<PAGE> 1
================================================================================
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED AUGUST 31, 2000
OR
[ ]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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 (I.R.S. Employer
incorporation or organization) Identification No.)
12300 C. E. SELECMAN DR., 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 August 31, 2000 there were 50,898,095 shares of common stock, par value $0.01
per share, outstanding.
<PAGE> 2
INPUT/OUTPUT, INC. AND SUBSIDIARIES
INDEX TO FORM 10-Q
FOR THE QUARTER ENDED AUGUST 31, 2000
<TABLE>
<CAPTION>
PART I. Financial Information. Page
----
<S> <C>
Item 1. Financial Statements.
Consolidated Balance Sheets
August 31, 2000 and May 31, 2000 ............................................ 2
Consolidated Statements of Operations
Three months ended August 31, 2000 and August 31, 1999 ...................... 3
Consolidated Statements of Cash Flows
Three month ended August 31, 2000 and August 31, 1999 ....................... 4
Notes to Consolidated Financial Statements .................................... 5
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition ............................................................ 10
Item 3. Quantitative and Qualitative Disclosures about Market Risk ...................... 21
PART II. Other Information.
Item 1. Legal Proceedings ............................................................... 21
Item 6. Exhibits and Reports on Form 8-K ................................................ 22
</TABLE>
1
<PAGE> 3
INPUT/OUTPUT, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
ASSETS AUGUST 31, May 31,
Current assets: 2000 2000
---------- ---------
<S> <C> <C>
Cash and cash equivalents .................................................................. $ 84,842 $ 99,210
Restricted cash ............................................................................ 1,006 1,006
Trade accounts receivable, net ............................................................. 30,875 24,944
Trade notes receivable, net ................................................................ 13,445 12,224
Inventories, net ........................................................................... 70,457 69,185
Deferred income tax asset, net ............................................................. 12,479 13,459
Prepaid expenses ........................................................................... 1,214 1,274
--------- ---------
Total current assets ............................................................... 214,318 221,302
Long-term trade notes receivable, net ......................................................... 6,108 6,013
Deferred income tax asset, net ................................................................ 42,373 41,393
Property, plant and equipment, net ............................................................ 55,592 58,419
Goodwill, net ................................................................................. 48,331 49,256
Other assets, net ............................................................................. 4,427 4,681
--------- ---------
Total assets ....................................................................... $ 371,149 $ 381,064
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable, principally trade ........................................................ $ 10,212 $ 8,011
Current installments of long-term debt ..................................................... 1,176 1,154
Income tax payable ......................................................................... 2,898 1,464
Accrued expenses ........................................................................... 20,365 27,261
--------- ---------
Total current liabilities .......................................................... 34,651 37,890
Long-term debt ................................................................................ 7,491 7,886
Other liabilities ............................................................................. 274 273
Commitments and contingencies
Stockholders' equity:
Cumulative convertible preferred stock, $.01 par value; authorized 5,000,000 shares;
issued and outstanding 55,000 shares at the end of both periods (liquidation value of
$55.0 million) ............................................................................. 1 1
Common stock, $.01 par value; authorized 100,000,000 shares; outstanding
50,898,095 shares and 50,744,180 shares respectively ....................................... 512 510
Additional paid-in capital .................................................................... 350,485 348,743
Retained deficit .............................................................................. (13,539) (6,065)
Accumulated other comprehensive loss .......................................................... (6,079) (5,427)
Treasury stock, at cost, 232,500 shares at the end of both periods ........................... (1,651) (1,651)
Unamortized restricted stock compensation ..................................................... (996) (1,096)
--------- ---------
Total stockholders' equity .............................................................. 328,733 335,015
--------- ---------
Total liabilities and stockholders' equity ......................................... $ 371,149 $ 381,064
========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
2
<PAGE> 4
INPUT/OUTPUT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
Three months ended August 31,
------------------------------
2000 1999
------------ ------------
<S> <C> <C>
Net sales ............................................. $ 27,141 $ 29,979
Cost of sales ......................................... 20,780 23,994
------------ ------------
Gross profit ................................. 6,361 5,985
------------ ------------
Operating expenses:
Research and development ........................... 6,463 7,203
Marketing and sales ................................ 2,453 2,881
General and administrative ......................... 3,094 6,914
Amortization and impairment of intangibles ......... 1,153 1,925
------------ ------------
Total operating expenses ..................... 13,163 18,923
------------ ------------
Loss from operations .................................. (6,802) (12,938)
Interest income ....................................... 1,602 1,092
Interest expense ...................................... (261) (212)
Other expense ......................................... (131) (58)
------------ ------------
Loss before income taxes .............................. (5,592) (12,116)
Income tax expense (benefit) .......................... 667 (3,877)
------------ ------------
Net loss .............................................. (6,259) (8,239)
Preferred dividend .................................... 1,215 1,081
------------ ------------
Net loss applicable to common stock ................... $ (7,474) $ (9,320)
============ ============
Basic loss per common share ........................... $ (0.15) $ (0.18)
============ ============
Weighted average number of common shares
outstanding ........................................ 50,845,070 50,667,007
Diluted loss per common share ......................... $ (0.15) $ (0.18)
============ ============
Weighted average number of diluted common shares
outstanding ........................................ 50,845,070 50,667,007
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE> 5
INPUT/OUTPUT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(UNAUDITED)
<TABLE>
<CAPTION>
Three months ended August 31,
------------------------------
2000 1999
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net loss ................................................. $ (6,259) $ (8,239)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization ............................ 4,971 5,332
Amortization of restricted stock compensation ............ 100 28
Loss on disposal of fixed assets ......................... 28 --
Bad debt expense and loan losses ......................... 14 --
Inventory obsolescence expense ........................... -- 340
Deferred income benefit .................................. -- (2,808)
Changes in assets and liabilities, net of above provisions:
Accounts and notes receivable ............................ (7,331) 6,946
Inventories .............................................. (1,387) 4,903
Accounts payable and accrued expenses .................... (4,744) (10,998)
Income taxes payable/receivable .......................... 1,403 3,777
Other .................................................... 69 273
-------- --------
Net cash used in operating activities ............. (13,136) (446)
-------- --------
Cash flows from investing activities:
Purchase of property, plant and equipment ................ (1,006) (3,046)
-------- --------
Net cash used in investing activities .............. (1,006) (3,046)
-------- --------
Cash flows from financing activities:
Payments on long-term debt ............................... (373) (259)
Payments of preferred dividends .......................... (138) (60)
Proceeds from exercise of stock options .................. 240 101
Proceeds from issuance of common stock to Employee
Stock Purchase Plan ................................... 427 --
Net proceeds from preferred stock offering ............... -- 14,804
-------- --------
Net cash provided by financing activities .......... 156 14,586
-------- --------
Effect of change in foreign currency exchange rates on
cash and cash equivalents ............................. (382) 6
-------- --------
Net increase (decrease) in cash and cash equivalents ..... (14,368) 11,100
Cash and cash equivalents at beginning of period ......... 99,210 75,140
-------- --------
Cash and cash equivalents at end of period ......... $ 84,842 $ 86,240
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE> 6
INPUT/OUTPUT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(1) GENERAL
The accompanying unaudited consolidated financial statements were prepared
using generally accepted accounting principles for interim financial information
and the instructions to Form 10-Q and applicable rules of Regulation S-X.
Accordingly, these financial statements do not include all information or
footnotes required by generally accepted accounting principles for complete
financial statements and should be read in conjunction with our 2000 Annual
Report on Form 10-K. The financial statements reflect all adjustments 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 current year presentation.
(2) SEGMENT INFORMATION
Commencing in fiscal year 2000 we began reporting operating segment
information by two segments: Land and Marine. During the quarter ended August
31, 2000, we added another segment called Reservoir. The Marine and Land
segments are defined by the environment in which customers use our equipment and
services. Our Reservoir products and technologies are used for enhanced
reservoir imaging. All segments provide products and services that are used in
the exploration for, and development and related production of oil and gas
reserves. Customers include major, independent and national oil companies as
well as seismic survey operators.
Our Land segment products include vibrators, geophones, vehicles, data
acquisition systems, and applications software. We also offer transition zone
systems in shallow water with marine versions of our land-based recording
systems. Our Marine segment provides data acquisition systems, hydrophones,
airguns and marine positioning systems. Our Reservoir segment principally
provides services (along with related products), including studies, analysis and
management to enhance hydrocarbon recovery. We measure segment operating results
based on income (loss) from operations.
The following summarizes our segment information (in thousands):
<TABLE>
<CAPTION>
Three months ended August 31,
------------------------------
2000 1999
------------ ------------
<S> <C> <C>
Net sales:
Land ................ $ 20,157 $ 22,692
Marine .............. 6,963 7,287
Reservoir ........... 21 --
------------ ------------
$ 27,141 $ 29,979
============ ============
Gross profit:
Land ................ $ 5,514 $ 4,996
Marine .............. 839 989
Reservoir ........... 8 --
------------ ------------
$ 6,361 $ 5,985
============ ============
Loss from operations:
Land ................ $ (203) $ (2,683)
Marine .............. (2,824) (4,515)
Reservoir ........... (106) --
Corporate ........... (3,669) (5,740)
------------ ------------
$ (6,802) $ (12,938)
============ ============
</TABLE>
5
<PAGE> 7
INPUT/OUTPUT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Three months ended August 31,
-----------------------------
2000 1999
------------ ------------
<S> <C> <C>
Depreciation and amortization:
Land .......................... $ 1,820 $ 2,141
Marine ........................ 1,060 1,943
Reservoir ..................... -- --
Corporate ..................... 2,091 1,248
------------ ------------
$ 4,971 $ 5,332
============ ============
Capital expenditures:
Land .......................... $ 766 $ 553
Marine ........................ 193 872
Reservoir ..................... -- --
Corporate ..................... 47 1,621
------------ ------------
$ 1,006 $ 3,046
============ ============
AUGUST 31, May 31,
Total assets: 2000 2000
------------ ------------
Land .......................... $ 110,607 $ 106,431
Marine ........................ 73,789 77,411
Reservoir ..................... -- --
Corporate ..................... 186,753 197,222
------------ ------------
$ 371,149 $ 381,064
============ ============
</TABLE>
Intersegment sales are insignificant for all periods presented. 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 is allocated based on each segment's use of those
assets.
Revenues from two significant customers comprised 27% and 17%, respectively
of Land segment net sales for the quarter ended August 31, 2000. Revenues from
one customer comprised 50% of Marine segment net sales for the quarter ended
August 31, 2000.
(3) INVENTORIES
A summary of inventories follows (in thousands):
<TABLE>
<CAPTION>
AUGUST 31, May 31,
2000 2000
---------- -------
<S> <C> <C>
Raw materials ................. $51,928 $52,451
Work-in-process ............... 7,266 7,979
Finished goods ................ 25,863 23,746
------- -------
85,057 84,176
Less inventory reserves ....... 14,600 14,991
------- -------
$70,457 $69,185
======= =======
</TABLE>
6
<PAGE> 8
INPUT/OUTPUT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(4) TRADE NOTES RECEIVABLE
Trade notes receivable at August 31, 2000 are generally secured by seismic
equipment sold by us, bearing interest at contractual rates of up to 13% per
annum and are due at various dates through 2001. The recorded investment in
trade notes receivable for which an impairment has been recognized was $17.7
million at August 31, 2000. The activity in the allowance for loan loss is as
follows (in thousands):
<TABLE>
<CAPTION>
AUGUST 31, 2000
----------------
<S> <C>
Balance at beginning of period ................... $ 13,718
Additions charged to costs and expenses .......... 814
Recoveries reducing costs and expenses ........... (1,558)
Write-downs charged against the allowance ........ (796)
----------------
Balance at end of period ......................... $ 12,178
================
</TABLE>
(5) LOSS PER SHARE
Basic loss per share is computed by dividing net loss applicable to common
stock by the weighted average number of common shares outstanding during the
period. Diluted earnings per share is typically 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 our
common stock using the average price of such common stock for the period.
Because inclusion of these shares would reduce the loss per share amount, we
have not included the effects of these dilutive equity items in our calculation
of diluted loss per share.
At August 31, 2000 and August 31, 1999 there were 4,588,112 and 4,588,813,
respectively of common stock shares subject to stock options that were not
included in the calculation of diluted loss per common share. In addition, the
cumulative convertible preferred stock has also not been considered in the
computation of diluted loss per common share.
(6) STATEMENTS OF CASH FLOWS
We consider all highly liquid investments purchased with an original maturity of
three months or less to be cash equivalents. We do not use or intend to use
derivative instruments. Exchange rate fluctuations have not had a material
effect on our cash balances. At August 31 and May 31, 2000 we had approximately
$1.0 million of certificates of deposits that were used to secure standby and
commercial letters of credits. Supplemental disclosure of cash flow information
follows (in thousands):
<TABLE>
<CAPTION>
Three months ended August 31,
-----------------------------
Cash paid (refund) during the period for: 2000 1999
---------- ----------
<S> <C> <C>
Interest .......................... $ 261 $ 212
========== ==========
Income taxes ...................... $ (862) $ (3,352)
========== ==========
Non-cash financing activities
Dividends on preferred stocks ..... $ 1,077 $ 1,021
========== ==========
</TABLE>
7
<PAGE> 9
INPUT/OUTPUT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(7) LONG TERM DEBT
In August 1996, we obtained, through one of our wholly-owned subsidiaries,
a $12.5 million, ten-year term loan secured by certain of our land and buildings
located in Stafford, Texas which then included our executive headquarters,
research and development headquarters, and electronics manufacturing building.
The term loan, which we have guaranteed under a limited guaranty, bears interest
at a fixed rate of 7.875% per annum and is repayable in equal monthly
installments of principal and interest of $151,439. We lease all of the property
from our 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 pre-payment prior to maturity.
(8) COMPREHENSIVE LOSS
Comprehensive loss includes all changes in a company's equity (except those
resulting from investments by and distributions to owners). The components of
total comprehensive loss are as follows:
<TABLE>
<CAPTION>
Three months ended August 31,
------------------------------
2000 1999
------------ ------------
<S> <C> <C>
Net loss .................................... $ (6,259) $ (8,239)
Foreign currency translation adjustment ..... (652) 222
------------ ------------
$ (6,911) $ (8,017)
============ ============
</TABLE>
(9) STOCKHOLDERS' EQUITY
In July 2000, we announced that our Board of Directors had authorized the
repurchase of up to an additional 1,000,000 shares of our common stock in open
market and privately negotiated transactions, with purchases to be made from
time to time through May 31, 2001. Shares repurchased will be held by us as
treasury stock to be available for our stock option and other equity
compensation and benefits plans. As of September 30, 2000, we had not yet
repurchased any shares under this program.
(10) COMMITMENTS AND CONTINGENCIES
In the ordinary course of our business, we have been named from time to
time in various lawsuits. While the final resolution of these matters may have
an impact on our consolidated financial results for a particular reporting
period, we believe that the ultimate resolution of these matters will not have a
material adverse impact on our financial position, results of operations or
liquidity.
We sell to many customers on extended-term arrangements. Moreover, in
connection with certain sales of our systems and equipment, we have previously
guaranteed loans from unaffiliated parties to purchasers of such systems and
equipment. In addition, we have sold contracts and leases to third-party
financing sources, the terms of which often obligate us to repurchase the
contracts and leases in the event of a customer default or upon certain other
occurrences. At August 31, 2000 and May 31, 2000, no guaranties were outstanding
with regards to any of our trade notes receivable or loans from unaffiliated
parties to purchasers of our seismic equipment.
8
<PAGE> 10
INPUT/OUTPUT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Sales outside the United States have historically accounted for a
significant part of our net sales. Foreign sales are subject to special risks
inherent in doing business outside of the United States, including fluctuations
in currency exchange rates, and the risk of war, civil disturbances, embargo and
government activities, which may disrupt markets and affect operating results.
Demand for our products from customers in developing countries is difficult
to predict and can fluctuate significantly from year to year. We believe 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 our future operating results and financial position.
In addition, sales to customers in developing countries on extended terms can
present heightened credit risks for us, for the reasons discussed above.
(11) SPECIAL CHARGES AND RECOVERIES
Our special charges and recoveries have consisted of various transactions
resulting from industry downturns and cost reduction initiatives. The table
below summarizes the fiscal year 2000 pretax expenses and costs for special
charges and the accrued amounts at August 31, 2000 for cash liabilities (in
thousands):
<TABLE>
<CAPTION>
Receivable Long-lived Personnel/
Inventory Related Asset Warranty Facility
Related Charges/ Related Product And Other
Charges Recoveries Charges Related Charges Total
--------- ---------- ---------- --------- ---------- --------
<S> <C> <C> <C> <C> <C> <C>
Fiscal 2000 charges/recoveries to
expense by business segment:
Marine .............................. $ 3,607 $ 2,400 $ 25,200 $ 1,993 $ 1,700 $ 34,900
Land ................................ 8,700 3,600 7,100 -- 1,400 20,800
Corporate ........................... -- -- -- -- 7,900 7,900
-------- -------- -------- -------- -------- --------
Total .................................. 12,307 6,000 32,300 1,993 11,000 63,600
Adjustments to 1999
Charges recorded in Fiscal 2000 ..... -- (10,200) -- (2,600) -- (12,800)
-------- -------- -------- -------- -------- --------
$ 12,307 $ (4,200) $ 32,300 $ (607) $ 11,000 $ 50,800
======== ======== ======== ========
Balance at May 31, 1999 ................ 11,980 1,903
Settled in Fiscal 2000 ................. (8,079) (5,362)
-------- --------
Balance at May 31, 2000 ................ $ 3,294 $ 7,541
Settled in first quarter ............... (330) (5,676)
-------- --------
Balance at August 31, 2000 ............. $ 2,964 $ 1,865
======== ========
</TABLE>
During the first quarter of fiscal year 2000, we recorded pretax charges
totaling $4.7 million, comprised of $3.3 million primarily related to employee
severance arrangements and the closing of our 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 our equipment. This weak demand 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. There were no special charges or
recoveries recorded during the quarter ended August 31, 2000.
9
<PAGE> 11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION
RESULTS OF OPERATIONS
INTRODUCTION
Our 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, in
turn, 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 Seismic Services Industry Will Adversely Affect
Results of Operations", and "- Risk from Significant Amount of Foreign Sales
Could Adversely Affect Results of Operations".
During fiscal years 2000 and 1999, our financial performance was adversely
impacted by the deterioration in energy industry conditions and, more
specifically, in the seismic service 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 and oilfield service firms. As a result of reduced
exploration spending and a deterioration of energy service sector conditions
beginning in 1998, demand for our products has continued to decline. 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 primarily has
resulted in continued weak demand for our seismic data acquisition equipment.
Further contributing to this weak demand for new equipment has been an
industry-wide oversupply of seismic equipment in the field and an excess
inventory of seismic data in contractors' data libraries. This weak demand
coupled with pricing pressures from competitors have in turn weakened our
margins.
SUMMARY REVIEW AND OUTLOOK
In response to the prevailing industry conditions, we have concentrated on
lowering our cost structure, consolidating our product offerings and
reorganizing into a products-based divisional structure. During the first and
second quarters of fiscal year 2000, we closed our cable manufacturing facility
in Cork, Ireland and merged its operations into our U.K. and U.S. facilities,
allowing us to address some of our excess capacity issues. We are evaluating
additional restructuring and cost control solutions with the goal of returning
to profitability as quickly as practicable. Implementing these solutions could
result in additional charges in the near term.
For the next nine months, we foresee continued equipment oversupply in the
marine seismic fleets and continued weak demand in the marine seismic sector.
While overall demand for new seismic work currently remains low by historical
standards, demand for land seismic equipment is showing signs of improvement,
which we believe will be reflected in our results of operations after January 1,
2001. We are continuing to invest resources and seek improvements in our seismic
data acquisition technology. A few of the goals we are seeking to achieve during
the next nine months include commercializing our VectorSeis(TM) technology in
our sensor product line, further development in our land seismic ground
electronics, and developing new product offerings in hydrocarbon reservoir
monitoring. We recently completed a field test
10
<PAGE> 12
for a VectorSeis(TM) system in Canada and are currently manufacturing a pilot
system which we believe should be ready by May 31, 2001. Our goal is to complete
as many field tests as possible by then. We continue to explore opportunities on
how the product will be marketed.
We are also reviewing possible alternatives to further strengthen our balance
sheet, potential corporate opportunities, and alternative applications for some
of our technology. No assurances can be made that we will implement any of these
potential actions, and if so, whether any of them will prove successful or the
degree of that success.
We presently believe that industry conditions will continue to adversely
impact demand for our products during the next 9 to 12 calendar months. However,
we also believe that the initiatives discussed above will better position us to
return to profitability as industry conditions improve.
CHANGE IN FISCAL YEAR END
On September 25, 2000, our Board of Directors adopted a resolution
providing for the change of our fiscal year end from May 31 to December 31. We
intend to file a Transition Report on Form 10-K covering the transition period
from June 1, 2000 to December 31, 2000 on or before March 31, 2001.
FISCAL YEAR 2000 FIRST QUARTER SPECIAL CHARGES
During the first quarter of fiscal year 2000, we recorded pretax charges
totaling $4.7 million, comprised of $3.3 million primarily related to employee
severance arrangements and the closing of our 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 our equipment. This weak demand resulted
from, among other things, a widespread downturn in exploration activity due to
the decline in energy prices from October 1997 through February 1999, and
consolidation among energy producers. No special charges were recorded during
the quarter ended August 31, 2000.
NET SALES
Land division net sales for the quarter ended August 31, 2000 decreased
$2.5 million, or 11%, to $20.2 million as compared to the land division's net
sales of $22.7 million for the prior year's first quarter. Marine division net
sales for the quarter ended August 31, 2000 decreased $324,000, or 4%, to $7.0
million as compared to the marine division's net sales of $7.3 million for the
prior year's first quarter. The decline in both the land and marine division net
sales for the quarter ended August 31, 2000 is attributable to the deterioration
in the seismic service industry over the past two years, resulting in continued
weak demand for our seismic data acquisition equipment. See "Introduction"
above. Reservoir services and products did not contribute significant net sales
during the current quarter.
GROSS PROFITS
Land division gross profit and gross profit margin for the quarter ended
August 31, 2000 compared to the first quarter of fiscal year 2000 increased to a
gross profit of $5.5 million, or 27.3% of land net sales, from a gross profit of
$5.0 million, or 22.0% of land net sales. The increase in margins reflects
primarily changes in product mix.
11
<PAGE> 13
Marine division gross profit and gross profit margin for the quarter ended
August 31, 2000 compared to the first quarter in fiscal year 2000 decreased to a
gross profit of $839,000, or 12.0% of marine net sales, from a gross profit of
$989,000 or 13.6% of marine net sales. The marine division's gross profit margin
for the first quarter in fiscal year 2000 included charges of $1.4 million for
product-related warranties. Excluding these charges, the marine division's gross
profit margin for the first quarter in fiscal year 2000 would have been 33.2%.
This decrease in current year margin is principally the result of a $900,000
warranty charge recorded in the quarter ended August 31, 2000, partially offset
by reduced manufacturing overheads.
The land and marine division gross profit margins continue to be affected
by pricing pressures attributable to our competitors, the weak customer demand
for our products, and manufacturing under-absorption due to low production
volumes as a result of the prevailing industry conditions. Our 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.
RESEARCH AND DEVELOPMENT
Research and development expenses for the quarter ended August 31, 2000
were $6.5 million, a decrease of $740,000, or 10%, compared to the first quarter
in fiscal year 2000, primarily due to reduced costs and expenditures for
salaries and other payroll related items, contract labor, and outside services,
offset in part by an increase in depreciation and amortization.
MARKETING AND SALES
Marketing and sales expenses for the quarter ended August 31, 2000 were
$2.5 million, a decrease of $428,000, or 15%, compared to the first quarter in
fiscal year 2000 primarily due to reduced costs and expenditures for salaries,
commissions and other payroll related items. This decrease was principally
attributable to our cost reduction program and reduced net sales.
GENERAL AND ADMINISTRATIVE
General and administrative expenses for the quarter ended August 31, 2000
were $3.1 million, a decrease of $3.8 million, or 55%, compared to the first
quarter in fiscal year 2000. In the first quarter of fiscal year 2000, we
recorded $3.3 million of charges related to employee severance arrangements and
the closing of our Ireland facility. Excluding these charges for the first
quarter in fiscal year 2000, general and administrative expenses for the quarter
ended August 31, 2000 decreased approximately $500,000, or 14% compared to the
first quarter in fiscal year 2000. The decrease was attributed to the cost
reduction initiatives put in place during the past two fiscal years.
AMORTIZATION AND IMPAIRMENT OF IDENTIFIED INTANGIBLES
Amortization of intangibles for the quarter ended August 31, 2000 was $1.2
million, a decrease of $772,000, or 40%, compared to the first quarter in fiscal
year 2000. The decrease was attributable to the intangibles that were impaired
in fiscal year 2000.
12
<PAGE> 14
OPERATING INCOME
The loss from operations for the quarter ended August 31, 2000 was $6.8
million, an improvement of $6.1 million, or 47%, compared to the $12.9 million
loss in the first quarter in fiscal year 2000. Excluding special charges, our
loss from operations in the first quarter in fiscal year 2000 was $8.2 million.
The improvement was primarily the result of improvements in gross margins and
reductions in operating expenses.
INTEREST EXPENSE
Interest expense was $261,000 in the quarter ended August 31, 2000, an
increase of $49,000, or 23% from the first quarter in fiscal year 2000. Our
principal interest expense is attributed to our ten-year-term facilities
financing.
INTEREST INCOME
Interest income for the quarter ended August 31, 2000 was $1.6 million, an
increase of $510,000 or 47% compared to the first quarter in fiscal year 2000.
Income from investments increased $504,000 to $1.4 million as a result of higher
excess cash balances invested during the year and increases in the rates earned
on invested balances.
INCOME TAX EXPENSE
The effective tax rate for the quarter ended August 31, 2000 was 12%,
compared to (32%) for the first quarter of fiscal year 2000. Our effective tax
rate for the quarter ended August 31, 2000 is reflective of current U.S. losses
for which we have recorded no income tax benefit.
In assessing the realizability of deferred income tax assets, we consider
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. We consider
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, we will need to generate future taxable income of
approximately $165 million over the next 20 years. Although we experienced
significant losses in fiscal years 2000 and 1999, our taxable income for the
years 1996 through 1998 aggregated approximately $128 million. Based on the
level of historical income prior to fiscal year 1999 and our 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, we
believe it is more likely than not that we will realize the benefits of the
deferred income tax assets, net of the valuation allowance at August 31, 2000.
The ultimate realization of the net deferred tax assets, prior to the expiration
of the net operating loss carry-forward in the next 19-20 years, will require
significant improvements in our results of operations from fiscal years 1999 and
2000 levels and a return to levels of profitability that existed prior to fiscal
year 1999. The amount of deferred income tax assets considered realizable,
however, could be reduced in the near term if estimates of future taxable income
during the carry-forward period are reduced. If a reduction in the net deferred
tax assets determined to be more likely than not realizable occurs in the near
term, it is likely that this adjustment will have a material adverse effect on
our results of operations. Finally, we do not expect to be in a position to
recognize any deferred tax benefits in the near term if we incur losses, which
may result in a negative impact when comparing quarterly results for these
periods.
13
<PAGE> 15
PREFERRED STOCK DIVIDENDS
Preferred stock dividends for the quarter ended August 31, 2000 are related
to our outstanding Series B and Series C Preferred Stock. The dividends are
recognized as a charge to retained earnings at the rate of 8% per annum,
compounded quarterly (of which 7% is accounted for as accrued dividends and 1%
is paid as a quarterly cash dividend). The preferred stock dividend charge for
the quarter ended August 31, 2000 was $1.2 million, an increase of $134,000 over
the quarter ended August 31, 2000. The increase was attributed to the
compounding of interest on the accrued and unpaid dividends.
LIQUIDITY AND CAPITAL RESOURCES
General. In recent years we have financed our operations from internally
generated cash and funds from equity financings. Our cash and cash equivalents
were $84.8 million at August 31, 2000, a decrease of $14.4 million, or 14%, as
compared to May 31, 2000. The decrease is due to negative cash flows from
operating activities for the quarter ended August 31, 2000.
Cash flow from operating activities before changes in working capital items
was a negative $1.1 million for the quarter ended August 31, 2000. Cash flow
from operating activities after changes in working capital items was a negative
$13.1 million for the quarter ended August 31, 2000, primarily due to the
operating loss, increases in accounts and notes receivables, and decreases in
levels of accounts payable and accrued expenses (primarily in connection with
the $5.0 million payment for the Coastline Geophysical, Inc. litigation
settlement). Our various working capital accounts can vary in amount
substantially from period to period depending upon our levels of sales, product
mix sold, demand for our products, percentages of cash versus credit sales,
collection rates, inventory levels and general economic and industry factors.
Cash flow used in investing activities was $1.0 million for the quarter
ended August 31, 2000. The principal investing activities were capital
expenditure projects.
Cash flow from financing activities was $156,000 for the quarter ended
August 31, 2000.
Long Term Indebtedness. In 1996, we obtained a $12.5 million ten-year term
mortgage loan to finance the construction of our electronics manufacturing
facility in Stafford, Texas. The loan is secured by land, buildings and
improvements, including our executive and research and development headquarters
as well as the adjacent manufacturing facility. The mortgage loan bears interest
at the fixed rate of 7.875% per annum and is repayable in equal monthly
installments of principal and interest of $151,439. The promissory note contains
certain prepayment penalties. As of August 31, 2000, $8.7 million in
indebtedness was outstanding under this mortgage loan.
Capital Expenditures. Capital expenditures for property, plant and
equipment totaled $1.0 million for the quarter ended August 31, 2000 and are
expected to aggregate $8.0 million for the twelve months ending May 31, 2001.
Planned expenditures include the purchase of advanced manufacturing machinery
and additional equipment for our rental fleet. We believe that the combination
of our existing working capital, current cash in place and access to other
financing sources will be adequate to meet our anticipated capital and liquidity
requirements for the foreseeable future.
Credit Agreement. We terminated our outstanding credit agreement during the
first quarter of fiscal year 2000. While we believe that we would be able to
negotiate a credit facility
14
<PAGE> 16
or facilities with similar lenders, we believe that the terms currently
available would not be as advantageous as future terms may be when we may then
require a facility. We do not anticipate the need for a credit facility at the
present time, but anticipate securing a facility or facilities in the future at
a time when the proposed terms are more likely to be more advantageous for us.
RECENT ACCOUNTING PRONOUNCEMENTS
Statement of Financial Accounting Standards No. 133, Accounting for
Derivative Instruments and Hedging Activities ("SFAS 133"), as amended by SFAS
No. 137 and SFAS No. 138, 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. Based on our announced change in
year end to December 31, we will adopt SFAS 133 beginning January 1, 2001. We do
not expect the adoption of SFAS 133 will have a material effect on our financial
condition or results of operation because we historically have not entered into
derivative or other financial instruments for trading or speculative purposes
nor do we use or intend to use derivative financial instruments or derivative
commodity instruments.
In December 1999, the Securities and Exchange Commission (SEC) issued Staff
Accounting Bulletin No. 101, Revenue Recognition in Financial Statements ("SAB
No. 101"). SAB No. 101 summarizes the SEC staff's views in applying generally
accepted accounting principles to selected revenue recognition issues. We
understand 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 our revenue recognition practices, we are required to adopt
SAB No. 101 in our Transition Report on Form 10-K for the seven-month period
ended December 31, 2000, with any cumulative effect adjustment computed as of
June 1, 2000. We cannot determine the potential impact that SAB No. 101 may have
on our consolidated financial position or results of operations at this time.
OTHER FACTORS
Market Conditions. Demand for our products is dependent upon the level of
worldwide oil and gas exploration and development activity and the availability
of seismic information in seismic libraries. Exploration and development
activity is primarily dependent upon oil and gas prices, which have been subject
to wide fluctuation in recent years. During fiscal years 2000 and 1999, our
financial performance was adversely impacted by the deterioration in the seismic
services industry. 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, consolidation among energy producers and
oilfield services firms and an oversupply of speculative seismic data and
current-generation seismic instrumentation in the field. Despite the recovery in
commodity prices, the factors of increased competition and pricing pressures and
the oversupply of seismic data and current-generation instrumentation have
resulted in continued weak demand for our seismic data acquisition equipment.
Credit Risk. A continuation of weak demand for the services of our
customers will further strain the revenues and cash resources of our customers,
thereby resulting in lower sales levels and a higher likelihood of defaults in
the customers' timely payment of their obligations under our credit sales
arrangements. Increased levels of payment defaults with respect to our credit
sales arrangements could have a material adverse effect on our results of
operations.
15
<PAGE> 17
Our combined gross trade accounts receivable and trade notes receivable
balance as of August 31, 2000 from customers in Russia and other former Soviet
Union countries was approximately $15.1 million, from customers in Latin
American countries was approximately $9.3 million, and from customers in China
was approximately $9.4 million. As of August 31, 2000 the total allowance for
doubtful accounts (foreign and US) was $1.8 million and the allowance for loan
losses was $12.2 million. During the quarter ended August 31, 2000, there were
approximately $2.8 million of sales to customers in Russia and other former
Soviet Union countries, approximately $600,000 of sales to customers in Latin
American countries and $1.2 million of sales to customers in China. All terms of
sale for these foreign receivables are denominated in US dollars. Russia and
certain Latin American countries have experienced economic problems and
uncertainties and devaluations of their currencies in recent years. To the
extent that economic conditions in the former Soviet Union, Latin America, China
or elsewhere negatively affect future sales to our customers in those regions or
the collectibility of our existing receivables, our future results of
operations, liquidity and financial condition may be adversely affected.
See Note 4 and Note 10 of the Notes to Consolidated Financial Statements
and "- Cautionary Statement for Purposes of Forward-Looking Statements -
Continuation of Downturn in Seismic Services Industry 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. We own facilities
and manufacture components for our systems in one member country. The transition
period for the introduction of the Euro is between January 1, 1999 and June 30,
2002. We continue to address the issues involved with the introduction of the
Euro. The more important issues facing us include: converting information
technology systems; reassessing currency risk; and processing tax and accounting
records.
Based on our progress to date in reviewing this matter, and the fact that
our sales to customers are denominated in US dollars, we believe that the
introduction of the Euro has not had and will not have a significant impact on
the manner in which we conduct our business affairs and process our business and
accounting records. Therefore, we anticipate that conversion to the Euro should
not have a material effect on our 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
(including statements contained in Part I -Item #2. "Management's Discussion and
Analysis of Results of Operations and Financial Condition"), as well as other
written and oral statements made or incorporated by reference from time to time
by us and our 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 and write-downs and special charges and savings and
benefits therefrom; anticipated timing of commercialization of and capabilities
of products planned or under development, including products incorporating
VectorSeis(TM) technology; future demand for our products; anticipated product
releases and technological
16
<PAGE> 18
advances; the future mix of business and future asset recoveries; the
realization of deferred tax assets; the effect of changes in accounting
standards on our results of operation and financial condition; the effect of the
Euro's introduction; the Company's Year 2000 issues; the inherent
unpredictability of adversarial proceedings and other contingent liabilities;
future capital expenditures and our future financial condition; future 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 Form 10-Q. Although we believe that the expectations reflected in these
forward-looking statements are reasonable, we 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
our actual results and cause actual results to differ materially from those
results which might be projected, forecast, estimated or budgeted by us in these
forward-looking statements include, but are not limited to, the following:
CONTINUATION OF DOWNTURN IN SEISMIC SERVICES INDUSTRY WILL ADVERSELY AFFECT
RESULTS OF OPERATIONS AND FINANCIAL CONDITION. Demand for our 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 our control. Worldwide oil
prices declined from October 1997 and remained at lower levels through February
1999. Despite the recovery in commodity prices since 1999, energy producers'
continuing concerns over the sustainability of higher prices for hydrocarbon
production resulted in lower exploration budgets by energy companies, which
resulted in weak demand for our seismic data acquisition equipment. Other
factors which have negatively impacted demand for our products have been the
weakened financial condition of many of our customers, consolidations among
energy producers and oilfield service and equipment providers, an oversupply in
the marketplace of current-generation seismic equipment, a current industry-wide
oversupply of "spec" seismic data, pricing pressures from our competitors and
customers, and the destabilized economies in many developing countries. Despite
higher prices for oil and natural gas since February 1999, 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 with any certainty. A further prolonged downturn in market
demand for our products will have a material adverse effect on our 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
worldwide oil and gas exploration and development and their relationship(s) to
the demand for our products. Additionally, no assurances can be given that our
efforts to reduce and contain costs will be sufficient to offset the effect of
continued lower levels of our net sales until industry conditions improve.
FAILURE TO DEVELOP PRODUCTS AND KEEP PACE WITH TECHNOLOGICAL CHANGE WILL
ADVERSELY AFFECT RESULTS OF OPERATIONS. The markets for our product lines are
characterized by rapidly changing technology and frequent product introductions.
Whether we 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
our customers, will be significant factors in our ability to compete in
17
<PAGE> 19
the future. During the third quarter of fiscal year 2000, we recorded $8.7
million of inventory charges primarily related to our decision then to
commercialize VectorSeis(TM) digital sensor products having higher technical
standards than the products we had previously produced. We had previously
decided to commercialize earlier-stage VectorSeis(TM) products, which
subsequently were proven not to be commercially feasible based on data gathered
from VectorSeis(TM) digital sensor surveys, the anticipated longer-term market
recovery for new seismic instrumentation and then current and expected market
conditions.
There can be no assurance that we 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 (or any other of our technology
product introductions or enhancements) will be commercially feasible or accepted
in the marketplace by our present or future customers. If we are 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, our business and operating results will be materially and
adversely affected. In addition, our continuing development of new products
inherently carries the risk of inventory obsolescence with respect to our older
products. Updates and upgrades in our 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
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. Our 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).
Our 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 us, 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 our future results. Several of our competitors have greater name
recognition, more extensive engineering, manufacturing and marketing
capabilities, and greater financial, technological and personnel resources than
those available to us. 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 we 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 and lower margins for our 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 our 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 our 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,
18
<PAGE> 20
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. U.S. technology export
restrictions may affect the types and specifications of products we may export.
We are, from time to time, required to obtain export licenses and there can be
no assurance that we may not experience difficulty in obtaining such licenses as
may be required in connection with export sales.
Demand for our 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. We believe 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 our future operating results and financial position. In addition, sales
to customers in developing countries on extended terms present heightened credit
risks for us, for the reasons discussed above. See, in particular above, "-
Other Factors" for further information concerning these risks in those
countries.
We are also required to convert to the Euro currency at our facility
located in one of the European Union member countries and although we do not
currently anticipate any problems with such conversion, there can be no
assurances that the problems actually encountered by us in the Euro conversion
will not be more pervasive than those anticipated by management.
SIGNIFICANT PAYMENT DEFAULTS UNDER SALES ARRANGEMENTS COULD ADVERSELY
AFFECT THE COMPANY. We sell to many customers on extended-term arrangements.
Significant payment defaults by customers could have a material adverse effect
on our financial position and results of operations. A significant portion of
our trade notes and trade accounts receivable balance as of August 31, 2000 was
attributable to sales made in former Soviet Union, Latin American and Asian
countries.
DEPENDENCE ON KEY AND TECHNICAL PERSONNEL. Our success depends upon the
continued contributions of our personnel, particularly our management personnel,
many of whom would be difficult to replace. Our success will depend on our
abilities to attract and retain skilled employees. Changes in personnel,
particularly 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 US. A relatively small
number of customers have accounted for most of our net sales, although the
degree of sales concentration with any one customer has varied from fiscal year
to year. During fiscal years 2000, 1999 and 1998 the three largest customers in
each of those years accounted for 41%, 52% and 43%, respectively, of our net
sales. The loss of these customers or a significant reduction in their equipment
needs could have a material adverse effect on our net sales and results of
operations.
RISKS RELATED TO GROSS MARGIN. Our gross margin percentage is a function of
pricing pressures from our customers and our competitors and 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 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
19
<PAGE> 21
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 and results of operations.
FAILURE TO PROTECT INTELLECTUAL PROPERTY WILL ADVERSELY AFFECT OUR
OPERATIONS. We believe that technology is a primary basis of competition in the
industry. Although we currently hold certain intellectual property rights
relating to our product lines, there can be no assurance that these rights will
not be challenged by third parties or that we will obtain additional patents or
other intellectual property rights in the future. Additionally, there can be no
assurance that our efforts to protect our trade secrets will be successful or
that others will not independently develop products similar to our products or
design around any of the intellectual property rights owned by us, or that we
will be precluded by others' patent claims.
DISRUPTION IN VENDOR SUPPLIES WILL AFFECT FINANCIAL RESULTS. Our
manufacturing process requires a high volume of quality components. Certain
components used by us are currently provided by only one supplier. In the
future, we may, from time to time, experience supply or quality control problems
with our suppliers, and such problems could significantly affect our ability to
meet production and sales commitments. Our 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 our future
financial results.
RISKS RELATED TO GOVERNMENT REGULATIONS AND PRODUCT CERTIFICATION. Our
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 our 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 our 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 us and
our domestic subsidiaries from participating in certain business activities in
those countries. These constraints may adversely affect our 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 our
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
our operating results from time to time, is that a substantial portion of our
net sales in any period may result from shipments during the latter part of a
period. Because we establish our sales and operating expense levels based on our
operational goals, if shipments in any period do not meet goals, net sales and
net earnings may be adversely affected.
STOCK VOLATILITY AND ABSENCE OF DIVIDENDS MAY ADVERSELY AFFECT OUR STOCK
PRICE. In recent years, the stock market in general and the market for energy
and technology stocks in particular, including our common stock, have
experienced extreme price fluctuations. There is a risk that future stock price
fluctuations could impact our operations. Continued depressed prices for our
common stock (and further price declines) could affect our ability to
successfully attract and retain qualified personnel, complete desirable business
combinations or accomplish financing or similar transactions in the future. We
have historically not paid, and do not intend to pay in the foreseeable future,
cash dividends on our common stock.
20
<PAGE> 22
RISKS RELATED TO ACQUISITIONS. We 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 our operations. Our operating results could be adversely
affected if we are unable to successfully integrate these new companies into our
operations. Structural changes in our 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 us could also result in issuance of equity securities or the
rights associated with the equity securities, which could potentially dilute our
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 our 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, WE WISH TO REFER READERS TO OTHER FACTORS DISCUSSED ELSEWHERE
IN THIS REPORT AS WELL AS OUR OTHER FILINGS AND REPORTS WITH THE SECURITIES AND
EXCHANGE COMMISSION FOR A FURTHER DISCUSSION OF RISKS AND UNCERTAINTIES WHICH
COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE CONTAINED IN
FORWARD-LOOKING STATEMENTS. WE UNDERTAKE 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
We may be, from time to time, exposed to market risk, which is the
potential loss arising from adverse changes in market prices and rates. We
traditionally have not entered into derivative or other financial instruments
for trading or speculative purposes nor do we use or intend to use derivative
financial instruments or derivative commodity instruments. We are not currently
a borrower under any material credit arrangements which feature fluctuating
interest rates. Our market risk could arise from changes in foreign currency
exchange rates. Our sales and financial instruments are principally denominated
in US dollars.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We were named, along with a former employee, as defendants 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 alleged a number of claims arising out of a purchase of a marine
seismic system manufactured by us. While believing we had meritorious defenses
to this action, we settled this lawsuit in July 2000 for $5.0 million, after
giving consideration to the cost and distraction of protracted litigation. As a
result of the settlement, we recorded a $5.0 million charge to general and
administrative expense in the fourth quarter and year ended May 31, 2000. See
Part I - Item 2. "Management's Discussion and Analysis of Results of Operations
and Financial Condition - Liquidity and Capital Resources."
21
<PAGE> 23
In the ordinary course of business, we have been named in other various
lawsuits or threatened actions. While the final resolution of these matters may
have an impact on our consolidated financial results for a particular reporting
period, we believe that the ultimate resolution of these matters will not have a
material adverse impact on our financial position, results of operations or
liquidity.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) List of Documents Filed.
3.1 Bylaws of the Company, as amended as of September 25, 2000
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 quarter ended August
31, 2000
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON
ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED IN THE CITY OF
STAFFORD, STATE OF TEXAS, ON OCTOBER 16, 2000.
Input/Output, Inc.
By /s/ C. Robert Bunch
------------------------------------------------------
C. ROBERT BUNCH
VICE PRESIDENT AND CHIEF ADMINISTRATIVE OFFICER
22
