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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED: FEBRUARY 28, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _____________ TO ____________
COMMISSION FILE NUMBER: 1-13402
INPUT/OUTPUT, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 22-2286646
(STATE OR OTHER JURISDICTION OF (IRS EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
11104 WEST AIRPORT BLVD., STAFFORD, TEXAS 77477
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
Registrant's telephone number, including area code: (281) 933-3339
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes [ X ] No [ ]
At February 28, 1998 there were 44,451,293 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 FEBRUARY 28, 1998
PART I. Financial Information. Page
----
Item 1. Financial Statements.
Consolidated Balance Sheets
February 28, 1998 and May 31, 1997........................ 2
Consolidated Statements of Operations
Three and nine months ended February 28, 1998 and 1997... 3
Consolidated Statements of Cash Flows
Nine months ended February 28, 1998 and 1997............. 4
Notes to Consolidated Financial Statements.................. 5
Item 2. Management's Discussion and Analysis of Results
of Operations and Financial Condition................ 8
Item 3. Quantitative and Qualitative Disclosures about
Market Risk.......................................... 15
PART II. Other Information.
Item 1. Legal Proceedings.................................... 15
Item 2. Changes in Securities................................ 16
Item 6. Exhibits and Reports on Form 8-K..................... 16
1
INPUT/OUTPUT, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
ASSETS
FEBRUARY 28, MAY 31,
1998 1997
------------ -------
Current assets:
Cash and cash equivalents . . . . . . . . . . . $ 50,347 $ 2,573
Trade accounts receivable, net. . . . . . . . . 64,015 61,788
Trade notes receivable, net . . . . . . . . . . 38,065 27,800
Income taxes receivable . . . . . . . . . . . . -- 2,403
Inventories . . . . . . . . . . . . . . . . . . 114,790 106,337
Prepaid expenses. . . . . . . . . . . . . . . . 1,172 1,939
-------- --------
Total current assets. . . . . . . . . . . . . 268,389 202,840
Long-term trade notes receivable . . . . . . . . . 35,558 27,003
Deferred income tax asset. . . . . . . . . . . . . 2,232 3,097
Property, plant and equipment, net . . . . . . . . 71,752 78,376
Goodwill, net. . . . . . . . . . . . . . . . . . . 58,478 61,024
Other assets . . . . . . . . . . . . . . . . . . . 26,306 12,318
-------- --------
$462,715 $384,658
-------- --------
-------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable, principally trade . . . . . . $ 31,467 $ 13,143
Accrued expenses. . . . . . . . . . . . . . . . 19,073 18,358
Current installments of debt. . . . . . . . . . 967 912
Income taxes payable. . . . . . . . . . . . . . 2,502 --
-------- --------
Total current liabilities . . . . . . . . . . 54,009 32,413
Long-term debt . . . . . . . . . . . . . . . . . . 10,270 11,000
Other liabilities. . . . . . . . . . . . . . . . . 1,063 2,631
Stockholders' equity:
Preferred stock, $.01 par
value; authorized 5,000,000
shares, none issued. . . . . . . . . . . . . -- --
Common stock, $.01 par value;
authorized 100,000,000 shares;
issued 44,451,293 shares at
February 28, 1998 and 43,280,851
shares at May 31, 1997. . . . . . . . . . . . 445 433
Additional paid-in capital. . . . . . . . . . . 238,058 218,973
Retained earnings . . . . . . . . . . . . . . . 162,619 121,116
Cumulative translation adjustment . . . . . . . (2,268) (1,673)
Unamortized restricted stock compensation . . . (1,481) (235)
-------- --------
Total stockholders' equity. . . . . . . . . . 397,373 338,614
-------- --------
$462,715 $384,658
-------- --------
-------- --------
See accompanying notes to consolidated financial statements.
2
INPUT/OUTPUT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
FEBRUARY 28, FEBRUARY 28,
-------------------------- -------------------------
1998 1997 1998 1997
---- ---- ---- ----
Net sales and other revenues . . . . . . . . $ 95,266 $ 64,773 $ 281,919 $ 204,821
Cost of sales. . . . . . . . . . . . . . . . 54,455 40,887 166,003 130,089
----------- ----------- ----------- -----------
Gross profit . . . . . . . . . . . . . 40,811 23,886 115,916 74,732
----------- ----------- ----------- -----------
Operating expenses:
Research and development . . . . . . . . . 8,122 5,641 23,738 17,514
Marketing and sales. . . . . . . . . . . . 4,160 3,456 10,751 10,322
General and administrative . . . . . . . . 6,572 4,984 21,082 16,161
Amortization of intangibles. . . . . . . . 1,628 1,118 4,044 3,340
----------- ----------- ----------- -----------
Total operating expenses . . . . . . . 20,482 15,199 59,615 47,337
----------- ----------- ----------- -----------
Earnings from operations . . . . . . . . . . 20,329 8,687 56,301 27,395
Interest expense . . . . . . . . . . . . . . (262) (296) (842) (468)
Other income . . . . . . . . . . . . . . . . 2,204 685 5,576 3,412
----------- ----------- ----------- -----------
Earnings before income taxes . . . . . . . . 22,271 9,076 61,035 30,339
Income taxes . . . . . . . . . . . . . . . . 7,127 2,904 19,532 9,709
----------- ----------- ----------- -----------
Net earnings . . . . . . . . . . . . . . . . $ 15,144 $ 6,172 $ 41,503 $ 20,630
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Basic earnings per common share. . . . . . . $ 0.34 $ 0.14 $ 0.95 $ 0.48
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Weighted average number of common
shares outstanding . . . . . . . . . . . . . 44,157,319 43,248,318 43,758,807 43,148,387
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Diluted earnings per common share. . . . . . $ 0.34 $ 0.14 $ 0.94 $ 0.47
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Weighted average number of common and
common equivalent shares outstanding . . . . 44,564,745 43,742,770 44,257,576 43,873,227
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
See accompanying notes to consolidated financial statements.
3
INPUT/OUTPUT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
NINE MONTHS ENDED
FEBRUARY 28,
--------------------
1998 1997
---- -----
Cash flows from operating activities:
Net earnings . . . . . . . . . . . . . . . . . . . . . . . . . $ 41,503 $ 20,630
Adjustments to reconcile net earnings to net cash
provided by (used in) operating activities:
Depreciation and amortization . . . . . . . . . . . . . . . 12,096 8,976
Amortization of restricted stock compensation . . . . . . . 154 500
Deferred income taxes . . . . . . . . . . . . . . . . . . . 865 429
Pension costs . . . . . . . . . . . . . . . . . . . . . . . 277 323
-------- --------
54,895 30,858
Changes in assets and liabilities:
Receivables . . . . . . . . . . . . . . . . . . . . . . . (20,058) (20,865)
Inventories . . . . . . . . . . . . . . . . . . . . . . . (7,944) (25,122)
Leased equipment. . . . . . . . . . . . . . . . . . . . . 3,355 (2,362)
Accounts payable and accrued expenses . . . . . . . . . . 18,016 (4,969)
Income taxes. . . . . . . . . . . . . . . . . . . . . . . 5,059 (2,726)
Other . . . . . . . . . . . . . . . . . . . . . . . . . . (569) (230)
-------- --------
Net cash provided by (used in) operating activities . . . 52,754 (25,416)
Cash flows from investing activities:
Purchases of property, plant and equipment . . . . . . . . . . (4,363) (24,793)
Acquistion of net assets and business, net of cash acquired. . (10,803) --
Investment in other assets . . . . . . . . . . . . . . . . . . (324) (1,445)
-------- --------
Net cash used in investing activities. . . . . . . . . (15,490) (26,238)
Cash flows from financing activities:
Borrowing from bank. . . . . . . . . . . . . . . . . . . . . . -- 20,750
Payments on debt . . . . . . . . . . . . . . . . . . . . . . . (675) (5,921)
Proceeds from exercise of stock options
and related tax benefit. . . . . . . . . . . . . . . . . . . 10,857 4,627
Employee Stock Purchase Plan . . . . . . . . . . . . . . . . . 465 --
-------- --------
Net cash provided by financing activities. . . . . . . 10,647 19,456
Effect of foreign currency exchange rates. . . . . . . . . . . . (137) (511)
-------- --------
Net increase (decrease) in cash and cash equivalents . . . . . . 47,774 (32,709)
Cash and cash equivalents at beginning of year . . . . . . . . . 2,573 34,252
-------- --------
Cash and cash equivalents at end of period . . . . . . . . . . . $ 50,347 $ 1,543
-------- --------
-------- --------
See accompanying notes to consolidated financial statements.
4
INPUT/OUTPUT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(1) GENERAL
The consolidated financial statements included herein have been prepared
by the Company, without audit, pursuant to the rules and regulations of the
Securities and Exchange Commission. The financial statements reflect all
adjustments (consisting of normal recurring accruals) which are, in the
opinion of management, necessary to fairly present such information. Although
the Company believes that the disclosures are adequate to make the
information presented not misleading, certain information and footnote
disclosures, including significant accounting policies, normally included in
financial statements prepared in accordance with generally accepted
accounting principles have been omitted pursuant to such rules and
regulations. It is suggested that these financial statements be read in
conjunction with the consolidated financial statements and the notes thereto,
as well as Item 7. "Management's Discussion and Analysis of Results of
Operations and Financial Condition," included in the Company's Annual Report
on Form 10-K for the year ended May 31, 1997, as filed with the Securities
and Exchange Commission.
(2) INVENTORIES
Inventories are stated at the lower of cost (primarily first-in,
first-out) or market. A summary of inventories follows (in thousands):
FEBRUARY 28 May 31,
1998 1997
---------- --------
Raw materials $ 65,982 $ 56,573
Work-in-process 25,129 23,878
Finished goods 23,679 25,886
-------- --------
$114,790 $106,337
-------- --------
-------- --------
(3) EARNINGS PER SHARE
The Company adopted the Financial Accounting Statements Board Statement
of Financial Accounting Standards No. 128, "Earnings per Share" (SFAS 128)
during the third quarter of 1998. In accordance with this new pronouncement,
basic earnings per share is computed by dividing net earnings available to
common share holders 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 as defined were used to reacquire Company common
stock using the average price of such common stock for the period. Prior
period earnings per share amounts have been restated in accordance with the
requirements of the pronouncement.
5
INPUT/OUTPUT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
(UNAUDITED)
The following table summarizes the calculation of net earnings and
weighted average common shares and common equivalent shares outstanding for
purposes of the computation of earnings per share.
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
FEBRUARY 28, FEBRUARY 28,
--------------------------- -------------------------
1998 1997 1998 1997
---------- ---------- --------- --------
Net earnings available to common stockholders
(in thousands) $15,144 $6,172 $41,503 $20,630
Weighted average number of common
shares outstanding 44,157,319 43,248,318 43,758,807 43,148,387
Common stock equivalent of stock options 407,426 494,452 498,769 724,840
---------- ---------- ---------- ----------
Weighted average number of common shares and
common shares equivalent outstanding 44,564,745 43,742,770 44,257,576 43,873,227
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Basic earnings per common share $ 0.34 $ 0.14 $ 0.95 $ 0.48
------- ------- ------- -------
------- ------- ------- -------
Diluted earnings per common share $ 0.34 $ 0.14 $ 0.94 $ 0.47
------- ------- ------- -------
------- ------- ------- -------
(4) STATEMENTS OF CASH FLOWS
The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents. Similar
investments with original maturities beyond three months are considered
short-term investments available for sale and are carried at fair value. The
Company does not use or intend to use derivatives. Exchange rate fluctuations
have not had a material effect on the Company's Statements of Cash Flows.
Supplemental disclosures of cash flow information for the nine months ended
February 28, 1998 and 1997 follow (in thousands):
1998 1997
------ ------
Cash paid during the periods for:
Interest (net of amount capitalized) $ 892 $ 416
Income taxes $7,947 $9,418
6
INPUT/OUTPUT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
(UNAUDITED)
1998 1997
------- -----
Non-cash investing and financing activities:
Restricted stock issued:
Increase in common stock $ 1 $ --
Increase in paid in capital 1,572 --
Increase in unamortized restricted stock compensation (1,573) --
------- -----
$ -- $ --
------- -----
------- -----
Issuance of common stock in
connection with business acquisition (320,555 shares):
Increase in common stock $ 3 $ --
Increase in paid in capital 6,372 --
------- -----
$ 6,375 $ --
------- -----
------- -----
(5) LONG TERM DEBT
In August 1996, the Company, through one of its wholly-owned
subsidiaries, obtained a $12.6 million, ten-year term loan secured by certain
of its land and buildings located in Stafford, Texas which includes the
Company's executive offices, research and development headquarters, and
electronics manufacturing facility. The term loan, which the Company has
guaranteed under a Limited Guaranty, bears interest at a fixed rate of 7.875%
per annum. The Company leases all of the property from its subsidiary under
a master lease, which lease has been collaterally assigned to the lender as
security for the term loan. The term loan provides for penalties for
prepayment prior to maturity.
(6) RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income" (SFAS 130). SFAS 130 establishes standards for reporting and display
of comprehensive income and its components in a full set of general purpose
financial statements. The requirements of this statement will be effective
for both interim and annual periods beginning with the Company's fiscal year
ending May 31, 1999. Management does not believe that the implementation of
SFAS 130 will have a material effect on the financial statements.
7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
RESULTS OF OPERATIONS
NET SALES AND OTHER REVENUES. The Company's third quarter net sales and
other revenues increased $30.5 million, or 47.1%, to $95.3 million as
compared to the prior year's third quarter net sales and other revenues of
$64.8 million. The increase in sales revenues was primarily due to continued
demand for the Company's land systems and components for expansion of
existing systems. During the third quarter, six I/O SYSTEM TWO-Registered
Trademark- land systems and two MSX marine systems were sold, along with
other seismic data acquisition recording equipment and components for
expanding existing systems (for a total channel capacity of 25,356 land and
7,712 marine), compared to the prior year's third quarter sales of eight I/O
SYSTEM TWO land systems and five MSX marine systems and other recording
equipment and components (for a total channel capacity of 10,172 land and
4,288 marine).
Net sales and other revenues for the first nine months of the current
year were $281.9 million, up 37.6% from $204.8 million for last year's first
nine month period, reflecting continued demand for the Company's systems,
recording equipment and components for expansion of existing systems. Sales
of 37 I/O SYSTEM TWO land systems and four MSX marine systems (for a total
channel capacity of 82,872 land and 13,074 marine) were recorded during the
first nine months of fiscal 1998 compared to 30 I/O SYSTEM TWO land systems
and eight MSX marine systems (for a total channel capacity of 49,728 land and
7,232 marine) for the prior year's first nine months.
GROSS PROFIT MARGIN. The Company's gross profit margin increased
for the third quarter and year-to-date compared to the prior year's
comparable periods, from 36.9% to 42.8%, and 36.5% to 41.1% respectively.
Continued demand for seismic equipment and instrumentation and the resulting
sales of land systems and land system expansion components, which typically
feature higher margins than the Company's marine systems and other equipment,
were major contributing factors to the improved gross profit margins. The
Company's gross profit margin for any particular reporting period is
dependent on the product mix sold and the pricing scheme for the products
sold for that period and may vary from period to period.
OPERATING EXPENSES. Operating expenses increased $5.3 million, or
34.8%, for the third quarter over the prior year's third quarter operating
expenses. Research and development expenses increased $2.5 million, or 44.0%,
compared to the prior year's third quarter, primarily resulting from
increased development and enhancement efforts, recent acquisitions and
increased usage of outside engineering services. Marketing and sales expenses
increased $704,000, or 20.4%, compared to the prior year's third quarter
primarily due to outside commissions on increased third party sales. General
and administrative expenses increased $1.6 million, or 31.9%, primarily due
to an increase in allowance for doubtful accounts resulting from increased
sales, increased outside services and increased depreciation. Amortization of
intangibles increased $510,000, or 45.6%, primarily due to increased goodwill
expense resulting from acquisitions.
Operating expenses for the first nine months of the current year were
$12.3 million, or 25.9%, above operating expenses for the first nine months
of the prior year. Research and development expense increased $6.2 million,
or 35.5%, compared to the prior year's first nine months, primarily resulting
from increased development and enhancement efforts, recent acquisitions and
increased usage of outside engineering services. Marketing and sales expense
increased $429,000, or 4.2%, compared to the prior year's first nine months.
General and administrative expenses increased $4.9 million, or 30.4%,
primarily due to increased compensation expense (mainly attributable to the
first six months of fiscal 1998) and
8
increased allowance for doubtful accounts resulting from increased sales.
Amortization of intangibles increased $704,000, or 21.1%, primarily due to
increased goodwill expense resulting from acquisitions.
INTEREST EXPENSE. As a result of the ten-year term facilities financing
completed in August 1996, interest expense for the third quarter and the
first nine months of the current year was $262,000 and $842,000 respectively.
See "Note (5) - Long-Term Debt" of the Notes to Consolidated Financial
Statements. Interest expense for last year's third quarter and first nine
months was $296,000,and $468,000 respectively, representing interest on this
facility.
INCOME TAX EXPENSE. The Company's effective income tax rate was
approximately 32%, both for the third quarter and the first nine months of
1998 and 1997.
LIQUIDITY AND CAPITAL RESOURCES
GENERAL. The Company has traditionally financed its operations from
internally generated cash flow, funds from equity financings and its credit
facilities. Operating funds flows (which does not consider changes in
operating assets and liabilities) were $54.9 million for the nine months
ended February 28, 1998. Cash flows from operating activities were $52.8
million for the nine months ended February 28, 1998, primarily due to higher
net earnings and increases in accounts payable and accrued expenses (which
represented a source of cash) as a result of the increased levels of sales
and related increases in inventory during fiscal 1998. As of February 28,
1998 the Company had no borrowings outstanding under its revolving line of
credit. On February 27, 1998 the Company entered into a new revolving working
capital facility; see "Credit Agreement" below.
For the first nine months of 1998, the Company has experienced higher
levels of cash and cash equivalents (approximately $50.3 million as of
February 28, 1998) as a result of increased sales during 1998 to date
compared to the first nine months of 1997 sales. Trade notes receivable
increased 34.3% compared to May 31, 1997, proportionately with the increased
level of sales. For information concerning the Company's sales finance
activities, see "Item 1. Business - Markets and Customers" of the Company's
Annual Report on Form 10-K for the year ended May 31, 1997. Accounts payable
and accrued expenses at February 28, 1998 were 60.4% higher than at May 31,
1997, primarily reflecting the increased levels of sales and increase in
inventory during the first nine months of fiscal 1998. The Company's various
working capital accounts can vary in amount substantially from period to
period depending upon the Company's levels of sales, product mix sold, demand
for its products, percentages of cash versus credit sales, collection rates,
inventory levels, and general economic and industry factors.
In August 1996, a subsidiary of the Company borrowed $12.6 million in
long-term financing secured by the land, buildings and improvements housing
the Company's executive offices, research and development headquarters and
electronics manufacturing facility in Stafford, Texas. The loan bears
interest at the rate of 7.875% per annum and is repayable in equal monthly
installments of principal and interest of $151,439. The promissory note,
which matures on September 1, 2006, contains prepayment penalties. See "Note
(5) - Long-Term Debt" of the Notes to Consolidated Financial Statements.
The Company anticipates current year expenditures for exploration and
development of oil and gas properties to be approximately $2.5 million and
expects to fund these expenditures from its cash flows from operations.
However, the Company currently expects that its future level of participation
in oil and gas drilling activities will be funded primarily by cash flows
from its productive properties. The Company has drilled one well to date in
1998, which was a dry hole. The Company expects to participate in up to three
wells in 1998.
9
Capital expenditures totaled $15.2 million for the first nine months of
1998, representing $10.8 million for acquisition of net assets and
businesses, and $4.4 million for purchases of property, plant and equipment.
Total capital expenditures are currently expected to aggregate $17.0 million
for 1998. The Company believes that the combination of its existing working
capital, unused credit available under its revolving credit facility,
internally generated cash flow and access to other financing sources will be
adequate to meet its anticipated capital and liquidity requirements for the
foreseeable future.
CREDIT AGREEMENT. On February 27, 1998, the Company entered into a
Credit Agreement with certain lenders, including Bank One, Texas, N.A., as
administrative agent for the lenders. The credit facility under the Credit
Agreement replaces the Company's existing revolving working capital line of
credit. The maximum amount available for borrowings under the Credit
Agreement is $50 million. In addition, up to $15 million of credit available
under the Credit Agreement may be used, as needed, by the Company for letters
of credit. Indebtedness under the Credit Agreement will mature on February
27, 2001. Borrowings under the Credit Agreement may be made to finance the
Company's working capital, capital expenditures, acquisitions permitted under
the Credit Agreement and for general corporate purposes. Outstanding
indebtedness under the Credit Agreement will bear interest, at the Company's
option, at fluctuating interest rates based upon a prime rate or a eurodollar
rate plus a credit margin that fluctuates depending upon the Company's ratio
of funded debt to capitalization. In addition, the Company must pay a
commitment fee for unused amounts available under the credit facility, in an
amount also based upon the Company's ratio of funded debt to capitalization.
The obligations of the Company under the Credit Agreement are unsecured,
except for a first lien pledge of the capital stock of certain wholly-owned
subsidiaries of the Company that the lenders consider to be "material
subsidiaries". Additionally, certain of these wholly-owned subsidiaries have
guaranteed the Company's obligations under the Credit Agreement.
The Credit Agreement contains certain covenants, representations and
warranties by the Company, including (i) restrictions on liens on the assets
of the Company and its subsidiaries, (ii) limitations on acquisitions of
unaffiliated businesses, (iii) limitations on mergers, consolidations and the
sale of substantially all of the assets of the Company or its subsidiaries,
and (iv) limitations on indebtedness permitted to be incurred or assumed by
the Company and its subsidiaries, and certain investments (including
investments in partnerships and joint ventures) that may be made by the
Company and its subsidiaries, if such indebtedness or investments would
result in the failure by the Company to be in compliance with its financial
ratios and other covenants.
The Credit Agreement also contains provisions restricting the amount of
capital expenditures (excluding capital expenditures in connection with
permitted acquisitions) that the Company and its subsidiaries may make in any
fiscal year ($30 million for any fiscal year). Further, the Credit Agreement
requires the Company to maintain and comply with certain financial covenants
and ratios, including a current ratio, a maximum funded debt to
capitalization ratio, a fixed charge coverage ratio and a covenant requiring
that the Company maintain a certain minimum tangible net worth.
YEAR 2000. Historically, most computer systems have utilized software
that processes transactions using two digits to represent the year of the
transaction (i.e., 97 represents the year 1997). This software needs to be
modified to properly process dates beyond December 31, 1999 and to avoid
miscalculation or system failures (the "Year 2000 issue"). The Company is
currently working to resolve the potential impact of the Year 2000 issue on
the computerized information systems it utilizes internally and its products
and customers.
10
The Company has completed a preliminary assessment of the Year 2000
issue with respect to the systems and software internally utilized in its
business enterprise. The Company is in the process of bringing its
externally-generated information system software into compliance and
estimates that such software will be fully Year 2000 compliant by mid-1999.
While the Company has not yet completed its assessment of the Year 2000
issue with respect to its products and customers, it has formed a focus team
responsible for this area. The focus team is in the process of reviewing
these issues and contacting the Company's suppliers and certain of the
Company's customers, to assist them in identifying and resolving Year 2000
issues. Because its assessment is not yet completed, the Company has not
yet determined whether it, its customers or its suppliers have any material
Year 2000 issues, and if so, the potential effects on the Company's
operations, results of operations or financial condition.
CAUTIONARY STATEMENT FOR PURPOSES OF FORWARD-LOOKING STATEMENTS
Certain information contained in this Quarterly Report on Form 10-Q
(including statements contained in this Part I., Item 2. "Management's
Discussion and Analysis of Results of Operation and Financial Condition" and
in Part II, Item 1. "Legal Proceedings"), as well as other written and oral
statements made or incorporated by reference from time to time by the Company
and its representatives in other reports, filings with the Securities and
Exchange Commission, press releases, conferences, or otherwise, may be deemed
to be forward-looking statements within the meaning of Section 21E of the
Securities Exchange Act of 1934 and are subject to the "Safe Harbor"
provisions of that section. This information includes, without limitation,
statements concerning future revenues, future earnings, future costs, future
margins and future expenses; anticipated product releases and technological
advances; the future mix of business and future asset recoveries; contingent
liabilities; Year 2000 issues; the inherent unpredictability of adversarial
proceedings; and future demand, future industry conditions and trends, future
capital expenditures, and future financial condition. 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. Although the Company believes that the expectations
reflected in such forward-looking statements are reasonable, it can give no
assurance that such expectations will prove to be correct.
When used in this report, the words "anticipate," "estimate," "expect,"
"may," "project" and similar expressions are intended to be among the
statements that identify forward-looking statements. Important factors which
could affect the Company's actual results and cause actual results to differ
materially from those results which might be projected, forecast, estimated
or budgeted by the Company in such forward-looking statements include, but
are not limited to, the following:
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RISKS RELATED TO PRODUCTS AND TECHNOLOGICAL CHANGE. The markets for
the Company's product lines are characterized by rapidly changing technology
and frequent product introductions. Whether the Company can develop and
produce successfully, on a timely basis, new and enhanced products that
embody new technology, meet evolving industry standards and practice, and
achieve levels of capability and price that are acceptable to its customers,
will be significant factors in the Company's ability to compete in the
future. 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. If the Company is unable, for
technological or other reasons, to develop competitive products in a timely
manner in response to changes in the seismic data acquisition industry or
other technological changes, its business and operating results will be
materially and adversely affected. In addition, the Company's continuing
development of new products inherently carries the risk of inventory
obsolescence with respect to its older products.
While the Company is currently assessing the potential impact of the
Year 2000 issue, it has not yet completed its review. The problems actually
encountered by the Company in addressing its Year 2000 issues may be more
pervasive than anticipated by management, and if so, could have adverse
effects on the Company's operations, results of operations or financial
condition. See "--Liquidity and Capital Resources--Year 2000."
RISKS RELATED TO TIMING OF PRODUCT SHIPMENTS. Due to the relatively high
sales price of the Company's products and relatively low unit sales volume,
the timing in the shipment of systems and the mix of products sold can
produce fluctuations in quarter-to-quarter financial performance. One of the
factors which may affect the Company's operating results from time to time is
that a substantial portion of its net sales and other revenues in any period
may result from shipments during the latter part of a period. Because the
Company establishes its sales and operating expense levels based on its
operational goals, if shipments in any period do not meet goals, revenues and
net profits may be adversely affected. The Company believes that factors
which could affect such timing in shipments include, among others,
seasonality of end-user markets, availability of purchaser financing,
manufacturing lead times, customer purchases of leased equipment and
shortages of system components. In addition, because the Company typically
operates, and expects to continue to operate, without a significant backlog
of orders for its products, the Company's manufacturing plans and expenditure
levels are based principally on sales forecasts, which sometimes results in
inventory excesses and imbalances from time to time.
RISKS RELATED TO GROSS MARGIN. The Company's gross margin percentage is
a function of the product mix sold in any period. Other factors, such as unit
volumes, inventory obsolescence, heightened price competition, changes in
sales and distribution channels, shortages in components due to timely
supplies or ability to obtain items at reasonable prices, and availability of
skilled labor, may also continue to affect the cost of sales and the
fluctuation of gross margin percentages in future periods.
UNCERTAINTY OF ENERGY INDUSTRY CONDITIONS. Demand for the Company's
products is dependent upon the level of worldwide oil and gas exploration and
development activity. Such activity in turn is primarily dependent upon oil
and gas prices, which have been subject to wide fluctuation in recent years
in response to relatively minor changes in the supply and demand for oil and
natural gas, market uncertainty and a variety of additional factors that are
beyond the control of the Company. It is impossible to predict future oil and
natural gas price movements with any certainty. No assurances can be given as
to the future level of activity in the oil and gas exploration and
development industry and its relationship to the future demand for the
Company's products.
CREDIT RISK FROM SALES ARRANGEMENTS. The Company sells to many
customers on extended-term arrangements. Moreover, in connection with certain
sales of its systems and equipment, the Company has guaranteed certain loans
from unaffiliated parties to purchasers of such systems and equipment. In
addition, the Company has sold contracts and leases to third-party financing
sources, the terms of which often obligate the Company to repurchase the
contracts and leases in the event of a customer default or upon certain other
occurrences. Performance of the Company's obligations under these
arrangements could have a material adverse effect on the Company's financial
condition. A number of significant payment defaults
12
by customers could have a material adverse effect on the Company's financial
position and results of operations.
DISRUPTION IN VENDOR SUPPLIES. The Company's manufacturing process
requires a high volume of quality components. Certain components used by the
Company are currently provided by only one vendor. In the future, the Company
may, from time to time, experience supply or quality control problems with
its suppliers, and such problems could significantly affect its ability to
meet production and sales commitments. The Company's reliance on certain
vendors, as well as industry supply conditions generally, involve several
risks, including the possibility of a shortage or a lack of availability of
key components, increases in component costs and reduced control over
delivery schedules, any of which could adversely affect the Company's future
financial results.
RELIANCE ON SIGNIFICANT CUSTOMERS. A relatively small number of
customers has accounted for most of the Company's net sales, although the
degree of sales concentration with any one customer has varied from fiscal
year to year. During fiscal 1995, 1996 and 1997 the two largest customers in
each of those years accounted for 26%, 42% and 45%, respectively, of the
Company's net sales and other revenues. The loss of any of these customers
could have a material adverse effect on the Company's sales revenues.
COMPETITION. The design, manufacture and marketing of seismic data
acquisition systems is highly competitive and is characterized by continual
and rapid changes in technology. The Company's principal competitor for land
seismic equipment is Societe d'Etudes Recherches et Construction
Electroniques, an affiliate of Compagnie General de Geophysique which, unlike
the Company, possesses the advantage of being able to sell to an affiliated
seismic contractor.
Competition in the industry is expected to intensify and could adversely
affect the Company's future results. Several of the Company's competitors
have greater name recognition, more extensive engineering, manufacturing and
marketing capabilities, and greater financial, technological and personnel
resources than those available to the Company. In addition, certain companies
in the industry have expanded their product lines or technologies in recent
years as a result of acquisitions and recent mergers in the oil field
services industry. 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 could result in
future price reductions for the Company's products.
A continuing trend toward consolidation in the oil field services
industry may have the effect of adversely affecting the prices and demand for
the Company's products and services.
RISK FROM SIGNIFICANT AMOUNT OF FOREIGN SALES. Sales outside the United
States have historically accounted for a significant part of the Company's
net sales and other revenues. Foreign sales are subject to special risks
inherent in doing business outside of the United States, including the risk
of war, civil disturbances, embargo and government activities, which may
disrupt markets and affect operating results. Foreign sales are also
generally subject to the risks of compliance with additional laws, including
tariff regulations and import/export restrictions. The Company is, from time
to time, required to obtain export licenses and there can be no assurance
that it will not experience difficulty in obtaining such licenses as may be
required in connection with export sales.
Demand for the Company's products from customers in developing countries
is difficult to predict and can fluctuate significantly from year to year.
The Company believes that these changes in demand result primarily from the
instability of economies and governments in certain developing countries,
changes in internal laws and policies affecting trade and investment, and
because those markets are only beginning to
13
adopt new technologies and establish purchasing practices. These risks may
adversely affect the Company's future operating results and financial
position. In addition, sales to customers in developing countries on extended
terms can present heightened credit risks for the Company, for the reasons
discussed above.
PROTECTION OF INTELLECTUAL PROPERTY. The Company believes that
technology is the primary basis of competition in the industry. Although the
Company currently holds certain intellectual property rights relating to its
product lines, there can be no assurance that these rights will not be
challenged by third parties or that the Company will obtain additional
patents or other intellectual property rights in the future. Additionally,
there can be no assurance that the Company's efforts to protect its trade
secrets will be successful or that others will not independently develop
products similar to the Company's or design around any of the intellectual
property rights owned by the Company.
DEPENDENCE ON PERSONNEL. The Company's success depends upon the
continued contributions of its personnel, many of whom would be difficult to
replace. The success of the Company will depend on the ability of the Company
to attract and retain skilled employees. Changes in personnel, therefore,
could adversely affect operating results.
RISKS RELATED TO GOVERNMENT REGULATIONS AND PRODUCT CERTIFICATION. The
Company's operations are also subject to laws, regulations, government
policies, and product certification requirements worldwide. Changes in such
laws, regulations, policies, or requirements could affect the demand for the
Company's products or result in the need to modify products, which may
involve substantial costs or delays in sales and could have an adverse effect
on the Company's future operating results.
RISKS OF STOCK VOLATILITY AND ABSENCE OF DIVIDENDS. 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 stock price fluctuation could impact
the Company's operations. Changes in the price of the Company's common stock
could affect the Company's ability to successfully attract and retain
qualified personnel or complete desirable business combinations or other
transactions in the future. The Company has historically not paid cash
dividends on its capital stock, and there can be no assurances that the
Company will do so.
RISKS RELATED TO ACQUISITIONS. To implement its business plans, the
Company has relied in part upon acquisitions and may make further
acquisitions in the future. Acquisitions require significant financial and
management resources both at the time of the transaction and during the
process of integrating the newly acquired business into the Company's
operations. The Company's operating results could be adversely affected if it
is unable to successfully integrate such new companies into its operations.
Certain acquisitions or strategic transactions may be subject to approval by
the other party's board or shareholders, domestic or foreign governmental
agencies, or other third parties. Accordingly, there is a risk that important
acquisitions or transactions could fail to be concluded as planned. Future
acquisitions by the Company could also result in issuances of equity
securities or the rights associated with the equity securities, which could
potentially dilute earnings per share. In addition, future acquisitions could
result in the incurrence of additional debt, taxes, or contingent
liabilities, and amortization expenses related to goodwill and other
intangible assets. These factors could adversely affect the Company's future
operating results and financial position.
OIL AND GAS OPERATIONS. The Company's oil and gas operations are subject
to the economic risks typically associated with exploration, development, and
production activities, including the necessity of significant expenditures to
drill exploratory wells. In conducting exploration and development
activities, the
14
Company may drill unsuccessful wells and experience losses and charges to
earnings and, if oil or natural gas is discovered, there can be no assurance
that such oil or natural gas can be economically produced or satisfactorily
marketed. Historically, the markets for oil and natural gas have been
volatile and are likely to continue to be volatile in the future. The nature
of the oil and gas business involves certain operating hazards such as well
blowouts, cratering, explosions, uncontrollable flows of oil, natural gas or
well fluids, fires, formations with abnormal pressures, pollution, releases
of toxic gas and other environmental hazards and risks, any of which could
result in losses to the Company. While the Company's current practice is not
to act as operator of any drilling prospect, and while the Company does
maintain insurance in accordance with customary industry practices under the
circumstances against some, but not all, of such risks and losses, the
occurrence of such an event not fully covered by insurance could have a
material adverse affect on the Company's financial position and results of
operation.
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 the
Company's other filings and reports with the Securities and Exchange
Commission, including its recent reports on Forms 10-K and 10-Q, 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 is not yet required to provide the disclosures required by
Regulations S-K Item 305 pursuant to General Instruction 1. to Paragraphs
305(a), 305(b), 305(c), 305(d), and 305(e) of Item 305.
PART II - OTHER INFORMATION.
ITEM 1. LEGAL PROCEEDINGS
On September 24, 1997, a purported class action lawsuit was filed
against the Company and the former president and chief executive officer,
and the executive vice president, chief financial officer and secretary
of the Company, in the U.S. District Court for the Southern District of
Texas, Houston Division. The action, styled NORMAN TOCK V. INPUT/OUTPUT,
INC., GARY D. OWENS AND ROBERT P. BRINDLEY, alleges violations of Sections
10(b) and 20(a) of the Securities Exchange Act of 1934, and state statutory
and common law fraud provisions. The action was filed on behalf of purchasers
of common stock of the Company that purchased shares during the period from
September 17, 1996 through March 18, 1997. The complaint seeks damages in an
unspecified amount plus costs and attorney's fees. The complaint alleges
misrepresentations and omissions in public filings and announcements
concerning the Company's business, sales and products, and disputes certain
accounting methodologies employed by the Company. On October 21, 1997, a
stipulation and order was entered by the court, extending the time for
responses to the complaint by the defendants pending entry of an order
appointing lead plaintiff and lead counsel. On March 2, 1998 the Court
entered an order extending the time in which plaintiff may file an amended
complaint through April 17, 1998. Responses to the amended complaint are due
on June 8, 1998. The Company believes that the plaintiff's allegations are
without merit and that there are meritorious defenses to the allegations, and
intends to defend the action vigorously.
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ITEM 2. CHANGES IN SECURITIES
During the fiscal quarter ended February 28, 1998, the Company made no
sales of its equity securities that were not registered under the Securities
Act of 1993, as amended, except that on February 2, 1998, the Company issued
in a privately-negotiated transaction, 320,555 shares of its Common Stock in
connection with the Company's acquisition of CompuSeis, Inc. ("CompuSeis").
The Common Stock was issued as partial consideration for such acquisition to
the former shareholders of CompuSeis in a statutory merger of CompuSeis with
and into a wholly-owned subsidiary of the Company. The issuance of the Common
Stock was effected in a transaction exempt from registration pursuant to the
provisions of Section 4(2) (Rule 506 under Regulation D) of the Securities
Act of 1933.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) List of documents filed as Exhibits.
10.1 - Employment Agreement, effective as of January 1, 1998
between the Company and W.J. "Zeke" Zeringue.
10.2 - Credit Agreement dated as of February 27, 1998 among the
Company, certain lenders and Banc One, Texas, N.A. as
agent for the lenders.
27.1 - Financial Data Schedule (included in EDGAR copy only)
(b) Reports on Form 8-K
No reports on form 8-K were filed by the Company during the
quarter ended February 28, 1998.
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SIGNATURE
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THE
REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED THEREUNTO DULY AUTHORIZED.
INPUT/OUTPUT, INC.
By:
-------------------------------------
Ronald A. Harris
Vice President and Controller
(duly authorized officer and
Chief Accounting Officer)
Dated: March 26, 1998
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