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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 MARCH 31, 2002
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 PARC CREST 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 March 31, 2002 there were 50,956,889 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 MARCH 31, 2002
<Table>
<Caption>
PART I. Financial Information. PAGE
Item 1. Financial Statements.
Consolidated Balance Sheets
March 31, 2002 (unaudited) and December 31, 2001............ 3
Consolidated Statements of Operations
Three months ended March 31, 2002 (unaudited) and
March 31, 2001 (unaudited).................................. 4
Consolidated Statements of Cash Flows
Three months ended March 31, 2002 (unaudited) and
March 31, 2001 (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..... 16
PART II. Other Information.
Item 6. Exhibits and Reports on Form 8-K............................... 16
</Table>
INPUT/OUTPUT, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<Table>
<Caption>
(UNAUDITED)
ASSETS MARCH 31, DECEMBER 31,
2002 2001
----------- -----------
Current assets:
Cash and cash equivalents ............................................. $ 97,791 $ 101,681
Restricted cash ....................................................... 28 221
Accounts receivable, net .............................................. 36,157 46,434
Current portion notes receivable, net ................................. 1,542 1,078
Inventories ........................................................... 68,075 68,283
Deferred income tax ................................................... 15,346 15,083
Prepaid expenses ...................................................... 1,894 3,115
--------- ---------
Total current assets .......................................... 220,833 235,895
Notes receivable ......................................................... 5,800 5,800
Deferred income tax ...................................................... 40,540 40,745
Property, plant and equipment, net ....................................... 45,588 47,538
Goodwill, net ............................................................ 45,584 45,584
Other assets, net ........................................................ 7,617 7,609
--------- ---------
Total assets .................................................. $ 365,962 $ 383,171
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt .................................. $ 2,330 $ 2,312
Accounts payable ...................................................... 7,043 10,169
Accrued expenses ...................................................... 10,132 18,814
--------- ---------
Total current liabilities ..................................... 19,505 31,295
Long-term debt, net of current maturities ................................ 19,499 20,088
Other long-term liabilities .............................................. 676 751
Stockholders' equity:
Cumulative convertible preferred stock, $0.01 par value;
authorized 5,000,000 shares; issued and outstanding 55,000
shares at March 31, 2002 and December 31, 2001 (liquidation
value of $55 million at March 31, 2002) ............................. 1 1
Common stock, $0.01 par value; authorized 100,000,000 shares;
outstanding 50,956,889 shares at March 31, 2002 and
50,865,729 shares at December 31, 2001 .............................. 517 516
Additional paid-in capital ............................................ 361,928 360,147
Accumulated deficit ................................................... (21,710) (15,713)
Accumulated other comprehensive loss .................................. (8,253) (7,499)
Treasury stock, at cost, 743,298 shares at March 31, 2002 and
at December 31, 2001 ................................................ (5,769) (5,769)
Unamortized restricted stock compensation ............................. (432) (646)
--------- ---------
Total stockholders' equity ......................................... 326,282 331,037
--------- ---------
Total liabilities and stockholders' equity .................... $ 365,962 $ 383,171
========= =========
</Table>
See accompanying notes to unaudited consolidated financial statements.
3
INPUT/OUTPUT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)
<Table>
<Caption>
THREE MONTHS ENDED
MARCH 31,
------------------------------
2002 2001
------------ ------------
Net sales ............................. $ 30,213 $ 42,409
Cost of sales ......................... 23,252 26,168
------------ ------------
Gross profit ................. 6,961 16,241
------------ ------------
Operating expenses:
Research and development ........... 7,021 7,537
Marketing and sales ................ 2,530 2,850
General and administrative ......... 4,627 4,893
Amortization of intangibles ........ 316 1,136
------------ ------------
Total operating expenses ..... 14,494 16,416
------------ ------------
Loss from operations .................. (7,533) (175)
Interest expense ...................... (35) (207)
Interest income ....................... 491 1,291
Other income (expense) ................ (136) 307
------------ ------------
Earnings (loss) before income taxes ... (7,213) 1,216
Income tax expense (benefit) .......... (2,671) 1,026
------------ ------------
Net earnings (loss) ................... (4,542) 190
Preferred dividend .................... 1,455 1,390
------------ ------------
Net loss applicable to common shares .. $ (5,997) $ (1,200)
============ ============
Basic loss per common share ........... $ (0.12) $ (0.02)
============ ============
Weighted average number of
common shares outstanding .......... 50,890,836 50,851,239
============ ============
Diluted loss per common share ......... $ (0.12) $ (0.02)
============ ============
Weighted average number of diluted
common shares outstanding .......... 50,890,836 50,851,239
============ ============
</Table>
See accompanying notes to unaudited consolidated financial statements.
4
INPUT/OUTPUT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<Table>
<Caption>
THREE MONTHS ENDED
MARCH 31,
------------------------
2002 2001
--------- ---------
Cash flows from operating activities:
Net earnings (loss) ......................................... $ (4,542) $ 190
Depreciation and amortization ............................... 2,992 4,765
Amortization of restricted stock and other
stock compensation ......................................... 56 78
Loss (gain) on disposal of fixed assets ..................... 47 (53)
Bad debt collections ........................................ (54) (92)
Accounts and notes receivable ............................... 9,775 (9,384)
Inventories ................................................. 16 (5,101)
Accounts payable and accrued expenses ....................... (8,480) 106
Income taxes payable/receivable ............................. (3,089) (2,057)
Other assets and liabilities ................................ 987 1,582
--------- ---------
Net cash used in operating activities ................. (2,292) (9,966)
--------- ---------
Cash flows from investing activities:
Purchase of property, plant and equipment ................... (1,054) (1,642)
Business acquisition ........................................ -- (6,183)
Cash of acquired business ................................... -- 2,032
--------- ---------
Net cash used in investing activities ................. (1,054) (5,793)
--------- ---------
Cash flows from financing activities:
Payments on long-term debt .................................. (571) (293)
Payments of preferred dividends ............................. (136) (136)
Proceeds from exercise of stock options ..................... 164 966
Proceeds from issuance of common stock ...................... 457 371
Purchase of treasury stock .................................. -- (456)
--------- ---------
Net cash (used in) provided by financing activities ... (86) 452
--------- ---------
Effect of change in foreign currency exchange rates on
cash and cash equivalents ................................ (458) (19)
--------- ---------
Net decrease in cash and cash equivalents ................... (3,890) (15,326)
Cash and cash equivalents at beginning of period ............ 101,681 92,376
--------- ---------
Cash and cash equivalents at end of period ............ $ 97,791 $ 77,050
========= =========
</Table>
See accompanying notes to unaudited consolidated financial statements.
5
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, 2001 has
been derived from the Company's audited consolidated financial statements at
that date. The consolidated balance sheet at March 31, 2002, the consolidated
statements of operations for the three months ended March 31, 2002 and 2001, and
the consolidated statements of cash flows for the three months ended March 31,
2002 and 2001 have been prepared by the Company without audit. In the opinion of
management, all adjustments, consisting only 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 months ended March 31, 2002 are not necessarily
indicative of the operating results for a full year or of future operations.
These consolidated financial statements have been prepared using accounting
principles generally accepted in the United States for interim financial
information and the instructions to Form 10-Q and applicable rules of Regulation
S-X of the Securities and Exchange Commission. Certain information and footnote
disclosures normally included in financial statements presented in accordance
with accounting principles generally accepted in the United States have been
omitted. The accompanying consolidated financial statements should be read in
conjunction with the Company's Annual Report on Form 10-K for the year ended
December 31, 2001. 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 months ended March 31, 2002 and 2001 is as follows (in
thousands):
<Table>
<Caption>
THREE MONTHS ENDED
MARCH 31,
----------------------
2002 2001
-------- --------
Net sales:
Land ..................... $ 17,611 $ 27,813
Marine ................... 12,602 14,596
-------- --------
Total .................... $ 30,213 $ 42,409
======== ========
Depreciation and amortization:
Land ..................... $ 1,498 $ 2,285
Marine ................... 434 913
Corporate ................ 1,060 1,567
-------- --------
Total .................... $ 2,992 $ 4,765
======== ========
Loss from operations:
Land .................... $ (6,626) $ 329
Marine .................. 2,506 4,087
Corporate ............... (3,413) (4,591)
-------- --------
Total ................... $ (7,533) $ (175)
======== ========
</Table>
<Table>
<Caption>
MARCH 31 DECEMBER 31,
Total assets: 2002 2001
-------- ------------
Land .................... $129,320 $139,978
Marine .................. 68,797 62,422
Corporate ............... 167,845 180,771
-------- --------
Total ................... $365,962 $383,171
======== ========
</Table>
6
<Table>
<Caption>
MARCH 31, DECEMBER 31,
Total assets by geographic area: 2002 2001
--------- ------------
North America ............ $322,656 $340,375
Europe ................... 43,306 42,796
-------- --------
Total .................... $365,962 $383,171
======== ========
</Table>
Intersegment sales are insignificant for all periods presented. Corporate
assets include all assets specifically related to corporate personnel and
operations, substantially all cash and cash equivalents, all facilities and
manufacturing machinery and equipment that are jointly utilized by segments and
all income taxes receivable and deferred income tax assets. Depreciation and
amortization expense is allocated to segments based upon use of the underlying
assets.
A summary of net sales by geographic area is as follows (in thousands):
<Table>
<Caption>
THREE MONTHS ENDED
MARCH 31,
-------------------
2002 2001
------- -------
North America ................. $11,064 $20,584
Middle East ................... 360 6,115
Europe ........................ 7,958 5,314
Asia .......................... 1,444 2,808
Former Soviet Union ........... 6,081 3,077
Other ......................... 3,306 4,511
------- -------
$30,213 $42,409
======= =======
</Table>
Net sales are attributed to individual countries on the basis of the
ultimate destination of the equipment, if known; if the ultimate destination is
not known, it is based on the geographical location of initial shipment.
(3) INVENTORIES
A summary of inventories is as follows (in thousands):
<Table>
<Caption>
MARCH 31, DECEMBER 31,
2002 2001
--------- -----------
Raw materials ................. $ 45,884 $ 46,729
Work-in-process ............... 6,887 4,191
Finished goods ................ 15,304 17,363
-------- --------
$ 68,075 $ 68,283
======== ========
</Table>
At March 31, 2002, some portion of the Company's inventory is in excess of
near-term requirements based on the recent level of sales. Management has
developed a program to reduce this inventory to more desirable levels over the
near term and believes no loss will be incurred on its disposition in excess of
current reserve estimates. Should the inventory reduction program not be
successful, it is reasonably possible the estimated reserve could change and
that the change could be material to the financial statements.
(4) ACCOUNTS AND NOTES RECEIVABLE
A summary of accounts receivable is as follows (in thousands):
<Table>
<Caption>
MARCH 31, DECEMBER 31,
2002 2001
--------- ------------
Accounts receivable, principally trade .. $ 38,183 $ 48,186
Allowance for doubtful accounts ......... (2,026) (1,752)
-------- --------
Accounts receivable, net ................ $ 36,157 $ 46,434
======== ========
</Table>
The original recorded investment in notes receivable, excluding accrued
interest, for which a reserve has been recorded was $12.0 million at March 31,
2002. A summary of notes receivable, accrued interest and allowance for loan
loss is as follows (in thousands):
7
<Table>
<Caption>
MARCH 31, DECEMBER 31,
2002 2001
--------- ------------
Notes receivable and accrued interest ....... $ 18,013 $ 17,613
Less allowance for loan loss ................ (10,671) (10,735)
-------- --------
Notes receivable, net ....................... 7,342 6,878
Less current portion notes receivable, net .. 1,542 1,078
-------- --------
Long-term notes receivable .................. $ 5,800 $ 5,800
======== ========
</Table>
(5) EARNINGS (LOSS) PER COMMON SHARE
Basic earnings (loss) per common 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 (loss) per common 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):
<Table>
<Caption>
THREE MONTHS ENDED
MARCH 31,
--------------------------------
2002 2001
------------- -------------
Net loss applicable to common shares ............... $ (5,997) $ (1,200)
============= =============
Weighted average number of common shares
outstanding ..................................... 50,890,836 50,851,239
Stock options and other common stock equivalents ... -- --
------------- -------------
Weighted average number of diluted common shares
outstanding ..................................... 50,890,836 50,851,239
============= =============
Basic loss per common share ........................ $ (0.12) $ (0.02)
============= =============
Diluted loss per common share ...................... $ (0.12) $ (0.02)
============= =============
</Table>
At March 31, 2002, and 2001, 4,931,142 and 4,521,628, respectively, of
common 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 presented 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
collateralized by certain land and buildings. The term loan bore interest at a
fixed rate of 7.875% per year and was repayable in equal monthly installments of
principal and interest of $151,439. On August 20, 2001, the Company sold the
same land and buildings for $21 million. As part of the transaction, the Company
repaid the ten-year term loan. Simultaneous to the sale and loan repayment, the
Company entered into a non-cancelable lease with the purchaser of the property.
The lease has a twelve year term with three consecutive options to extend the
lease for five years each. As a result of the lease terms, the commitment is
recorded as a twelve year $21 million lease obligation with an implicit interest
rate of 9.1%. The Company paid $1.7 million in commissions and professional fees
which have been recorded as deferred financing costs and are being amortized
over the twelve year term of the obligation.
On January 3, 2001, in connection with the acquisition of Pelton Company,
Inc. ("Pelton"), 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. The unpaid balance at March
31, 2002 was $1.5 million.
8
A summary of future principal obligations under the note payable and lease
obligation is as follows (in thousands):
<Table>
<Caption>
YEARS ENDED DECEMBER 31,
------------------------
2002......................................... $ 1,741
2003......................................... 1,264
2004......................................... 973
2005......................................... 1,184
2006......................................... 1,470
2007 and thereafter.......................... 15,197
----------
Total........................................ $ 21,829
==========
</Table>
(7) COMPREHENSIVE EARNINGS (LOSS)
The components of comprehensive earnings (loss) are as follows (in
thousands):
<Table>
<Caption>
THREE MONTHS ENDED
MARCH 31,
----------------------
2002 2001
-------- --------
Net earnings (loss) ...................... $ (4,542) $ 190
Foreign currency translation adjustment .. (754) (1,460)
-------- --------
Comprehensive loss ....................... $ (5,296) $ (1,270)
======== ========
</Table>
(8) ACQUISITIONS
On January 3, 2001, the Company acquired all of the outstanding capital
stock of Pelton for approximately $6 million in 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 final allocation of the purchase price, including related direct costs, for
the acquisition of Pelton is as follows (in thousands):
<Table>
<Caption>
Fair values of assets and liabilities
Net current assets ............................. $ 5,266
Property, plant and equipment .................. 373
Intangible assets .............................. 4,969
-------
Total allocated purchase price ......... 10,608
Less non-cash consideration -- note payable ...... 3,000
Less cash of acquired business ................... 2,032
-------
Cash paid for acquisition, net of cash acquired .. $ 5,576
=======
</Table>
The consolidated results of operations of the Company include the results of
Pelton from the date of acquisition. Pro-forma results prior to the acquisition
date were not material to the Company's consolidated results of operations.
(9) 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.
(10) RECENT ACCOUNTING PRONOUNCEMENTS
In June 2001, the FASB issued SFAS No. 142 entitled "Goodwill and Other
Intangible Assets," which became effective on
9
January 1, 2002. Under SFAS 142, existing goodwill will no longer be amortized,
but will be tested for impairment using a fair value approach. SFAS No. 142
requires goodwill to be tested for impairment at a level referred to as a
reporting unit, generally one level lower than 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, the Company will test goodwill 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.
The following is a reconciliation of reported net income to adjusted net
income subsequent to the adoption, from January 1, 2002 of SFAS No. 142 (in
thousands):
<Table>
<Caption>
THREE MONTHS ENDED
MARCH 31,
--------------------
2002 2001
------- -------
Reported net loss applicable to common shares .. $(5,997) $(1,200)
Elimination of goodwill amortization ........... -- 924
------- -------
Adjusted net loss applicable to common shares .. $(5,997) $ (276)
======= =======
</Table>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
SUMMARY REVIEW AND OUTLOOK
In response to prevailing seismic industry conditions, the Company has
concentrated 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 with the goal of
achieving sustained profitability throughout industry cycles as quickly as
practicable. Implementing these solutions could result in additional charges
against future earnings.
We are uncertain about the development of demand for seismic services and
equipment in the near term. Recent world events and a weakened world economy
indicate that demand for seismic equipment in the first half of the year will be
less robust than last year. Although we are unable to provide any definitive
guidance for this year, we currently believe that revenue and operating profits
for the second quarter of 2002 will be similar to the first quarter of 2002.
However, we believe long term fundamentals for the sector remain strong and that
we should be well-positioned to benefit from new product sales and the widely
anticipated strengthening sector fundamentals in the second half of the year.
RESULTS OF OPERATIONS
Three Months Ended March 31, 2002 Compared to Three Months Ended March 31, 2001
Net Sales: Net sales of $30.2 million for the three months ended March 31,
2002 decreased $12.2 million, or 29%, compared to the corresponding period last
year. The decrease is primarily due to decreased demand for products produced by
our Land Division. Our Land Division's net sales decreased $10.2 million, or
37%, to $17.6 million primarily as a result of declining industry conditions.
Our Marine Division's net sales decreased $2.0 million to $12.6 million, or 14%,
compared to the prior year. Marine sales remain lackluster primarily due to over
capacity in this sector and an abundance of marine library data.
Cost of Sales: Cost of sales of $23.3 million for the three months ended
March 31, 2002 decreased $2.9 million, or 11%, compared to the corresponding
period last year. Cost of sales of our Land Division was $16.7 million and cost
of sales of our Marine Division was $6.6 million. Cost of sales in the current
quarter decreased as a result of the decrease in revenues and lower gross profit
percentage on those revenues.
Gross Profit and Gross Profit Percentage: Gross profit of $7.0 million for
the three months ended March 31, 2002 decreased $9.3 million, or 57%, compared
to the corresponding period last year. Gross profit percentage for the three
months ended March 31, 2002 was 23% compared to 38% in the prior year. The
decline in gross profit percentage is primarily due to under-absorbed
manufacturing overhead, and to a lesser degree, severance for work force
reductions.
10
Research and Development: Research and development expense of $7.0 million
for the three months ended March 31, 2002 decreased $0.5 million, or 7%,
compared to the corresponding period last year. Research and development expense
remained at high levels as we completed the final stages of Vectorseis(R)
commercialization and continue to develop a lightweight ground electronics
system, ocean bottom system and next generation marine system.
Marketing and Sales: Marketing and sales expense of $2.5 million for the
three months ended March 31, 2002 decreased $0.3 million, or 11%, compared to
the corresponding period last year. The decrease is primarily related to lower
sales and lower commissions on those sales.
General and Administrative: General and administrative expense of $4.6
million for the three months ended March 31, 2002 decreased $0.3 million, or 5%,
compared to the corresponding period last year. The decrease in general and
administrative expense is primarily attributable to accruals for profit-based
bonuses in the prior year for which no accrual has been recorded in the current
quarter, offset by severance expenses in the current quarter.
Amortization of Intangibles: Amortization of intangibles of $0.3 million for
the three months ended March 31, 2002 decreased $0.8 million, or 72%, compared
to the corresponding period last year. The decrease in amortization of
intangibles primarily relates to the implementation of SFAS No. 142 in the
current year, which among other things, precludes the amortization of goodwill.
Total Other Income: Total net interest and other income of $0.3 million for
the three months ended March 31, 2002 decreased $1.1 million, or 77%, compared
to the corresponding period last year. The decease is primarily due to
fluctuations in exchange rates and falling interest rates on cash balances.
Income Tax Expense (Benefit): Income tax benefit of $2.7 million for the
three months March 31, 2002 represents a net change of $3.7 million from an
expense of $1.0 million in the corresponding period last year. The income tax
benefit for the current period is due to our net loss. Our expectations
regarding a long-term return to profitability should result in a tax provision
that reflects a year-end estimated effective tax rate of approximately 37%.
In assessing the realizability of our 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 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 U.S. taxable income of approximately $120 million over the next
19-20 years. Although we have 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 sustained profitability.
Preferred Stock Dividends: Preferred stock dividends for the three months
ended March 31, 2002 and 2001 are related to outstanding Series B and Series C
Preferred Stock. We recognize the dividends as a charge to retained earnings at
a stated rate of 8% per year, compounded quarterly (of which 7% is accounted for
as a non-cash event recorded to additional paid-in capital so as to reflect
potential dilution upon preferred stock conversion and 1% is paid as a quarterly
cash dividend). The preferred stock dividend charge for the three months ended
March 31, 2002 was $1.5 million, compared to $1.4 million for the corresponding
period last year.
LIQUIDITY AND CAPITAL RESOURCES
We have typically financed operations from internally generated cash and
funds from equity financings. Cash and cash equivalents were $97.8 million at
March 31, 2002, a decrease of $3.9 million, or 4%, compared to December 31,
2001. The decrease is due to cash flows used in operating activities and
investing activities. Net cash used in operating activities was $2.3 million for
the three months ended March 31, 2002 compared to the net cash used in operating
activities of $10.0 million for the corresponding period last year. Negative
operating cash flows were primarily due to decreases in accounts payable and
accrued expenses and taxes, offset by a decrease in receivables.
Net cash flow used in investing activities was $1.1 million for the three
months ended March 31, 2002 compared to net cash used in investing activities of
$5.8 million for the corresponding period last year. The principal investing
activities were capital expenditure projects. Planned capital expenditures for
2002 are approximately $9.9 million, including the purchase of advanced
manufacturing
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machinery and additions of VectorSeis equipment for use in acquiring seismic
data in conjunction with our alliance partner. Capital expenditures could
increase should the Company enter into additional similar alliances to
commercialize VectorSeis. We will reevaluate our capital expenditure plans for
2002 if industry conditions do not evolve as we anticipate.
Net cash flow used in financing activities was $0.1 million for the three
months ended March 31, 2002 compared to net cash flow provided by financing
activities of $0.5 million for the corresponding period last year. The principal
use was repayment of long-term debt offset by proceeds from issuance of common
stock and exercise of stock options.
We believe 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.
FUTURE CONVERSION OF SERIES B AND SERIES C PREFERRED STOCK
In 1999, we issued 40,000 shares of Series B Preferred Stock and 15,000
shares of Series C Preferred Stock to SCF-IV, L.P. ("SCF") for approximately $55
million in a privately negotiated transaction. Both the Series B and Series C
Preferred Stock are convertible into shares of our Common Stock at SCF's option
at any time after May 7, 2002, and will automatically convert into shares of our
Common Stock on May 7, 2004. SCF may convert the shares of Series B and Series C
Preferred Stock into shares of our Common Stock at either:
o SCF's initial per share purchase price divided by a fixed conversion
price (currently $8.00 for the Series B Preferred Stock and $8.50 for
the Series C Preferred Stock); or
o SCF's initial per share purchase price increased at a rate of 8% per
year compounded quarterly, less any cash dividends paid, divided by a
trailing 10 day average market price for our Common Stock.
If the conversion of the Series B and Series C Preferred Stock would result
in more than 10,099,979 shares of Common Stock being issued, we would be
required to redeem any excess in cash. Therefore, if we experience a significant
decline in our stock price prior to conversion of the Series B and Series C
Preferred Stock, our liquidity and capital resources may be materially and
adversely affected.
Under the terms of a registration rights agreement, SCF has the right, first
exercisable on March 8, 2002, to demand us to file a registration statement for
the resale of the shares of Common Stock SCF acquires upon conversion of the
Series B and Series C Preferred Stock. Sales or the availability for sale of a
substantial number of our shares of Common Stock in the public market could
adversely affect the market price for our Common Stock.
We recognize dividends on the preferred stock as a charge to retained
earnings at a stated rate of 8% per year, compounded quarterly (of which 7% is
accounted for as a non-cash event recorded to additional paid-in capital so as
to reflect potential dilution at time of preferred stock conversion and 1% is
paid as a quarterly cash dividend). The charge to retained earnings will cease
following conversion.
Because the number of shares we will issue upon conversion of the Series B
and Series C Preferred Stock depends on the market price of our common stock at
the time of conversion, we do not know the ultimate impact conversion will have
on our reported results. However, if conversion had occurred at March 31, 2002,
it would have been accretive to our earnings per share.
CREDIT RISK
A continuation of weak demand for the services of certain of our customers
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 our results of operations.
Our principal customers are seismic contractors, which operate seismic data
acquisition systems and related equipment to collect data in accordance with
their customers' specifications or for their own seismic data libraries. In
addition, we market and sell products to oil and gas companies. The loss of any
one of these customers could have a material adverse effect on the results of
operations and financial condition. See Management's Discussion and Analysis of
Results of Operations and Financial Condition - Cautionary
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Statement for Purposes of Forward Looking Statements - Further consolidation
among our significant customers could materially and adversely affect us.
CAUTIONARY STATEMENT FOR PURPOSES OF FORWARD-LOOKING STATEMENTS
We have made statements in this report which constitute forward-looking
statements within the meaning of Section 21E of the Securities Exchange Act of
1934. Examples of forward-looking statements in this report include statements
regarding:
o our expected revenues, operating profit and net income for 2002 or the
three months ended March 31, 2002;
o future demand for seismic equipment and services;
o future commodity prices;
o future economic conditions, including conditions in Russia and certain
Asian and Latin American countries;
o anticipated timing of commercialization and capabilities of our
products under development;
o potential alliances with strategic partners for development of new
products;
o our expectations regarding our future mix of business and future asset
recoveries;
o our expectations regarding realization of our deferred tax assets;
o the anticipated effects of changes in accounting standards;
o our belief regarding accounting estimates we make;
o the result of pending or threatened disputes and other contingencies;
and
o our future levels of capital expenditures.
You can identify these forward-looking statements by forward-looking words
such as "believe," "may," "could," "will," "estimate," "continue," "anticipate,"
"intend," "seek," "plan," "expect," "should," "would" and similar expressions.
These forward-looking statements reflect our best judgment about future events
and trends based on the information currently available to us. Our results of
operations can be affected by inaccurate assumptions we make or by risks and
uncertainties known or unknown to us. Therefore, we cannot guarantee the
accuracy of the forward-looking statements. Actual events and results of
operations may vary materially from our current expectations. While we cannot
identify all of the factors that may cause actual events to vary from our
expectations, we believe the following factors should be considered carefully:
Demand for our products will be materially and adversely affected if there
is further reduction in the level of exploration expenditures by oil and gas
companies and geophysical contractors. Demand for our products is particularly
sensitive to the level of exploration spending by oil and gas companies and
geophysical contractors. Exploration expenditures have tended in the past to
follow trends in the price of oil and gas, which have fluctuated widely in
recent years in response to relatively minor changes in supply and demand for
oil and gas, market uncertainty and a variety of other factors beyond our
control. Any prolonged reduction in oil and gas prices will depress the level of
exploration activity and correspondingly depress demand for our products. A
prolonged downturn in market demand for our products will have a material
adverse effect on our results of operations and financial condition.
We may not gain rapid market acceptance for our new products which could
materially and adversely affect our results of operations and financial
condition. Seismic exploration requires sensitive scientific instruments capable
of withstanding harsh operating environments. In addition, our customers demand
broad functionality from our products. We require long development and testing
periods before releasing major new product enhancements and new products. We
currently intend to release for commercial use our next generation land seismic
data acquisition system and our next generation marine seismic data acquisition
system. If our anticipated product introductions are delayed, our customers may
turn to alternate suppliers and our results of operations and financial
condition will be adversely affected. We have on occasion experienced delays in
the scheduled introduction of new and enhanced products. In addition, products
as complex as those we offer sometimes contain undetected errors or bugs when
first introduced that,
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despite our rigorous testing program, are not discovered until the product is
purchased and used by a customer. If our customers deploy our new products and
they do not work correctly, our relationship with our customers may be
materially and adversely affected. We cannot assure you that errors will not be
found in future releases of our products, or that these errors will not impair
the market acceptance of our products. If our new products are not accepted by
our customers as rapidly as we anticipate, our business and results of
operations may be materially and adversely affected.
The rapid pace of technological change in the seismic industry requires us
to make substantial capital expenditures and could make our products obsolete.
The markets for our products are characterized by rapidly changing technology
and frequent product introductions. We must invest substantial capital to
maintain our leading edge in technology with no assurance that we will receive
an adequate rate of return on such investments. If we are unable to develop and
produce successfully and timely new and enhanced products, we will be unable to
compete in the future and our business and results of operations will be
materially and adversely affected.
Competition for sellers of seismic data acquisition systems and equipment
is intensifying and could adversely affect our results of operations. Our
industry is highly competitive. Our competitors have been consolidating into
better-financed companies with broader product lines. Several of our competitors
are affiliated with seismic contractors, which forecloses a portion of the
market to us. Some of our competitors have greater name recognition, more
extensive engineering, manufacturing and marketing capabilities, and greater
financial, technical and personnel resources than those available to us.
In recent years our competitors have expanded or improved their product
lines, which has adversely affected our results of operations. For instance, one
competitor recently introduced a lightweight land seismic system which we
believe has made our current land system more difficult to sell at acceptable
margins. In addition, one of our competitors has introduced a marine solid
streamer product that competes with our oil-filled product. Our net sales of
marine streamers have been, and will continue to be, adversely affected by
customer preferences for solid products. We are currently exploring strategies
to offer a marine solid streamer. We can not assure you that we will find a
cost-effective way to market a solid streamer product or that we will be able to
compete effectively in the future for sales of marine streamers.
Further consolidation among our significant customers could materially and
adversely affect us. A relatively small number of customers account for the
majority of our net sales in any period. During the prior year ended December
31, 2001, three customers (WesternGeco, Veritas, and PGS) accounted for
approximately 51% of our net sales. In recent years, our customers have been
rapidly consolidating, shrinking the demand for our products. Veritas and PGS,
two of our large customers, have recently announced that they intend to merge.
The loss of any of our significant customers to further consolidation or
otherwise could materially and adversely affect our results of operations and
financial condition.
Large fluctuations in our sales and gross margin can result in operating
losses. Because our products have a high sales price and are technologically
complex, we experience a very long sales cycle. In addition, the revenues from
any particular sale can vary greatly from our expectations due to changes in
customer requirements. These factors create substantial fluctuations in our net
sales from period to period. Variability in our gross margins compounds the
uncertainty associated with our sales cycle. Our gross margins are affected by
the following factors:
o pricing pressures from our customers and competitors;
o product mix sold in a period;
o inventory obsolescence;
o unpredictability of warranty costs;
o changes in sales and distribution channels;
o availability and pricing of raw materials and purchased components;
and
o absorption of manufacturing costs through volume production.
We must establish our expenditure levels for product development, sales and
marketing and other operating expenses based, in large part, on our forecasted
net sales and gross margin. As a result, if net sales or gross margins fall
below our forecasted expectations, our operating results and financial condition
are likely to be adversely affected because only a relatively small portion of
our expenses vary with our revenues.
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We may be unable to obtain broad intellectual property protection for our
current and future products which may significantly erode our competitive
advantages. We rely on a combination of patent, copyright and trademark laws,
trade secrets, confidentiality procedures and contractual provisions to protect
our proprietary technologies. We believe that the technological and creative
skill of our employees, new product developments, frequent product enhancements,
name recognition and reliable product maintenance are the foundations of our
competitive advantage. Although we have a considerable portfolio of patents,
copyrights and trademarks, these property rights offer us only limited
protection. Our competitors may attempt to copy aspects of our products despite
our efforts to protect our proprietary rights, or may design around the
proprietary features of our products. Policing unauthorized use of our
proprietary rights is difficult and we are unable to determine the extent to
which such use occurs. Our difficulties are compounded in certain foreign
countries where the laws do not offer as much protection for proprietary rights
as the laws of the United States.
We are not aware that our products infringe upon the proprietary rights of
others. However, third parties may claim that we have infringed their
intellectual property rights. Any such claims, with or without merit, could be
time consuming, result in costly litigation, cause product shipment delays or
require us to enter into royalty or licensing arrangements. Such claims could
have a material adverse affect on our results of operation and financial
condition.
We derive a substantial amount of our net sales from foreign sales which
pose additional risks. Sales to customers outside of the United States and
Canada accounted for approximately 63% of our consolidated net sales for the
three months ended March 31, 2002. United States export restrictions affect the
types and specifications of products we can export. Additionally, to complete
certain sales, United States laws may require us to obtain export licenses and
there can be no assurance that we will not experience difficulty in obtaining
such licenses. Operations and sales in countries other than the United States
are subject to various risks peculiar to each country. With respect to any
particular country, these risks may include:
o expropriation and nationalization;
o political and economic instability;
o armed conflict and civil disturbance;
o currency fluctuations, devaluations and conversion restrictions;
o confiscatory taxation or other adverse tax policies;
o governmental activities that limit or disrupt markets, restrict
payments or the movement of funds; and
o governmental activities that may result in the deprivation of
contractual rights.
The majority of our foreign sales are denominated in United States dollars.
While this practice protects the value of our assets as reported on our
consolidated financial statements, an increase in the value of the dollar
relative to other currencies will make our products more expensive, and
therefore less competitive, in foreign markets.
In addition, we are subject to taxation in many jurisdictions and the final
determination of our tax liabilities involves the interpretation of the statutes
and requirements of taxing authorities worldwide. Our tax returns are subject to
routine examination by taxing authorities, and these examinations may result in
assessments of additional taxes or penalties or both.
Significant payment defaults under extended financing arrangements could
adversely affect us. We often sell to customers on extended-term arrangements.
Significant payment defaults by customers could have a material adverse effect
on our financial position and results of operations.
We are highly dependent on certain key personnel. Our future success
depends upon the continued contributions of personnel, particularly management
personnel, many of whom would be difficult to replace. Our success will also
depend on our 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.
15
Our strategy of pursuing acquisitions and alliances has risks that can
materially and adversely affect our business, results of operations and
financial condition. One of our business strategies is to acquire operations and
assets that are complementary to our existing business, or to enter strategic
alliances that will extend our existing business. Acquisitions and alliances
involve financial, operational and legal risks, including:
o increased levels of goodwill subject to potential impairment;
o increased interest expense or increased dilution from issuance of
equity;
o disruption of existing and acquired business from our integration
efforts; and
o loss of uniformity in standards, controls, procedures and policies.
In addition, other potential buyers could compete with us for acquisitions
and strategic alliances. Competition could cause us to pay a higher price for an
acquisition than we otherwise might have to pay or reduce the available
strategic alternatives. We might be unsuccessful in identifying attractive
acquisition candidates, completing and financing additional acquisitions on
favorable terms or integrating the acquired businesses or assets into our
operations.
Our operations are subject to numerous government regulations which could
adversely limit our operating flexibility. Our 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 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 United States government.
These restrictions, sanctions and embargoes prohibit or limit us from
participating in certain business activities in those countries.
Disruption in vendor supplies will adversely affect our results of
operations. Our manufacturing processes require a high volume of quality
components. Certain components used by us are currently provided by only one
supplier. We may, from time to time, experience supply or quality control
problems with suppliers, and these problems could significantly affect our
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
these could adversely affect our future results of operations.
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, WE WISH 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. WE UNDERTAKE NO
OBLIGATION TO PUBLICLY RELEASE THE RESULT OF ANY REVISIONS TO ANY SUCH
FORWARD-LOOKING STATEMENTS, WHICH MAY BE MADE TO REFLECT THE EVENTS OR
CIRCUMSTANCES AFTER THE DATE HEREOF OR TO REFLECT THE OCCURRENCE OF
UNANTICIPATED EVENTS.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We may, 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. We are 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) Reports on Form 8-K.
On March 8, 2002, we filed a Current Report on Form 8-K reporting under
Item 5. Other Events and Regulation FD Disclosure certain amendments to our
Bylaws.
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On April 1, 2002, we filed a Current Report on Form 8-K reporting under
Item 5. Other Events and Regulation FD Disclosure and Item 7. Financial
Statements and Exhibits our change in accounting method for the sale and lease
of certain land and buildings during the quarter ended September 30, 2001.
17
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 May 15, 2002.
INPUT/OUTPUT, INC.
By /s/ MARTIN B. DECAMP
--------------------------
Vice President-Accounting
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