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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 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 August 9, 2002 there were 51,069,732 shares of common stock, par value $0.01
per share, outstanding.
INPUT/OUTPUT, INC. AND SUBSIDIARIES
INDEX TO FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 2002
Page
----
PART I. Financial Information.
Item 1. Financial Statements.
Consolidated Balance Sheets
June 30, 2002 (unaudited) and December 31, 2001............. 3
Consolidated Statements of Operations
Three and six months ended June 30, 2002 (unaudited)
and June 30, 2001 (unaudited)............................... 4
Consolidated Statements of Cash Flows
Six months ended June 30, 2002 (unaudited) and
June 30, 2001 (unaudited)................................... 5
Notes to Unaudited Consolidated Financial Statements........... 6
Item 2. Management's Discussion and Analysis of Results of
Operations and Financial Condition.......................... 11
Item 3. Quantitative and Qualitative Disclosures about Market Risk..... 18
PART II. Other Information.
Item 2. Changes in Securities and Use of Proceeds...................... 18
Item 4. Submission of Matters to a Vote of Security Holders............ 19
Item 6. Exhibits and Reports on Form 8-K............................... 19
2
INPUT/OUTPUT, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
JUNE 30, DECEMBER 31,
2002 2001
------------ -------------
ASSETS
Current assets:
Cash and cash equivalents...................................... $ 103,225 $ 101,681
Restricted cash................................................ 148 221
Accounts receivable, net....................................... 22,444 46,434
Current portion notes receivable, net.......................... 3,167 1,078
Inventories.................................................... 64,339 68,283
Deferred income tax asset...................................... -- 15,083
Prepaid expenses............................................... 2,908 3,115
------------ -------------
Total current assets................................... 196,231 235,895
Notes receivable.................................................. 6,430 5,800
Deferred income tax asset......................................... -- 40,745
Property, plant and equipment, net................................ 43,569 47,538
Goodwill, net..................................................... 45,584 45,584
Other assets, net................................................. 7,672 7,609
------------ -------------
Total assets........................................... $ 299,486 $ 383,171
============ =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt........................... $ 1,726 $ 2,312
Accounts payable............................................... 6,417 10,169
Accrued expenses............................................... 18,248 18,814
------------ ------------
Total current liabilities.............................. 26,391 31,295
Long-term debt, net of current maturities......................... 19,325 20,088
Other long-term liabilities....................................... 664 751
Stockholders' equity:
Cumulative convertible preferred stock, $0.01 par value;
authorized 5,000,000 shares; issued and outstanding 55,000
shares at June 30, 2002 and December 31, 2001 (liquidation
value of $55 million at June 30, 2002)....................... 1 1
Common stock, $0.01 par value; authorized 100,000,000 shares;
outstanding 51,009,054 shares at June 30, 2002 and
50,865,729 shares at December 31, 2001....................... 517 516
Additional paid-in capital..................................... 363,189 360,147
Accumulated deficit............................................ (100,602) (15,713)
Accumulated other comprehensive loss........................... (3,855) (7,499)
Treasury stock, at cost, 743,298 shares at June 30, 2002 and
at December 31, 2001......................................... (5,769) (5,769)
Unamortized restricted stock
compensation....................... (375) (646)
------------ -------------
Total stockholders' equity.................................. 253,106 331,037
------------ -------------
Total liabilities and stockholders' equity............. $ 299,486 $ 383,171
============ =============
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)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------------------ ----------------------------------
2002 2001 2002 2001
-------------- -------------- -------------- --------------
Net sales...................................... $ 22,850 $ 59,868 $ 53,063 $ 102,277
Cost of sales.................................. 20,365 39,621 43,617 65,789
-------------- -------------- -------------- --------------
Gross profit.......................... 2,485 20,247 9,446 36,488
-------------- -------------- -------------- --------------
Operating expenses:
Research and development.................... 8,667 7,659 15,688 15,196
Marketing and sales......................... 2,775 2,737 5,305 5,587
General and administrative.................. 4,709 4,717 9,336 9,610
Amortization of intangibles................. 321 1,185 637 2,321
-------------- -------------- -------------- --------------
Total operating expenses............. 16,472 16,298 30,966 32,714
-------------- -------------- -------------- --------------
Earnings (loss) from operations................ (13,987) 3,949 (21,520) 3,774
Interest expense............................... (461) (383) (496) (590)
Interest income................................ 753 1,195 1,244 2,486
Other expense.................................. (207) (407) (343) (100)
-------------- -------------- -------------- --------------
Income (loss) before income taxes.............. (13,902) 4,354 (21,115) 5,570
Income tax expense............................. 63,511 1,370 60,840 2,396
-------------- -------------- -------------- --------------
Net earnings (loss)............................ (77,413) 2,984 (81,955) 3,174
Preferred dividend............................. 1,479 1,395 2,934 2,785
-------------- -------------- -------------- --------------
Net earnings (loss) applicable to
common shares............................... $ (78,892) $ 1,589 $ (84,889) $ 389
============== ============== ============== ==============
Basic earnings (loss) per common share......... $ (1.55) $ 0.03 $ (1.67) $ 0.01
============== ============== ============== ==============
Weighted average number of
common shares outstanding................... 50,971,486 50,891,153 50,931,384 50,909,476
============== ============== ============== ==============
Diluted earnings (loss) per common share....... $ (1.55) $ 0.03 $ (1.67) $ 0.01
============== ============== ============== ==============
Weighted average number of diluted
common shares outstanding................... 50,971,486 52,178,755 50,931,384 52,176,499
============== ============== ============== ==============
See accompanying notes to unaudited consolidated financial statements.
4
INPUT/OUTPUT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
SIX MONTHS ENDED
JUNE 30,
----------------------------
2002 2001
---------- -----------
Cash flows from operating activities:
Net earnings (loss).................................. $ (81,955) $ 3,174
Depreciation and amortization........................ 6,019 8,894
Amortization of restricted stock and other
stock compensation................................. 113 207
Loss (gain) on disposal of fixed assets.............. 264 (64)
Bad debt expense..................................... 140 288
Deferred income tax.................................. 59,992 --
Accounts and notes receivable........................ 21,263 (10,392)
Inventories.......................................... 4,771 (6,816)
Accounts payable and accrued expenses................ (9,274) 3,583
Income taxes payable/receivable...................... 335 (1,405)
Other assets and liabilities......................... 556 (2,519)
---------- -----------
Net cash provided by (used in) operating
activities................................... 2,224 (5,050)
---------- -----------
Cash flows from investing activities:
Purchase of property, plant and equipment............ (1,932) (2,830)
Business acquisition................................. (688) (6,183)
Cash of acquired business............................ -- 2,032
---------- -----------
Net cash used in investing activities.......... (2,620) (6,981)
---------- -----------
Cash flows from financing activities:
Payments on long-term debt........................... (1,102) (966)
Payments of preferred dividends...................... (275) (275)
Proceeds from exercise of stock options.............. 551 1,736
Proceeds from issuance of common stock............... 457 371
Purchase of treasury stock........................... -- (456)
---------- -----------
Net cash (used in) provided by financing
activities................................... (369) 410
---------- -----------
Effect of change in foreign currency exchange rates
on cash and cash equivalents....................... 2,309 882
---------- -----------
Net decrease in cash and cash equivalents............ 1,544 (10,739)
Cash and cash equivalents at beginning of period..... 101,681 92,376
---------- -----------
Cash and cash equivalents at end of period..... $ 103,225 $ 81,637
========== ===========
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 June 30, 2002, the consolidated
statements of operations for the three and six months ended June 30, 2002 and
2001, and the consolidated statements of cash flows for the six months ended
June 30, 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 and six months ended June 30, 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 and six months ended June 30, 2002 and 2001 is as
follows (in thousands):
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------------ -----------------------------
2002 2001 2002 2001
----------- ----------- ----------- -----------
Net sales:
Land........................ $ 10,823 $ 44,228 $ 28,434 $ 72,041
Marine...................... 12,027 15,640 24,629 30,236
----------- ----------- ----------- -----------
Total....................... $ 22,850 $ 59,868 $ 53,063 $ 102,277
=========== =========== =========== ===========
Depreciation and amortization:
Land........................ $ 1,723 $ 1,822 $ 3,221 $ 4,107
Marine...................... 346 839 780 1,752
Corporate................... 958 1,468 2,018 3,035
----------- ----------- ----------- -----------
Total....................... $ 3,027 $ 4,129 $ 6,019 $ 8,894
=========== =========== =========== ===========
Operations:
Land........................ $ (11,047) $ 5,652 $ (17,673) $ 5,981
Marine...................... 2,329 2,897 4,835 6,984
Corporate................... (5,269) (4,600) (8,682) (9,191)
----------- ----------- ----------- -----------
Total....................... $ (13,987) $ 3,949 $ (21,520) $ 3,774
=========== ============ ============ ===========
JUNE 30, DECEMBER 31,
2002 2001
------------ ------------
Total assets:
Land............................... $ 122,663 $ 139,978
Marine............................. 64,034 62,422
Corporate.......................... 112,789 180,771
------------ ------------
Total.............................. $ 299,486 $ 383,171
============ ============
6
JUNE 30, DECEMBER 31,
2002 2001
------------ ------------
Total assets by geographic area:
North America...................... $ 253,481 $ 340,375
Europe............................. 46,005 42,796
------------ ------------
Total.............................. $ 299,486 $ 383,171
============ ============
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):
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------------ ------------------------------
2002 2001 2002 2001
------------ ------------ ------------ ------------
North America..................... $ 7,621 $ 27,255 $ 18,685 $ 47,839
Middle East....................... 487 15,060 847 21,175
Europe............................ 8,355 5,802 16,313 11,116
Asia.............................. 2,147 3,168 3,591 5,976
Former Soviet Union............... 803 7,703 6,884 10,780
Other............................. 3,437 880 6,743 5,391
------------ ------------ ------------ ------------
$ 22,850 $ 59,868 $ 53,063 $ 102,277
============ ============ ============ ============
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):
JUNE 30, DECEMBER 31,
2002 2001
------------ ------------
Raw materials............................. $ 44,060 $ 46,729
Work-in-process........................... 2,576 4,191
Finished goods............................ 17,703 17,363
------------ ------------
$ 64,339 $ 68,283
============ ============
At June 30, 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):
JUNE 30, DECEMBER 31,
2002 2001
------------ -----------
Accounts receivable, principally trade.............. $ 23,531 $ 48,186
Allowance for doubtful accounts..................... (1,087) (1,752)
------------ -----------
Accounts receivable, net............................ $ 22,444 $ 46,434
============ ===========
7
The original recorded investment in notes receivable, excluding accrued
interest, for which a reserve has been recorded was $13.6 million at June 30,
2002. A summary of notes receivable, accrued interest and allowance for loan
loss is as follows (in thousands):
JUNE 30, DECEMBER 31,
2002 2001
------------ ------------
Notes receivable and accrued interest................$ 20,268 $ 17,613
Less allowance for loan loss......................... (10,671) (10,735)
------------ ------------
Notes receivable, net................................ 9,597 6,878
Less current portion notes receivable, net........... 3,167 1,078
------------ ------------
Long-term notes receivable...........................$ 6,430 $ 5,800
============ ============
(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):
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------------- --------------------------------
2002 2001 2002 2001
------------ ------------ ------------- ------------
Net earnings (loss) applicable to common shares........ $ (78,892) $ 1,589 $ (84,889) $ 389
Weighted average number of common shares outstanding... 50,971,486 50,891,153 50,931,384 50,909,476
Stock options and other common stock equivalents....... -- 1,287,602 -- 1,267,023
------------ ------------ ------------ ------------
Weighted average number of diluted common shares
outstanding......................................... 50,971,486 52,178,755 50,931,384 52,176,499
============ ============ ============= ============
Basic earnings (loss) per common share................. $ (1.55) $ 0.03 $ (1.67) $ 0.01
============ ============ ============= ============
Diluted earnings (loss) per common share: $ (1.55) $ 0.03 $ (1.67) $ 0.01
============ ============ ============= ============
At June 30, 2002, and 2001, 4,792,785 and 4,996,173 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 June
30, 2002 was $0.9 million.
8
A summary of future principal obligations under the note payable and lease
obligation is as follows (in thousands):
YEARS ENDED DECEMBER 31,
- ------------------------
2002......................................... $ 917
2003......................................... 1,264
2004......................................... 973
2005......................................... 1,184
2006......................................... 1,470
2007 and thereafter.......................... 15,243
----------
Total........................................ $ 21,051
==========
(7) DEFERRED INCOME TAX
The Company recorded a $68.4 million charge to establish an additional
valuation allowance for its net deferred tax assets in the second quarter of
fiscal year 2002. The valuation allowance was calculated in accordance with the
provisions of Statement of Financial Accounting Standards (SFAS) 109,
"Accounting for Income Taxes", which places primary importance on the Company's
cumulative operating results in the most recent three-year period when assessing
the need for a valuation allowance. Although management believes the Company's
results for those periods were heavily affected by deliberate and planned
business restructuring activities in response to the prolonged downturn in the
seismic equipment market, as well as heavy expenditures on research and
development primarily relating to the development of the Company's new
VectorSeis(R) technology, the Company's cumulative loss in the most recent
three-year period, including the net loss reported in the second quarter,
represented sufficient negative evidence to establish an additional valuation
allowance under the provisions of SFAS 109. The Company intends to maintain a
full valuation allowance for its net deferred tax assets and net operating loss
carryforwards until sufficient positive evidence exists to support reversal of
the allowance.
The establishment of this valuation allowance in no way affects the
Company's ability to reduce future tax expense through utilization of net
operating losses.
(8) COMPREHENSIVE EARNINGS (LOSS)
The components of comprehensive earnings (loss) are as follows (in
thousands):
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------------ ------------------------------
2002 2001 2002 2001
----------- ----------- ----------- -----------
Net earnings (loss)......................... $ (77,413) $ 2,984 $ (81,955) $ 3,174
Foreign currency translation adjustment..... 4,398 (1,425) 3,644 (2,885)
----------- ----------- ----------- -----------
Comprehensive earnings (loss)............... $ (73,015) $ 1,559 $ (78,311) $ 289
=========== =========== =========== ===========
(9) 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.
9
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):
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
=============
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.
(10) 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.
(11) RECENT ACCOUNTING PRONOUNCEMENTS
On January 1, 2002, the Company adopted SFAS No. 142 "Goodwill and Other
Intangible Assets". 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. 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 completed its
initial periodic tests for impairment during the second quarter of 2002, which
did not indicate any impairment of our goodwill.
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):
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
----------------------------- --------------------------------
2002 2001 2002 2001
---------- ---------- ------------- -------------
Reported net earnings (loss) applicable to
common shares.............................. $ (78,892) $ 1,589 $ (84,889) $ 389
Elimination of goodwill amortization.......... -- 972 -- 1,896
---------- ---------- ------------- -------------
Adjusted net earnings loss applicable to
common shares.............................. $ (78,892) $ 2,561 $ (84,889) $ 2,285
========== ========== ============= =============
(12) SUBSEQUENT EVENTS
On July 23, 2002, the Company acquired AXIS Geophysics, Inc., a seismic data
service company based in Denver, Colorado. AXIS Geophysics provides specialized
seismic data processing and integration services to major and independent
exploration and production companies. The AXIS Interpretation-Ready Process(TM)
("IRP") integrates seismic and subsurface data to provide customers more
accurate and higher quality data that can result in improved reservoir
characterization.
On August 6, 2002, the Company repurchased all of the 40,000 outstanding
shares of its Series B Convertible Preferred Stock and all of the 15,000
outstanding shares of its Series C Convertible Preferred Stock (the "Preferred
Stock") from the holder, SCF-IV, L.P. ("SCF"), a Houston-based private equity
fund specializing in oil service investments. In exchange for the Preferred
Stock, the Company paid SCF $30 million in cash at closing, issued SCF a $31
million unsecured promissory note due May 7, 2004 (the "Note") and granted SCF
warrants to purchase 2,673,517 shares of the Company's common stock at $8.00 per
share through August 5, 2005. The Note bears interest at 8% per year until May
7, 2003, at which time the interest rate will increase to 13%. Immediately
preceding
10
the closing of this transaction, David C. Baldwin, the elected representative of
the holder of the Preferred Stock, resigned from the Company's board of
directors.
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, we have concentrated
on lowering our cost structure, consolidating product offerings and reorganizing
into a products-based operating structure. We continue 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 remainder of the year will be
less robust than last year. Despite current conditions, we currently believe
that revenue and operating profits for the latter half of 2002 will modestly
improve compared to the first half of 2002. 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 as demand rebounds from cyclical lows.
RESULTS OF OPERATIONS
Three Months Ended June 30, 2002 Compared to Three Months Ended June 30, 2001
Net Sales: Net sales of $22.9 million for the three months ended June 30,
2002 decreased $37.0 million, or 62%, 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 $33.4 million, or
76%, to $10.8 million primarily as a result of declining industry conditions.
Our Marine Division's net sales decreased $3.6 million to $12.1 million, or 23%,
compared to the corresponding period last 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 $20.4 million for the three months ended
June 30, 2002 decreased $19.3 million, or 49%, compared to the corresponding
period last year. Cost of sales of our Land Division was $13.3 million and cost
of sales of our Marine Division was $7.1 million. Cost of sales in the current
quarter decreased as a result of the decrease in revenues offset partially by
lower gross profit percentage on those revenues.
Gross Profit and Gross Profit Percentage: Gross profit of $2.5 million for
the three months ended June 30, 2002 decreased $17.8 million, or 88%, compared
to the corresponding period last year. Gross profit percentage for the three
months ended June 30, 2002 was 11% compared to 34% in the corresponding period
last 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.
Research and Development: Research and development expense of $8.7 million
for the three months ended June 30, 2002 increased $1.0 million, or 13%,
compared to the corresponding period last year. Research and development expense
remained at high levels as we develop a lightweight ground electronics system,
ocean bottom system and next generation marine system that exploits our
VectorSeis technology. The Company also incurred severance expenses and charges
relating to the closure of our Austin, Texas software development facility in
the current quarter.
Marketing and Sales: Marketing and sales expense of $2.8 million for the
three months ended June 30, 2002 remained relatively constant compared to the
corresponding period last year due to severance expenses in the current quarter
offset by lower commission expense.
General and Administrative: General and administrative expense of $4.7
million for the three months ended June 30, 2002 remained constant compared to
the corresponding period last year. This is primarily attributable to severance
expenses in the current quarter offset by accruals for profit-based bonuses in
the corresponding period last year for which no accrual has been recorded in the
current quarter.
11
Amortization of Intangibles: Amortization of intangibles of $0.3 million for
the three months ended June 30, 2002 decreased $0.9 million, or 73%, 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 $0.1 million for
the three months ended June 30, 2002 decreased $0.3 million, or 79%, 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: Income tax expense of $63.5 million for the three months
June 30, 2002 increased $62.1 million compared to the corresponding period last
year. The increase is due to a charge of $68.4 million to establish an
additional valuation allowance for deferred tax assets. Although management
expects that we will generate sufficient taxable income in future years to fully
utilize our net operating losses, such expectation is subject to a significant
amount of risk and uncertainty. In accordance with SFAS 109, we established an
additional valuation allowance for our net deferred tax assets based on our
cumulative operating results in the most recent three year period. Our results
in this period were heavily affected by deliberate and planned business
restructuring activities in response to the prolonged downturn in the seismic
equipment market, as well as heavy expenditures on research and development of
our VectorSeis technology. Nevertheless, recent losses represented sufficient
negative evidence to establish an additional valuation allowance. We will
continue to reserve all of our net deferred tax assets and net operating loss
carryforwards until we have sufficient evidence to warrant reversal. This
valuation allowance in no way affects our ability to reduce future tax expense
through utilization of net operating losses.
Preferred Stock Dividends: Preferred stock dividends for the three months
ended June 30, 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
June 30, 2002 was $1.5 million, compared to $1.4 million for the corresponding
period last year. As discussed in "-- Repurchase of Series B and Series C
Preferred Stock", we repurchased the preferred stock on August 6, 2002.
Six Months Ended June 30, 2002 Compared to Six Months Ended June 30, 2001
Net Sales: Net sales of $53.1 million for the six months ended June 30, 2002
decreased $49.2 million, or 48%, 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 $43.6 million, or 61%, to
$28.4 million primarily as a result of declining industry conditions. Our Marine
Division's net sales decreased $5.6 million to $24.6 million, or 19%, 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 $43.6 million for the six months ended June
30, 2002 decreased $22.2 million, or 34%, compared to the corresponding period
last year. Cost of sales of our Land Division was $30.0 million and cost of
sales of our Marine Division was $13.6 million. Cost of sales in the current
quarter decreased as a result of the decrease in revenues, partially offset by
lower gross profit percentage on those revenues.
Gross Profit and Gross Profit Percentage: Gross profit of $9.4 million for
the six months ended June 30, 2002 decreased $27.0 million, or 74%, compared to
the corresponding period last year. Gross profit percentage for the six months
ended June 30, 2002 was 18% compared to 36% 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.
Research and Development: Research and development expense of $15.7 million
for the six months ended June 30, 2002 increased $0.5 million, or 3%, compared
to the corresponding period last year. Research and development expense remained
at high levels as we completed the final stages of VectorSeis commercialization
and continue to develop a lightweight ground electronics system, ocean bottom
system and next generation marine system and due to severance expenses and
charges relating to the closure of our Austin, Texas software development
facility in the current period.
Marketing and Sales: Marketing and sales expense of $5.3 million for the six
months ended June 30, 2002 decreased $0.3 million, or 5%, compared to the
corresponding period last year. The decrease is primarily related to lower
commission on sales partially offset by severance expenses in the current
quarter.
12
General and Administrative: General and administrative expense of $9.3
million for the six months ended June 30, 2002 decreased $0.3 million, or 3%,
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 corresponding period last year for which no accrual has been
recorded in the current period, offset by severance expenses in the current
period.
Amortization of Intangibles: Amortization of intangibles of $0.6 million for
the six months ended June 30, 2002 decreased $1.7 million, or 73%, 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 $0.4 million for
the six months ended June 30, 2002 decreased $1.4 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: Income tax expense of $60.8 million for the six months
June 30, 2002 increased $58.4 million compared to the corresponding period last
year. The increase is due to a charge of $68.4 million to establish an
additional valuation allowance for deferred tax assets. See discussion of Three
Months Ended June 30, 2002 Compared to Three Months Ended June 30, 2001 --
Income Tax Expense.
Preferred Stock Dividends: Preferred stock dividends for the six months
ended June 30, 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 six months ended
June 30, 2002 was $2.9 million, compared to $2.8 million for the corresponding
period last year. As discussed in "-- Repurchase of Series B and Series C
Preferred Stock", we repurchased the preferred stock on August 6, 2002.
LIQUIDITY AND CAPITAL RESOURCES
We have typically financed operations from internally generated cash and
funds from equity financings. Cash and cash equivalents were $103.2 million at
June 30, 2002, an increase of $1.5 million, or 2%, compared to December 31,
2001. The increase is due to cash flows provided by operating activities and
changes in foreign currency exchange rates, partially offset by cash flows used
in investing activities. Net cash provided by operating activities was $2.2
million for the six months ended June 30, 2002 compared to the net cash used in
operating activities of $5.1 million for the corresponding period last year.
Positive operating cash flows were primarily due to a decrease in accounts
receivable, partially offset by decreases in accounts payable and accrued
expenses.
Net cash used in investing activities was $2.6 million for the six months
ended June 30, 2002 compared to net cash used in investing activities of $7.0
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 machinery and additions of VectorSeis equipment for use in
acquiring seismic data in conjunction with our North American 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 used in financing activities was $0.4 million for the six months
ended June 30, 2002 compared to net cash provided by financing activities of
$0.4 million for the corresponding period last year. The principal use was
repayment of long-term debt and capital lease obligations offset by proceeds
from issuance of common stock and exercise of stock options.
On August 6, 2002, we repurchased all of the outstanding shares of Series B
Preferred Stock and Series C Preferred Stock from the holder thereof for $30
million in cash, a $31 million unsecured promissory note due May 7, 2004 and a
warrant to purchase 2,673,517 shares of our common stock at $8.00 per share
through August 5, 2005. The note bears interest at 8 percent per annum until May
7, 2003, at which time the interest rate will increase to 13 percent. At August
9, 2002, we had approximately $71 million in unrestricted cash. See "--
Repurchase of Series B and Series C Preferred Stock".
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.
13
REPURCHASE OF SERIES B AND SERIES C PREFERRED STOCK
On August 6, 2002, we repurchased all of the 40,000 outstanding shares of
its Series B Convertible Preferred Stock and all of the 15,000 outstanding
shares of its Series C Convertible Preferred Stock from SCF-IV, L.P., a
Houston-based private equity fund specializing in oil service investments. In
exchange for the Preferred Stock, we paid SCF $30 million in cash at closing,
issued SCF a $31 million unsecured promissory note due May 7, 2004 and granted
SCF warrants to purchase 2,673,517 shares of our common stock at $8.00 per share
through August 5, 2005. The Note bears interest at 8% per annum until May 7,
2003, at which time the interest rate will increase to 13%. Immediately
preceding the closing of this transaction, David C. Baldwin, the elected
representative of the holder of the Preferred Stock, resigned from our board of
directors.
The Preferred Stock was issued in 1999, at a purchase price of $1,000 per
share (the "Stated Value"), for an aggregate of $55 million. Since that time,
the Preferred Stock has earned an 8 percent dividend, of which we paid 1%
quarterly in cash and we accrued the balance to increase the Adjusted Stated
Value ($1,000 per share Stated Value plus accrued and unpaid dividends) of the
Preferred Stock. The Adjusted Stated Value of the Preferred Stock as reflected
in the equity section of the Company's June 30, 2002 balance sheet was $68.3
million. The comparable Adjusted Stated Value of the Preferred Stock as of
August 6, 2002, was $68.8 million.
The Preferred Stock became convertible at the option of SCF on May 7, 2002.
Under its terms, the number of shares into which the Preferred Stock would have
been convertible is the greater of (i) Stated Value divided by approximately
$8.14 per share or (ii) Adjusted Stated Value divided by the average market
price of our common stock during the ten-day trading period immediately prior to
conversion. We had the right, without the holder's consent, to redeem for cash
up to one-half of any Preferred Stock tendered for conversion based on the
Adjusted Stated Value of such Preferred Stock on the conversion date. If SCF had
converted all of the Preferred Stock on August 6, 2002, and we had declined to
exercise our redemption rights, SCF would have received about 9.2 million shares
of our common stock, representing 15.3% of the total outstanding common stock of
the Company after giving effect to the conversion.
Under the terms of a registration rights agreement, SCF has the right to
demand that we file a registration statement for the resale of the shares of
Common Stock SCF acquires upon exercise of the warrant. 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.
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 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
six months ended December 31, 2002;
o future demand for seismic equipment and services;
o future commodity prices;
o future economic conditions;
14
o anticipated timing of commercialization and capabilities of our products
under development;
o our expectations regarding our future mix of business and future asset
recoveries;
o our expectations regarding realization of our deferred tax assets;
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, 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.
15
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 currently intend to commercially
release a marine solid streamer in the fourth quarter of this year. We can not
assure you, however, 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. 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.
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 65% of our consolidated net sales for the six
months ended June 30, 2002. United States export restrictions affect the types
and specifications of products we can export. Additionally, to complete certain
sales,
16
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.
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
17
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 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On August 6, 2002, we repurchased all of the 40,000 outstanding shares of
its Series B Convertible Preferred Stock and all of the 15,000 outstanding
shares of its Series C Convertible Preferred Stock from SCF-IV, L.P., a
Houston-based private equity fund specializing in oil service investments. We
relied on Section 4(2) of the Securities Act of 1933 as an exemption from
registration of the transaction because we only negotiated with one
sophisticated party. In exchange for the Preferred Stock, we paid SCF $30
million in cash at closing, issued SCF a $31 million unsecured promissory note
due May 7, 2004 and granted SCF warrants to purchase 2,673,517 shares of our
common stock at $8.00 per share through August 5, 2005. The Note bears interest
at 8% per annum until May 7, 2003, at which time the interest rate will increase
to 13%. The note prohibits dividends to be paid in cash on our equity securities
while the note is outstanding. Immediately preceding the closing of this
transaction, David C. Baldwin, the elected representative of the holder of the
Preferred Stock, resigned from our board of directors.
The Preferred Stock was issued in 1999 at a purchase price of $1,000 per
share (the "Stated Value"), for an aggregate of $55 million. Since that time,
the Preferred Stock has earned an 8 percent dividend, of which we paid 1%
quarterly in cash and we accrued the balance to increase the Adjusted Stated
Value ($1,000 per share Stated Value plus accrued and unpaid dividends) of the
Preferred Stock. The Adjusted Stated Value of the Preferred Stock as reflected
in the equity section of the Company's June 30, 2002 balance sheet was $68.3
million. The comparable Adjusted Stated Value of the Preferred Stock as of
August 6, 2002, was $68.8 million.
The Preferred Stock became convertible at the option of SCF on May 7, 2002.
Under its terms, the number of shares into which the Preferred Stock would have
been convertible is the greater of (i) Stated Value divided by approximately
$8.14 per share or (ii) Adjusted Stated Value divided by the average market
price of our common stock during the ten-day trading period immediately prior to
conversion. We had the right, without the holder's consent, to redeem for cash
up to one-half of any Preferred Stock tendered for conversion based on the
Adjusted Stated Value of such Preferred Stock on the conversion date. If SCF had
converted all of the Preferred Stock on August 6, 2002, and we had declined to
exercise its redemption rights, SCF would have received about 9.2 million shares
of our common stock, representing 15.3% of the total outstanding common stock of
the Company after giving effect to the conversion.
18
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
We held our annual meeting of stockholders in Stafford, Texas on May
21,2002. The following sets forth matters submitted to a vote of stockholders at
the annual meeting:
(a) Two directors were elected to our Board of Directors, each to serve
until our annual meeting in 2004 and until their respective successors
have been elected and qualified. Two directors were elected to our Board
of Directors, each to serve until our annual meeting in 2005 and until
their respective successors have been elected and qualified. One
director was elected to our Board of Directors to serve until our annual
meeting in 2003 and until his successor has been elected and qualified.
The following four individuals were elected to the Board of Directors by
the holders of our common stock and our Series B and Series C
Convertible Preferred Stock, voting together:
Nominee For Withheld
------- --- --------
Timothy J. Probert.................51,217,998 2,077,898
Franklin Myers.....................40,015,287 13,280,609
Robert P. Peebler..................51,611,661 1,684,235
Sam K. Smith.......................39,345,860 13,950,036
The holder of our Series B and Series C Preferred Stock elected David C.
Baldwin to our Board of Directors. Mr. Baldwin was elected by a vote of
55,000 shares of Series B and Series C Preferred Stock, being all of the
outstanding shares of Series B and Series C Preferred Stock outstanding.
(b) The stockholders ratified the appointment of PricewaterhouseCoopers, LLP
to audit our financial statements for the year ending December 31, 2002
by a vote of 51,779,215 shares of common stock, Series B Preferred Stock
and Series C Preferred Stock, voting together, being more than a
majority of the outstanding shares of common stock, Series B Preferred
Stock and Series C Preferred Stock, voting together, with 1,478,784
shares voting against and 37,897 shares abstaining.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
Exhibit
Number Description
-------- -----------
99.1 Certification of Timothy J. Probert, Chief
Executive Officer, Pursuant to 18 U.S.C.
Section 1350.
99.2 Certification of C. Robert Bunch, Chief
Administrative Officer, Pursuant to 18 U.S.C.
Section 1350.
(b) Reports on Form 8-K.
On August 13, 2002, we filed a Current Report on Form 8-K reporting
under Item 5. Other Events the repurchase of our series B and Series C Preferred
Stock.
19
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized in the City of
Stafford, State of Texas, on August 14, 2002.
INPUT/OUTPUT, INC.
By /s/ MARTIN B. DECAMP
------------------------------
Vice President-Accounting
20
EXHIBIT INDEX
Exhibit
Number Description
-------- -----------
99.1 Certification of Timothy J. Probert, Chief Executive
Officer, Pursuant to 18 U.S.C. Section 1350.
99.2 Certification of C. Robert Bunch, Chief Administrative
Officer, Pursuant to 18 U.S.C. Section 1350.