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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 NOVEMBER 30, 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 November 30, 2000 there were 51,168,820 shares of common stock, par value
$0.01 per share, outstanding.
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INPUT/OUTPUT, INC. AND SUBSIDIARIES
INDEX TO FORM 10-Q
FOR THE QUARTER ENDED NOVEMBER 31, 2000
<TABLE>
<CAPTION>
PART I. Financial Information. Page
----
<S> <C> <C>
Item 1. Financial Statements.
Consolidated Balance Sheets
November 30, 2000 and May 31, 2000 ....................................... 2
Consolidated Statements of Operations
Three months and six months ended
November 30, 2000 and November 30, 1999 .................................. 3
Consolidated Statements of Cash Flows
Six months ended November 30, 2000 and
November 30, 1999 ........................................................ 4
Notes to Consolidated Financial Statements ................................ 5
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition ........................................................ 9
Item 3. Quantitative and Qualitative Disclosures about Market Risk .................. 20
PART II. Other Information.
Item 1. Legal Proceedings ........................................................... 20
Item 4. Submission of Matters to a Vote of Security Holders ......................... 20
Item 6. Exhibits and Reports on Form 8-K ............................................ 21
</TABLE>
1
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INPUT/OUTPUT, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
(UNAUDITED)
ASSETS NOVEMBER 30, May 31,
Current assets: 2000 2000
------------ ---------
<S> <C> <C>
Cash and cash equivalents .................................................... $ 92,133 $ 99,210
Restricted cash .............................................................. 458 1,006
Trade accounts receivable, net ............................................... 32,924 24,944
Current portion trade notes receivable, net .................................. 8,752 12,224
Inventories .................................................................. 72,272 69,185
Deferred income tax asset .................................................... 11,542 13,459
Prepaid expenses ............................................................. 1,520 1,979
------------ ---------
Total current assets ................................................. 219,601 222,007
Long-term trade notes receivable ................................................ 5,737 6,013
Deferred income tax asset ....................................................... 43,310 41,393
Property, plant and equipment, net .............................................. 52,623 58,419
Goodwill, net ................................................................... 47,407 49,256
Other assets, net ............................................................... 4,177 4,681
------------ ---------
Total assets ......................................................... $ 372,855 $ 381,769
============ =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt ......................................... $ 1,200 $ 1,154
Accounts payable ............................................................. 12,516 8,011
Accrued expenses ............................................................. 22,073 27,261
Income tax payable ........................................................... 3,631 2,169
------------ ---------
Total current liabilities ............................................ 39,420 38,595
Long-term debt, net of current maturities ....................................... 7,182 7,886
Other long-term liabilities ..................................................... 274 273
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
51,168,820 shares and 50,744,180 shares respectively ......................... 512 510
Additional paid-in capital ...................................................... 351,873 348,743
Retained deficit ................................................................ (17,221) (6,065)
Accumulated other comprehensive loss ............................................ (6,543) (5,427)
Treasury stock, at cost, 243,500 shares and 232,500 shares, respectively ........ (1,737) (1,651)
Unamortized restricted stock compensation ....................................... (906) (1,096)
------------ ---------
Total stockholders' equity ................................................ 325,979 335,015
------------ ---------
Total liabilities and stockholders' equity ........................... $ 372,855 $ 381,769
============ =========
</TABLE>
See accompanying notes to consolidated financial statements.
2
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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,
---------------------------- ----------------------------
2000 1999 2000 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net sales ........................................ $ 40,880 $ 24,438 $ 68,021 $ 54,417
Cost of sales .................................... 28,775 19,165 49,555 43,159
------------ ------------ ------------ ------------
Gross profit ............................ 12,105 5,273 18,466 11,258
------------ ------------ ------------ ------------
Operating expenses:
Research and development ...................... 6,955 6,868 13,418 14,071
Marketing and sales ........................... 2,602 1,999 5,055 4,879
General and administrative .................... 4,193 4,283 7,287 11,197
Amortization and impairment of intangibles .... 1,136 1,915 2,289 3,841
------------ ------------ ------------ ------------
Total operating expenses ............... 14,886 15,065 28,049 33,988
------------ ------------ ------------ ------------
Loss from operations ............................. (2,781) (9,792) (9,583) (22,730)
Interest income .................................. 1,954 1,270 3,556 2,363
Interest expense ................................. (259) (202) (520) (414)
Other income (expense) ........................... 286 (50) 155 (108)
------------ ------------ ------------ ------------
Loss before income taxes ......................... (800) (8,774) (6,392) (20,889)
Income tax expense (benefit) ..................... 1,507 (2,389) 2,174 (6,266)
------------ ------------ ------------ ------------
Net loss ......................................... (2,307) (6,385) (8,566) (14,623)
Preferred dividend ............................... 1,375 1,143 2,590 2,224
------------ ------------ ------------ ------------
Net loss applicable to common stock .............. $ (3,682) $ (7,528) $ (11,156) $ (16,847)
============ ============ ============ ============
Basic loss per common share ...................... $ (0.07) $ (0.15) $ (0.22) $ (0.33)
============ ============ ============ ============
Weighted average number of
common shares outstanding ..................... 50,912,680 50,697,358 50,827,970 50,682,183
============ ============ ============ ============
Diluted loss per common share .................... $ (0.07) $ (0.15) $ (0.22) $ (0.33)
============ ============ ============ ============
Weighted average number of diluted
common shares outstanding ..................... 50,912,680 50,697,358 50,827,970 50,682,183
============ ============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
3
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INPUT/OUTPUT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
NOVEMBER 30,
--------------------
2000 1999
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net loss ......................................................... $ (8,566) $(14,623)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization .................................... 9,777 10,688
Amortization of restricted stock and other stock compensation .... 190 245
Impairment or loss on disposal of fixed assets ................... 1,129 287
Bad debt expense and loan losses ................................. (1,492) 404
Inventory obsolescence expense ................................... -- 340
Deferred income benefit .......................................... -- (6,059)
Changes in assets and liabilities, net of above provisions:
Accounts and notes receivable .................................... (3,074) 11,240
Inventories ...................................................... (3,398) 465
Accounts payable and accrued expenses ............................ (777) (12,644)
Income taxes payable/receivable .................................. 2,267 2,994
Other ............................................................ 979 1,071
-------- --------
Net cash used in operating activities ..................... (2,965) (5,592)
-------- --------
Cash flows from investing activities:
Purchase of property, plant and equipment ........................ (3,590) (7,530)
-------- --------
Net cash used in investing activities ...................... (3,590) (7,530)
-------- --------
Cash flows from financing activities:
Payments on long-term debt ....................................... (658) (523)
Payments of preferred dividends .................................. (275) (179)
Proceeds from exercise of stock options .......................... 391 145
Proceeds from issuance of common stock to Employee
Stock Purchase Plan ........................................... 427 659
Purchase of treasury stock ....................................... (86) (802)
Net proceeds from preferred stock offering ....................... -- 14,794
-------- --------
Net cash provided by (used in) financing activities ........ (201) 14,094
-------- --------
Effect of change in foreign currency exchange rates on
cash and cash equivalents ..................................... (321) (6)
-------- --------
Net increase (decrease) in cash and cash equivalents ............. (7,077) 966
Cash and cash equivalents at beginning of period ................. 99,210 75,140
-------- --------
Cash and cash equivalents at end of period ................. $ 92,133 $ 76,106
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
4
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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 and development 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. Reservoir segment results are
included in Land segment results and are currently not material to any of the
disclosures. We measure segment operating results based on income (loss) from
operations. The following summarizes our segment information (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
NOVEMBER 30, NOVEMBER 30,
----------------------- -----------------------
2000 1999 2000 1999
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Net sales:
Land .......................... $ 32,332 $ 13,414 $ 52,509 $ 36,106
Marine ........................ 8,548 11,024 15,512 18,311
---------- ---------- ---------- ----------
Total ....................... $ 40,880 $ 24,438 $ 68,021 $ 54,417
========== ========== ========== ==========
Gross profit:
Land .......................... $ 9,152 $ 2,195 $ 14,673 $ 7,191
Marine ........................ 2,953 3,078 3,793 4,067
---------- ---------- ---------- ----------
Total ...................... $ 12,105 $ 5,273 $ 18,466 $ 11,258
========== ========== ========== ==========
Depreciation and amortization:
Land .......................... $ 1,722 $ 2,469 $ 3,543 $ 4,611
Marine ........................ 1,058 1,655 2,118 3,598
Corporate ..................... 2,026 1,232 4,116 2,479
---------- ---------- ---------- ----------
Total ...................... $ 4,806 $ 5,356 $ 9,777 $ 10,688
========== ========== ========== ==========
</TABLE>
5
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INPUT/OUTPUT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
NOVEMBER 30, NOVEMBER 30,
------------------------ ------------------------
2000 1999 2000 1999
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Earnings (loss) from operations:
Land ................................. $ 2,543 $ (2,694) $ 2,236 $ (5,377)
Marine ............................... (741) (2,112) (3,565) (6,627)
Corporate ............................ (4,583) (4,986) (8,254) (10,726)
---------- ---------- ---------- ----------
Total ............................. $ (2,781) $ (9,792) $ (9,583) $ (22,730)
========== ========== ========== ==========
<CAPTION>
NOVEMBER 30, May 31,
Total assets: 2000 2000
------------ ----------
<S> <C> <C>
Land .............................. $ 120,302 $ 106,431
Marine ............................ 72,156 77,411
Corporate ......................... 180,397 197,927
------------ ----------
Total .......................... $ 372,855 $ 381,769
============ ==========
</TABLE>
Corporate assets include assets specifically related to corporate personnel
and operations, cash and cash equivalents, income tax related assets and all
facilities and manufacturing machinery that are jointly utilized by multiple
segments.
(3) INVENTORIES
The following summarizes our inventories (in thousands):
<TABLE>
<CAPTION>
NOVEMBER 30, May 31,
2000 2000
------------ ----------
<S> <C> <C>
Raw materials ...................... $ 40,712 $ 42,131
Work-in-process .................... 10,062 7,979
Finished goods ..................... 21,498 19,075
------------ ----------
$ 72,272 $ 69,185
============ ==========
</TABLE>
6
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INPUT/OUTPUT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(4) TRADE NOTES RECEIVABLE
Trade notes receivable at November 30, 2000 are generally secured by
seismic equipment sold by us, bearing interest at contractual rates of 8-13% per
annum and are due at various dates through 2004. The recorded investment in
trade notes receivable, net, on our balance sheet was $14.5 million at November
30, 2000, and is summarized as follows (in thousands):
<TABLE>
<CAPTION>
CURRENT NON-CURRENT TOTAL
------------ ------------ ------------
<S> <C> <C> <C>
Trade notes receivable $ 19,845 $ 5,737 $ 25,582
Less anticipated loan-loss
allowance 11,093 -- 11,093
------------ ------------ ------------
Trade notes receivable, net $ 8,752 $ 5,737 $ 14,489
============ ============ ============
</TABLE>
At November 30, 2000 there were approximately $13.0 million of notes receivable
for which the anticipated loan-loss was recorded. The activity in the notes
receivable allowance for anticipated loan-loss is as follows (in thousands):
<TABLE>
<CAPTION>
NOVEMBER 30, November 30,
2000 1999
------------ ------------
<S> <C> <C>
Balance at beginning of period.............................. $ 13,718 $ 28,778
Additions charged to costs and expenses..................... 811 4,745
Recoveries reducing costs and expenses ..................... (2,303) (5,766)
Write-downs charged against the allowance .................. (72) (9,389)
Reclassifications of trade accounts receivable ............. (1,061) 11,988
------------ ------------
Balance at end of period.................................... $ 11,093 $ 30,356
============ ============
</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.
Were the Company to report earnings at November 30, 2000 and November
30, 1999 there were 2,594,027 and 228,675 common stock shares subject to stock
options that were not included in the weighted average number of diluted common
shares outstanding. At November 30, 2000 and November 30, 1999 there were
4,739,433 and 4,246,913, respectively, of common stock shares subject to total
stock options outstanding, which could potentially be included in the future
weighted average number of diluted common shares outstanding. In addition, the
cumulative convertible preferred stock has also not been considered in the
computation of diluted loss per common share.
(6) LONG-TERM DEBT
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
7.9% 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 November 30, 2000, $8.4 million in indebtedness was outstanding under this
mortgage loan.
7
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INPUT/OUTPUT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(7) 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 SIX MONTHS ENDED
NOVEMBER 30, NOVEMBER 30,
-------------------- --------------------
2000 1999 2000 1999
-------- --------- -------- ---------
<S> <C> <C> <C> <C>
Net loss........................................ $ (2,307) $ (6,385) $ (8,566) $ (14,623)
Foreign currency translation adjustment......... (464) 70 (1,116) 292
-------- --------- -------- ---------
$ (2,771) $ (6,315) $ (9,682) $ (14,331)
======== ========= ======== =========
</TABLE>
(8) 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 November 30, 2000 we had repurchased
11,000 shares under this program.
(9) 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.
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.
8
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(10) SPECIAL CHARGES AND RECOVERIES
Our special charges and recoveries have consisted of various
transactions resulting from industry downturns and cost reduction initiatives.
During the first quarter of the fiscal year ended May 31, 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
charges or recoveries recorded during the quarters ended August 31, 2000 and
November 30, 2000.
(11) SUBSEQUENT EVENTS
On January 3, 2001, the Company acquired all of the issued and outstanding
capital stock of Pelton Company, Inc. ("Pelton") for $6 million cash, a
$3 million two-year unsecured promissory note bearing interest at 8.5% per
annum, and additional contingent future payments. Pelton is based in Ponca City,
Oklahoma and designs, manufactures and sells seismic vibrator control systems,
vibrator positioning systems using GPS, and explosive energy control systems.
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 pricing, in turn, is influenced by
numerous factors including, but not limited to, those described in "Cautionary
Statement for Purposes of Forward-Looking Statements - Continuation of Downturn
in Seismic Services Industry Will Adversely Affect Results of Operations and
Financial Condition" 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 commenced with a
widespread downturn in exploration activity due to a decline in energy prices
from October 1997 to February 1999, which was followed by consolidation among
many energy producers and oilfield service firms. As a result of reduced
exploration spending and the deterioration of energy service sector conditions,
demand for our products declined precipitously. Despite the recovery in
commodity prices during 1999 and 2000, energy producers' continued concerns over
the sustainability of higher prices for hydrocarbon production resulted in lower
exploration budgets by energy companies, which has resulted in continued weak
demand for our seismic data acquisition equipment. Further contributing to this
weak demand 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 was further exacerbated by new product offerings from
competitors.
9
<PAGE> 11
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
quarter 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 three to six months, we foresee continued equipment
oversupply in the marine seismic fleets and continued weak demand in the marine
seismic sector. We presently believe that industry conditions will continue to
adversely impact demand for our marine products through at least the first six
months of calendar 2001.
While overall demand for new seismic work currently remains low by
historical standards, demand for land seismic equipment is showing signs of
improvement. We currently believe that overall net sales for the three months
ending March 31, 2001 will be somewhat less than our net sales for the quarter
ended November 30, 2000, but the improved demand for land seismic equipment
should continue to be reflected in future results of operations.
We are also 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 first six months of calendar 2001 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 field tests 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 are currently in the process of
manufacturing a limited inventory of VectorSeis(TM) sensor modules for this
pilot system. However, additional commercialization refinements are anticipated
before any full-scale commercial marketing efforts will commence. Also, we are
continuing to develop a lightweight land seismic system, with a view toward
commercial introduction of such a system during calendar 2001. Finally, we plan
to create a new business unit for our Micro-ElectroMechanical Systems ("MEMS")
facility in Stafford during calendar 2001 to provide for the production of MEMS
components for our VectorSeis(TM) products and also to seek additional
applications and revenue sources for our MEMS capacity and 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. However, we 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 29, 2001.
10
<PAGE> 12
FISCAL YEAR 2000 SPECIAL CHARGES
During the first quarter of the fiscal year ended May 31, 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. No
similar charges or recoveries were recorded during the six month period ended
November 30, 2000.
THREE MONTHS ENDED NOVEMBER 30, 2000 COMPARED TO THREE MONTHS ENDED NOVEMBER 30,
1999
NET SALES:
Net Sales for the three months ended November 30, 2000 increased $16.4
million, or 67%, compared to the corresponding period one year ago. The increase
is primarily due to increased demand for products produced by our Land Division.
Net sales of our Land Division increased $18.9 million, or 141%, compared to the
corresponding period one year ago. Increased sales of our Land Division were
partially offset by decreased net sales of our Marine Division where continued
equipment oversupply in the marine seismic fleets adversely affects sales.
Marine Division net sales decreased $2.5 million, or 22% as compared to the
corresponding period one year ago.
COST OF SALES:
Cost of sales for the three months ended November 30, 2000 increased
$9.6 million, or 50%, compared to the corresponding period one year ago. The
increase in cost of sales was the result of increased revenues; however, better
utilization of manufacturing facilities and higher profit margins on sales from
both the Land and Marine Division resulted in increased gross profit. Gross
profits increased $6.8 million, or approximately 130%, compared to the
corresponding period one year ago.
OPERATING EXPENSES:
Operating expenses for the three months ended November 30, 2000
remained relatively constant, decreasing $0.2 million, or 1%, compared to the
corresponding period one year ago.
INTEREST INCOME:
Interest income for the three months ended November 30, 2000 increased
$0.7 million, or 54% as a result of increased cash balances and increased rates
of interest earned on those cash balances.
INCOME TAX EXPENSE:
Income tax expense for the three months ended November 30, 2000
increased $3.9 million, or 163%, compared with a tax benefit in the
corresponding period one year ago. The change in income tax expense (benefit) is
primarily the result of: (i) increased profitability of operations in foreign
tax jurisdictions and (ii) no recognition of benefit from domestic net operating
losses. In assessing the realizability of deferred income tax assets, we
considered 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 considered the scheduled reversal of
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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. Regardless, 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 a return to levels of
profitability that existed prior to fiscal year 1999.
SIX MONTHS ENDED NOVEMBER 30, 2000 COMPARED TO SIX MONTHS ENDED NOVEMBER 30,
1999
NET SALES:
Net sales for the six months ended November 30, 2000 increased $13.6
million, or 25% as compared to the corresponding period one year ago. The
increase is primarily due to increased industry demand for products produced by
our Land Division. Net sales of our Land Division increased $16.4 million, or
45%, compared to the corresponding period one year ago. Increased sales of our
Land Division were partially offset by decreased net sales of our Marine
Division where continued equipment oversupply in the marine seismic fleets
adversely affects our sales. Marine Division net sales decreased $2.8 million,
or 15%, compared to the corresponding period one year ago.
COST OF SALES:
Cost of sales for the six months ended November 30, 2000 increased $6.4
million, or 15% as compared to the corresponding period one year ago. The
increase in cost of sales was the result of increased net sales. However, better
utilization of manufacturing facilities and increasing profit margins on sales
from both the Land and Marine Division resulted in increased gross profit. Gross
profit increased $7.2 million, or approximately 64%, compared to the
corresponding period one year ago.
OPERATING EXPENSES:
Operating expenses for the six months ended November 30, 2000 decreased
$5.9 million or 17%, compared to the corresponding period one year ago. The
decrease in operating expenses was primarily the result of decreases in
amortization of intangibles and decreases in general and administrative expense.
Amortization of intangibles decreased $1.6 million, or 40%, primarily as the
result of the reduction in total intangibles by impairment charges during the
fiscal year ended May 31, 2000. General and administrative expenses decreased
$3.9 million, or 35%, primarily as the result of $3.3 million of charges related
to employee severance arrangements and the closing of our Ireland facility
during the corresponding period one year ago. Excluding these charges, general
and administrative expenses decreased by $0.6 million as the result of continued
cost reduction initiatives.
INTEREST INCOME:
Interest income for the six months ended November 30, 2000 increased
$1.2 million, or 50% as a result of increased cash balances and increased rates
of interest earned by those cash balances.
INCOME TAX EXPENSE:
Income tax expense for the six months ended November 30, 2000 increased
$8.4 million, or 135%, compared with a tax benefit in the corresponding period
one year ago. The change in income tax expense (benefit) is primarily the result
of; (i) increased profitability of operations in foreign tax jurisdictions and
(ii) no recognition of
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benefit from domestic net operating losses (see disclosures concerning
realizability of deferred income tax assets above in discussion of three months
ended November 30, 1999 and 2000.)
PREFERRED STOCK DIVIDENDS:
Preferred stock dividends for the three and six months ended November
30, 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 six months ended November 30, 2000 was $2.6 million, an
increase of $366,000 over the prior year period. The increase was attributed to
the compounding of the dividend rate and the accrued and unpaid dividend.
LIQUIDITY AND CAPITAL RESOURCES:
In recent years we have financed our operations from internally
generated cash and funds from equity financings. Our cash and cash equivalents
were $92.1 million at November 30, 2000, with a decrease of $7.1 million, or 7%,
compared to May 31, 2000. The decrease is due to negative cash flows from
operating activities and investing activities for the six months ended November
30, 2000.
Cash flow from operating activities before changes in working capital
items was a positive $1.0 million for the six months ended November 30, 2000.
Cash flow from operating activities after changes in working capital items was a
negative $3.0 million for the six months ended November 30, 2000, primarily due
to the operating loss, net increases in accounts and notes receivables and
increases in levels of inventories. The increases in the working capital items
result from higher sales volume. 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 $3.6 million for the six
months ended November 30, 2000. The principal investing activities were capital
expenditure projects. This was a decrease of $3.9 million compared to the amount
of net cash used in investing activities for the six months ended November 30,
1999, due to decreased levels of capital expenditures.
Cash flow used in financing activities was $0.2 million for the six
months ended November 30, 2000. Net cash provided by financing activities was
$14.1 million for the six months ended November 30, 1999, primarily due to a
preferred stock offering in the prior period.
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
7.9% 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 November 30, 2000, $8.4 million in indebtedness was outstanding under this
mortgage loan.
CAPITAL EXPENDITURES:
Capital expenditures for property, plant and equipment totaled $3.6
million for the six months ended November 30, 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 equipment fleet. We believe
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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.
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
fiscal year end to December 31, we will adopt SFAS 133 beginning January 1,
2001. We do not expect the adoption of SFAS 133 to have a material effect on our
financial condition or results of operation.
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.
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 computed as of June 1, 2000. The Company is in the process of finalizing
a comprehensive analysis of its contracts to determine the effect of adoption
of SAB No. 101. We have not yet determined if a cumulative effect adoption
adjustment will be required as of June 1, 2000.
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.
Our combined gross trade accounts receivable and trade notes receivable
balance as of November 30, 2000 from customers in Russia and other former Soviet
Union countries was approximately $10.4 million, from customers in Latin
American countries was approximately $9.2 million, and from customers in China
was approximately $8.3 million. As of November 30,
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2000 the total allowance for doubtful accounts (foreign and US) was $1.7 million
and the allowance for loan losses was $11.1 million. During the six months ended
November 30, 2000, there were approximately $5.1 million of sales to customers
in Russia and other former Soviet Union countries, approximately $1.5 million of
sales to customers in Latin American countries and $4.6 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 9 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", "Risk from Significant Amount of
Foreign Sales Could Adversely Affect Results of Operations", and "Significant
Payment Defaults Under Sales Arrangements Could Adversely Affect the Company".
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 lightweight Land seismic systems, products
incorporating VectorSeis(TM) technology; further applications and revenue
sources for our MEMS technologies and capacity; future demand for our products;
anticipated product releases and technological advances; the future mix of
business and future asset recoveries; the effects and expected benefits from
acquisitions and strategic alliances, 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 inherent
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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 low 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, 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, new product offering and pricing pressures from our
competitors 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.
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, GeoScience
Corporation (GSI), an affiliate of CGG; Teledyne Brown Engineering, an affiliate
of Allegheny Teledyne Company; and Thomson Marconi Sonar P/L. Unlike our
company, Sercel and GSI possess the advantage of being able to
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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. The recent
product introduction of a lightweight land seismic system by one of our
competitors has had an adverse effect on our net sales in recent periods.
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, having the effect of
concentrating buying power in the oil field services industry, could adversely
affect 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, 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 "Other
Factors" above, 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.
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, increased competition from new
products and frequent product introductions and revisions. 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 the future.
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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.
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 November 30, 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.
RISKS RELATED TO ACQUISITIONS. We may make additional 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.
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.
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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 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,
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
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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.
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
THE FORWARD-LOOKING STATEMENTS. WE UNDERTAKE NO OBLIGATION TO PUBLICLY RELEASE
THE RESULTS OF ANY REVISIONS TO ANY SUCH FORWARD-LOOKING STATEMENTS, WHICH MAY
BE MADE TO REFLECT 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
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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Annual Meeting of Stockholders of Input/Output, Inc. was held on
September 25, 2000. The matters considered at the Annual Meeting were the
election of two directors, each for a three-year term, the approval of the
Input/Output, Inc. 2000 Long-Term Incentive Plan, and the ratification of the
appointment of KPMG LLP as the Company's independent public accountants for the
fiscal year. Theodore H. Elliott, Jr. was elected as a director and received
53,171,019 votes in favor of his election, with 909,928 votes withheld. James M.
Lapeyre, Jr. was elected as a director and received 50,047,105 votes in favor of
his election, with 4,033,842 votes withheld. The following directors remain in
office: Timothy J. Probert, David C. Baldwin, Ernest E. Cook, Theodore H.
Elliott, Jr. Robert P. Peebler, Sam K. Smith and William F. Wallace. The
proposal to approve the Input/Output, Inc. 2000 Long-Term Incentive Plan was
adopted with 32,123,725 votes in favor of its approval, 20,036,166 votes against
and 1,921,056 votes abstaining. The motion to ratify the appointment of KPMG LLP
as independent public accountants for the Company was approved, receiving
53,918,742 votes for ratification, 127,040 votes against and
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35,165 votes abstaining.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) List of Documents Filed.
27.1 Financial Data Schedule (included in EDGAR copy only).
(b) Reports on Form 8-K.
On October 10, 2000, we filed a current report on Form 8-K reporting
under Item 8. "Change in Fiscal Year," the company's decision to change
to a fiscal year ending on December 31 of each year.
21
<PAGE> 23
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 JANUARY 11, 2001.
INPUT/OUTPUT, INC.
January 11, 2001 /s/ C. Robert Bunch
---------------- ------------------------------------
(Date) C. Robert Bunch
Vice President and
Chief Administrative Officer
(principal administrative officer)
<PAGE> 24
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
27.1 Financial Data Schedule
</TABLE>
