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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 JUNE 30, 2001
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 June 30, 2001 there were 51,266,173 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 JUNE 30, 2001
PART I. Financial Information. Page
Item 1. Financial Statements.
Consolidated Balance Sheets
June 30, 2001 (unaudited) and December 31, 2000.............. 3
Consolidated Statements of Operations
Three and six months ended June 30, 2001 (unaudited)
and June 30, 2000 (unaudited)................................ 4
Consolidated Statements of Cash Flows
Six months ended June 30, 2001 (unaudited) and June 30, 2000
(unaudited).................................................. 5
Notes to Unaudited Consolidated Financial Statements........... 6
Item 2. Management's Discussion and Analysis of Results of
Operations and Financial Condition........................... 10
Item 3. Quantitative and Qualitative Disclosures about Market Risk..... 18
PART II. Other Information.
Item 6. Exhibits and Reports on Form 8-K............................... 19
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INPUT/OUTPUT, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<Table>
<Caption>
(UNAUDITED)
ASSETS JUNE 30, DECEMBER 31,
2001 2000
------------ ------------
Current assets:
Cash and cash equivalents......................................... $ 81,637 $ 92,376
Restricted cash................................................ 1,387 1,115
Accounts receivable, net....................................... 45,520 30,920
Current portion notes receivable, net.......................... 4,115 7,889
Inventories.................................................... 79,087 67,646
Deferred income tax asset...................................... 12,519 12,081
Prepaid expenses............................................... 2,757 2,217
--------- ---------
Total current assets................................... 227,022 214,244
Long-term notes receivable........................................ 6,166 6,150
Deferred income tax asset......................................... 42,333 42,771
Property, plant and equipment, net................................ 44,734 51,267
Goodwill, net..................................................... 46,724 47,098
Other assets, net................................................. 6,332 4,103
--------- ---------
Total assets........................................... $ 373,311 $ 365,633
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt........................... $ 3,006 $ 1,207
Accounts payable............................................... 14,069 8,283
Accrued expenses............................................... 21,416 23,388
--------- ---------
Total current liabilities.............................. 38,491 32,878
Long-term debt, net of current maturities......................... 7,312 7,077
Other long-term liabilities....................................... 233 275
Stockholders' equity:
Cumulative convertible preferred stock, $0.01 par value;
authorized 5,000,000 shares; issued and outstanding 55,000
shares at the end of both periods (liquidation value of $55
million)..................................................... 1 1
Common stock, $0.01 par value; authorized 100,000,000 shares;
outstanding 51,266,173 shares and 50,936,420 shares,
respectively................................................. 515 512
Additional paid-in capital..................................... 356,927 352,294
Retained deficit............................................... (19,033) (19,422)
Accumulated other comprehensive loss........................... (8,238) (5,353)
Treasury stock, at cost, 281,398 shares and 243,500 shares,
respectively................................................. (2,162) (1,737)
Unamortized restricted stock compensation...................... (735) (892)
--------- ---------
Total stockholders' equity.................................. 327,275 325,403
--------- ---------
Total liabilities and stockholders' equity............. $ 373,311 $ 365,633
========= =========
</Table>
See accompanying notes to unaudited consolidated financial statements and
accompanying independent accountants' review report.
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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
JUNE 30, JUNE 30,
-------------------------------------------------------------
2001 2000 2001 2000
----------- ------------ ----------- -----------
Net sales.................................. $ 59,868 $ 26,624 $ 102,277 $ 66,665
Cost of sales.............................. 38,858 22,874 64,557 64,476
----------- ------------ ----------- -----------
Gross profit...................... 21,010 3,750 37,720 2,189
----------- ------------ ----------- -----------
Operating expenses:
Research and development................ 7,659 7,072 15,196 14,332
Marketing and sales..................... 3,500 2,656 6,819 5,340
General and administrative.............. 4,717 13,411 9,610 10,674
Amortization and impairment of
intangibles......................... 1,185 33,598 2,321 35,656
----------- ----------- ----------- -----------
Total operating expenses......... 17,061 56,737 33,946 66,002
----------- ----------- ----------- -----------
Earnings (loss) from operations............ 3,949 (52,987) 3,774 (63,813)
Interest expense........................... (383) (212) (590) (407)
Interest income............................ 1,195 549 2,486 2,465
Other income (expense)..................... (407) 1,553 (100) 1,493
----------- ----------- ----------- -----------
Income (loss) before income taxes.......... 4,354 (51,097) 5,570 (60,262)
Income tax expense......................... 1,370 2,032 2,396 2,156
----------- ----------- ----------- -----------
Net earnings (loss)........................ 2,984 (53,129) 3,174 (62,418)
Preferred dividend......................... 1,395 1,180 2,785 2,338
----------- ----------- ----------- -----------
Net earnings (loss) applicable to
common shares........................... $ 1,589 $ (54,309) $ 389 $ (64,756)
=========== =========== =========== ===========
Basic earnings (loss) per common share..... $ 0.03 $ (1.07) $ 0.01 $ (1.28)
=========== =========== =========== ===========
Weighted average number of
common shares outstanding............... 50,891,153 50,765,728 50,909,476 50,775,626
=========== =========== =========== ===========
Diluted earnings (loss) per common share... $ 0.03 $ (1.07) $ 0.01 (1.28)
=========== =========== =========== ===========
Weighted average number of diluted
common shares outstanding............... 52,178,755 50,765,728 52,176,499 50,775,626
=========== =========== =========== ===========
See accompanying notes to unaudited consolidated financial statements and
accompanying independent accountants' review report.
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INPUT/OUTPUT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<Table>
<Caption>
SIX MONTHS ENDED
JUNE 30,
-------------------------
2001 2000
--------- --------
Cash flows from operating activities:
Net earnings (loss)...................................... $ 3,174 $ (62,418)
Adjustments to reconcile net earnings (loss) to net cash
used in operating activities:
Depreciation and amortization............................ 8,894 12,260
Amortization of restricted stock and other
stock compensation....................................... 207 (686)
Impairment or loss (gain) on disposal of fixed assets.... (64) 4,227
Bad debt collections and loan losses..................... (85) (5,269)
Inventory obsolescence................................... -- 8,700
Impairment of intangibles and other assets............... -- 31,596
Changes in assets and liabilities, net of above provisions:
Accounts and notes receivable............................ (10,019) 5,438
Inventories.............................................. (11,092) 18,434
Leased equipment......................................... 4,276
Accounts payable and accrued expenses.................... 3,583 199
Income taxes payable/receivable.......................... (1,405) 2,214
Other assets and liabilities............................. (2,519) (1,711)
----------- -----------
Net cash (used in) provided by operating activities...... (5,050) 12,984
----------- -----------
Cash flows from investing activities:
Purchase of property, plant and equipment................ (2,830) (2,157)
Cash paid for acquisitions............................... (4,151) --
----------- -----------
Net cash used in investing activities.................... (6,981) (2,157)
----------- -----------
Cash flows from financing activities:
Payments on long-term debt............................... (966) (547)
Payments of preferred dividends.......................... (275) (275)
Proceeds from exercise of stock options.................. 1,736 280
Proceeds from issuance of common stock to
employee Stock Purchase Plan........................... 371 --
Purchase of treasury stock............................... (456) 403
----------- -----------
Net cash provided by (used in) financing activities...... 410 (139)
----------- -----------
Effect of change in foreign currency exchange rates on
cash and cash equivalents............................. 882 531
----------- -----------
Net increase (decrease) in cash and cash equivalents..... (10,739) 11,219
Cash and cash equivalents at beginning of period......... 92,376 82,749
----------- -----------
Cash and cash equivalents at end of period............... $ 81,637 $ 93,968
=========== ===========
See accompanying notes to unaudited consolidated financial statements and
accompanying independent accountants' review report.
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INPUT/OUTPUT, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(1) BASIS OF PRESENTATION
The consolidated balance sheet of Input/Output, Inc. and its subsidiaries
(collectively referred to as the "Company" or "I/O") at December 31, 2000 has
been derived from the Company's audited consolidated financial statements at
that date. The consolidated balance sheet at June 30, 2001, and the consolidated
statements of operations for the three and six months ended June 30, 2001 and
2000, and the consolidated statements of cash flows for the six months ended
June 30, 2001 and 2000, have been prepared by the Company without audit. In the
opinion of management, all adjustments, consisting of normal and recurring
adjustments, which are necessary to present fairly the consolidated financial
position, results of operations and cash flows have been made. The results of
operations for the three and six months ended June 30, 2001 are not necessarily
indicative of the operating results for a full year or of future operations.
These consolidated financial statements have been prepared using generally
accepted accounting principles for interim financial information and the
instructions to Form 10-Q and applicable rules of Regulation S-X. Certain
information and footnote disclosures normally included in financial statements
presented in accordance with accounting principles generally accepted in the
United States of America have been omitted. The accompanying consolidated
financial statements should be read in conjunction with the Company's Transition
Report on Form 10-K for the seven months ended December 31, 2000. Certain
amounts previously reported in the consolidated financial statements have been
reclassified to conform to the current period's presentation.
(2) SEGMENT INFORMATION
The Company evaluates and reviews results based on two segments, Land and
Marine, to allow for increased visibility and accountability of costs and more
focused customer service and product development. The Company measures segment
operating results based on earnings (loss) from operations. A summary of segment
information for the three and six months ended June 30, 2001 and 2000 is as
follows (in thousands):
<Table>
<Caption>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------- -------------------------
2001 2000 2001 2000
--------- --------- -------- --------
Net sales:
$ 44,228 $ 18,930 $ 72,041 $ 36,583
Land...........................
Marine......................... 15,640 7,694 30,236 30,082
-------- --------- --------- ---------
Total.......................... $ 59,868 $ 26,624 $ 102,277 $ 66,665
======== ========= ========= =========
Depreciation and amortization:
Land........................... $ 1,822 $ 9,042 $ 4,107 $ 11,723
Marine......................... 839 26,878 1,752 28,638
Corporate...................... 1,468 1,963 3,035 3,495
-------- --------- -------- ---------
Total.......................... $ 4,129 $ 37,883 $ 8,894 $ 43,856
======== ========= ======== ==========
Earnings (loss) from
Operations:
Land........................... $ 5,652 $ (11,082) $ 5,981 $ (15,642)
Marine......................... 2,897 (36,974) 6,984 (27,797)
Corporate...................... (4,600) (4,931) (9,191) (20,374)
-------- ----------
Total.......................... $ 3,949 $ (52,987) $ 3,774 $ (63,813)
======== ========== ======== =========
</Table>
<Table>
<Caption>
JUNE 30, DECEMBER 31,
Total assets: 2001 2000
------------ ------------
Land....................... $142,114 $ 116,554
Marine..................... 72,789 69,897
Corporate.................. 158,408 179,182
-------- ----------
Total...................... $373,311 $ 65,633
======== ==========
</Table>
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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. Depreciation and
amortization expense is allocated to segments based upon use of the underlying
assets.
(3) INVENTORIES
A summary of inventories is as follows (in thousands):
<Table>
<Caption>
JUNE 30, DECEMBER 31,
2001 2000
------------ -------------
Raw materials...................................... $ 46,007 $ 39,988
Work-in-process.................................... 9,709 6,774
Finished goods ................................... 23,371 20,884
---------- ---------
$ 79,087 $ 67,646
========== =========
(4) NOTES RECEIVABLE
The recorded investment in notes receivable for which an allowance for loan
loss has been recognized was $12.2 million at June 30, 2001. A summary of notes
receivable and allowance for loan loss is as follows (in thousands):
<Table>
<Caption>
JUNE 30, DECEMBER 31,
2001 2000
------------ -------------
Notes receivable................................... $ 21,156 $ 24,986
Allowance for loan loss ......................... (10,875) (10,947)
------------ ---------
Notes receivable, net ............................. 10,281 14,039
Current portion notes receivable, net ............. 4,115 7,889
------------ ---------
Long-term notes receivable ........................ $ 6,166 $ 6,150
============ =========
</Table>
The activity in the allowance for loan loss is as follows (in thousands):
<Table>
<Caption>
SIX MONTHS ENDED
JUNE 30,
----------------------------
2001 2000
-------- ---------
Balance at beginning of period ................. $ 10,947 $ 30,006
Additions charged to costs and expenses......... 568 7,454
Recoveries reducing costs and expenses.......... (440) (16,811)
Write-downs charged against the allowance....... (200) (7,042)
-------- ---------
Balance at end of period ....................... $ 10,875 $ 13,607
======== =========
</Table>
(5) EARNINGS (LOSS) PER COMMON SHARE
Basic earnings (loss) per share is computed by dividing net earnings (loss)
applicable to common stock by the weighted average number of common shares
outstanding during the period. Diluted earnings per share is determined on the
assumption that outstanding dilutive stock options have been exercised and the
aggregate proceeds were used to reacquire common stock using the average price
of such common stock for the period. The following table summarizes the
calculation of weighted average number of common shares and weighted average
number of diluted common shares outstanding for purposes of the computation of
basic earnings (loss) per common share and diluted earnings (loss) per common
share (in thousands, except share and per share amounts):
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<Table>
<Caption>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------------------- -------------------------------
2001 2000 2001 2000
------------- ------------- ------------ ------------
Net earnings (loss) applicable to common shares........ $ 1,589 $ (54,309) $ 389 $ (64,756)
Weighted average number of common shares
outstanding.......................................... 50,891,153 50,765,728 50,909,476 50,775,626
Effect of dilutive stock options and other common
stock equivalents.................................... 1,287,602 -- 1,267,023 --
------------- ------------ ------------ -------------
Weighted average number of diluted common shares
outstanding.......................................... 52,178,755 50,765,728 52,176,499 50,775,626
============= ============ ============ =============
Basic earnings (loss) per common share................. $ 0.03 $ (1.07) $ 0.01 $ (1.28)
============= ============= ============ ==============
Diluted earnings (loss) per common share............... $ 0.03 $ (1.07) $ 0.01 $ (1.28)
============= ============= ============ ==============
</Table>
At June 30, 2001 and 2000, 4,996,173 and 5,001,875 shares subject to stock
options were considered anti-dilutive and not included in the calculation of
diluted earnings (loss) per common share. In addition, the outstanding
convertible preferred stock is considered anti-dilutive for all periods shown
and is not included in the calculation of diluted earnings (loss) per common
share.
(6) LONG TERM DEBT
In August 1996, the Company obtained a $12.5 million, ten-year term loan
secured by certain of its land and buildings. The term loan 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. The total installment payments for principal
and interest in each of the next five years will be $1.8 million, with a balance
thereafter of $1.2 million. The term loan provides for penalties for pre-payment
prior to maturity (see Note 12).
In January 2001, in connection with the acquisition of Pelton Company, Inc.
("Pelton") (see Note 9), the Company entered into a $3 million two-year
unsecured promissory note payable to the former shareholder of Pelton, bearing
interest at 8.5% per year. Principal is payable in quarterly payments of $0.4
million plus interest, with final payment due in February 2003.
(7) COMPREHENSIVE EARNINGS (LOSS)
The Statement of Financial Accounting Standards ("SFAS") No. 130 Reporting
Comprehensive Income, establishes standards for reporting and presentation of
comprehensive earnings (loss) and its components. Comprehensive earnings (loss)
primarily consists of net earnings (loss) and foreign currency translation
adjustment. SFAS No. 130 does not significantly affect the financial position or
results of operations of the Company. The components of total comprehensive
earnings (loss) are as follows (in thousands):
<Table>
<Caption>
THREE MONTHS END SIX MONTHS ENDED
JUNE 30, JUNE 30,
--------------------------- --------------------------
2001 2000 2001 2000
----------- ----------- ----------- -----------
Net earnings (loss).................................... $ 2,984 $ (53,129) $ 3,174 $ (62,418)
Foreign currency translation adjustment................ (1,425) (1,368) (2,885) (1,821)
----------- ----------- ----------- -----------
Comprehensive earnings (loss).......................... $ 1,559 $ (54,497) $ 289 $ (64,239)
=========== =========== =========== ===========
</Table>
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(8) COMMITMENTS AND CONTINGENCIES
In the ordinary course of business, the Company has been named in various
lawsuits or threatened actions. While the final resolution of these matters may
have an impact on its consolidated financial results for a particular reporting
period, the Company believes that the ultimate resolution of these matters will
not have a material adverse impact on its financial position, results of
operations or liquidity.
A significant part of the Company's marketing efforts are focused on areas
outside the United States. Foreign sales are subject to special risks inherent
in doing business outside of the United States, including the risk of war, civil
disturbances, exchange rate fluctuations, embargo and government activities, as
well as risks of compliance with U.S. and foreign laws, including tariff
regulations and import/export restrictions, which may disrupt markets and affect
operating results.
Demand for products from customers in developing countries is difficult to
predict and can fluctuate significantly from year to year. 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 the adoption of new technologies and purchasing
practices. These risks may adversely affect the future operating results and
financial position of the Company. In addition, sales to customers in developing
countries on extended terms can present heightened credit risks.
(9) ACQUISITION
On January 3, 2001, the Company acquired all of the outstanding capital
stock of Pelton for approximately $6 million cash and a $3 million two-year
unsecured promissory note. Pelton is based in Ponca City, Oklahoma and designs,
manufactures and sells seismic vibrator control systems, vibrator positioning
systems and explosive energy control systems.
The acquisition was accounted for by the purchase method, with the purchase
price allocated to the fair value of assets purchased and liabilities assumed.
The preliminary allocation of the purchase price as of June 30, 2001, including
related direct costs, for the acquisition of Pelton was as follows (in
thousands):
<Table>
Fair values of assets and liabilities
Net current assets .............................. $ 4,688
Property, plant and equipment ................... 373
Intangible assets................................ 4,122
-------
Total allocated purchase price .............. 9,183
Less non-cash consideration - note payable............ 3,000
Less cash of acquired business........................ 2,032
-------
Cash used for business acquisition, net of cash
acquired............................................ $ 4,151
=======
</Table>
The consolidated results of operations of the Company include the results of
Pelton from the date of acquisition. The revenues and net income of Pelton prior
to the acquisition dates were not material to the Company's consolidated results
of operations.
(10) SIGNIFICANT AND UNUSUAL CHARGES AND RECOVERIES
Significant and unusual pre-tax charges of $4.5 million, net, were recorded
during the three months ending March 31, 2000 and included $8.7 million of
inventory charges (included in cost of sales) related to the Company's decision
to commercialize VectorSeis(TM) digital sensor products having higher technical
standards than the products that were previously produced. The Company had
decided to commercialize these earlier VectorSeis(TM) products which were since
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 current and expected market
conditions. Other charges were $4.2 million of an inventory write-down in the
Marine Division (included in cost of sales); $2.4 million of bad debt expense
(included in general and administrative expense); $1.3 million of charges
related to the employee reduction in workforce worldwide (included in general
and administrative expense); and $0.7 million of charges related to legal
settlements (included in cost of sales -- $0.3 million, and in general and
administrative expense -- $0.4 million). These charges were offset in part by
$12.8 million of recoveries attributable to a more favorable than anticipated
resolution of a customer's bankruptcy settlement, consisting of a $10.2 million
reduction in allowance for loan loss (recorded as a reduction to general and
administrative expense) and a $2.6 million reversal of warranty reserves based
on this bankruptcy settlement (recorded as a reduction to cost of sales).
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Significant and unusual pre-tax charges of $41.9 million were recorded during
the three months ending June 30, 2000 and included a charge of $31.9 million to
amortization and impairment of intangibles, reflecting the impairment of certain
goodwill recorded in conjunction with the acquisition of manufacturing assets of
Western Geophysical in 1995 and the acquisition of CompuSeis, Inc. in 1998. The
impairment of the Western Geophysical goodwill principally reflected the
then-diminished outlook for the marine towed array seismic sector in general,
evidenced by customers' decisions to reduce the size of their marine fleets, and
changes in customers' preferences and technology for certain products within
that sector. The impairment of the CompuSeis goodwill reflects the result of
certain technological changes relating to land seismic systems. Additionally,
$10.0 million was charged to general and administrative expense consisting of a
$5.0 million charge for settlement of litigation, a $3.6 million loan loss
expense, $0.7 million related to the sale of certain idle manufacturing capacity
in Europe, and $0.7 million of charges related to employee severance and
continued cost reduction efforts worldwide
No material special charges were recorded in the three and six months ending
June 30, 2001. In response to prevailing seismic industry conditions, the
Company, during 2000, began concentrating on lowering its cost structure,
consolidating product offerings and reorganizing into a products-based operating
structure. The Company continues to evaluate additional restructuring and cost
control solutions. Implementing these solutions could result in additional
charges against future earnings.
(11) CHANGE IN FISCAL YEAR
During 2000, the Company changed its fiscal year end from May 31 to a fiscal
year ending December 31 of each year. The Company filed a Transition Report on
Form 10-K for the transition period ended December 31, 2000. The Company
commenced reporting on a calendar year basis with the filing of the Form 10-Q
for the quarter ended March 31, 2001.
(12) SALE OF REAL PROPERTY
Effective June 19, 2001, IPOP Management, Inc., a wholly-owned subsidiary of
the Company, entered into an agreement to sell the Company's real property and
buildings in Stafford, Texas for $21 million. Closing of the transaction
requires satisfaction of certain conditions, including negotiating an acceptable
lease with the buyer for the continued use and occupancy of the real property
and buildings to be conveyed. Although the Company expects to close the
transaction in the quarter ending September 30, 2001, there can be no assurance
that all of the conditions to closing will be satisfied prior to that time or at
all.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
Net sales have traditionally been 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. These factors are affected by
expectations regarding the supply and demand for oil and natural gas, energy
prices, and discovery and development costs. However, the seismic industry has
been adversely affected by surplus seismic data, principally marine "spec" data,
used to generate exploration prospects. Other factors which may limit the demand
for the Company's products may include, but are not limited to, those described
below 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.
Results of operations and financial condition have been affected by
acquisitions of businesses and significant charges during certain prior periods,
which may affect the comparability of the financial information. The following
discussion and analysis of results of operations and financial condition should
be read in conjunction with the consolidated financial statements and the notes
thereto included elsewhere in this Form 10-Q and the Company's Transition Report
on Form 10-K for the seven months ended December 31, 2000.
SUMMARY REVIEW AND OUTLOOK
The seismic industry continues to show signs of a broadening recovery from
the depressed levels of activity over the past several years. Demand for certain
of the Company's land products is expected to remain strong through 2001.
However, continued equipment oversupply in the marine seismic fleets should
result in only a modest recovery in the marine seismic sector before the end of
the year. Total revenue growth for fiscal 2001 is currently anticipated to be
35% to 40% higher than total revenues for calendar 2000. The Company believes
its results of operations will reflect a minimal profit for fiscal 2001.
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The Company's key strategies involve optimizing the performance of its core
business, bringing key technology initiatives to fruition that support
identifiable industry trends, monetizing underutilized assets and growing the
business through acquisitions and alliances. The Company is continuing to invest
resources and seek improvements in seismic data acquisition technology. The
Company's goals for 2001 include commercializing its VectorSeis(TM) technology,
further development in land seismic ground electronics, formalization of an
alliance with Thomson Marconi P/L to develop a next generation marine seismic
data acquisition system, and developing new product offerings in hydrocarbon
reservoir monitoring and characterization.
The Company finished production of the previously-announced 1,500
VectorSeis(TM) stations and has completed nine surveys with VectorSeis(TM)
stations in Canada and the United States. The equipment has operated favorably
and the Company expects to make a determination in the third quarter regarding
full commercialization of the VectorSeis(TM) platform in its commercial
packaging.
The Company expects to begin field testing a next generation land data
acquisition system by the end of 2001, enabling the Company to include a
lightweight land system in its product portfolio.
The Company announced an agreement in principle to form an alliance with
Thomson Marconi P/L to develop a next generation marine seismic data acquisition
system. The parties are working to complete due diligence and formalize the
alliance, while at the same time working with several customers to finalize the
design specifications of the new system.
The Company has created a new business unit for its MEMS
(micro-electromechanical systems) facility in Stafford, Texas during 2001 to
provide for the production of MEMS components for VectorSeis(TM) products and
also to seek additional applications and revenue sources for its MEMS facility's
capacity and technology.
With regards to the proposed activities described above, no assurances can
be made that the Company will implement any of these potential actions, and if
so, whether any of them will prove successful or the degree of that success.
FISCAL YEAR CHANGE
During 2000, the Company changed its fiscal year end from May 31 to a fiscal
year ending December 31 of each year. The Company filed a Transition Report on
Form 10-K for the transition period ended December 31, 2000. The Company
commenced reporting on a calendar year basis with the filing of the Form 10-Q
for the quarter ended March 31, 2001.
RESULTS OF OPERATIONS
Three Months Ended June 30, 2001 Compared to Three Months Ended June 30, 2000
Net Sales: Net sales of $59.9 million for the three months ended June 30,
2001 increased $33.2 million, or 125%, compared to the corresponding period one
year prior. The increase is primarily due to increased demand for products
produced by the Land and Marine Divisions. Net sales of $44.2 million in the
Land Division increased $25.3 million, or 134%, as a result of improving
industry conditions and the acquisition of Pelton. Net sales of $15.6 million in
the Marine Division increased $7.9 million, or 103%, compared to the
corresponding period one year prior. The increase in net sales of the Marine
Division was primarily due to the completion of a large sale in the current
quarter.
Cost of Sales: Cost of sales of $38.9 million for the three months ended
June 30, 2001 increased $16.0 million, or 70%, compared to the corresponding
period one year prior due to the increased net sales. Cost of sales of the Land
Division was $29.4 million and cost of sales of the Marine Division was $9.5
million.
Gross Profit. Gross profit of $21.0 million for the three months ended June
30, 2001 increased $17.3 million compared to the corresponding period one year
prior. Gross profit percentage for the three months ended June 30, 2001 was 35%
compared to 14% during the corresponding period one year prior. Contributing to
the higher 2001 gross profit percentage was the return to a more normal pricing
regime, success in reducing costs and improving absorption of fixed and
semi-fixed overhead, as well as the continued elimination from the sales mix of
products that had been highly discounted during recent periods of weaker demand.
Research and Development: Research and development expense of $7.7 million
for the three months ended June 30, 2001 increased $0.6 million, or 8%, compared
to the corresponding period one year prior. Research and development expense has
remained relatively constant due to the increase in VectorSeis(TM) development
costs partially offset by a significantly narrowed focus on a
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smaller number of technology developments for land, marine and reservoir
applications. All costs for the 1,500-station prototype VectorSeis(TM) fleet
were expensed in the period incurred.
Marketing and Sales: Marketing and sales expense of $3.5 million for the
three months ended June 30, 2001 increased $0.8 million, or 32%, compared to the
corresponding period one year prior. The increase is primarily related to
increased net sales and higher gross profit percentage on current period net
sales, which has, in turn, led to higher commission costs.
General and Administrative: General and administrative expense of $4.7
million for the three months ended June 30, 2001 decreased $8.7 million, or 65%,
compared to the corresponding period one year prior. Results for the three
months ended June 30, 2000 included significant and unusual charges of $10.0
million due to an unfavorable legal settlement, loan loss expense, work-force
reductions and loss on the sale of idle facilities. Excluding the effect of
these significant and unusual charges in 2000, general and administrative
expense increased $1.3 million in 2001. This increase in general and
administrative expense is primarily attributable to increased compensation
expense, reflecting estimated accruals for profit-based bonuses this year, and
the inclusion of Pelton in the current quarter's results.
Amortization and Impairment of Intangibles: Amortization and impairment of
intangibles of $1.2 million for the three months ended June 30, 2001 decreased
$32.4 million, or 96%, compared to the corresponding period one year prior. The
decrease is primarily due to the impairment of $31.9 million of goodwill
recorded during the three months ended June 30, 2000.
Total Net Interest and Other Income: Total net interest and other income of
$0.4 million for the three months ended June 30, 2001 decreased $1.5 million, or
79%, compared to the corresponding period one year prior primarily as a result
of decreasing interest rates on lower cash balances and lower interest-bearing
note receivable balances.
Income Tax Expense: Income tax expense of $1.4 million for the three months
ended June 30, 2001 decreased $0.7 million, compared to the corresponding period
one year prior. Income tax expense decreased from the prior period despite
higher income before taxes because: (i) the Company returned to profitability
and is currently recording an income tax provision reflective of the anticipated
year-end effective tax rate, and (ii) during the prior period the Company was
profitable in certain foreign tax jurisdictions but recognized no offsetting
benefit from domestic net operating losses. Income tax expense reflects an
estimated 43% effective rate for the year.
In assessing the realizability of its deferred income tax assets, the
Company 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. The Company considered the scheduled reversal of deferred income tax
liabilities and projected future taxable income in making this assessment.
In order to fully realize the deferred income tax assets, the Company will
need to generate future taxable income of approximately $155 million over the
next 19-20 years. Although the Company has experienced significant losses in
recent fiscal years, 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 the Company's fiscal year ended May 31,
1999.
Six Months Ended June 30, 2001 Compared to Six Months Ended June 30, 2000
Net Sales: Net sales of $102.3 million for the six months ended June 30,
2001 increased $35.6 million, or 53%, compared to the corresponding period one
year prior. The increase is primarily due to increased demand for products
produced by the Land Division. Net sales of $72.0 million in the Land Division
increased $35.5 million, or 97%, as a result of improving industry conditions
and the acquisition of Pelton. Net sales of $30.2 million in the Marine Division
increased $0.2 million, or 1%, compared to the corresponding period one year
prior.
Cost of Sales: Cost of sales of $64.6 million for the six months ended June
30, 2001 increased $0.1 million, or 0.1%, compared to the corresponding period
one year prior. Cost of sales of the Land Division was $47.9 million and cost of
sales of the Marine Division was $16.7 million. Results for the six months ended
June 30, 2000 included $10.6 million, net, in significant and unusual charges
for inventory write-downs partially offset by favorable legal settlements.
Excluding the effect of these significant and unusual net charges, cost of sales
increased $10.7 million, or 20%, compared to the corresponding period one year
prior, due to higher levels of net sales.
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Gross Profit. Gross profit for the six months ended June 30, 2001 increased
$35.5 million compared to the corresponding period one year prior. Gross profit
percentage for the six months ended June 30, 2001 was 37%. Excluding the effect
of significant and unusual charges in the prior period, gross profits for the
six months ended June 30, 2001 increased $24.9 million compared to the
corresponding period one year prior. Excluding the effect of these significant
and unusual charges, gross profit percentage for the six months ended June 30,
2000 was 19%. Contributing to the higher 2001 gross profit percentage was the
return to a more normal pricing regime, success in reducing costs and improving
absorption of fixed and semi-fixed overhead, as well as the continued
elimination from the sales mix of products that had been highly discounted
during recent periods of weaker demand.
Research and Development: Research and development expense of $15.2 million
for the six months ended June 30, 2001 increased $0.9 million, or 6%, compared
to the corresponding period one year prior. Research and development expense has
remained relatively constant due to increased VectorSeis(TM) development costs
partially offset by a significantly narrowed focus on a smaller number of
technology developments for land, marine and reservoir applications. All costs
for the 1,500-station prototype VectorSeis(TM) fleet were expensed in the period
incurred.
Marketing and Sales: Marketing and sales expense of $6.8 million for the six
months ended June 30, 2001 increased $1.5 million, or 28%, compared to the
corresponding period one year prior. The increase is primarily related to
increased net sales and higher gross profit percentage on current period net
sales, which has, in turn, led to higher commission costs.
General and Administrative: General and administrative expense of $9.6
million for the six months ended June 30, 2001 decreased $1.1 million, or 10%,
compared to the corresponding period one year prior. Results for the six months
ended June 30, 2000 included significant and unusual net charges of $3.9 million
due to bad debt expense, work-force reductions, unfavorable legal settlements,
loan loss expense and loss on the sale of idle facilities, offset by favorable
legal settlements. Excluding the effect of these significant net charges in the
prior period, general and administrative expense increased $2.8 million in 2001.
This increase in general and administrative expense is partially attributable to
increased compensation expense, reflecting estimated accruals for profit-based
bonuses this year, and the inclusion of Pelton in the current quarter's results.
Amortization and Impairment of Intangibles: Amortization and impairment of
intangibles of $2.3 million for the six months ended June 30, 2001 decreased
$33.3 million, or 93%, compared to the corresponding period one year prior. The
decrease is primarily due to the impairment of $31.9 million of goodwill
recorded during the six months ended June 30, 2000.
Total Net Interest and Other Income: Total net interest and other income of
$1.8 million for the six months ended June 30, 2001 decreased $1.8 million, or
49%, compared to the corresponding period one year prior primarily as a result
of decreasing interest rates on lower cash balances and lower interest bearing
note receivable balances.
Income Tax Expense: Income tax expense of $2.4 million for the six months
ended June 30, 2001 increased $0.2 million, compared to the corresponding period
one year prior. Income tax expense did not differ materially from the prior
period despite higher income before taxes because: (i) the Company returned to
profitability and is currently recording an income tax provision reflective of
the anticipated year-end effective tax rate, and (ii) during the prior period
the Company was profitable in certain foreign tax jurisdictions but recognized
no offsetting benefit from domestic net operating losses. Income tax expense
reflects an estimated 43% effective rate for the year.
In assessing the realizability of its deferred income tax assets, the
Company 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. The Company considered the scheduled reversal of deferred income tax
liabilities and projected future taxable income in making this assessment.
In order to fully realize the deferred income tax assets, the Company will
need to generate future taxable income of approximately $155 million over the
next 19-20 years. Although the Company has experienced significant losses in
recent fiscal years, 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 the Company's fiscal year ended May 31,
1999.
Preferred Stock Dividends: Preferred stock dividends for the three and six
months ended June 30, 2001 and 2000 are related to outstanding Series B and
Series C Preferred Stock. The dividends are recognized as a charge to retained
earnings at the rate of 8% per
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year, 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 three months ended June 30, 2001 was $1.4 million, compared to
$1.2 million for the corresponding period one year prior. The preferred stock
dividend charge for the six months ended June 30, 2001 was $2.8 million,
compared to $2.3 million for the corresponding period one year prior.
Liquidity and Capital Resources
The Company has typically financed operations from internally generated cash
and funds from equity financings. Cash and cash equivalents were $81.6 million
at June 30, 2001, a decrease of $10.7 million, or 12%, compared to December 31,
2000. The decrease is due to negative cash flows from operating activities and
investing activities for the six months ended June 30, 2001. Net cash used in
operating activities was $5.1 million for the six months ended June 30, 2001
compared to the net cash provided by operating activities of $13.0 million for
the corresponding period one year prior. The changes in working capital items
for the six months ended June 30, 2001 represented a $17.2 million use of cash,
due primarily to increases in receivables and inventories as a result of
increased net sales and anticipated higher sales levels in succeeding quarters.
The various working capital accounts can vary in amount substantially from
period to period, depending upon levels of sales, product mix sold, demand for
products, percentages of cash versus credit sales, collection rates, inventory
levels, and general economic and industry factors. Excluding changes in working
capital items, operating cash flow was a positive $12.1 million.
Net cash flow used in investing activities was $7.0 million for the six
months ended June 30, 2001, an increase of $4.8 million, or 224%, compared to
the corresponding period one year prior. The principal investing activities were
capital expenditure projects and the purchase of all the capital stock of
Pelton. Planned capital expenditures for entire fiscal year of 2001 of
approximately $8.0 million include the purchase of advanced manufacturing
machinery and additional equipment for the rental equipment fleet.
Cash flow provided by financing activities was a positive $0.4 million for
the six months ended June 30, 2001, an increase of $0.5 million compared to the
corresponding period one year prior.
The Company believes the combination of existing working capital, current
cash on hand and access to other financing sources will be adequate to meet
anticipated capital and liquidity requirements for the foreseeable future.
RECENT ACCOUNTING PRONOUNCEMENTS
SFAS No. 141 entitled "Business Combinations" was issued in June 2001 and
becomes effective July 1, 2001. SFAS No. 141 requires that all business
combinations be accounted for using the purchase method of accounting, which
requires that acquisitions be recorded at fair value as of the date of
acquisition. The pooling-of -interests method of accounting allowed under prior
standards, which reflected business combinations using historical financial
information, is now prohibited.
SFAS No. 142 entitled "Goodwill and Other Intangible Assets" was also issued
in June 2001, in concert with SFAS No. 141. SFAS No. 142 becomes effective for
the Company on January 1, 2002. On that date, goodwill will no longer be
amortized, but will be tested for impairment using a fail value approach.
Currently existing goodwill ($46.7 million at June 30, 2001) will continue to be
amortized through December 31, 2001. Any goodwill recorded by the Company from
an acquisition during the remainder of 2001 will not be subject to amortization.
SFAS No. 142 requires goodwill to be tested for impairment at a level referred
to as a reporting unit, generally one level lower than the Company's reportable
segments. SFAS No. 142 requires the Company to perform the first goodwill
impairment test on all reporting units within six months of adoption. The first
step is to compare the fair value with the book value of a reporting unit. If
the fair value of the reporting unit is less than its book value, the second
step will be to calculate the impairment loss, if any. Any impairment loss from
the initial adoption of SFAS No. 142 will be recognized as a change in
accounting principle. After the initial adoption, goodwill of a reporting unit
shall be tested for impairment on an annual basis and between annual tests if an
event occurs or circumstances change that would more likely than not reduce the
fair value of a reporting unit below its carrying amount.
The Company is still reviewing SFAS No. 142 to determine the effect, if any,
of the initial goodwill impairment testing. During the year ended December 31,
2000 and the six months ended June 30, 2001, the Company recorded goodwill
amortization of $4.5 million and $2.2 million, respectively. These amounts, less
related income tax effects, would not have been recorded under SFAS No. 142.
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CONVERSION TO THE EURO CURRENCY
On January 1, 1999, certain members of the European Union established fixed
conversion rates between their existing currencies and the European Union's
common currency, the Euro. The Company owns facilities and manufactures
components for systems in one member country. The transition period for the
introduction of the Euro is between January 1, 1999 and June 30, 2002. The
Company continues to address the issues involved with the introduction of the
Euro. The more important issues include: converting information technology
systems; reassessing currency risk; and processing tax and accounting records.
Based on progress to date in reviewing this matter, the Company believes that
the introduction of the Euro has not and will not have a significant impact on
its business affairs and its processing of business and accounting records.
CREDIT RISK
A continuation of weak demand for the services of certain customers of the
Company will further strain their revenues and cash resources, thereby resulting
in lower sales levels and a higher likelihood of defaults in their timely
payment of their obligations under credit sales arrangements. Increased levels
of payment defaults with respect to credit sales arrangements could have a
material adverse effect on the Company's results of operations.
The combined gross trade accounts receivable and trade notes receivable
balance as of June 30, 2001, from customers in Russia and other former Soviet
Union countries was approximately $12.6 million and was approximately $9.0
million from customers in Latin American countries. As of June 30, 2001 the
total allowance for doubtful accounts (foreign and US) was $1.6 million and the
allowance for loan losses was $10.9 million. During the six months ended June
30, 2001, there were $10.8 million of sales to customers in Russia and other
former Soviet Union countries (substantially all in the form of cash sales
backed by irrevocable letters of credit), $1.8 million of sales to customers in
Latin American countries and $4.1 million of sales to customers in China. All
terms of sale for these foreign receivables are denominated in US dollars.
Russia and certain Asian and Latin America 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 customers in those
regions or the collectibility of existing receivables, future results of
operations, liquidity and financial condition may be adversely affected.
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 the Company and its representatives in other reports, filings with the
Securities and Exchange Commission, press releases, conferences, conference
calls, 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 expected revenues and profitability for fiscal
2001, other statements concerning future expected results of operation,
including 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
the Company's VectorSeis(TM) technology, marine seismic data acquisition system
through a proposed alliance with Thomson Marconi P/L, further applications and
revenue sources for the Company's MEMS technology and facility capacity; future
demand for I/O products; anticipated product releases and technological
advances; the future mix of business and future asset recoveries; the
realization of deferred tax assets; the effects of and expected benefits from
acquisitions and strategic alliances; the effect of changes in accounting
standards on the results of operations and financial condition; the effect of
the Euro's introduction; the inherent unpredictability of adversarial
proceedings and other contingent liabilities; future capital expenditures and
I/O's future financial condition; future energy industry and seismic services
industry conditions; and world economic conditions, including those in the
Former Soviet Union, Latin America and Asian countries. These statements are
based on current expectations and involve a number of risks and uncertainties,
including those set forth below and elsewhere in this Quarterly Report on Form
10-Q. Although the Company believes that the expectations reflected in such
forward-looking statements are reasonable, there can be no assurance that such
expectations will prove 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
actual results and cause actual results to differ materially from those results
which might be projected, forecast, estimated or budgeted in such
forward-looking statements include, but are not limited to, the following:
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Failure to Develop Products and Keep Pace with Technological Change Will
Adversely Affect Results of Operations. The markets for the Company's products
are characterized by rapidly changing technology and frequent product
introductions. Whether the Company can develop and produce successfully, on a
timely basis, new and enhanced products that embody new technology, meet
evolving industry standards and practices, and achieve levels of capability and
price that are acceptable to customers, will be significant factors in the
ability to compete in the future.
There can be no assurance that the Company will not encounter resource
constraints or technical or other difficulties that could delay introduction of
new products in the future. No assurances can be given as to whether any new
products incorporating the VectorSeis(TM) digital sensor (or any other product
introductions or enhancements) will be commercially feasible or accepted in the
marketplace by present or future customers. If the Company is unable, for
technological or other reasons, to develop competitive products in a timely
manner in response to changes in the seismic data acquisition industry or other
technological changes, business and operating results will be materially and
adversely affected. In addition, continuing development of new products
inherently carries the risk of inventory obsolescence with respect to older
products. Updates and upgrades in 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 consolidation, as well as continual
and rapid changes in technology. Competitors for land and marine seismic
equipment include, among others, Fairfield Industries; Geo-X Systems, Limited;
JGI Incorporated; OYO Geospace Corporation; Bolt Technology Corporation;
Teledyne Brown Engineering, an affiliate of Allegheny Teledyne Company; Thomson
Marconi Sonar P/L ("TMS"); Geoscience Corp. and Societe d'etudes Recherches et
Construction Electroniques ("Sercel"), both affiliates of Compagnie General de
Geophysique (CGG). Unlike I/O, companies such as Sercel and Geoscience Corp.
possess the advantage of selling to an affiliated seismic contractor.
Competition in the industry is expected to intensify and could adversely
affect future results. Several competitors have greater name recognition, more
extensive engineering, manufacturing and marketing capabilities, and greater
financial, technological and personnel resources. In addition, certain companies
in the industry have expanded and improved their product lines or technologies
in recent years. Specifically, the recent introduction by one competitor of a
lightweight land seismic system has had an adverse effect on the Company's net
sales in recent periods. In addition, one of the Company's competitors has
introduced a marine solid streamer product, and the Company believes another
competitor is developing or has developed a similar product. Currently, the
Company does not have a competitive solid streamer product offering and does not
intend to develop or produce one. The Company is currently negotiating a
strategic alliance with TMS to jointly market and develop marine seismic data
acquisition systems incorporating solid streamers. There can be no assurance
that an agreement with TMS can be finalized, or if so, whether the alliance's
objectives can be realized. Therefore, the Company cannot predict whether it
will be able to market a solid streamer in the near future. The Company's net
sales of marine streamers have been, and will continue to be, adversely affected
to the extent customers prefer solid streamers over the Company's liquid filled
product. There can be no assurance that the Company will be able to compete
successfully in the future with existing or new competitors. Pressures from
competitors offering lower-priced products or products employing new
technologies could result in future price reductions and lower margins.
A continuation of the trend toward consolidation and concentrated buying
power in the oil field services industry could also have an adverse effect on
the demand for the Company's products and services.
Continuation of Downturn in Seismic Services Industry Will Adversely Affect
Results of Operations and Financial Condition. Demand for the Company's products
is dependent upon the level of worldwide oil and gas exploration and development
activity and the available inventory of seismic data used to generate
exploration prospects. This activity in turn is primarily dependent upon oil and
gas prices, which have been subject to wide fluctuation in recent years in
response to changes in the supply and demand for oil and natural gas, market
uncertainty and a variety of additional factors that are beyond the Company's
control. Despite the recovery in commodity prices since February 1999, energy
producers' continuing concerns over the sustainability of higher prices for
hydrocarbon production has resulted in weak demand for seismic data acquisition
equipment. Other factors which have negatively impacted demand for products have
been the weakened financial condition of many 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 competitors and
customers, and the destabilized economies in many developing countries. The
Company therefore expects that any turnaround for the seismic equipment market
will occur later than for other sectors of the energy services industry.
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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 products will have a material adverse effect on results of operations
and financial condition. No assurances can be given as to future levels of
worldwide oil and natural gas prices, the extent of the oversupply in "spec"
seismic data , the future level of activity in worldwide oil and gas exploration
and development and their relationship(s) to the demand for the Company's
products. Additionally, no assurances can be given that efforts to reduce and
contain costs will be sufficient to offset the effect of the expected continued
lower levels of net sales until industry conditions improve.
Risk From Significant Amount of Foreign Sales Could Adversely Affect Results
of Operations. Sales outside the United States have historically accounted for a
significant part of the Company's net sales. Foreign sales are subject to
special risks inherent in doing business outside of the United States, including
the risk of war, civil disturbances, exchange rate fluctuations, embargo, and
government activities, as well as 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
exported. The Company may, from time to time, require export licenses and there
can be no assurance that the Company will not experience difficulty in obtaining
such licenses required in connection with export sales.
Demand for the Company's products from customers in developing countries
(including Russia and other Former Soviet Union countries as well as certain
Latin American and Asian countries, including China) is difficult to predict and
can fluctuate significantly from year to year. 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 the slow rate of adoption of new technologies and regular,
transparent purchasing practices. These risks may adversely affect future
operating results and the Company's financial position. In addition, sales to
customers in developing countries on extended terms present heightened credit
risks for the reasons discussed above.
The Company is required to convert to the Euro currency at its facility
located in one of the European Union member countries, and although the Company
does not currently anticipate any problems with such conversion, there can be no
assurance that the problems actually encountered in the Euro conversion will not
be more pervasive than those currently anticipated by management.
Dependence on Key and Technical Personnel. Future success depends upon the
continued contributions of personnel, particularly management personnel, many of
whom would be difficult to replace. Success will also depend on the Company's
ability to attract and retain skilled employees. Changes in personnel,
particularly technical personnel, could adversely affect operating results and
continued changes in management personnel could have a disruptive effect on
employees which could, in turn, adversely affect operating results.
Loss of Significant Customers Will Adversely Affect the Company. A
relatively small number of customers have accounted for a large portion of net
sales, although the degree of sales concentration with any one customer has
varied from fiscal year to year. During the six months ended June 30, 2001, four
customers (Western Geco, Veritas DGC, Schlumberger, and PGS) accounted for
approximately 53% of net sales. The loss of any one of these customers could
have a material adverse effect on net sales, the results of operation and
financial condition of the Company.
Significant Payment Defaults under Sales Arrangements Could Adversely Affect
the Company. The Company often sells to customers on extended-term arrangements.
Significant payment defaults by customers could have a material adverse effect
on the Company's financial position and results of operations. A significant
portion of trade notes and accounts receivable balance as of June 30, 2001 was
attributable to sales made in the former Soviet Union, Latin American and Asian
countries.
Risks Related to Gross Profit. Gross profit percentage is a function of
pricing pressures from Company customers and 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 profit. 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, as well as
unavailability of skilled labor and manufacturing under-absorption due to low
production volumes, may also continue to affect the cost of sales and result in
fluctuations of gross profit percentages in future periods.
Risks Related to Acquisitions. The Company may make further acquisitions or
strategic partnerships in the future. Acquisitions and alliances require
significant financial and management resources both at the time of the
transaction and during the process of integrating the newly acquired business
into current operations. Operating results could be adversely affected if the
Company is
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unable to successfully integrate newly acquired companies into operations.
Structural changes in 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 conclude as planned. Future acquisitions could
also result in issuance of equity securities or the rights associated with the
equity securities, which could potentially dilute earnings per share. In
addition, future acquisitions could result in the incurrence of additional debt,
taxes, or contingent liabilities, and amortization expenses related to goodwill
and other intangible assets. These factors could adversely affect future
operating results and the Company's financial position.
Risks Related to Government Regulations and Product Certification. The
Company's operations are subject to laws, regulations, government policies and
product certification requirements worldwide. Changes in such laws, regulations,
policies, or requirements could affect the demand for 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 future operating results. Certain countries
are subject to restrictions, sanctions and embargoes imposed by the US
government. These restrictions, sanctions and embargoes prohibit or limit the
Company from participating in certain business activities in those countries.
These constraints may adversely affect opportunities for business in those
countries.
Failure to Protect Intellectual Property Will Adversely Affect Operations.
The Company believes that technology is a primary basis of competition in the
industry. Although the Company currently holds certain intellectual property
rights relating to its product lines, there can be no assurance that these
rights will not be challenged by third parties or that the Company will obtain
additional patents or other intellectual property rights in the future.
Additionally, there can be no assurance that efforts to protect its trade
secrets will be successful or that others will not independently develop similar
products or design around any of the intellectual property rights owned by the
Company or that the Company will be precluded by others' patent claims.
Disruption in Vendor Supplies Will Affect Financial Results. The Company's
manufacturing process requires a high volume of quality components. Certain
components used by the Company are currently provided by only one supplier. The
Company may, from time to time, experience supply or quality control problems
with suppliers, and such problems could significantly affect the Company's
ability to meet production and sales commitments. 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 and
increases in component costs and reduced control over delivery schedules; any of
which could adversely affect future financial results.
Risks Related to Timing of Product Shipments Could Result in Significant
Quarterly Fluctuations. Due to the relatively high sales price of many 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. A substantial portion of the Company's net sales in any
period may result from shipments during the latter part of a period. Because the
Company establishes its sales and operating expense levels based on 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 Stock Price.
In recent years, the stock market in general, and the market for energy and
technology stocks in particular, including the Company's common stock, have
experienced extreme price fluctuations. There is a risk that future stock price
fluctuations could impact Company operations. Stock price declines could affect
the Company's ability to successfully attract and retain qualified personnel,
complete desirable business combinations or accomplish financing or similar
transactions in the future. The Company has historically not paid, and does not
intend to pay in the foreseeable future, cash dividends on common stock.
NOTE: THE FOREGOING REVIEW OF FACTORS PURSUANT TO THE PRIVATE SECURITIES
LITIGATION REFORM ACT OF 1995 SHOULD NOT BE CONSTRUED AS EXHAUSTIVE. IN ADDITION
TO THE FOREGOING, THE COMPANY WISHES TO REFER READERS TO OTHER FACTORS DISCUSSED
ELSEWHERE IN THIS REPORT AS WELL AS OTHER FILINGS AND REPORTS WITH THE SEC FOR A
FURTHER DISCUSSION OF RISKS AND UNCERTAINTIES WHICH COULD CAUSE ACTUAL RESULTS
TO DIFFER MATERIALLY FROM THOSE CONTAINED IN FORWARD-LOOKING STATEMENTS. THE
COMPANY UNDERTAKES NO OBLIGATION TO PUBLICLY RELEASE THE RESULT OF ANY REVISIONS
TO ANY SUCH FORWARD-LOOKING STATEMENTS, WHICH MAY BE MADE TO REFLECT THE EVENTS
OR CIRCUMSTANCES AFTER THE DATE HEREOF OR TO REFLECT THE OCCURRENCE OF
UNANTICIPATED EVENTS.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company may, from time to time, be exposed to market risk, which is the
potential loss arising from adverse changes in market prices and rates. The
Company traditionally has not entered into significant derivative or other
financial instruments. The
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Company is not currently a borrower under any material credit arrangements which
feature fluctuating interest rates. Market risk could arise from changes in
foreign currency exchange rates.
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) List of Documents Filed.
3.3 Amended and Restated Bylaws.
10.27 Sale and Purchase Agreement by and between IPOP Management, Inc. as
Seller and N.L. Ventures III Stafford, L.P. and Assigns, as Purchaser,
effective as of June 19, 2001.
15.1 Acknowledgement Letter Regarding Unaudited Interim Financial
Information from KPMG LLP.
99.1 Independent Accountants' Review Report.
(b) Reports on Form 8-K.
None.
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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 August 14, 2001.
INPUT/OUTPUT, INC.
August 14, 2001 By /s/ MARTIN DECAMP
- --------------- -----------------------------------
(Date) Chief Accounting Officer
(principal executive officer)
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EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
3.3 Amended and Restated Bylaws.
10.27 Sale and Purchase Agreement by and between IPOP Management, Inc. as
Seller and N.L. Ventures III Stafford, L.P. and Assigns, as Purchaser,
effective as of June 19, 2001.
15.1 Acknowledgement Letter Regarding Unaudited Interim Financial
Information from KPMG LLP.
99.1 Independent Accountants' Review Report.