6.0%, compared to the prior year, primarily due to the impairment of certain
intangibles during fiscal 1999.
INTEREST EXPENSE. Interest expense for the second quarter and the first
six months of fiscal 2000 (related to the ten-year term facilities financing)
was $202,000 and $414,000, respectively. See "Note (7) - Long Term Debt" of the
Notes to Consolidated Financial Statements. Interest expense for the prior
year's
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second quarter and first six months was $217,000 and $459,000, respectively,
also representing interest on this facility.
INCOME TAXES. The Company's effective income tax rate for the second
quarter and first six months of fiscal 2000 was approximately 27.2% and 30.0%,
respectively. The Company's effective income tax rate for both the second
quarter and first six months of the prior year was approximately 32.0%.
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 deferred income tax assets, the Company will need to
generate future taxable income of approximately $164 million over the next 20
years. Although the Company experienced a significant loss in fiscal 1999 and
the first six 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 at
November 30, 1999. 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 second
quarter and first six months of fiscal 2000 are related to the 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 second
quarter and first six months of fiscal 2000 was $1.1 million and $2.2 million,
respectively. There were no preferred stock dividends for fiscal 1999. See "Note
(10) - Changes in Capital Structure" of the Notes to Consolidated Financial
Statements.
LIQUIDITY AND CAPITAL RESOURCES
GENERAL. The Company has traditionally financed its operations from
internally generated cash flows, funds from equity financings and its credit
facilities. The Company's cash and cash equivalents were $76.1 million at
November 30, 1999, an increase of $1.0 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. The increase
in cash attributable to the preferred stock offering was offset in part by the
purchase of property, plant and equipment and the operating losses for the first
six months of fiscal 2000.
Cash flows used in operating activities were $5.6 million for the six
months ended November 30, 1999, primarily due to decreases in accounts payable
and accrued expenses and the operating losses for the first six months of fiscal
2000, offset in part by decreased accounts and notes receivable and income tax
refunds.
The Company had outstanding indebtedness of $9.5 million as of November
30, 1999 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
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and interest of $151,437. The promissory note, which matures on September 1,
2006, contains prepayment penalties. See "Note (7) - Long-term Debt" of the
Notes to Consolidated Financial Statements.
Capital expenditures for property, plant and equipment totaled $7.5
million for the first six months of fiscal 2000. Total capital expenditures are
currently expected to aggregate $29.5 million for fiscal 2000, which includes an
estimated $23.7 million of additions to the Company's rental equipment fleet, a
portion of which will come from on-hand inventories. 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 in 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
Many computer systems and software products are coded to accept only
two-digit entries in the date code field and cannot distinguish 21st century
dates from 20th century dates. These date code fields need to distinguish 21st
century dates from 20th century dates and, as a result, many companies' software
and computer systems need to be upgraded or replaced in order to comply with
such "Year 2000" requirements. The Company has worked to resolve the potential
impact of the Year 2000 issue on the computerized systems it utilizes
internally, and with regard to its products, suppliers and customers. The
Company has adopted the British Standards Institute "Definition of the Year 2000
Requirements." BSI DISC PD 2000-1 states the following: "Year 2000 conformity
shall mean that neither performance or functionality is affected by dates prior
to, during, and after the Year 2000." The Company has developed two levels of
readiness for its equipment. The Company's "Year 2000 Compliant" products will
perform as per the British Standards Guidelines. The Company's "Year 2000
Assessed" products have been assessed in the same manner as "Year 2000
Compliant" products and issues found and determined by the Company to be
detrimental to the function of recording seismic data have been addressed so
that the Company believes that these products will function in Year 2000 and
after. As used herein, the terms "Year 2000 Compliant" or "Year 2000 Compliance"
shall mean either "Year 2000 Compliant" and/or "Year 2000 Assessed", each as
defined above.
OUTCOME OF CHANGEOVER. The Company experienced no significant problems
as a result of the changeover of the date from 1999 to 2000. Based on
information currently available, however, the Company cannot conclude that a
failure of third parties to achieve Year 2000 compliance or an unanticipated
pervasive failure of the Company's products, IT systems and non-IT systems would
not adversely affect the Company in the future.
STATE OF READINESS. The Company continues to monitor its Year 2000
compliance program for the hardware and software products sold by it, the
information technology systems used in its operations ("IT Systems"), and its
non-IT Systems or embedded technology, such as building security, voice mail and
other systems. The Company's Year 2000 compliance program covers the following
phases: (i) inventory of all products, IT Systems and non-IT Systems; (ii)
assessment of repair or replacement requirements; (iii)
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planning and remediation; (iv) testing; and (v) implementation. The Company has
completed all phases for its products, IT systems and non-IT systems.
As a result of its planned component testing, the Company decided that
some of its older products in the field, which it no longer manufactures or
sells, would not be made Year 2000 compliant and the Company will not offer Year
2000 support for these products. These products are no longer covered by the
Company's product warranties. Other Company products in the field, some of which
supersede or replace the discontinued products, are already Year 2000 Compliant,
or will be made Year 2000 Compliant via remedial patches. These patches will be
made available at no charge for those products under warranty coverage and for
sale for those products that are no longer under warranty. All products
manufactured for sale by the Company since January 1, 1999 have been tested to
be Year 2000 Compliant.
The Company relies, both domestically and internationally, upon various
vendors, governmental agencies, utility companies, telecommunications service
companies, delivery service companies and other service providers, the
operations of which are outside of the Company's control. There is no assurance
that such parties will not suffer a Year 2000 business disruption, which could
have a material adverse effect on the Company's financial condition and results
of operations.
COSTS. To date, the Company has not incurred any material expenditures
in connection with identifying, evaluating or remediating Year 2000 compliance
issues. The Company did not retain an outside consultant to assist it in its
review and assessment of its Year 2000 issues. Most of its expenditures to date
have related to the opportunity cost of time spent by employees of the Company
in evaluating and remediating the Company's Year 2000 issues for its products,
IT Systems and its non-IT Systems. Management currently believes that Year 2000
expenditures will not have a material adverse effect on the Company's
operations, results of operations or financial condition.
A portion of the Company's Year 2000 compliance expenditures that may
ultimately be incurred relate to the Company's limited warranty coverage. As of
November 30, 1999, no specific amounts had been accrued to the warranty reserve
for such costs, as the Company had not been able to make a firm estimate of such
costs. However, the Company currently estimates that based on its assessments to
date, the Company's total estimated Year 2000 compliance-related expenses will
be less than $500,000. This estimate consists of the total costs of bringing the
Company's European IT systems into Year 2000 Compliance, and possible product
warranty expense.
RISKS. A survey was sent in November 1998 to customers, various
vendors, governmental agencies, utility companies, telecommunication service
companies, delivery service and other service companies concerning their Year
2000 compliance. Approximately 50% of the surveys sent were returned and all of
the surveys received indicated the recipient was already Year 2000 compliant or
was currently carrying out a Year 2000 compliance program. In August 1999 a
survey was sent to the parties that had not responded to the previous survey
sent in November 1998. Approximately 68% of the surveys sent in August 1999 have
been returned, and all of the surveys received have indicated the recipient was
already Year 2000 compliant or was currently carrying out a Year 2000 compliance
program.
CONTINGENCY PLAN. The Company has completed its Year 2000 contingency
plan for its products, IT systems and non-IT systems. The Company's contingency
plan consists of policies and procedures for addressing any higher-risk
compliance issues discovered and written communication instructions if
compliance problems are actually encountered. Also, starting in December 1999
the Company implemented a 24-hour hotline to assist in addressing Year 2000
compliance issues that the Company's customers, vendors or personnel may
encounter. In addition, if further Year 2000 compliance issues are discovered,
the Company then will evaluate the need for one or more contingency plans
relating to those particular issues.
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Due to the highly technical nature of the equipment manufactured and
sold by the Company, it is difficult to predict a "worst case" scenario if the
products provided by the Company experience a pervasive Year 2000 problem. The
Company believes that if a pervasive Year 2000 product problem did occur, it
could result in a significant negative impact on the Company's business
reputation and future sales opportunities, which in turn would have a material
adverse effect on the Company's operations, results of operations and financial
position. No pervasive Year 2000 problems have been encountered to date.
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.
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 the first six months of fiscal 2000,
our financial performance was adversely impacted by the deterioration in energy
industry conditions over the past 18 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 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 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 six 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 November 30, 1999 from customers in Russia and Former
Soviet Union countries was approximately $19.2 million and was approximately
$11.7 million from customers in Latin American countries. As of November 30,
1999 the total allowance for doubtful accounts (foreign and US) was $3.5 million
and the
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allowance for loan loss was $30.4 million. During the first six months of fiscal
2000, there were $10.4 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 $209,000 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 11 - Commitments and Contingencies" and "Note 4 - Trade Notes
Receivable" of Notes to Consolidated Financial Statements and "- Cautionary
Statement for Purposes of Forward-Looking Statements Continuation in 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 information includes, without
limitation, statements concerning future results of operation; future revenues;
future costs and expenses; future margins; future writedowns and special
charges; 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 realization of deferred tax
assets; 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
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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 IN 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 over-supply of
current-generation seismic equipment 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.
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. The Company has completed nine field
tests of its new VectorSeis-TM-, multi-component digital sensor. Further tests
are planned and may increasingly involve potential customers. There can be no
assurance that the Company will not encounter resource constraints or technical
or other difficulties that could delay introduction of this new product or other
new products in the future. No assurances can be given as to whether any
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.
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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 operating results. Foreign
sales are also generally subject to the risks of compliance with additional
laws, including tariff regulations and import/export restrictions. The Company
is, from time to time, required to obtain export licenses and there can be no
assurance that it 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) 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.
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 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.
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
21
<PAGE>
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 in addressing its 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.
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 GROSS MARGIN. The Company's gross margin percentage is
a function of the product mix sold in any period. Increased sales of lower
margin equipment and related components in the overall sales mix may result in
lower gross margins. Other factors, such as unit volumes, inventory
obsolescence, increased warranty costs and other product related contingencies,
heightened price competition, changes in sales and distribution channels,
shortages in components due to untimely supplies or inability to obtain items at
reasonable prices, unavailability of skilled labor and manufacturing
under-absorption due to low volumes, may also continue to affect the cost of
sales and the fluctuation of gross margin percentages in future periods.
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
22
<PAGE>
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
$5 3/8 per share at November 30, 1999 (based on New York Stock Exchange
composite tape closing sales prices). There is a risk that stock price
fluctuation could impact the Company's operations. Changes in the price of
the Company's Common Stock could affect the Company's ability to successfully
attract and retain qualified personnel, 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.
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.
23
<PAGE>
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
plaintiff's 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, plaintiff's responses to recent discovery requests indicate that it may
seek to recover costs in excess of $22 million. The Company believes it has
meritorious defenses to the plaintiff's allegations and plans to vigorously
defend against the plaintiff's claims.
In the ordinary course of its business, the Company has been named in
other various lawsuits or threatened actions. While final resolution of these
matters may have an impact on the Company's consolidated financial results for a
particular reporting period, management believes that the ultimate resolution of
these matters will not have a material adverse impact on the Company's financial
position, results of operations or liquidity.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(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 November 30, 1999.
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/ Sam K. Smith
----------------------------------------
Sam K. Smith
Director and Chief Executive Officer
Dated: January 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 THE SECOND QUARTER ENDED
11/30/99 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAY-31-2000
<PERIOD-START> JUN-01-1999
<PERIOD-END> NOV-30-1999
<CASH> 76,106
<SECURITIES> 0
<RECEIVABLES> 36,744
<ALLOWANCES> 0
<INVENTORY> 95,020
<CURRENT-ASSETS> 240,609
<PP&E> 68,161
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<TOTAL-ASSETS> 439,157
<CURRENT-LIABILITIES> 32,430
<BONDS> 0
0
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<COMMON> 508
<OTHER-SE> 396,904
<TOTAL-LIABILITY-AND-EQUITY> 439,157
<SALES> 54,417
<TOTAL-REVENUES> 54,417
<CGS> 43,159
<TOTAL-COSTS> 33,988
<OTHER-EXPENSES> (2,255)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 414
<INCOME-PRETAX> (20,889)
<INCOME-TAX> (6,266)
<INCOME-CONTINUING> (14,623)
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<NET-INCOME> (16,847)
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