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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
Form 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 |
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For the Fiscal Year Ended December 31, 2004 |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 |
Commission file number 1-12691
Input/ Output, Inc.
(Exact Name of Registrant as Specified in Its Charter)
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Delaware
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22-2286646 |
(State or Other Jurisdiction of
Incorporation or Organization) |
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(I.R.S. Employer
Identification No.) |
12300 Parc Crest Drive
Stafford, Texas 77477
(Address of Principal Executive Offices, Including Zip
Code)
(281) 933-3339
(Registrant’s Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the
Act:
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Name of Each Exchange on Which Registered |
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Common Stock, $0.01 par value
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New York Stock Exchange |
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Rights to Purchase Series A Preferred Stock
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New York Stock Exchange |
Securities registered pursuant to Section 12(g) of the
Act:
None
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 þ No o
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not
contained herein, and will not be contained, to the best of
registrant’s knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this
Form 10-K or any amendment to this
Form 10-K. o
Indicate by check mark whether the registrant is an accelerated
filer (as defined in Exchange Act
Rule 12b-2). Yes þ No o
Aggregate market value of the voting stock held by
non-affiliates of the registrant: Approximately
$566.0 million as of June 30, 2004.
Indicate the number of shares outstanding of each of the
registrant’s classes of common stock, as of the latest
practicable date: common stock, $.01 par value,
78,675,198 shares outstanding as of March 1, 2005.
Portions of the registrant’s definitive proxy statement to
be filed pursuant to Regulation 14A under the Securities
Exchange Act of 1934 within 120 days after the
registrant’s fiscal year end of December 31, 2004 are
incorporated by reference into Part III of this Report.
TABLE OF CONTENTS
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PART I
Preliminary Note: This Annual Report on Form 10-K
contains forward-looking statements as defined in the Private
Securities Litigation Reform Act of 1995. Forward-looking
statements should be read in conjunction with the cautionary
statements and other important factors included in this
Form 10-K. See Item 7. Management’s Discussion
and Analysis of Financial Condition and Results of
Operations — Risk Factors for a description of
important factors which could cause actual results to differ
materially from those contained in the forward-looking
statements.
Introduction
In this Annual Report on Form 10-K, “Input/
Output,” “I/ O,” “company,”
“we,” “our,” “ours” and
“us” refer to Input/ Output, Inc. and its consolidated
subsidiaries, except where the context otherwise requires or as
otherwise indicated.
The information contained in this Annual Report on
Form 10-K contains references to trademarks, service marks
and registered marks of Input/ Output and our subsidiaries, as
indicated. Except where stated otherwise or unless the context
otherwise requires, the terms “VectorSeis,”
“VectorSeis System Four,” “Tescorp” and
“DigiCourse” refer to our VectorSeis®, VectorSeis
System Four®, Tescorp® and DigiCourse® registered
marks, and the terms “AZIM,” “True Digital,”
“DigiShot,” “DigiRANGE II,”
“Applied MEMS,” “System Four
Digital-Analog,” “SM-24,” “AHV-IV,”
“MRX,” “RSR,” “X-Vib,”
“Vib Pro,” “ShotPro,”
“GATOR,” “SPECTRA,” “Millennium”
and “Image” refer to our
AZIMtm,
True
Digitaltm,
DigiShottm,
DigiRANGE IItm,
Applied
MEMStm,
System Four
Digital-Analogtm,
SM-24tm,
AHV-IVtm,
MRXtm,
RSRtm,
X-Vibtm,
Vib Protm,
ShotProtm,
GATORtm,
SPECTRAtm,
Millenniumtm
and
Imagetm
trademarks and service marks.
Input/ Output was incorporated in 1979 and, along with its
predecessors, has been engaged in the business of manufacturing
seismic equipment since the early 1970’s. We are a leading
provider of seismic imaging technology used by oil and gas
companies and seismic contractors for exploration, appraisal,
development and reservoir monitoring in both land and marine
environments. We add value for our customers by providing
technologies and services to collect seismic data and develop
geophysical images to find, develop and extract hydrocarbons
more quickly and economically. We offer a full suite of related
products and services for seismic data acquisition and
processing without owning vessels or maintaining crews typically
used in the field to acquire seismic data.
Through recent acquisitions, we have implemented a strategy to
reposition our business from being primarily an equipment and
technology provider to offering our customers full-seismic
imaging technology solutions — from the design and
planning of seismic surveys to the acquisition and processing of
seismic data. Our seismic data acquisition products are well
suited for both traditional three-dimensional (3-D) and
time-lapse, or four-dimensional (4-D), data collection as well
as more advanced multi-component — or
full-wave — seismic data collection techniques. Based
on historical revenues, we believe that we are a market leader
in numerous product lines, such as geophones, navigation and
data management software and marine positioning systems. In
addition, we offer advanced seismic data processing and imaging
services.
Our business changed significantly during 2004 as a result of
two acquisitions we completed. In February 2004, we acquired all
of the share capital of Concept Systems Holdings Limited
(Concept Systems), a Scottish-based provider of integrated
planning, navigation and data management software and solutions
for towed streamer, seabed and land seismic operations, for
approximately $49.8 million, consisting of
$39.0 million in cash and 1,680,000 shares of our
common stock valued at approximately $10.8 million. Concept
System’s software is installed on towed streamer marine
vessels worldwide and is a component of many redeployable and
permanent seabed monitoring systems. In June 2004, we acquired
all of the capital stock of GX Technology Corporation (GXT), a
Houston-based provider of customized imaging solutions for
marine environments through its expertise in computer processing
technologies, for approximately $152.5 million, comprised
of $137.9 million in cash and the assumption of certain GXT
stock options and indebtedness. See Item 7.
“Management’s Discussion and Analysis of Financial
Condition and Results of Operations — 2004
Acquisitions and Dispositions.”
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Our executive headquarters are located at 12300 Parc Crest
Drive, Stafford, Texas 77477. Our telephone number is
(281) 933-3339. Our home page on the Internet is
www.i-o.com. We make our website content available for
information purposes only. It should not be relied upon for
investment purposes, nor is it incorporated by reference into
this Form 10-K.
In portions of this Form 10-K, we incorporate by reference
information from parts of other documents filed with the
Securities and Exchange Commission (SEC). The SEC allows us to
disclose important information by referring to it in this
manner, and you should review this information. We make our
annual report on Form 10-K, quarterly reports on
Form 10-Q, current reports on Form 8-K and proxy
statement for our annual shareholders’ meeting, as well as
any amendments to those reports, available free of charge
through our website as soon as reasonably practicable after we
electronically file such material with, or furnish it to, the
SEC. You can learn more about us by reviewing our SEC filings on
our website. Our SEC reports can be accessed through the
investor relations page of our website, namely www.i-o.com/
About – us/ Investor – Relations/. The SEC also
maintains a website at www.sec.gov that contains reports,
proxy statements and other information regarding SEC
registrants, including our company.
Seismic Industry Overview
Oil and gas companies have traditionally used seismic data to
reduce exploration risk by creating an image of the subsurface.
Typically, an oil and gas company contracts with a geophysical
logistics contracting company to acquire seismic data in a
selected area. The contractor will often rely on third parties,
such as I/O, to provide the contractor with the technology and
equipment necessary for data acquisition. After collection,
either the geophysical contractor or another data processor
processes the data through algorithms designed to create a
seismic image. Geoscientists then interpret the data by
reviewing the image and integrating known facts about the
surrounding geology.
In recent years, two principal factors have negatively affected
demand for seismic data by oil and gas companies — the
maturation of 3-D data collection technology, and the business
model adopted by geophysical contractors to leverage large fixed
investments in equipment. The advent of commercial
3-D seismic data collection in the 1980s caused a sharp
increase in demand for seismic data as oil and gas companies
sought to capitalize on the improved images from
3-D technology compared to those from the predecessor two
dimensional, or 2-D, technology. Recently, however, without
advances beyond 3-D in imaging technology, oil and gas companies
have not had a compelling reason to maintain a high rate of
purchasing seismic surveys. Much of the current demand for
conventional analog 3-D seismic surveys comes from areas
where use of the technology was not quickly adopted, such as
China and countries within the former Soviet Union.
The traditional business model employed by geophysical
contractors has also impacted demand. In an effort to achieve
higher utilization of the large investments needed to conduct
3-D surveys, geophysical contractors increasingly began to
collect speculative surveys for their own account as
customer-requested demand for surveys declined. Contractors
typically selected an area, acquired data using generic
acquisition parameters and generic processing algorithms,
capitalized the acquisition costs and sold the survey results to
multiple parties. These general speculative surveys were not
tailored to meet a particular request and caused an oversupply
of seismic data. Additionally, since contractors incurred most
of the costs of speculative seismic data at the time of
acquisition, contractors lowered prices to recover as much of
the fixed investment as possible which, in the process, drove
operating margins down.
Accelerating global reservoir decline rates coupled with recent
reserve writedowns have increased the pressure on oil and gas
companies to discover additional reserves. We expect these
increased exploration demands, combined with significant changes
in commodity prices, will drive increased demand for seismic
technology and services. Additionally, oil and gas companies are
focusing on deeper hydrocarbon reservoirs with more complex and
more subtle structures, making development more challenging. As
a result, oil and gas companies are increasingly using seismic
data to enhance the development of and production from known
fields. By repeating a seismic survey over a defined area, oil
and gas companies can detect untapped areas of a reservoir and
adjust their drilling program to optimize production. Such
time-lapse seismic images are referred to as 4-D surveys
and make seismic data relevant to the entire life cycle of the
reservoir. We believe our
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technologies are well suited for 4-D data collection as well as
more advanced multi-component — or
full-wave — seismic data collection techniques.
We also believe that oil and gas companies will increasingly
value seismic technology providers who will collaborate with
them to tailor surveys that address specific geophysical
problems and to apply advanced digital sensor and imaging
technologies to take into account the geologic peculiarities of
a specific area. We expect that oil and gas companies will, in
the future, rely less on undifferentiated, mass seismic studies
created using analog sensors and traditional processing
technologies that do not adequately identify geologic
complexities.
Segment Information
Beginning in June 2004, we began evaluating and reviewing our
results of operations based on four business segments. See
Note 14 of Notes to Consolidated Financial
Statements:
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Land Imaging Systems, |
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Marine Imaging Systems, |
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Data Management Solutions and |
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Seismic Imaging Solutions. |
After we acquired GXT in June 2004, we combined the operations
of our Processing division (which included our AXIS seismic data
processing and integration services business and our Green
Mountain Geophysics geophysical software operations) with those
of GXT to form our Seismic Imaging Solutions business segment.
At that time, we also began reporting the results of operations
and assets of Concept Systems as those of a new Data Management
Solutions business segment. See further discussion of the GXT
and Concept Systems acquisitions at Item 7.
“Management’s Discussion and Analysis of Financial
Condition and Results of Operations — 2004
Acquisitions and Dispositions” and Note 2 of Notes
to Consolidated Financial Statements.
Our evaluation and review of results of operations using these
four business segments has allowed for increased visibility and
accountability of costs and more focused customer service and
product development. We measure segment operating results based
on income (loss) from operations.
Products and Services
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Land Imaging Systems Products |
Products for our Land Imaging Systems business segment include
the following:
Land Data Acquisition Systems. Both our traditional
analog land data acquisition systems (such as our
Imagetm
system) and our newer VectorSeis® System Four land data
acquisition systems consist of a central electronics unit and
multiple remote ground equipment modules that are either
connected by cable or utilize radio transmission and retrievable
data storage. The central electronics unit, which acts as the
control center of the system, is typically mounted within a
vehicle or helicopter transportable enclosure. The central
electronics unit receives digitized data, stores the data on
storage media for subsequent processing and displays the data on
optional monitoring devices. It also provides calibration,
status and test functionality. The remote ground equipment
consists of multiple remote modules and line taps positioned
over the survey area. Seismic data is collected by geophones or
VectorSeis digital sensors.
Analog Data Acquisition Systems. Our Image land
acquisition system is our traditional analog land data
acquisition system. The remote ground equipment consists of
multiple remote modules (MRX) and line taps positioned over
the survey area. Seismic signals from geophones are collected by
the MRX modules, which collect multiple channels of analog
seismic data. The MRX modules filter and digitize the data,
which is then transmitted from the MRX modules via cable to a
line tap. Alternatively, our radio telemetry system
(RSR) records data across a variety of environments,
including transition zones, swamps, mountain ranges, jungles and
other environments. RSRs are radio controlled and do not require
cables for data transmission since the information is stored at
the unit source and subsequently retrieved.
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VectorSeis® Data Acquisition Systems. Our
VectorSeis digital platform systems offer high-resolution,
cost-effective compression-wave (P-wave) data collection as well
as shear wave multi-component acquisition. Digital sensors, when
compared with traditional analog geophones, provide increased
response linearity and bandwidth and preserve a higher degree of
vector fidelity. In addition, one digital sensor can replace a
string of six or more analog geophones, providing users with
significant operating efficiencies. These advantages enable
improved location and characterization of reservoir structure
and fluids and more accurate identification of rock properties
at reduced total costs.
We began VectorSeis land acquisition field tests in 1999, and
since that time, VectorSeis technology has been used to acquire
seismic data in Canada, Mexico, the United States, France,
Eastern Europe and the former Soviet Union (or Commonwealth of
Independent States (CIS)). In May 2002, we commercialized our
VectorSeis System Four® radio-based land acquisition
system, and in the second quarter of 2003, we commercialized our
VectorSeis System Four cable-based telemetry system. In 2004,
there were new sales of our VectorSeis System Four cable-based
telemetry systems, in addition to sales of system expansion
components for the existing systems in the field. For our
VectorSeis System Four radio-based land acquisition systems,
there were follow-on sales of additional components and system
expansion components for existing systems.
In May 2004, we announced the introduction of our new hybrid
System Four
Digital-Analogtm
system. The System Four Digital-Analog system is based on our
System Four platform and gives seismic contractors the
flexibility to use traditional analog geophone sensors, or
digital full-wave VectorSeis sensors, even on the same survey.
The introduction of our System Four Digital-Analog system in
2004 allowed us to begin transitioning out of our legacy Image
analog system. We commercialized and sold five System Four
Digital-Analog systems during 2004.
Geophones. Geophones are analog electro-mechanical
seismic sensor devices that measure acoustic energy reflected
from rock layers in the earth’s subsurface. We market a
full suite of geophones and geophone test equipment that operate
in all environments, including land, marine, ocean-bottom and
downhole. Our principal geophone product, the
SM-24tm,
features low distortion and wide bandwidth for seismic recording
systems.
Vibrators and Traditional Energy Sources. Vibrators are
devices carried by large vehicles and are used as energy sources
for land seismic acquisition. We market and sell the
AHV-IVtm,
an articulated vibrator vehicle with simplified hydraulics and
superior maneuverability. In addition, we offer a low impact,
tracked vibrator, the
X-Vibtm,
for use in environmentally sensitive areas like the Arctic
tundra and desert environments.
Our Pelton Company subsidiary provides energy source control and
positioning technology to our suite of products. The Vib
Protm
control system provides digital technology for energy control,
and integrates global positioning system (GPS) technology
for navigation and positioning of vibrator vehicles. The Shot
Protm
dynamite firing system is the equivalent technology for seismic
operations using dynamite energy sources. Integrated GPS
technology and compatibility with the Vib Pro control system
helps to streamline field operations and improve operational
efficiencies.
Specialty Cables and Connectors. Cables and connectors
are used in conjunction with most seismic equipment. Our Tescorp
cables are not only a replacement option to correct for ordinary
wear, but also offer performance improvement and specialization
features for new environments and applications.
Reliability Issues. System reliability is an important
competitive consideration for seismic data acquisition systems.
Even though we attempt to assure that our systems are always
reliable in the field, the many technical variables related to
operations can cause a combination of factors that can, and has
from time to time, caused service issues. We believe that our
VectorSeis System Four A/C analog land data acquisition system
has made significant improvements in both field troubleshooting
and reliability compared to our legacy analog land data
acquisition systems, but until we have significantly more field
experience in a wide variety of operational conditions, we
cannot be certain that problems will not arise. Even though we
have a large installed base of customers using our analog
products without reported significant problems, customers do
occasionally experience issues and therefore there is a
possibility that our new products may also suffer from
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similar issues. In that case, market acceptance of our new
products could be delayed and our results of operations and
financial condition could be adversely affected.
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Marine Imaging Systems Products |
Products for our Marine Imaging Systems business segment include
the following:
Marine Data Acquisition Systems. Our traditional marine
data acquisition system consists of towed marine streamers and
shipboard electronics that collect seismic data in marine
environments with water depths greater than 30 meters. Marine
streamers, which contain hydrophones, electronic modules and
cabling, may measure up to 12,000 meters in length and are towed
behind a seismic acquisition vessel. Seismic sensors installed
in the cable (hydrophones) detect acoustical energy
transmitted through water from the earth’s subsurface
structure.
Marine Positioning Systems. Our DigiCourse® marine
positioning system includes streamer cable depth control
devices, compasses, acoustic positioning systems
(DigiRANGE IItm)
and other auxiliary sensors. Marine positioning equipment
controls the depth of the streamer cables and provides acoustic,
compass and depth measurements to allow processors to tie
navigation and location data with geophysical data to determine
the location of potential hydrocarbon reserves for precise
drilling operations.
Source and Source Control Systems. We manufacture and
sell airguns, which are the primary seismic energy source used
in marine environments to initiate the acoustic energy
transmitted through the earth’s subsurface. An airgun fires
a high compression burst of air underwater to create an energy
wave for seismic measurement. We offer a digital source control
system
(DigiSHOTtm),
which allows more precise and reliable control, and quality
control, of airgun arrays for 4-D exploration activities.
VectorSeis Ocean-Bottom Acquisition System. Since 2002,
we have expanded our focus on reservoir applications by placing
VectorSeis ocean-bottom products into our Marine Imaging product
line. We believe that the VectorSeis ocean-bottom products will
address many shortcomings of current ocean-bottom systems.
VectorSeis modules can operate at angles, which eliminates the
need for gimbal receiver units that distort data and add cost.
In addition, our patented cable de-coupler design further
reduces data distortions and improves sea-bottom coupling. In
2002, we completed the first test of our VectorSeis ocean-bottom
acquisition system in the Ekofisk Field in the North Sea. This
test indicated that our VectorSeis-based system delivered higher
frequency and better vector fidelity than previous ocean-bottom
cable surveys. During 2004, we completed the first shipment of
our VectorSeis Ocean-Bottom redeployable acquisition system
under a contract with Reservoir Exploration Technology A.S., a
Norwegian start-up seismic contractor (RXT). This system was put
into operation during August 2004, and experienced some start-up
functionality issues, causing RXT to delay its deployment and
some of its purchase payments to us. See Item 7.
“Management’s Discussion and Analysis of Financial
Condition and Results of Operation — Credit Risk”
and “— Risk Factors — We are exposed to
risks related to complex, highly technical products.”
However, the data quality produced to date from this system has
been positive. We will continue to provide service and support
to this project and upgrade and make refinements to the system.
As a result of the system’s recent development and advanced
and complex nature, we expect to experience occasional
operational issues from time to time in the future, and we will
continue our practice of refining the system and its components
to reflect the system’s operating experience.
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Data Management Solutions Products and Services |
Through our purchase of Concept Systems in February 2004, we
acquired software systems and services for towed marine
streamer, seabed and land seismic operations. Products and
services for our Data Management Solutions business segment
include the following:
Marine Imaging.
SPECTRAtm
is Concept Systems’ integrated navigation and survey
control system for marine streamer vessels. The SPECTRA system,
which we believe is installed on more than 75% of the
world’s streamer fleet, is designed specifically for
streamer-based seismic survey operations, including 2-D, 3-D and
4-D applications.
Seabed Imaging. Concept Systems offers an integrated
system for ocean-bottom cable and transition zone (such as marsh
lands) operations, called
GATORtm.
The GATOR system provides real-time multi-vessel positioning and
data management solutions for ocean-bottom, shallow-water and
transition zone crews.
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Survey Design and Planning. Concept Systems also offers
consulting services for planning and designing of 4-D survey
operations.
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Seismic Imaging Solutions Products and Services |
Products and services for our Seismic Imaging Solutions business
segment include the following:
Processing and Imaging for Marine Environments. GXT
provides seismic data processing and imaging services to oil and
gas exploration and production companies for data obtained from
seismic data acquisition equipment — from survey
planning and design, to data collection management and
processing, to image development. Through its Integrated Seismic
Solutions services, GXT can manage the entire seismic process
for customers, from survey planning and design, to data
acquisition and management, to pre-processing, interpretation
and final subsurface imaging. GXT also offers processing and
imaging services through which it develops images by applying
its processing technology to data owned or licensed by its
customers. While GXT’s processing services have
traditionally been more concentrated in processing marine
environment data, GXT also performs its services for land
environment applications.
In its processing, GXT uses parallel computer clusters to
process seismic data through advanced algorithms that
incorporate technologies such as illumination analysis, velocity
modeling and pre-stack depth and time migration. The pre-stack
depth and time migration solutions involve advanced processing
techniques to convert seismic time-based information to
depth-based information. Geologists can use this information to
more accurately map subsurface structures than conventional
seismic processing. We believe that these techniques can better
identify and access complex hydrocarbon reservoirs and deeper
drilling targets, and are well suited for processing information
from digital, full-wave VectorSeis sensors. They also complement
the advanced velocity imaging technology and expertise in land
environments developed in our AXIS group described below.
Currently, GXT’s imaging is limited to data collected with
traditional 2-D and 3-D techniques, but since the acquisition we
have been developing initiatives to apply its imaging
technologies to data collected with multi-component and 4-D time
lapse methods.
GXT also provides support services to its customers, including
survey design, project management, quality control, data
preconditioning for imaging, and outsourced management of
seismic data acquisition and image processing services.
Processing and Imaging for Land Environments. Following
our acquisition of GXT, we aligned our AXIS group with GXT. AXIS
is a seismic data service company based in Denver, Colorado that
we acquired in July 2002. AXIS provides specialized data
processing and integration services to major and independent
exploration and production companies.
In addition, AXIS has developed its proprietary
AZIMtm
data processing techniques. Most processing techniques assume
that seismic energy travels at the same velocity through a
geological structure regardless of the path that the energy
takes through that structure. In reality, the earth is
anisotropic — which means that energy will travel at
different velocities through the same structure, depending on
the direction of the energy. AZIM accounts for the anisotropy
effects of the earth, which results in more accurate images,
particularly in complex reservoirs. AXIS also offers a
pre-processing software package,
Millenniumtm,
that calculates a statics model and imports the solution to the
seismic processing system for completion of processing.
Product Research and Development
Our research and development efforts have been focused on
improving both the quality of the subsurface image and the
seismic data acquisition economics for our customers. Our
ability to compete effectively in the manufacture and sale of
seismic equipment and data acquisition systems, as well as
related processing services, depends principally upon continued
technological innovation. Development cycles of most products,
from initial conception through commercial introduction, may
extend over several years.
During 2004, much of our development focus continued on the
completion, testing and introduction of our VectorSeis Ocean
redeployable ocean-bottom data acquisition system and our System
Four Digital-Analog land acquisition system. Since these
products were in the commercialization stage during much of
2004, our total research and development expenditures for these
products were less than those for 2003. Our
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acquisitions of Concept Systems and GXT, however, added a number
of research and development projects and corresponding
expenditures.
During the second half of 2004, we introduced two new processing
techniques for GXT’s pre-stack depth migration technology.
In 2005, we anticipate continuing our research initiatives in
this area to develop applications for GXT’s advanced
processing techniques for data gathered through our
multi-component and 4-D time-lapse data collection methods.
In the second half of 2005, we expect to release Concept
Systems’
Orcatm
software product, a successor software product to its software
for towed streamer navigation and integrated data management.
Orca will include modules designed to better ensure
repeatability across time-lapse 4-D surveys by integrating
navigation, source control, and streamer control systems.
Within the next year, we expect to introduce a new product
called
DigiFINtm
for advanced marine streamer control. DigiFIN is being designed
to allow vessel operators to control lateral position of
streamer cables in the water, allowing them to be towed closer
together without the threat of tangling and enabling faster line
changes as each line of a survey is acquired. The tighter
streamer spacing should improve image quality for oil and gas
companies.
DigiFIN will join two other DigiCourse products in the
marketplace that provide for digital control of marine air-gun
energy sources and acoustic position determination of streamer
cables in the water. The combination of these products, we
believe, will permit vessel operators to acquire repeatable
marine surveys, the most critical factor in time-lapse 4-D
programs.
In September 2004, we announced the formation of a joint
industry project with QinetiQ, a European science and technology
company, to develop and deploy the world’s first
fiber-optic seabed seismic data acquisition system, which would
acquire full-wave seismic data from the seabed. Given the long
term time schedule for this project, I/ O has made no
significant expenditures on the project to date and has minimal
expenditures budgeted for 2005.
We expect to incur significant future research and development
expenditures aimed at the development of our products and
technologies. In 2004, we incurred research and development
expenditures of approximately $19.6 million. For a summary
of our research and development expenditures, see Item 7.
“Management’s Discussion and Analysis of Financial
Condition and Results of Operations — Results of
Operations.”
Because many of these new products are under development, their
commercial feasibility or degree of commercial acceptance, if
any, is not yet known. No assurance can be given concerning the
successful development of any new products or enhancements, the
specific timing of their release or their level of acceptance in
the market place.
For a summary of our research and development expenditures
during the past five years, see Item 6. “Selected
Financial Data.”
Markets and Customers
Our principal customers are seismic contractors and oil and gas
companies. Seismic contractors purchase our data acquisition
systems and related equipment to collect data both onshore and
offshore in accordance with their oil and gas company
customers’ specifications or for their own seismic data
libraries. We also market and sell products and offer
value-added services directly to oil and gas companies,
primarily imaging-related processing services from our GXT group
and 4-D consulting services from Concept Systems. In 2004 and
2003, BGP, an international seismic contractor and subsidiary of
the China National Petroleum Corporation, accounted for
approximately 15% and 28% of our consolidated net sales,
respectively. In 2004, British Petroleum was our most
significant oil and gas company customer, accounting for 3% of
our consolidated revenues and 14% of GXT’s total revenues.
In recent years, the seismic industry has been affected by a
number of market forces that impact demand for our products.
There has been significant consolidation among oil and gas
companies which has tended to reduce capital outlays on
exploration activities, including those related to seismic
acquisition and processing. The contractor segment has been
impacted by consolidation among the oil and gas companies,
excess capacity of seismic acquisition crews, seismic vessels,
and seismic data libraries, and the emergence on the global stage
9
of low-cost acquisition contractors from the rapidly developing
markets, including China, India, and the CIS. These factors have
put financial pressure on many contractors, prompting
bankruptcies and reduced capital expenditures for new seismic
acquisition technology, which creates a consolidation in the
demand for our acquisition systems and related equipment. The
loss of any of our significant customers or deterioration in our
relations with any of them could materially adversely affect our
results of operations and financial condition.
A significant part of our marketing efforts is focused on areas
outside the United States. Contractors from China and the CIS
are increasingly active not only in their own countries, but
also in other international markets. Foreign sales are subject
to special risks inherent in doing business outside of the
United States, including the risk of armed conflict, civil
disturbances, currency fluctuations, embargo and governmental
activities, customer credit risks, as well as risks of
non-compliance with U.S. and foreign laws, including tariff
regulations and import/export restrictions. We sell products
through a direct sales force consisting of employees and several
international third-party sales representatives responsible for
key geographic areas. During the years ended December 31,
2004, 2003 and 2002, sales to destinations outside of North
America accounted for approximately 73%, 77% and 71% of our
consolidated net sales, respectively. Further, systems sold to
domestic customers are frequently deployed internationally and,
from time to time, certain foreign sales require export
licenses. GXT has historically derived the bulk of its revenues
from North America, with sales in the U.S. and Canada accounting
for 33% of its 2004 net sales. However, GXT intends to expand
internationally in 2005 with processing centers scheduled to
open in Venezuela, Nigeria, and Angola. These center openings
should reduce the percentage of revenues derived from North
America at GXT, but also increases the risks associated with
doing business in these markets.
For information concerning the geographic breakdown of our net
sales, see Note 14 of Notes to Consolidated Financial
Statements.
During 2003, we formed a strategic technology alliance with
Apache Corporation (Apache), a leading independent oil and gas
producer, to provide for cooperation between our two companies
in the development and deployment of next-generation seismic
imaging technology to selected projects within Apache’s
portfolio of oil and gas properties. No separate legal entity
has been formed, and, to date, this alliance has not imposed any
on-going legal obligations on either company.
Our initial efforts under the Apache arrangement have been
focused on using System Four land acquisition systems with
digital full-wave VectorSeis sensors and AZIM processing
techniques for subsurface imaging. This alliance has enabled us
to work directly with an oil and gas company to gain a better
understanding of its seismic challenges and opportunities and to
use that knowledge to make recommendations regarding technology
deployment. In working directly with oil and gas companies, we
believe that we have been able to stimulate end-user demand for
our VectorSeis products and technology, as well as for our
associated processing capabilities. In June 2004, Trace Energy
Services Ltd. purchased our first commercial System Four A/C
acquisition platform, which enables seismic data to be acquired
with either digital VectorSeis sensors or analog geophones in
any mix or configuration, even on the same survey. Trace used
this system to acquire data for Apache, among other oil and gas
companies.
Sales to customers are normally on standard net 30-day terms.
Also, in certain cases, we provide financing arrangements to
customers through short-term and long-term notes receivable.
Notes receivable, which are collateralized by the products sold,
bear interest at contractual rates ranging from 5.1% to
8.0% per year and are due at various dates through 2006.
The weighted average annual interest rate at December 31,
2004 was 6.6%. We have experienced problems from time to time in
the collectibility of certain of our financed sales receivables,
including in 2004. See Item 7. “Management’s
Discussion and Analysis of Financial Condition and Results of
Operations — Credit Risk.”
GXT’s customers include large oil companies, such as
British Petroleum, Total, ChevronTexaco, ExxonMobil, Statoil,
BHP and Pemex. During the year ended December 31, 2004, no
single GXT customer accounted for more than 10% of our
consolidated net sales.
GXT offers its services to customers on both an exclusive and a
multi-client basis. Through its processing and imaging services,
GXT develops images by applying its processing technology to
data owned or licensed by its customers. Under these
arrangements, its customers separately arrange and pay for
survey design, data collection, processing and imaging and
retain ownership of the data after image development.
10
GXT’s Integrated Seismic Solutions (ISS) service is
offered to customers on both a proprietary and multi-client
basis; in both cases, customers pre-fund the data acquisition
costs. With the proprietary service, the customer also pays for
the imaging and processing and has ownership of the data after
imaging. With the multi-client service, GXT will sometimes
assume the processing risk but retains ownership of or rights to
the data and images and receives on-going revenue from
subsequent license sales.
The majority of GXT’s services has been applied with
respect to Gulf of Mexico, West Africa and Trinidad properties.
Manufacturing Outsourcing and Suppliers
Since 2003, we have been increasing our use of contract
manufacturers in our Land and Marine Imaging Systems business
segments as an alternative to manufacturing our own products. We
may experience supply interruptions, cost escalations and
competitive disadvantages if we do not monitor these
relationships properly.
Our Land and Marine Imaging Systems contract manufacturers
purchase a substantial portion of the components used in our
systems and products from third-party vendors. Certain items,
such as integrated circuits used in our systems, are purchased
from sole source vendors. Although we and our contract
manufacturers attempt to maintain an adequate inventory of these
single source items, the loss of ready access to any of these
items could temporarily disrupt our ability to manufacture and
sell certain products. Since our components are designed for use
with these single source items, replacing the single source
items with functional equivalents could require a redesign of
our components and costly delays could result.
In December 2004 we transferred our Applied MEMS, Inc.
subsidiary and its business to Colibrys Ltd. (Colibrys), a Swiss
MEMS-based technology firm, in exchange for a 10% interest in
Colibrys. We also entered into a five-year supply agreement with
Colibrys. See Item 7. “Management’s Discussion
and Analysis of Financial Condition and Results of
Operations — 2004 Acquisitions and Dispositions.”
Applied MEMS manufactures micro-electro-mechanical system
(MEMS) products, including accelerometers, not only for our
VectorSeis sensors, but also for other applications, including
test and measurement, earthquake and structural monitoring and
defense. While we continue to believe that MEMS-based sensors
like our VectorSeis sensors will increasingly be used in seismic
imaging, we also believe that improvements in the design and
manufacture of MEMS technology will likely occur, which will
require additional financial and human capital to achieve. By
outsourcing our MEMS manufacturing operations to a MEMS-based
technology firm like Colibrys, we believe that we will be better
positioned to leverage the research and development of other
products and industries, improve gross margins on our
VectorSeis-based products, and reduce our future investment
requirements in MEMS technology. We have no further obligations
to fund Colibrys with regards to any mandatory assessments or
additional capital contribution requirements.
Competition
The market for seismic products and services is highly
competitive and is characterized by continual changes in
technology. Our principal competitor for land and marine seismic
equipment is Societe d’Etudes Recherches et Construction
Electroniques (Sercel), an affiliate of Compagnie General de
Geophysique (CGG). Unlike our company, Sercel possesses an
advantage of being able to sell to an affiliated seismic
contractor that operates both land crews and seismic acquisition
vessels, providing it with a greater ability to test new
technology in the field and to capture a captive internal market
for product sales. We also compete with other seismic equipment
companies on a product-by-product basis. Our ability to compete
effectively in the manufacture and sale of seismic instruments
and data acquisition systems depends principally upon continued
technological innovation, as well as prices, ability to access
third-party funding on behalf of our customers, reputation for
quality, and ability to deliver on schedule.
In recent years, there has been a trend among certain seismic
contractors to design, engineer, and manufacture seismic
acquisition technology in-house (or through a controlled network
of third-party vendors) in order to achieve real differentiation
versus their competition. WesternGeco (a seismic industry joint
venture of Schlumberger and Baker Hughes, two large integrated
oil field services and equipment companies) relies heavily on
in-house technology development for designing, engineering, and
manufacturing its “Q-Technology” platform, including
acquisition and processing systems. Although this technology
competes directly with I/O’s technology for marine
streamer, seabed, and land acquisition, WesternGeco does not
11
provide Q-Technology services to other seismic acquisition
contractors. Moving forward, there is a risk that other seismic
contractors may decide to in-source more seismic technology
development, which would put pressure on the demand for
I/O acquisition equipment.
GXT competes with more than a dozen processing companies that
are capable of providing pre-stack depth migration services to
the oil and gas companies. While the barriers to entry into this
market are relatively low, the barriers to competing at the
high-end of the advanced pre-stack depth migration market where
GXT focuses are significantly higher. At the top-end of the
pre-stack depth migration services market,
Veritas DGC Inc. and WesternGeco are GXT’s two
primary competitors for advanced imaging services. Both of these
companies are larger than GXT in terms of revenues, number of
processing locations, and sales and marketing resources. In
addition, Veritas and WesternGeco possess an advantage of being
part of affiliated seismic contractor companies, providing them
with access to both customer relationships and seismic datasets
that require processing.
Concept Systems is a leader in providing advanced data
integration software and services to seismic contractors
acquiring data using either towed streamer vessels or
ocean-bottom cable on the seabed. There are few sizeable
companies that provide third-party software and services which
compete directly with Concept Systems. Vessels or ocean-bottom
cable crews that do not use Concept Systems software either rely
upon manual data integration, reconciliation, and quality
control or, as is the case with WesternGeco, develop and
maintain their own proprietary software packages. There is a
risk that other seismic contractors may attempt to develop
software that competes directly with Concept Systems on their
own or in partnership with other contractors, or that
third-party software companies attempt to enter the market.
Intellectual Property
We rely on a combination of patents, copyrights, trademark,
trade secrets, confidentiality procedures and contractual
provisions to protect our proprietary technologies. Although our
portfolio of over 300 patents is considered important to
our operations, no one patent is considered essential to our
success.
Our patents, copyrights and trademarks 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. Third
parties routinely inquire and claim from time to time that we
have infringed upon their intellectual property rights. No
material liabilities have resulted from these claims to date.
Regulatory Matters
Our operations are subject to laws, regulations, government
policies and product certification requirements worldwide.
Changes in such laws, regulations, policies or requirements
could affect the demand for our products or result in the need
to modify products, which may involve substantial costs or
delays in sales and could have an adverse effect on our future
operating results. Our export activities are also subject to
extensive and evolving trade regulations. Certain countries are
subject to trade restrictions, embargoes and sanctions imposed
by the U.S. government. These restrictions and sanctions
prohibit or limit us from participating in certain business
activities in those countries.
Our operations are subject to numerous local, state and federal
laws and regulations in the United States and in foreign
jurisdictions concerning the containment and disposal of
hazardous materials, the remediation of contaminated properties
and the protection of the environment. We do not currently
foresee the need for significant expenditures to ensure our
continued compliance with current environmental protection laws.
Regulations in this area are subject to change, and there can be
no assurance that future laws or regulations will not have a
material adverse effect on us. Our customers’ operations
are also significantly impacted by laws and regulations
concerning the protection of the environment and endangered
species. For instance, many of our marine contractors have been
affected by regulations protecting marine mammals in the Gulf of
Mexico. To the extent that our customers’ operations are
disrupted by future laws and regulations, our business and
results of operations may be materially adversely affected.
12
Employees
As of December 31, 2004, we had 743 regular, full-time
employees, 492 of which were located in the U.S. From time
to time and on an as-needed basis, at certain business units we
supplement our regular workforce with individuals that we hire
temporarily or as independent contractors in order to meet
certain internal manufacturing needs. Our U.S. employees
are not represented by any collective bargaining agreement, and
we have never experienced a labor-related work stoppage. We
believe our employee relations are satisfactory.
Financial Information by Segment and Geographic Area
For a discussion of financial information by business segment
and geographic area, see Note 14 to Notes to
Consolidated Financial Statements.
Our primary operating facilities at December 31, 2004 were
as follows:
| |
|
|
|
|
| |
|
Square |
|
|
| Operating Facilities |
|
Footage |
|
Segment |
| |
|
|
|
|
|
Stafford, Texas
|
|
88,000 |
|
Land Imaging Systems |
|
Harahan, Louisiana
|
|
40,000 |
|
Marine Imaging Systems |
|
Voorschoten, The Netherlands
|
|
30,000 |
|
Land Imaging Systems |
|
Jebel Ali, Dubai, United Arab Emirates
|
|
17,000 |
|
Land Imaging Systems |
|
Denver, Colorado
|
|
30,000 |
|
Seismic Imaging Solutions |
|
Houston, Texas
|
|
75,000 |
|
Seismic Imaging Solutions |
|
Edinburgh, Scotland
|
|
12,000 |
|
Data Management Solutions |
| |
|
|
|
|
| |
|
292,000 |
|
|
| |
|
|
|
|
Each of these operating facilities is leased by us under a
long-term lease agreement. These lease agreements have terms
that expire ranging from 2005 to 2016. See Note 18 of
Notes to Consolidated Financial Statements.
In addition, we lease sales and support offices in Cranleigh,
Egham, and Norwich, England; Aberdeen, Scotland; Calgary,
Canada; Beijing, China and Moscow, Russia to support our global
sales force. Our executive headquarters (utilizing approximately
25,000 square feet) are located at 12300 Parc Crest Drive,
Stafford, Texas. The machinery, equipment, buildings and other
facilities owned and leased by us are considered by our
management to be sufficiently maintained and adequate for our
current operations.
|
|
| Item 3. |
Legal Proceedings |
On January 12, 2005, a purported class action lawsuit was
filed against I/ O, our chief executive officer, our chief
financial officer and the president of GXT in the
U.S. District Court for the Southern District of Texas,
Houston Division. The action, styled Harold Read,
individually and on behalf of all others similarly
situated v. Input/ Output, Inc, Robert P. Peebler, J.
Michael Kirksey, and Michael K. Lambert, alleges violations
of Sections 10(b) and 20(a) of the Securities Exchange Act
of 1934, and Rule 10b-5 thereunder. The action claimed to
be filed on behalf of purchasers of our common stock who
purchased shares during the period from May 10, 2004
through January 4, 2005. The complaint seeks damages in an
unspecified amount plus costs and attorneys’ fees. The
complaint alleges misrepresentations and omissions in public
announcements and filings concerning our business, sales and
products. On February 4 and 10, 2005, and March 15,
2005, three similar lawsuits were filed in the
U.S. District Court for the Southern District of Texas,
Houston Division. The three complaints, styled Matt Brody,
individually and on behalf of all others similarly
situated v. Input/ Output, Inc, Robert P. Peebler and
J. Michael Kirksey, and Giovanni Arca vs. Input/
Output, Inc., Robert P. Peebler, J. Michael Kirksey, and
Michael K. Lambert, and Schneur Grossberger, individually
and on behalf of all others similarly situated v.
Input/Output, Inc., Robert P. Peebler, J. Michael Kirksey, and
Michael K. Lambert, contain factual allegations similar to
those in the Read complaint. The Brody complaint,
however, contains additional allegations that the defendants
failed to disclose or misrepresented that (1) our products
were defective, (2) customers were wrongfully induced into
buying our products and (3) I/ O
13
violated Generally Accepted Accounting Principles and SEC rules
by failing to properly report and disclose the allegedly illegal
nature of its revenue during the proposed class period. The
Brody case is the only of the purported class action
cases where the defendants have been served with process. A
stipulation of the parties has been filed in the Brody
case that provides (i) the plaintiffs shall move
pursuant to the Private Securities Litigation Reform Act for
appointment of lead plaintiff and lead counsel on or before
March 14, 2005, (ii) the plaintiffs shall file a
consolidated class action complaint within 45 days after
the entry of an order appointing lead plaintiff and lead
counsel, (iii) the defendants shall answer or otherwise
respond within 45 days after a consolidated complaint is
filed, and (iv) if any defendant moves to dismiss the
consolidated complaint, then the response to the motion will be
filed within 45 days and the defendants will have
30 days to file a reply. No discovery has been conducted by
the parties in any of the cases, and discovery will be stayed
should the defendants file a motion to dismiss until there is a
ruling on that motion. Based on our review of the complaints, we
believe the lawsuits are without merit and intend to defend the
Company and our officers named as parties vigorously. However,
we are unable to determine whether the ultimate resolution of
these cases will have a material adverse impact on our financial
condition, results of operations of liquidity.
In October 2002, we filed a lawsuit against Paulsson Geophysical
Services, Inc. (“PGSI”) and its owner in the 286th
District Court for Fort Bend County, Texas, seeking
recovery of approximately $0.7 million that was unpaid and
due to us resulting from the manufacture and sale of a custom
product that PGSI had asked us to construct in 2001. In 2002, we
fully reserved for all amounts due from PGSI with regard to this
sale. After we filed suit to recover the PGSI receivable, PGSI
alleged that the delivered custom product was defective and
counter-claimed against us, asserting breach of contract, breach
of warranty and other related causes of action. The case was
tried to a jury during May 2004. The jury returned a verdict in
June 2004, the results of which would not have supported a
judgment awarding damages to either us or the defendants under
Texas law. In August 2004, the presiding judge overruled the
jury verdict and ordered a new trial. We and the defendants have
not yet scheduled a new trial and continue to discuss the
dispute. We continue to believe that the ultimate resolution of
the case will not have a material adverse impact on our
financial condition or liquidity.
We have also been named in various lawsuits or threatened
actions that are incidental to our ordinary business. Litigation
is inherently unpredictable. Any claims against us, whether
meritorious or not, could be time consuming, cause us to incur
costs and expenses, require significant amounts of management
time and result in the diversion of significant operational
resources. The results of these lawsuits and actions cannot be
predicted with certainty. We believe that the ultimate
resolution of these matters will not have a material adverse
impact on our financial condition or liquidity.
|
|
| Item 4. |
Submission of Matters to a Vote of Security Holders |
Not applicable.
14
PART II
|
|
| Item 5. |
Market for the Registrant’s Common Equity, Related
Stockholder Matters and Issuer Purchases of Equity
Securities |
General
Our common stock trades on the New York Stock Exchange
(NYSE) under the symbol “IO”. The following table
sets forth the high and low sales prices of the common stock for
the periods indicated, as reported in NYSE composite tape
transactions.
| |
|
|
|
|
|
|
|
|
|
| |
|
Price Range | |
| |
|
| |
| Period |
|
High | |
|
Low | |
| |
|
| |
|
| |
|
Year ended December 31, 2004
|
|
|
|
|
|
|
|
|
| |
Fourth Quarter
|
|
$ |
10.84 |
|
|
$ |
6.30 |
|
| |
Third Quarter
|
|
|
11.22 |
|
|
|
7.89 |
|
| |
Second Quarter
|
|
|
9.60 |
|
|
|
6.38 |
|
| |
First Quarter
|
|
|
7.82 |
|
|
|
4.55 |
|
|
Year ended December 31, 2003
|
|
|
|
|
|
|
|
|
| |
Fourth Quarter
|
|
$ |
4.90 |
|
|
$ |
3.30 |
|
| |
Third Quarter
|
|
|
6.00 |
|
|
|
3.61 |
|
| |
Second Quarter
|
|
|
5.76 |
|
|
|
2.91 |
|
| |
First Quarter
|
|
|
4.79 |
|
|
|
3.40 |
|
We have not historically paid, and do not intend to pay in the
foreseeable future, cash dividends on our common stock. We
presently intend to retain cash from operations for use in our
business, with any future decision to pay cash dividends on our
common stock dependent upon our growth, profitability, financial
condition and other factors our board of directors consider
relevant. Our losses from operations in recent years have also
inhibited our ability to pay dividends on our common stock. See
Item 6. “Selected Financial Data.”
In February 2005 we issued 30,000 shares of our newly
designated Series D-1 Cumulative Convertible Preferred
Stock, which accrues cumulative dividends at a minimum rate of
5% per annum, payable quarterly. These dividends may be
paid, at our election, in cash or shares of registered common
stock. So long as any shares of Series D-1 Preferred Stock
are outstanding, we may not pay any dividends in cash or
property to holders of our common stock, and may not purchase or
redeem for cash or property any common stock, unless there are
no arrearages in dividends paid on the Series D-1 Preferred
Stock and sufficient cash has been set aside to pay dividends on
the Series D-1 Preferred Stock for the next four quarterly
dividend periods. See Item 7. “Management’s
Discussion and Analysis of Financial Condition and Results of
Operations — Liquidity and Capital Resources.”
On December 31, 2004, there were 782 holders of record of
our common stock.
Issuer Purchase of Equity Securities
During the three months ended December 31, 2004, in
connection with the lapse of restrictions on shares of
restricted stock held by one of our employees, we acquired
shares of restricted stock in satisfaction of tax
15
withholding obligations that were incurred on the vesting date.
The time of acquisition, number of shares and average effective
acquisition price per share, were as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
(d) | |
| |
|
|
|
|
|
(c) | |
|
Maximum Number | |
| |
|
|
|
|
|
Total Number of | |
|
(or Approximate | |
| |
|
|
|
|
|
Shares Purchased | |
|
Dollar Value) of | |
| |
|
|
|
|
|
as Part of | |
|
Shares That May Yet | |
| |
|
(a) | |
|
(b) | |
|
Publicly | |
|
Be Purchased under | |
| |
|
Total Number of | |
|
Average Price Paid | |
|
Announced Plans | |
|
the Plans or | |
| Period |
|
Shares Acquired | |
|
Per Share | |
|
or Programs | |
|
Programs | |
| |
|
| |
|
| |
|
| |
|
| |
|
October 1 to
October 31, 2004
|
|
|
None |
|
|
|
None |
|
|
|
Not applicable |
|
|
|
Not applicable |
|
|
November 1 to November 30, 2004
|
|
|
1,323 |
|
|
$ |
8.36 |
|
|
|
Not applicable |
|
|
|
Not applicable |
|
|
December 1 to December 31, 2004
|
|
|
None |
|
|
|
None |
|
|
|
Not applicable |
|
|
|
Not applicable |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
Total
|
|
|
1,323 |
|
|
$ |
8.36 |
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
Equity Compensation Plan Information
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
Number of Securities | |
| |
|
|
|
|
|
Remaining Available | |
| |
|
|
|
|
|
for Future Issuance | |
| |
|
Number of Securities | |
|
|
|
Under Equity | |
| |
|
to Be Issued | |
|
Weighted-Average | |
|
Compensation Plans | |
| |
|
Upon Exercise of | |
|
Exercise Price of | |
|
(Excluding Securities | |
| |
|
Outstanding Options, | |
|
Outstanding Options, | |
|
Reflected in | |
| |
|
Warrants and Rights | |
|
Warrants and Rights | |
|
Column (a)) | |
| Plan Category |
|
(a) | |
|
(b) | |
|
(c) | |
| |
|
| |
|
| |
|
| |
|
Equity Compensation Plans Approved by Security
Holders(1)
|
|
|
6,524,600 |
|
|
$ |
6.95 |
|
|
|
827,042 |
|
|
Equity Compensation Plans Not Approved by Security
Holders(2)
|
|
|
789,000 |
|
|
$ |
6.79 |
|
|
|
131,971 |
|
| |
|
|
|
|
|
|
|
|
|
| |
Total
|
|
|
7,313,600 |
|
|
|
|
|
|
|
959,013 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
| (1) |
Consists of nine plans: our Amended and Restated 1990 Stock
Option Plan, our Amended and Restated 1991 Outside
Directors Stock Option Plan, our Amended and Restated 1996
Non-Employee Director Stock Option Plan, our 1998 Restricted
Stock Plan, our 2000 Long-Term Incentive Plan, our Employee
Stock Purchase Plan, our 2003 Stock Option Plan, our 2004
Long-Term Incentive Plan and our GX Technology Corporation
Employee Stock Option Plan. |
| |
| (2) |
Consists of four plans and programs: our Non-Employee
Director’s Retainer Plan, our 2000 Restricted Stock Plan,
our Concept Systems Employment Inducement Stock Option Program
and our GX Technology Corporation Employment Inducement Stock
Option Program. |
For more information regarding our stock option plans and plan
activity for the years ended December 31, 2004, 2003 and
2002, see Note 13 of Notes to Consolidated Financial
Statements.
16
|
|
| Item 6. |
Selected Financial Data |
The selected consolidated financial data set forth below with
respect to our consolidated statements of operations for the
years ended December 31, 2004, 2003, 2002 and 2001, the
seven months ended December 31, 2000 and the fiscal year
ended May 31, 2000, and with respect to our consolidated
balance sheets at December 31, 2004, 2003, 2002, 2001 and
2000 and May 31, 2000 have been derived from our audited
consolidated financial statements. Also, our results of
operations and financial condition have been affected by
acquisitions of companies and significant charges during the
periods presented, which may affect the comparability of the
financial information. For more information on our acquisitions
and a tabular presentation of significant charges, see
Notes 2 and 21, respectively, of Notes to
Consolidated Financial Statements. This information should
not be considered as being necessarily indicative of future
operations, and be should read in conjunction with Item 7.
“Management’s Discussion and Analysis of Financial
Condition and Results of Operations” and the consolidated
financial statements and the notes thereto included elsewhere in
this Form 10-K.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
Seven Months | |
|
|
| |
|
Years Ended December 31, | |
|
Ended | |
|
Year Ended | |
| |
|
| |
|
December 31, | |
|
May 31, | |
| |
|
2004 | |
|
2003 | |
|
2002 | |
|
2001 | |
|
2000 | |
|
2000 | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
| |
|
(In thousands, except per share data) | |
|
Statement of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$ |
247,299 |
|
|
$ |
150,033 |
|
|
$ |
118,583 |
|
|
$ |
212,050 |
|
|
$ |
78,317 |
|
|
$ |
121,454 |
|
|
Cost of sales
|
|
|
175,705 |
|
|
|
122,192 |
|
|
|
101,018 |
|
|
|
139,478 |
|
|
|
59,582 |
|
|
|
109,329 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Gross profit
|
|
|
71,594 |
|
|
|
27,841 |
|
|
|
17,565 |
|
|
|
72,572 |
|
|
|
18,735 |
|
|
|
12,125 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses (income):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
19,611 |
|
|
|
18,696 |
|
|
|
28,756 |
|
|
|
29,442 |
|
|
|
16,051 |
|
|
|
28,625 |
|
|
Marketing and sales
|
|
|
23,758 |
|
|
|
12,566 |
|
|
|
11,218 |
|
|
|
11,657 |
|
|
|
5,506 |
|
|
|
8,757 |
|
|
General and administrative
|
|
|
29,748 |
|
|
|
16,753 |
|
|
|
19,760 |
|
|
|
19,695 |
|
|
|
8,127 |
|
|
|
21,885 |
|
|
(Gain) loss on sale of assets
|
|
|
(3,980 |
) |
|
|
(291 |
) |
|
|
425 |
|
|
|
70 |
|
|
|
585 |
|
|
|
114 |
|
|
Impairment of long-lived assets
|
|
|
— |
|
|
|
1,120 |
|
|
|
6,274 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
Goodwill impairment
|
|
|
— |
|
|
|
— |
|
|
|
15,122 |
|
|
|
— |
|
|
|
— |
|
|
|
31,596 |
|
|
Amortization of goodwill
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
3,873 |
|
|
|
2,157 |
|
|
|
6,732 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Total operating expenses
|
|
|
69,137 |
|
|
|
48,844 |
|
|
|
81,555 |
|
|
|
64,737 |
|
|
|
32,426 |
|
|
|
97,709 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
|
2,457 |
|
|
|
(21,003 |
) |
|
|
(63,990 |
) |
|
|
7,835 |
|
|
|
(13,691 |
) |
|
|
(85,584 |
) |
|
Interest expense
|
|
|
(6,231 |
) |
|
|
(4,087 |
) |
|
|
(3,124 |
) |
|
|
(695 |
) |
|
|
(627 |
) |
|
|
(826 |
) |
|
Interest income
|
|
|
1,276 |
|
|
|
1,903 |
|
|
|
2,280 |
|
|
|
4,685 |
|
|
|
4,583 |
|
|
|
4,930 |
|
|
Fair value adjustment and exchange of warrant obligation
|
|
|
— |
|
|
|
1,757 |
|
|
|
3,252 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
Impairment of investment
|
|
|
— |
|
|
|
(2,059 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
Other income (expense)
|
|
|
220 |
|
|
|
685 |
|
|
|
(373 |
) |
|
|
644 |
|
|
|
761 |
|
|
|
1,420 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
|
(2,278 |
) |
|
|
(22,804 |
) |
|
|
(61,955 |
) |
|
|
12,469 |
|
|
|
(8,974 |
) |
|
|
(80,060 |
) |
|
Income tax expense (benefit)
|
|
|
701 |
|
|
|
348 |
|
|
|
56,770 |
|
|
|
3,128 |
|
|
|
1,332 |
|
|
|
(6,097 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
(2,979 |
) |
|
|
(23,152 |
) |
|
|
(118,725 |
) |
|
|
9,341 |
|
|
|
(10,306 |
) |
|
|
(73,963 |
) |
|
Preferred dividend
|
|
|
— |
|
|
|
— |
|
|
|
947 |
|
|
|
5,632 |
|
|
|
3,051 |
|
|
|
4,557 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) applicable to common shares
|
|
$ |
(2,979 |
) |
|
$ |
(23,152 |
) |
|
$ |
(119,672 |
) |
|
$ |
3,709 |
|
|
$ |
(13,357 |
) |
|
$ |
(78,520 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net income (loss) per common share
|
|
$ |
(0.05 |
) |
|
$ |
(0.45 |
) |
|
$ |
(2.35 |
) |
|
$ |
0.07 |
|
|
$ |
(0.26 |
) |
|
$ |
(1.55 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares outstanding
|
|
|
65,961 |
|
|
|
51,237 |
|
|
|
51,015 |
|
|
|
51,166 |
|
|
|
50,840 |
|
|
|
50,716 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net income (loss) per common share
|
|
$ |
(0.05 |
) |
|
$ |
(0.45 |
) |
|
$ |
(2.35 |
) |
|
$ |
0.07 |
|
|
$ |
(0.26 |
) |
|
$ |
(1.55 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of diluted shares outstanding
|
|
|
65,961 |
|
|
|
51,237 |
|
|
|
51,015 |
|
|
|
52,309 |
|
|
|
50,840 |
|
|
|
50,716 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
Seven Months | |
|
|
| |
|
Years Ended December 31, | |
|
Ended | |
|
Year Ended | |
| |
|
| |
|
December 31, | |
|
May 31, | |
| |
|
2004 | |
|
2003 | |
|
2002 | |
|
2001 | |
|
2000 | |
|
2000 | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
| |
|
(In thousands, except per share data) | |
|
Balance Sheet Data (end of year):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Working capital
|
|
$ |
109,075 |
|
|
$ |
133,467 |
|
|
|
$114,940 |
|
|
$ |
204,600 |
|
|
$ |
181,366 |
|
|
$ |
183,412 |
|
|
Total assets
|
|
|
479,116 |
|
|
|
249,204 |
|
|
|
249,594 |
|
|
|
387,335 |
|
|
|
365,633 |
|
|
|
381,769 |
|
|
Notes payable and current maturities of long-term debt and lease
obligations
|
|
|
6,564 |
|
|
|
2,687 |
|
|
|
2,142 |
|
|
|
2,312 |
|
|
|
1,207 |
|
|
|
1,154 |
|
|
Long-term debt and lease obligations, net of current maturities
|
|
|
79,387 |
|
|
|
78,516 |
|
|
|
51,430 |
|
|
|
20,088 |
|
|
|
7,077 |
|
|
|
7,886 |
|
|
Stockholders’ equity
|
|
|
314,512 |
|
|
|
133,764 |
|
|
|
152,486 |
|
|
|
331,037 |
|
|
|
325,403 |
|
|
|
335,015 |
|
|
Other Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
$ |
5,022 |
|
|
$ |
4,587 |
|
|
$ |
8,230 |
|
|
$ |
9,202 |
|
|
$ |
2,837 |
|
|
$ |
3,077 |
|
|
Investment in multi-client library
|
|
|
4,168 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
Depreciation and amortization (other than multi-client library)
|
|
|
18,345 |
|
|
|
11,444 |
|
|
|
13,237 |
|
|
|
17,535 |
|
|
|
11,448 |
|
|
|
22,835 |
|
|
Amortization of multi-client library
|
|
|
6,323 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
| Item 7. |
Management’s Discussion and Analysis of Financial
Condition and Results of Operations |
Note: The following should be read in conjunction with
our Consolidated Financial Statements and related notes that
appear elsewhere in this Annual Report on Form 10-K.
Executive Summary
We are a leading seismic services company, providing seismic
data acquisition equipment, software and planning and seismic
processing services to the global oil and gas industry.
During 2004, through two significant acquisitions, we continued
to execute our strategy to reposition our business from being
primarily an equipment and technology provider to offering our
customers full-seismic imaging solutions. In February 2004, we
acquired Concept Systems Holdings Limited (Concept Systems), an
Edinburgh, Scotland-based provider of software, systems and
services for towed streamer, seabed and land seismic operations.
In June 2004, we acquired Houston-based GX Technology
Corporation (GXT), a leading provider of seismic imaging
technology, data processing and subsurface imaging services to
oil and gas companies. Both acquisitions were completed as part
of our strategy to expand the range of products and services we
can provide to our existing customers and new end-user
customers. We now have four business segments: Land Imaging
Systems, Marine Imaging Systems, Data Management Solutions and
Seismic Imaging Solutions.
These acquisitions, along with an increase in demand for our
traditional products due to improvements in industry conditions
and our introduction of new products, had a positive impact on
our 2004 results of operations. Our overall margins improved as
new higher-margin products, reductions in costs, and our
outsourcing activities all contributed to improved gross profit
margins. Certain of our traditional product lines —
particularly our Sensor geophone business and our Digicourse
marine instrumentation business — and Concept
Systems’ business, had very good years. During 2004, we
accomplished two product introductions — our
VectorSeis Ocean seabed acquisition system and our new
digital/analog version of our System Four land acquisition
system, System Four Digital-Analog. We continued to implement
our program to reduce our unit costs and outsource our
manufacturing activities where we could. In June, we sold our
inactive Alvin, Texas facility that we had shut down in 2003,
and, most recently, in December, we transferred our Applied MEMS
business to Colibrys Ltd. (Colibrys), a Swiss-based designer and
contract manufacturer of micro-electro-mechanical systems, in
exchange for an approximate 10% equity position in Colibrys.
However, we continued to experience uneven results of operations
from period to period. Our 2004 results of operations, while
improved from 2003’s results, still reflected some of the
cautiousness and long cycle times experienced in the energy
seismic industry for adoption of new technologies and products,
and uncertainties as
18
to the predictability and dependability of sustained revenue
levels from product and service sales. Factors that contributed
to our performance in 2004 were:
|
|
|
| |
• |
unexpected delays in sales caused by various factors, including
slower-than-expected permitting for seismic shoots, |
| |
| |
• |
exploration and production companies focusing their
discretionary budgetary expenditures for the second half of 2004
on development of known prospects instead of exploration
projects, |
| |
| |
• |
the uncertainties inherent in international sales, |
| |
| |
• |
the sales mix of our products and services in certain
quarters, and |
| |
| |
• |
although demand was increasing, a continuing tendency on the
part of our traditional seismic contractor customers to curtail
their capital expenditures for our newer products and services
until the backlog for the contractors’ services improves. |
Particularly impacting our results of operations within our
Marine Imaging Systems business segment for 2004 was our
third-quarter $5.2 million write-down of the accounts and
notes receivables due from one of our Russian-based customers,
Laboratory of Regional Geodynamics, Limited (LARGE). LARGE is a
subsidiary of Yukos, a Russian energy company which experienced
financial difficulties during 2004. We do not currently extend
long-term sales financing to customers based in Russia.
In terms of how our execution translated into financial
performance, the following provides our overview of key fiscal
2004 financial metrics for our company as a whole and our four
business segments:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
Land | |
|
Marine | |
|
Data | |
|
Seismic | |
|
|
| |
|
I/O | |
|
Imaging | |
|
Imaging | |
|
Management | |
|
Imaging | |
|
|
| |
|
Consolidated | |
|
Systems | |
|
Systems | |
|
Solutions | |
|
Solutions | |
|
Other | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
Net sales
|
|
$ |
247,299 |
|
|
$ |
126,041 |
|
|
$ |
54,680 |
|
|
$ |
14,797 |
|
|
$ |
50,673 |
|
|
$ |
1,108 |
|
|
Year over year net % change in net sales
|
|
|
65 |
% |
|
|
17 |
% |
|
|
53 |
% |
|
|
— |
|
|
|
— |
|
|
|
28 |
% |
|
Income (loss) from operations
|
|
$ |
2,457 |
|
|
$ |
17,643 |
|
|
$ |
4,596 |
|
|
$ |
3,200 |
|
|
$ |
(2,368 |
) |
|
$ |
(20,614 |
) |
|
Net loss
|
|
$ |
(2,979 |
) |
|
|
* |
|
|
|
* |
|
|
|
* |
|
|
|
* |
|
|
|
* |
|
|
Basic and diluted loss per common share
|
|
$ |
(0.05 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
| * |
Net income (loss) by business segment is not considered a key
financial metric. |
Cash and cash equivalents for the fiscal year ended
December 31, 2004 totaled $14.9 million, a decline of
$44.6 million from the December 31, 2003 balance of
$59.5 million. We raised $150.1 million in June 2004
through an underwritten offering of 22.9 million shares of
our common stock. We used approximately $176.9 million of
cash for business acquisitions in 2004. The decline in our cash
position during 2004 was due primarily to these acquisitions and
the cash used in our operations, mainly through increases in our
accounts receivables and inventories. In February 2005, we
issued 30,000 shares of a newly designated Series D-1
Cumulative Convertible Preferred Stock in a privately-negotiated
transaction with a private investment firm, Fletcher Investment
Ltd., and received $30.0 million in proceeds. The issuance
of this preferred stock was considered by our management to be
advisable to secure additional capital for our general corporate
purposes, including working capital and potential business
opportunities.
Our ability to produce positive cash flows from operations and
consistent levels of profitability, to grow our business and to
service our debt and our other obligations, will depend on
returning GXT to profitability, as well as the success of our
efforts in marketing and business development to accelerate the
rate of diffusion of our new products and services into the
marketplace, achieving improvements in the balance of sales in
our GXT product and service lines, introducing and
technologically enhancing our products and services offered,
penetrating new markets for our products and services,
continuing to improve our margins on our sales and continuing to
reduce our overall costs.
19
We intend the discussion of our financial condition and results
of operations that follows to provide information that will
assist in understanding our consolidated financial statements,
the changes in certain key items in those financial statements
from year to year, and the primary factors that accounted for
those changes, as well as how certain accounting principles,
policies and estimates affect our consolidated financial
statements.
For a discussion of factors that could impact our future
operating results and financial condition, see the section
entitled “Risk Factors” below.
2004 Acquisitions and Dispositions
In February 2004, we purchased all of the share capital of
Concept Systems. The purchase price was approximately
$49.8 million, consisting of $39.0 million in cash
(including acquisition costs) and 1.68 million shares of
our common stock valued at approximately $10.8 million. We
granted to certain Concept Systems key employees inducement
stock options to purchase up to 365,000 shares of our
common stock at an exercise price of $6.42 per share (the
then-current closing sales price per share on the NYSE). These
options vest over a four-year period. Concept Systems was
acquired as a part of our strategy to develop solutions that
integrate data from multiple seismic sub-systems, including
source, source control, positioning, and recording in land,
towed streamer and seabed environments.
In June 2004, we acquired all of the outstanding capital stock
of GXT. The purchase price was approximately
$152.5 million, comprised of $137.9 million in cash
(including acquisition costs), and our assumption of certain GXT
stock options, which now represent fully vested options to
purchase up to 2.9 million shares of I/ O common stock, and
GXT indebtedness of approximately $6.1 million. We also
issued to certain GXT key employees inducement stock options to
purchase up to 434,000 shares of our common stock at an
exercise price of $7.09 per share (the then-current closing
sales price per share on the NYSE) vesting over a four-year
period. We acquired GXT to further our strategy to expand the
range of product and service offerings we can provide to our
customers, and to better penetrate new markets; we are now
better positioned to offer a range of seismic imaging solutions
that integrate both seismic acquisition equipment and seismic
imaging and data processing services.
We funded the Concept Systems acquisition from our cash on hand
and proceeds from our $60.0 million issuance of
5.5% convertible senior notes in December 2003. Cash for
the GXT acquisition was provided from the proceeds of our June
2004 underwritten common stock offering of 22.9 million
shares for $150.1 million in net proceeds.
In December 2004, we announced that we had sold all of the
capital stock of Applied MEMS, Inc., our wholly-owned
subsidiary, to Colibrys Ltd., a privately-held firm based in
Switzerland. Applied MEMS manufactures
micro-electro-mechanical-systems (MEMS) accelerometers used
in our VectorSeis digital, full-wave seismic sensors, as well as
products for applications that include test and measurement,
earthquake and structural monitoring and defense. In exchange
for the stock of Applied MEMS, we received shares of Colibrys
equal to approximately 10% of the outstanding equity of
Colibrys, and the right to designate one member of the board of
directors of Colibrys. To protect our intellectual property
rights, we retained ownership of our MEMS intellectual property,
and have licensed that intellectual property to Colibrys on a
royalty-free basis. Additionally, we received preferential
rights to Colibrys’ MEMS technology for seismic
applications involving natural resource extraction. We also
entered into a five-year supply agreement with Colibrys and
Applied MEMS, which requires them to supply us with the MEMS
accelerometers used in our VectorSeis sensors at agreed prices
that are consistent with market prices. We have agreed to
provide Applied MEMS with transition services for a period of
time.
Results of Operations
|
|
|
Year Ended December 31, 2004 Compared to Year Ended
December 31, 2003 |
Net Sales: Net sales of $247.3 million for the year
ended December 31, 2004 increased $97.3 million
compared to the corresponding period last year. Approximately
39% of this increase in net sales was primarily due to increases
within our historical Land and Marine Imaging Systems segments.
Net sales within our Land Imaging Systems segment increased
$18.4 million to $126.0 million compared to the
corresponding period of
20
last year. The increase is primarily due to an increase in sales
of our Sensor geophones. Our Marine Imaging Systems’ net
sales increased $19.0 million to $54.7 million
compared to the segment’s net sales for 2003. The increase
was primarily due to sales revenues from our first VectorSeis
Ocean-Bottom acquisition system contract. Total VectorSeis land
and marine system sales were a combined $31 million in
2004, an approximate $10 million increase from the
corresponding period last year; however, we fell short of our
2004 goal of $40 million.
The remaining 61% of our increase in net sales was due to our
acquisitions of GXT and Concept Systems. During the year ended
December 31, 2004, GXT and Concept Systems contributed
$44.3 million and $14.8 million, respectively, to our
net sales. For a further discussion of the acquisitions of GXT
and Concept Systems, see “2004 Acquisitions and
Dispositions” above and Note 2 of Notes to
Consolidated Financial Statements. GXT’s processing
revenues were negatively affected due to lower levels of
spending by oil and gas companies in the Gulf of Mexico during
the second half of 2004; however, GXT’s backlog has
increased in the first quarter of 2005 compared to the fourth
quarter of 2004. Also, certain multi-client data library
projects were delayed into 2005 due to international permitting
issues.
Gross Profit and Gross Profit Percentage: Gross profit of
$71.6 million for the year ended December 31, 2004
increased by $43.8 million over our gross profit in 2003.
Gross profit percentage for the year ended December 31,
2004 was 29% compared to 19% in 2003. The improvement in gross
profit was driven mainly by (i) contributions from Concept
Systems, (ii) overall improvement in margins within our
Marine Imaging Systems segment and (iii) follow-on sales of
VectorSeis System Four land acquisition systems and the first
five sales of our System Four Digital/ Analog land acquisition
systems by our Land Imaging Systems segment. Due to an increase
in warranty expenses incurred on new products in the second half
of 2004, we fell short of our 2004 goal of gross margins in the
low 30’s. Negatively impacting gross profits in 2003 was a
$2.5 million write-down of equipment associated with our
first generation radio-based VectorSeis land acquisition system.
Research and Development: Research and development
expense of $19.6 million for the year ended
December 31, 2004 increased $0.9 million compared to
the corresponding period last year. This increase is principally
due to our acquisitions of GXT and Concept Systems in 2004,
which together added $3.5 million to our research and
development expenses. Excluding these expenses for GXT and
Concept Systems, our research and development expenses decreased
approximately $2.6 million in 2004, primarily due to our
entering the commercialization phase of certain of our new
products. For a discussion of our significant product research
and development programs in 2005, see Item 1.
“Business — Product Research and
Development.”
Marketing and Sales: Marketing and sales expense of
$23.8 million for the year ended December 31, 2004
increased $11.2 million over 2003’s marketing and
sales expense. The increase is primarily a result of the
acquisitions of GXT and Concept Systems, which together added
$7.3 million to our marketing and sales expense. Excluding
these expenses of GXT and Concept Systems, our sales and
marketing expenses increased approximately $3.9 million,
primarily related to an increase in sales commissions resulting
from an increase in sales, an increase in corporate marketing
and advertising expenses and expenses related to the opening of
our sales representative office in Moscow.
General and Administrative: General and administrative
expense of $29.7 million for the year ended
December 31, 2004 increased $13.0 million compared to
2003’s level. The increase in general and administrative
expense is related primarily to our Marine Imaging Systems’
$5.2 million provision for doubtful accounts and notes
associated with our receivables due from LARGE. See further
discussion at Note 3 of Notes to Consolidated Financial
Statements. The remainder of the increase is primarily
attributed to our acquisitions of GXT and Concept Systems, which
together added $4.0 million to our general and
administrative expenses, in addition to an increase in legal
fees associated with various ongoing legal matters in the
ordinary course of business and fees associated with the
implementation of requirements under the Sarbanes-Oxley Act of
2002.
Gain on Sale of Assets: Gain on sale of assets of
$4.0 million for the year ended December 31, 2004
primarily related to the sales of our Alvin, Texas manufacturing
facility and an undeveloped tract of land across from our
headquarters in Stafford, Texas. Additionally, $0.4 million
of the gain on sale of assets relates to our sale of Applied
MEMS. For a further discussion of our sale of Applied MEMS, see
“2004 Acquisitions and Dispositions” above and
Note 8 of Notes to Consolidated Financial Statements.
21
Impairment of Long-Lived Assets: Impairment of long-lived
assets of $1.1 million for the year ended December 31,
2003 relates to the cancellation of a solid streamer project
within the Marine Imaging Systems segment. As such, certain
assets were impaired and other related assets and costs were
written off. There was no comparable charge during the year
ended December 31, 2004.
Net Interest Expense: Total net interest expense of
$5.0 million for the year ended December 31, 2004
increased $2.8 million, compared to 2003. The increase is
largely due to the issuance of $60.0 million of our
convertible senior notes in December 2003. In addition, at
December 31, 2004, GXT had $6.5 million of
indebtedness outstanding under its equipment loans.
Fair Value Adjustment of Warrant Obligation: The fair
value adjustment of warrant obligation totaling
$1.8 million in 2003 was due to a change in fair value
between January 1, 2003 and December 10, 2003 of a
previously outstanding common stock warrant. This warrant was
exchanged for 125,000 shares of our common stock in
December 2003, and cancelled.
Impairment of Investment: Impairment of investment of
$2.1 million for the year ended December 31, 2003
related to the write-down of our investment in Energy Virtual
Partners, Inc. (EVP) to its approximate liquidation value
of $1.0 million.
Income Tax Expense: Income tax expense for the year ended
December 31, 2004 was $0.7 million compared to
$0.3 million for the year ended December 31, 2003.
Income tax expense for the year ended December 31, 2003
reflected the effect of a $1.2 million federal tax refund.
Excluding this refund, income tax expense for the years ended
December 31, 2004 and 2003 reflected only state and foreign
taxes, since we continue to maintain a valuation allowance for
substantially all of our net deferred tax assets.
|
|
|
Year Ended December 31, 2003 Compared to Year Ended
December 31, 2002 |
Net Sales: Net sales of $150.0 million for the year
ended December 31, 2003 increased $31.5 million, or
27%, compared to the corresponding period last year. Land
Imaging System’s net sales increased $45.5 million, or
73%, to $107.7 million compared to $62.2 million last
year. The increase was due to an increase in land seismic
activity with our non-Western contractors, primarily in China
and the CIS. Marine Imaging Systems’ net sales decreased
$17.7 million, or 33%, to $35.7 million compared to
$53.4 million last year. The decrease was due to continued
overcapacity and reduction in capital spending in the marine
contractor market. AXIS’ net sales for the twelve months
ended December 31, 2003 were $5.8 million compared to
$2.2 million recorded from the date of acquisition in July
2002 to the end of 2002.
Gross Profit and Gross Profit Percentage: Gross profit of
$27.8 million for the year ended December 31, 2003
increased $10.3 million, or 59%, compared to the
corresponding period last year. Gross profit percentage for the
year ended December 31, 2003 was 19% compared to 15% for
the year ended December 31, 2002. The improvement in gross
profit was driven mainly by volume improvements as well sales of
our higher-margin VectorSeis System Four land acquisition system
which was commercialized in early 2003. Our gross profit
percentage for the year ended December 31, 2003 was
negatively impacted in part due to a charge of $2.5 million
related to the write-down of equipment associated with our first
generation radio-based VectorSeis land acquisition systems to
its net realizable value, and inventory-related charges of
$1.0 million. Inventory related charges for the year ended
December 31, 2002 were $4.3 million.
Research and Development: Research and development
expense of $18.7 million for the year ended
December 31, 2003 decreased $10.1 million, or 35%,
compared to the corresponding period last year. This decrease
primarily reflects reduced staffing levels, the cancellation of
our marine solid streamer project, the entrance into the
commercial phase of our VectorSeis System Four land acquisition
system and a reduction of rent expense (primarily associated
with our vacated Austin, Texas software development facility).
For the year ended December 31, 2002, we incurred charges
of $1.3 million relating to the closure of this facility.
Included in research and development expenses for the year ended
December 31, 2003 is $0.4 million of severance costs
compared to $0.8 million for the year ended
December 31, 2002. For the year ended December 31,
2003, we incurred $0.2 million of expenses related to the
cancellation of our solid streamer project within our Marine
Imaging Systems segment.
Marketing and Sales: Marketing and sales expense of
$12.6 million for the year ended December 31, 2003
increased $1.3 million, or 12%, compared to the
corresponding period last year. The increase was
22
primarily related to higher sales and commissions on sales and
due to the opening of our sales representative office in
Beijing, China.
General and Administrative: General and administrative
expense of $16.8 million for the year ended
December 31, 2003 decreased $3.0 million, or 15%,
compared to the corresponding period last year. The decrease in
general and administrative expense was primarily attributable to
reductions in personnel resulting from our 2002 and 2003 staff
reduction activities and a reduction in bad debt expense due to
collections of previously reserved notes receivable of
$0.5 million. This decrease was partially offset by
$0.4 million of moving costs associated with vacating our
Alvin, Texas facility as well as the inclusion of AXIS, which we
acquired in July 2002. Included in general and administrative
expenses are severance costs of $0.2 million and
$0.4 million for the years ended December 31, 2003 and
2002, respectively.
Impairment of Long-Lived Assets: Impairment of long-lived
assets of $1.1 million for the year ended December 31,
2003 relates to the cancellation of our solid streamer project
within our Marine Imaging Systems segment in the first quarter
of 2003. Impairment of long-lived assets of $6.3 million
for the year ended December 31, 2002 primarily relates to
the impairment of our Alvin, Texas manufacturing facility, the
impairment of the leasehold improvements of our Norwich, U.K.
geophone stringing facility and certain related manufacturing
equipment of both facilities. These impairment charges were
triggered by the announced closure of the facilities.
Goodwill Impairment: Goodwill impairment of
$15.1 million for the year ended December 31, 2002
relates to the impairment of goodwill of the former analog land
products reporting unit. There was no corresponding charge
during the year ended December 31, 2003.
Net Interest Expense: Total net interest expense of
$2.2 million for the year ended December 31, 2003
increased $1.3 million compared to the corresponding period
last year. Interest expense increased primarily due to the
issuance of the $31.0 million promissory note to
SCF — IV, L.P. in August 2002, which in May 2003 we
repaid $15.0 million in principal. In December 2003, a
portion of the proceeds from the issuance of our convertible
senior notes was used to repay in full the $16.0 million
remaining SCF debt.
Fair Value Adjustment and Exchange of Warrant Obligation:
The fair value adjustment and exchange of our warrant obligation
totaling $1.8 million was due to a change in the fair value
between January 1, 2003 and December 10, 2003 of our
common stock warrant we had issued to SCF. On December 10,
2003, we exchanged the warrant for 125,000 shares of our
common stock, which we issued to SCF. A fair value adjustment of
$3.3 million was recorded for the year ended
December 31, 2002.
Income Tax Expense: Income tax expense for the year ended
December 31, 2003 was $0.3 million compared to
$56.8 million for the year ended December 31, 2002.
Income tax expense for the year ended December 31, 2003
reflects $1.5 million of state and foreign taxes as we
continue to maintain a full valuation allowance for our net
deferred tax assets, partially offset by federal tax refunds of
$1.2 million. In the second quarter of 2002, we began to
fully reserve for our net deferred tax assets, which resulted in
a net charge to income tax expense of $58.8 million during
that period.
Preferred Stock Dividend: Preferred stock dividend of
$0.9 million for the year ended December 31, 2002 was
related to our previously outstanding Series B and
Series C Preferred Stock. We repurchased the preferred
stock on August 6, 2002 and, as a result, there were no
preferred stock dividends for the year ended December 31,
2003. The preferred stock dividend for the year ended
December 31, 2002 includes a preferred stock dividend
credit of $2.5 million, which represents the difference
between the fair value of the consideration granted to the
holder and our carrying value of the preferred stock at the time
of the repurchase.
Liquidity and Capital Resources
In June 2004, we issued 22,928,700 shares of our common
stock at a price to the public of $7.00 per share resulting
in proceeds, net of fees, of $150.1 million. Approximately
$137.9 million of the proceeds from this equity offering
were used to fund our acquisition of GXT, with the remainder of
the proceeds being retained to fund our ongoing operational
requirements. Also, in February of 2004, we purchased Concept
Systems for $39.0 million in cash, including acquisition
costs, and issued 1,680,000 of our common shares. The proceeds
to fund the Concept Systems acquisition were the result of the
sale of $60.0 million of 5.5% convertible senior notes
that we issued in December 2003. These notes mature in 2008 and
are convertible into our common
23
stock at any time prior to their maturity at an initial
conversion rate of 231.4815 shares per $1,000 principal
amount (a conversion price of $4.32), which represents
13,888,890 total common shares.
In February 2005, we issued to Fletcher International, Ltd.
(Fletcher), an affiliate of private investment firm Fletcher
Asset Management, Inc., 30,000 shares of a newly designated
Series D-1 Cumulative Convertible Preferred Stock
(Series D-1 Preferred Stock) in a privately-negotiated
transaction and received $30 million in proceeds. We intend
to use the proceeds from the issuance of the Series D-1
Preferred Stock for general corporate purposes, including
working capital and for potential business opportunities. We
have no present commitment or ongoing negotiations with respect
to any potential acquisition. The Series D-1 Preferred
Stock may be converted, at the holder’s election, into up
to 3,812,428 shares of our common stock, subject to
adjustment, at an initial conversion price of $7.869 per
share, also subject to adjustment in certain events.
We also granted Fletcher the right, commencing August 16,
2005 and expiring on February 16, 2008 (subject to
extension), to purchase up to an additional 40,000 shares
of one or more additional series of Series D Preferred
Stock, having similar terms and conditions as the
Series D-1 Preferred Stock, and having a conversion price
equal to 122% of the prevailing market price of our common stock
at the time of its issuance, but not less than $6.31 per
share (subject to adjustment in certain events).
The following table shows our capitalization (dollars in
thousands) as of December 31, 2004 on an actual basis and
on a pro forma basis to reflect the issuance by us of
30,000 shares of Series D-1 Preferred Stock for
$30.0 million.
| |
|
|
|
|
|
|
|
|
|
|
|
| |
|
December 31, 2004 | |
| |
|
| |
| |
|
Actual | |
|
Pro Forma | |
| |
|
| |
|
| |
| |
|
|
|
(unaudited) | |
|
Cash and cash equivalents
|
|
$ |
14,935 |
|
|
$ |
44,935 |
|
| |
|
|
|
|
|
|
|
Long-term debt, net of current maturities:
|
|
|
|
|
|
|
|
|
| |
5.50% Convertible Senior Notes due 2008
|
|
$ |
60,000 |
|
|
$ |
60,000 |
|
| |
Other long-term debt
|
|
|
19,387 |
|
|
|
19,387 |
|
|
Series D-1 Cumulative Convertible Preferred Stock,
$0.01 par value, authorized, issued and outstanding:
30,000 shares
|
|
|
— |
|
|
|
30,000 |
|
|
Stockholders’ equity:
|
|
|
|
|
|
|
|
|
| |
Common stock, $0.01 par value; authorized:
100,000,000 shares; issued and outstanding:
78,561,675 shares actual, net of treasury stock
|
|
|
795 |
|
|
|
795 |
|
| |
Additional paid-in capital
|
|
|
480,845 |
|
|
|
480,845 |
|
| |
Accumulated deficit
|
|
|
(161,516 |
) |
|
|
(161,516 |
) |
| |
Accumulated other comprehensive income
|
|
|
2,449 |
|
|
|
2,449 |
|
| |
Treasury stock, at cost, 784,009 shares
|
|
|
(5,844 |
) |
|
|
(5,844 |
) |
| |
Unamortized restricted stock compensation
|
|
|
(2,217 |
) |
|
|
(2,217 |
) |
| |
|
|
|
|
|
|
| |
|
Total stockholders’ equity
|
|
|
314,512 |
|
|
|
314,512 |
|
| |
|
|
|
|
|
|
| |
|
|
Total capitalization
|
|
$ |
393,899 |
|
|
$ |
423,899 |
|
| |
|
|
|
|
|
|
The issuance of the Series D-1 Preferred Stock resulted
from our evaluation that began in late 2004 of our long-term and
short-term capital needs. In connection with our assessment of
2004’s results of operations, we evaluated the working
capital required to manufacture certain of our sophisticated
VectorSeis systems, projections of our short-term and long-term
working capital requirements, the potential for unanticipated
delays in the adoption of new technologies, certain research and
development opportunities and market trends in the seismic
industry, and determined that an infusion of additional
long-term capital would be desirable.
We are currently pursuing a revolving line of credit or similar
short-term debt financing source for our working capital
requirements. We believe that our obtaining additional long-term
capital through the issuance of the Series D-1 Preferred
Stock will assist us in obtaining more favorable terms for a
revolving line of credit. We can give no assurances as to
whether a revolving line of credit or similar type of working
capital facility will
24
be obtained, and if so, whether the terms of such a line of
credit or other capital facility will be on terms advantageous
to us, or whether the amounts available for borrowing will be
sufficient for our purposes. However, based upon our forecasts
and our liquidity requirements for the near term, we currently
believe that the combination of our projected internally
generated cash and our working capital (including cash and cash
equivalents on hand), will be adequate to meet our anticipated
capital and liquidity requirements for the next twelve months.
Cash Flow from Operations
We have historically financed operations from internally
generated cash and funds from equity and debt financings. Cash
and cash equivalents were $14.9 million at
December 31, 2004, a decrease of $44.6 million,
compared to December 31, 2003. Net cash used in operating
activities was $20.0 million for the year ended
December 31, 2004, compared to cash used in operating
activities of $33.1 million for the year ended
December 31, 2003. The net cash used in our operating
activities for the year ended December 31, 2004 was
primarily caused by increases in our receivables, which was due
to our increase in sales during 2004, and an increase in
inventory due to our forecasted increase in sales during the
near term. Offsetting the increase in receivables and inventory
was a corresponding increase in accounts payable and accrued
expenses, also due to increased actual and projected sales
activity, as well as improvements in operating results in 2004
compared to 2003.
We have traditionally funded our working capital requirements
from internally generated cash from sales and equity infusions.
Our working capital requirements have grown in recent periods,
due to the increasing predominance of our sales to
non-U.S. customers (which have longer collection cycles
than sales to domestic customers), the increasing cost and
complexity of our new products (such as our VectorSeis Ocean
system), the addition of GXT and Concept Systems and their
special working capital requirements, the trend toward longer
lead times for our customers’ adoption of new technologies
(including our new technologies) and the further research and
development opportunities that the new technologies present.
Cash Flow from Investing Activities
Net cash flow used in investing activities was
$173.7 million for the year ended December 31, 2004,
compared to $7.5 million for the year ended
December 31, 2003. The principal investing activity was
related to our purchases of GXT and Concept Systems. See
Note 2 of Notes to Consolidated Financial
Statements. During the year ended December 31, 2004, we
sold excess property and equipment for net proceeds of
$4.8 million, most of which related to our Alvin, Texas
facility and undeveloped land located across from our
headquarters in Stafford, Texas. Also, we received payment in
full on a $5.8 million note receivable that related to the
sale of a subsidiary in 1999. We made capital expenditures of
$5.0 million for equipment purchases and invested
$4.2 million in our multi-client data library during the
year ended December 31, 2004. We expect to spend an
estimated $10 million for equipment and other capital
expenditures in 2005. We also expect to spend an estimated
$20 million for data acquisition costs for GXT’s
multi-client data library in 2005.
Cash Flow from Financing Activities
Net cash flow provided by financing activities was
$149.1 million for the year ended December 31, 2004,
compared to $21.2 million for the year ended
December 31, 2003. This net cash flow primarily represented
$150.1 million of net proceeds from our underwritten equity
offering in June 2004. Also, during the year ended
December 31, 2004 we made scheduled payments of
$6.3 million on our notes payable, long-term debt and lease
obligations, and employees exercised stock options resulting in
proceeds to us of $5.5 million.
Inflation and Seasonality
Inflation in recent years has not had a material effect on our
costs of goods or labor, or the prices for our products or
services. Over the years, our business has grown to become more
seasonal, with strongest demand typically in our first and
fourth quarters, and weakest demand typically in the second and
third quarters of our fiscal year. Additionally, GXT’s
imaging services are typically slower in the third quarter of
each calendar
25
year. This seasonality is primarily attributable to the typical
budgetary cycles of our seismic contractor and oil and gas
company customers.
Future Contractual Obligations
The following table sets forth estimates of future payments for
2005 through 2010, and thereafter, of our consolidated
contractual obligations, as of December 31, 2004 (in
thousands):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Payments Due by Fiscal Year | |
| |
|
| |
| |
|
|
|
2010 and | |
| Contractual Obligations |
|
Total | |
|
2005 | |
|
2006 | |
|
2007 | |
|
2008 | |
|
2009 | |
|
Thereafter | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
Long-term debt obligations
|
|
$ |
79,475 |
|
|
$ |
2,808 |
|
|
$ |
1,470 |
|
|
$ |
1,610 |
|
|
$ |
61,763 |
|
|
$ |
2,049 |
|
|
$ |
9,775 |
|
|
Interest on long-term debt obligations
|
|
|
21,457 |
|
|
|
4,908 |
|
|
|
4,756 |
|
|
|
4,617 |
|
|
|
4,464 |
|
|
|
995 |
|
|
|
1,717 |
|
|
Capital lease obligations
|
|
|
7,021 |
|
|
|
4,134 |
|
|
|
2,141 |
|
|
|
746 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
Operating leases
|
|
|
13,723 |
|
|
|
4,279 |
|
|
|
2,914 |
|
|
|
1,699 |
|
|
|
768 |
|
|
|
651 |
|
|
|
3,412 |
|
|
Product warranty
|
|
|
3,832 |
|
|
|
3,832 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
Purchase obligations
|
|
|
62,059 |
|
|
|
31,958 |
|
|
|
7,353 |
|
|
|
7,958 |
|
|
|
7,395 |
|
|
|
7,395 |
|
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
187,567 |
|
|
$ |
51,919 |
|
|
$ |
18,634 |
|
|
$ |
16,630 |
|
|
$ |
74,390 |
|
|
$ |
11,090 |
|
|
$ |
14,904 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The long-term debt and capital lease obligations at
December 31, 2004 included $60.0 million in
indebtedness under our convertible senior notes that mature in
December 2008. The remaining amount of these obligations consist
of (i) $0.7 million in unsecured promissory notes
related to our acquisition of AXIS in 2002,
(ii) $1.0 million of insurance costs we financed
through short-term notes payable, (iii) $17.8 million
related to the sale/leaseback arrangement housing our corporate
headquarters, our Land Imaging Systems division and our
subleased MEMS facility in Stafford, and
(iv) $7.0 million related to equipment loans of GXT.
For further discussion of our notes payable, long-term debt and
lease obligations, see Note 12 of Notes to Consolidated
Financial Statements.
The operating lease commitments at December 31, 2004 relate
to our leases for certain equipment, offices, and warehouse
space under non-cancelable operating leases.
The liability for product warranties at December 31, 2004
relate to the estimated future warranty expenditures associated
with our products. Our warranty periods generally range from
90 days to three years from the date of original purchase,
depending on the product. We record an accrual for product
warranties and other contingencies at the time of sale, which is
when the estimated future expenditures associated with those
contingencies become probable and the amounts can be reasonably
estimated.
Our purchase obligations in 2005 primarily relate to our
committed inventory purchase orders for which deliveries are
scheduled to be made in 2005. As further discussed at “2004
Acquisitions and Dispositions” above and Note 8 of
Notes to Consolidated Financial Statements, we entered
into a five-year supply agreement for the purchase of MEMS
accelerometers. The five-year minimum commitment ranges between
$7 million to $8 million per year through 2009.
Critical Accounting Policies and Estimates
The preparation of consolidated financial statements in
conformity with generally accepted accounting principles in the
United States of America requires management to make choices
between acceptable methods of accounting and to use judgment in
making estimates and assumptions that affect the reported
amounts of assets and liabilities, disclosure of contingent
assets and liabilities and the reported amounts of revenue and
expenses. The following accounting policies are based on, among
other things, judgments and assumptions made by management that
include inherent risk and uncertainties. Management’s
estimates are based on the relevant information available at the
end of each period. We believe that all of the judgments and
estimates used to prepare our financial statements were
reasonable at the time we made them, but circumstances may
change requiring us to revise our estimates in ways that could
be materially adverse to our results of operations and financial
condition. Management has discussed these critical accounting
estimates
26
with the Audit Committee of our Board of Directors and the Audit
Committee has reviewed the Company’s disclosures relating
to the estimates in this Management’s Discussion and
Analysis.
|
|
|
| |
• |
Revenue Recognition and Product Warranty —
Revenue is derived from the sale of data acquisition systems and
other seismic equipment as well as from imaging services. For
the sales of data acquisition systems, we follow the
requirements of SOP 97-2 “Software Revenue
Recognition,” and recognize revenue when the system is
delivered to the customer and risk of ownership has passed to
the customer, or, in the limited case where a customer
acceptance clause exists in the contract, the later of delivery
or when customer acceptance is obtained. For the sales of other
seismic equipment, we recognize revenue when the equipment is
shipped and risk of ownership has passed to the customer. |
| |
| |
• |
Revenues from all services are recognized when persuasive
evidence of an arrangement exists, the price is fixed or
determinable and collectibility is reasonably assured. Revenues
from contract services performed on a day-rate basis are
recognized as the service is performed. Revenues from other
contract services, including pre-funded multi-client surveys,
are recognized as the seismic data is acquired and/or processed
on a proportionate basis as work is performed. Multi-client data
surveys are licensed or sold to customers on a non-transferable
basis. Revenues on completed multi-client data surveys are
recognized upon obtaining a signed licensing agreement and
providing customers access to such data. |
| |
| |
|
We consider the proportionate basis to be the most reliable and
representative measure of progress on contract services. At
initiation of a project, we perform a detailed analysis of the
estimated costs and duration of the project. As work progresses
we assess the proportionate basis by comparing the actual
progress, which is based upon costs incurred and work performed
to date, to the estimated progress of the project. Accordingly,
changes in job performance, job conditions, estimated
profitability, contract price, cost estimates, and availability
of human and computer resources are reviewed periodically as the
work progresses and revisions to the proportionate basis are
reflected in the accounting period in which the facts that
require such adjustments become known. Losses on contracts are
recognized during the period in which the loss first becomes
probable and can be reasonably estimated. |
| |
| |
|
When separate elements such as a data acquisition system, other
seismic equipment and/or imaging services are contained in a
single sales arrangement, or in related arrangements with the
same customer, we allocate revenue to each element based on its
relative fair value, provided that such element meets the
criteria for treatment as a separate unit of accounting. The
price charged when the element is sold separately generally
determines fair value. We limit the amount of revenue
recognition for delivered elements to the amount that is not
contingent on the future delivery of products or services. We
generally do not grant return or refund privileges to our
customers. |
| |
| |
|
We generally warrant that manufactured equipment will be free
from defects in workmanship, material and parts. Warranty
periods generally range from 90 days to three years from
the date of original purchase, depending on the product. At the
time of sale, we record an accrual for product warranties and
other contingencies, which is when estimated future expenditures
associated with such contingencies are probable, and the amounts
can be reasonably estimated. However, new information may become
available, or circumstances (such as applicable laws and
regulations) may change, thereby resulting in an increase or
decrease in the amount required to be accrued for such matters
(and therefore a decrease or increase in reported net income in
the period of such change). |
| |
| |
• |
Goodwill and Other Intangible Assets — On
January 1, 2002, we adopted Statement of Financial
Accounting Standards (SFAS) No. 142 “Goodwill
and Other Intangible Assets.” Goodwill must be tested
for impairment on an annual basis. We completed our impairment
testing as of December 31, 2004 and determined that there
were no impairment losses related to goodwill. In making this
assessment we rely on a number of factors including operating
results, business plans, internal and external economic
projections, anticipated future cash flows and external market
data. If these estimates or related projections change in the
future, we may be required to record impairment charges. |
| |
| |
|
For purposes of performing the impairment test for goodwill as
required by SFAS No. 142 we established the following
reporting units: Land Imaging Systems, Sensor Geophone, Marine
Imaging Systems, Data Management Solutions and Seismic Imaging
Solutions. To determine the fair value of |
27
| |
|
our reporting units, we use a discounted future returns
valuation method. If we had established different reporting
units or utilized different valuation methodologies, the
impairment test results could differ. |
| |
| |
|
SFAS No. 142 requires us to compare the fair value of
our reporting units to their carrying amount on an annual basis
to determine if there is potential goodwill impairment. If the
fair value of the reporting unit is less than its carrying
value, an impairment loss is recorded to the extent that the
fair value of the goodwill within the reporting units is less
than its carrying value. |
| |
| |
|
Our intangible assets other than goodwill related to computer
software, proprietary technology, patents, customer list,
customer relationships, trade names and non-compete agreements
that are amortized over the estimated periods of benefit
(ranging from 2 to 18 years). We review the carrying values
of these intangible assets for impairment if events or changes
in the facts and circumstances indicate that their carrying
value may not be recoverable. Any impairment determined is
recorded in the current period and is measured by comparing the
fair value of the related asset to its carrying value. |
| |
| |
• |
Multi-Client Data Library — The multi-client
data library consists of seismic surveys that are offered for
licensing to customers on a nonexclusive basis. The capitalized
costs include costs paid to third parties for the acquisition of
data and related activities associated with the data creation
activity and direct internal processing costs, such as salaries,
benefits, computer-related expenses, and other costs incurred
for seismic data project design and management. For the year
ended December 31, 2004, we capitalized, as part of our
multi-client data library, approximately $2.0 million of
direct internal processing costs. |
| |
| |
|
During the acquisition and processing phase, we amortize costs
using the percentage of actual pre-funding revenue to the total
estimated revenue multiplied by the estimated total cost of the
project. Once a multi-client data library is available for
commercial sale, we amortize the remaining costs using the
greater of (i) the percentage of actual revenue to the
total estimated revenue multiplied by the estimated total cost
of the remaining project or (ii) a straight-line basis over
the useful economic life of the data. The straight-line
amortization period for 2-D projects is two years and three
years for 3-D projects. |
| |
| |
|
We estimate the ultimate revenue expected to be derived from a
particular seismic data survey over its estimated useful
economic life to determine the costs to amortize, if greater
than straight-line amortization. That estimate is made by us at
the project’s initiation and is reviewed and updated
periodically. If, during any such review and update, we
determine that the ultimate revenue for a survey is expected to
be less than the original estimate of total revenue for such
survey, we increase the amortization rate attributable to future
revenue from such survey. In addition, in connection with such
reviews and updates, we evaluate the recoverability of the
multi-client data library, and if required under
SFAS No. 144 “Accounting for the Impairment
and Disposal of Long-Lived Assets,” record an
impairment charge with respect to such data. |
| |
| |
• |
Accounts and Notes Receivable
Collectibility — We consider current information
and circumstances regarding our customers’ ability to repay
their obligations, such as the length of time the receivable
balance is outstanding, the customers’s credit worthiness
and historical experience, and consider an account or note
impaired when it is probable that we will be unable to collect
all amounts due. When we consider an account or note as
impaired, we measure the amount of the impairment based on the
present value of expected future cash flows or the fair value of
collateral. We include impairment losses (recoveries) in our
allowance for doubtful accounts and notes through an increase
(decrease) in bad debt expense. See further discussion of our
note receivable balances and our $5.2 million reserve
related to amounts outstanding owed to us by LARGE at
“— Credit Risks” and Note 3 of Notes
to Consolidated Financial Statements. |
| |
| |
|
We record interest income on investments in notes receivable on
the accrual basis of accounting. We do not accrue interest on
impaired loans where collection of interest according to the
contractual terms is considered doubtful. Among the factors we
consider in making an evaluation of the collectibility of
interest are: (i) the status of the loan, (ii) the
fair value of the underlying collateral, (iii) the
financial condition of the borrower and (iv) anticipated
future events. |
28
|
|
|
| |
• |
Stock-Based Compensation — We have elected to
continue to follow the intrinsic value method of accounting for
equity-based compensation as prescribed by APB Opinion
No. 25. If we had adopted SFAS No. 123, net loss,
basic and diluted loss per common share for the periods
presented would have been increased as follows (in thousands,
except per share amounts): |
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Years Ended December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
|
Net loss applicable to common shares
|
|
$ |
(2,979 |
) |
|
$ |
(23,152 |
) |
|
$ |
(119,672 |
) |
|
Add: Stock-based employee compensation expense included in
reported loss applicable to common shares
|
|
|
1,720 |
|
|
|
(222 |
) |
|
|
417 |
|
|
Deduct: Stock-based employee compensation expense determined
under fair value methods for all awards
|
|
|
(5,040 |
) |
|
|
(2,463 |
) |
|
|
(3,531 |
) |
| |
|
|
|
|
|
|
|
|
|
|
Pro forma net loss
|
|
$ |
(6,299 |
) |
|
$ |
(25,837 |
) |
|
$ |
(122,786 |
) |
| |
|
|
|
|
|
|
|
|
|
|
Basic and diluted loss per common share — as reported
|
|
$ |
(0.05 |
) |
|
$ |
(0.45 |
) |
|
$ |
(2.35 |
) |
| |
|
|
|
|
|
|
|
|
|
|
Pro forma basic and diluted loss per common share
|
|
$ |
(0.10 |
) |
|
$ |
(0.50 |
) |
|
$ |
(2.41 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
| |
The above amounts are based on Black-Scholes valuation model
variables of an average risk free interest rate based on 5-year
Treasury bonds, an estimated option term of five years, no
dividends and expected price volatility of 60% during the years
ended December 31, 2004, 2003 and 2002. We have not yet
determined whether we will continue to use the Black-Scholes
valuation method or use another method in accounting for our
equity-based compensation after we adopt SFAS No. 123R
at the beginning of the third quarter of 2005. |
Recent Accounting Pronouncements
In January 2003, the Financial Accounting Standards Board
(FASB) issued FIN No. 46, “Consolidation
of Variable Interest Entities, an Interpretation of ARB
No. 51”. The primary objective of the
interpretation is to provide guidance on the identification of
and financial reporting for entities over which control is
achieved through means other than voting rights; such entities
are known as variable-interest entities (VIEs).
FIN No. 46 provides guidance that determines
(a) whether consolidation is required under the
“controlling financial interest” model of Accounting
Research Bulletin No. 51, “Consolidated
Financial Statements,” or other existing authoritative
guidance, or, alternatively, (b) whether the
variable-interest model under FIN No. 46 should be
used to account for existing and new entities. In December 2003,
the FASB completed deliberations of proposed modifications to
FIN 46 (FIN 46-R) resulting in multiple effective
dates based on the nature as well as creation date of the VIE.
FIN No. 46, as revised, has been adopted by us and did
not have an impact on our results of operations or financial
position.
In December 2003, the SEC issued Staff Accounting Bulletin
(SAB) No. 104, “Revenue Recognition”,
which supersedes SAB No. 101, “Revenue
Recognition in Financial Statements.”
SAB No. 104’s primary purpose is to rescind
accounting guidance contained in SAB No. 101 related
to multiple element revenue arrangements, which was superseded
as a result of the issuance of EITF 00-21,
“Accounting for Revenue Arrangements with Multiple
Deliverables.” While the wording of
SAB No. 104 has changed to reflect the issuance of
EITF 00-21, the revenue recognition principles of
SAB No. 101 remain largely unchanged by the issuance
of SAB No. 104. The adoption of SAB No. 104
did not have a material effect on our results of operations or
financial position.
In March 2004, the FASB issued EITF Issue No. 03-1,
“The Meaning of Other-Than-Temporary Impairment and Its
Application to Certain Investments” which provides new
guidance for assessing impairment losses on debt and equity
investments. Additionally, EITF Issue No. 03-1 included new
disclosure requirements for investments that are deemed to be
temporarily impaired. In September 2004, the FASB delayed the
accounting provisions of EITF Issue No. 03-1; however, the
disclosure requirements remain effective and have been adopted
for the Company’s year ended December 31, 2004. We
will evaluate the effect, if any, of EITF Issue No. 03-1
when final guidance is released.
29
In November 2004, the FASB issued SFAS No. 151,
“Inventory Costs — An amendment of ARB
No. 43, Chapter 4,” which requires that
abnormal amounts of idle facility expense, freight, handling
costs and spoilage should be expensed as incurred and not
included in overhead, and that allocation of fixed production
overheads to conversion costs should be based on normal capacity
of the production facilities. The provisions in SFAS
No. 151 are effective for inventory costs incurred during
fiscal years beginning after June 15, 2005. We do not
believe that the adoption of SFAS No. 151 will have a
significant impact on our financial statements.
In December 2004, the FASB issued SFAS No. 123
(revised 2004) “Share-Based Payment”
(SFAS 123R), which replaces SFAS No. 123
“Accounting for Stock-Based Compensation”
(SFAS 123) and supersedes APB Opinion No. 25
“Accounting for Stock Issued to Employees.”
SFAS 123R requires all share-based payments to employees,
including grants of employee stock options, to be recognized in
the financial statements based on their fair values, beginning
with the first interim or annual period after June 15,
2005, with early adoption encouraged. The pro forma disclosures
previously permitted under SFAS 123 will no longer be an
alternative to financial statement recognition. We are required
to adopt SFAS 123R effective as of the quarter beginning
July 1, 2005. Under SFAS 123R, we must determine the
appropriate fair value model to be used for valuing share-based
payments, the amortization method for compensation cost and the
transition method to be used at date of adoption. The transition
methods include prospective and retroactive adoption options.
Under the retroactive options, prior periods may be restated
either as of the beginning of the year of adoption or for all
periods presented. The prospective method requires that
compensation expense be recorded for all unvested stock options
and restricted stock at the beginning of the first quarter of
adoption of SFAS 123R, while the retroactive methods would
record compensation expense for all unvested stock options and
restricted stock beginning with the first period restated. We
are currently evaluating the requirements of SFAS 123R and
expect that the adoption of SFAS 123R will have a material
impact on our consolidated results of operations and earnings
per share. We have not yet determined the method of adoption or
the effect of adopting SFAS 123R, and have not determined
whether the adoption will result in amounts that are similar to
the current pro forma disclosures under SFAS 123.
Credit Risk
Historically, our principal customers have been seismic
contractors that operate seismic data acquisition systems and
related equipment to collect data in accordance with their
customers’ specifications or for their own seismic data
libraries. However, through the acquisition of GXT, we have
diversified our customer base to include major integrated and
independent oil and gas companies. For the years ended
December 31, 2004 and 2003, approximately 15% and 28%,
respectively, of our consolidated net sales were equipment sales
to one Chinese customer. The loss of this customer or
deterioration in our relationship with it could have a material
adverse effect on our results of operations and financial
condition.
At December 31, 2003, approximately $11.9 million of
our total notes receivable and accounts receivable related to
one customer, Laboratory of Regional Geodynamics, Limited
(LARGE), a subsidiary of Yukos which experienced financial
difficulty during 2004. These notes and accounts receivable
related to sales and leases of our equipment that we had entered
into with LARGE in late 2001 through early 2003. During 2004,
LARGE became delinquent in payment of all of its existing
indebtedness owed to us and over the course of 2004, we
attempted to renegotiate the terms of these notes with LARGE and
potential new investors in LARGE. In September 2004 we
established a reserve of $5.2 million related to the LARGE
accounts and notes receivables.
In October 2004, LARGE reconveyed certain of the purchased
equipment to us in exchange for a reduction in the total amounts
outstanding owed by LARGE. As a result, we reclassified
approximately $5.0 million of LARGE notes receivable
indebtedness, net of allowance for doubtful notes, to our rental
equipment. Certain of our other customers agreed to lease or
purchase this repossessed equipment. In December 2004, LARGE
filed for insolvency liquidation proceedings in the United
Kingdom. The remaining outstanding notes receivable balance, net
of allowance for doubtful notes, with LARGE was
$2.1 million as of December 31, 2004, which represents
the estimated fair market value of equipment that we have
recovered from LARGE but for which title remains in dispute
pending the resolution of the LARGE liquidation, less estimated
refurbishment costs.
30
In 2004, we sold our first VectorSeis Ocean-based system for
seabed data acquisition. A portion of the purchase was financed
by us through a series of notes receivable. During 2004, this
system experienced unexpected warranty issues causing the
customer to delay its deployment of this system. As a result of
these issues, the customer has delayed payments under the notes.
The outstanding balance of the notes and accounts receivable due
from this customer at December 31, 2004 was
$10.0 million. We expect to be paid all amounts due in full
once the issues have been resolved. Therefore, no allowance has
been established for this customer.
For the year ended December 31, 2004, we recognized
$26.1 million of sales to customers in the Commonwealth of
Independent States, or former Soviet Union (CIS),
$13.7 million of sales to customers in Latin American
countries, $45.1 million of sales to customers in Europe,
$16.9 million of sales to customers in the Middle East,
$53.4 million of sales to customers in Asia Pacific and
$25.3 million of sales to customers in Africa. The majority
of our foreign sales are denominated in U.S. dollars. In
recent years, the CIS, and certain Latin American countries have
experienced economic problems and uncertainties. To the extent
that world events or economic conditions negatively affect our
future sales to customers in these and other regions of the
world or the collectibility of our existing receivables, our
future results of operations, liquidity and financial condition
may be adversely affected. We currently require customers in
these higher risk countries to provide their own financing and
in some cases assist the customer in organizing international
financing and Export-Import credit guarantees provided by the
United States government. We do not currently extend long-term
credit through notes or otherwise to companies in countries we
consider to be inappropriate credit risk.
Certain Relationships and Related Party Transactions
On March 31, 2003, we announced that we had appointed
Robert P. Peebler as our president and chief executive officer.
In April 2003, we invested $3.0 million in preferred
securities of Energy Virtual Partners, Inc. and its affiliated
corporation (EVP) for approximately 22% of the outstanding
ownership interests and 12% of the outstanding voting interests.
EVP had been formed in 2001 to provide asset management services
to large oil and gas companies. Mr. Peebler had founded EVP
and had served as its president and chief executive officer
until his joining us in March 2003. Mr. Peebler had
continued to serve as the Chairman of EVP and held a 23%
ownership interest in EVP. Under Mr. Peebler’s
employment agreement with us, he was permitted to devote up to
20% of his time to EVP.
During the second quarter of 2003, EVP failed to close two
anticipated asset management agreements, which resulted in
EVP’s management re-evaluating its business model and
adequacy of capital. During August 2003, the board of directors
of EVP voted to liquidate EVP. For that reason, we wrote our
investment down to its approximate liquidation value of
$1.0 million. Mr. Peebler offered, and we agreed, that
all proceeds Mr. Peebler received from the liquidation of
EVP were to be paid to us. In December 2003, we received
liquidation payments of $0.7 million from EVP and
$0.1 million from Mr. Peebler. In March 2004, we
received final liquidation payments of $0.1 million from
EVP and $0.01 million from Mr. Peebler.
James M. Lapeyre, Jr. is chairman of our board of directors
and beneficial owner of approximately 1.2% of our outstanding
common stock as of February 20, 2005. He is also the
chairman and a significant equity owner of Laitram, L.L.C.
(Laitram) and has served as president of Laitram and its
predecessors since 1989. Laitram is a privately-owned, New
Orleans-based manufacturer of food processing equipment and
modular conveyor belts. Mr. Lapeyre and Laitram together
owned approximately 10.7% of our outstanding common stock as of
February 20, 2005.
We acquired DigiCourse, Inc., our marine positioning products
business, from Laitram in 1998 and have renamed it
I/O Marine Systems, Inc. In connection with that
acquisition, we entered into a Continued Services Agreement with
Laitram under which Laitram agreed to provide us certain
accounting, software, manufacturing and maintenance services.
Manufacturing services consist primarily of machining of parts
for our marine positioning systems. The term of this agreement
expired in September 2001 but we continue to operate under its
terms. In addition, when we have requested, the legal staff of
Laitram has advised us on certain intellectual property matters
with regard to our marine positioning systems. During 2004, we
paid Laitram a total of approximately $1,823,970, which
consisted of approximately $1,166,700 for manufacturing
services, $623,270 for rent and other pass-through third party
facilities charges, and $34,000 for other services. For the 2003
and 2002 fiscal years, we paid Laitram a total of approximately
$1.17 million and $1.9 million, respectively, for
these services. In the opinion of our management, the terms of
these services are fair and
31
reasonable and as favorable to us as those that could have been
obtained from unrelated third parties at the time of their
performance.
Risk Factors
This report contains statements concerning our future results
and performance and other matters that are
“forward-looking” statements within the meaning of
Section 27A of the Securities Act of 1933, as amended (the
Securities Act), and Section 21E of the Securities Exchange
Act of 1934, as amended (the Exchange Act). These statements
involve known and unknown risks, uncertainties, and other
factors that may cause our or our industry’s results,
levels of activity, performance, or achievements to be
materially different from any future results, levels of
activity, performance, or achievements expressed or implied by
such forward-looking statements. In some cases, you can identify
forward-looking statements by terminology such as
“may,” “will,” “should,”
“intend,” “expect,” “plan,”
“anticipate,” “believe,”
“estimate,” “predict,”
“potential,” or “continue” or the negative
of such terms or other comparable terminology.
Examples of other forward-looking statements contained in this
report include statements regarding:
|
|
|
| |
• |
expectations of successfully marketing our products and services
to oil and gas company end-users; |
| |
| |
• |
anticipated timing and success of commercialization and
capabilities of products and services under development, and
start-up costs associated therewith; |
| |
| |
• |
our expected revenues, operating profit and net income; |
| |
| |
• |
future growth rates and margins for certain of our products and
services; |
| |
| |
• |
future levels of capital expenditures; |
| |
| |
• |
possible future acquisitions; |
| |
| |
• |
our success in integrating our acquired businesses; |
| |
| |
• |
our expectations regarding future mix of business and future
asset recoveries; |
| |
| |
• |
future cash needs and future sources of cash; |
| |
| |
• |
the adequacy of our future liquidity and capital resources; |
| |
| |
• |
future demand for seismic equipment and services; |
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future seismic industry fundamentals; |
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future oil and gas commodity prices; |
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the outcome of pending or threatened disputes and other
contingencies; |
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future worldwide economic conditions; |
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our expectations regarding realization of deferred tax assets; |
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our beliefs regarding accounting estimates we make; and |
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results from our current or future strategic alliances. |
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 and assumptions. While we cannot identify all of
the factors that may cause actual results to vary from our
expectations, we believe the following factors should be
considered carefully:
The loss of any significant customer could materially and
adversely affect our results of operations and financial
condition.
We have traditionally relied on a relatively small number of
significant customers. Consequently, our business is exposed to
the risks related to customer concentration. For the year ended
December 31, 2004 and
32
2003, approximately 15% and 28%, respectively, of our
consolidated net sales related to one Chinese customer. The loss
of any of our significant customers or deterioration in our
relations with any of them could materially and adversely affect
our results of operations and financial condition.
Our operating results may fluctuate from period to period
and we are subject to seasonality factors.
Our operating results are subject to fluctuations from period to
period, as a result of new product or service introductions, the
timing of significant expenses in connection with customer
orders, unrealized sales, the product mix sold and the
seasonality of our business. Because many of our products
feature a high sales price and are technologically complex, we
generally have experienced long sales cycles for these products
and historically incur significant expense at the beginning of
these cycles for component parts and other inventory necessary
to manufacture a product in anticipation of a future sale, which
may not ultimately occur. In addition, the revenues from our
sales can vary widely from period to period due to changes in
customer requirements. These factors can create fluctuations in
our net sales and results of operations from period to period.
Variability in our overall gross margins for any quarter, which
depend on the percentages of higher-margin and lower-margin
products and services sold in that quarter, compounds these
uncertainties. As a result, if net sales or gross margins fall
below expectations, our operating results and financial
condition will likely be adversely affected. Additionally, our
business is seasonal in nature, with weakest demand typically
experienced in the second and third calendar quarters, and the
strongest demand typically in the first and fourth calendar
quarters of each year.
Due to the relatively high sales price of many of our products
and data libraries and relatively low unit sales volume, our
quarterly operating results have historically fluctuated from
period to period due to the timing of orders and shipments and
the mix of products and services sold. This uneven pattern has
made financial predictions for any given period difficult,
increases the risk of unanticipated variations in our quarterly
results and financial condition and places challenges on our
inventory management. Also, delays in shipping or delivering
products in a given quarter could significantly affect our
results of operations for that quarter. Fluctuations in our
quarterly operating results may cause greater volatility in the
price of our common stock and convertible notes.
We derive a substantial amount of our revenues from
foreign sales, which pose additional risks.
Sales to customers outside of North America accounted for
approximately 73% of our consolidated net sales in 2004, and we
believe that export sales will remain a significant percentage
of our revenue. United States export restrictions affect the
types and specifications of products we can export.
Additionally, to complete certain sales, United States laws may
require us to obtain export licenses, and we cannot assure you
that we will not experience difficulty in obtaining these
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:
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expropriation and nationalization; |
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political and economic instability; |
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armed conflict and civil disturbance; |
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currency fluctuations, devaluations and conversion restrictions; |
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confiscatory taxation or other adverse tax policies; |
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tariff regulations and import/export restrictions; |
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customer credit risk; |
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governmental activities that limit or disrupt markets, or
restrict payments or the movement of funds; and |
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governmental activities that may result in the deprivation of
contractual rights. |
There is increasing risk that our collections cycle will further
lengthen as we anticipate a larger percentage of our sales will
be to foreign customers, particularly those in China and the CIS.
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The majority of our foreign sales are denominated in United
States dollars. 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, penalties and/or
interest.
The GXT and Concept Systems acquisitions have increased
our exposure to the risks experienced by more
technology-intensive companies.
The businesses of GXT and Concept Systems, being more
concentrated in software, processing services and proprietary
technologies than our traditional business, have exposed us to
the risks typically encountered by smaller technology companies
that are more dependent on proprietary technology protection and
research and development. These risks include:
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future competition from more established companies entering the
market; |
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product obsolescence; |
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dependence upon continued growth of the market for seismic data
processing; |
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the rate of change in the markets for GXT’s and Concept
Systems’ technology and services; |
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research and development efforts not proving sufficient to keep
up with changing market demands; |
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dependence on third-party software for inclusion in GXT’s
and Concept Systems’ products and services; |
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misappropriation of GXT’s or Concept Systems’
technology by other companies; |
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alleged or actual infringement of intellectual property rights
that could result in substantial additional costs; |
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difficulties inherent in forecasting sales for newly developed
technologies or advancements in technologies; |
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recruiting, training and retaining technically skilled personnel
that could increase the costs for GXT or Concept Systems, or
limit their growth; and |
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the ability to maintain traditional margins for certain of their
technology or services. |
We may not realize the anticipated benefits of our
acquisitions of GXT or Concept Systems or be successful in
integrating their operations, personnel or technology.
There can be no assurance that the anticipated benefits of our
acquisitions of GXT or Concept Systems will be realized or that
our integration of their operations, personnel and technology
will be successful. Likewise, no assurances can be given that
our business plan with respect to GXT’s or Concept
Systems’ services and products will prove successful. The
integration of these companies into our operations will require
the experience and expertise of managers and key employees of
GXT and Concept Systems who are expected to be retained by us.
There can be no assurance that these managers and key employees
of GXT and Concept Systems retained by us will remain with us
for the time period necessary to successfully integrate their
companies into our operations.
Future technologies and businesses that we may acquire may
be difficult to integrate, disrupt our business, dilute
stockholder value or divert management attention.
An important aspect of our current business strategy is to seek
new technologies, products and businesses to broaden the scope
of our existing and planned product lines and technologies.
While we believe that these acquisitions complement our
technologies and our general business strategy, there can be no
assurance that we will achieve the expected benefit of these
acquisitions.
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In addition, these acquisitions may result in unexpected costs,
expenses and liabilities. For example, during 2002, we acquired
certain assets of S/ N Technologies and, in April 2003, we
invested $3.0 million in EVP. These transactions were not
successful; in 2003, we completely wrote down the costs of the
assets we purchased from S/ N Technologies and wrote down our
investment in EVP to its liquidation value of $1.0 million.
Acquisitions expose us to:
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increased costs associated with the acquisition and operation of
the new businesses or technologies and the management of
geographically dispersed operations; |
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risks associated with the assimilation of new technologies,
operations, sites and personnel; |
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the possible loss of key employees and costs associated with
their loss; |
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risks that any technology we acquire may not perform as well as
we had anticipated; |
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the diversion of management’s attention and other resources
from existing business concerns; |
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the potential inability to replicate operating efficiencies in
the acquired company’s operations; |
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potential impairments of goodwill and intangible assets; |
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the inability to generate revenues to offset associated
acquisition costs; |
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the requirement to maintain uniform standards, controls, and
procedures; |
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the impairment of relationships with employees and customers as
a result of any integration of new and inexperienced management
personnel; and |
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the risk that acquired technologies do not provide us with the
benefits we anticipated. |
Integration of the acquired businesses requires significant
efforts from each entity, including coordinating existing
business plans and research and development efforts. Integrating
operations may distract management’s attention from the
day-to-day operation of the combined companies. If we are unable
to successfully integrate the operations of acquired businesses,
our future results will be negatively impacted.
We are exposed to risks related to complex, highly
technical products.
System reliability is an important competitive consideration for
seismic data acquisition systems. Our customers often require
demanding specifications for product performance and
reliability. Because many of our products are complex and often
use unique advanced components, processes, technologies and
techniques, undetected errors and design and manufacturing flaws
may occur. Even though we attempt to assure that our systems are
always reliable in the field, the many technical variables
related to their operations can cause a combination of factors
that can and have, from time to time, caused performance issues
with certain of our products. Product defects result in higher
product service, warranty and replacement costs and may affect
our customer relationships and industry reputation, all of which
may adversely impact our results of operations. Despite our
testing and quality assurance programs, undetected errors may
not be discovered until the product is purchased and used by a
customer in a variety of field conditions. If our customers
deploy our new products and they do not work correctly, our
relationship with our customers may be materially and adversely
affected.
Both our new VectorSeis System Four Digital-Analog land
acquisition system and VectorSeis Ocean-redeployable seabed
acquisition system experienced a number of undetected errors or
“bugs” when first introduced. This is not unusual in
the development and release of new technologically-advanced
products. Also, the inexperience of customers in using these new
products exacerbates any problems. We believe that our System
Four Digital-Analog land acquisition system contains significant
design improvements in both field troubleshooting and
reliability compared to legacy analog land acquisition systems,
and that the system has now generally achieved expected
reliability and performance levels. However, until we have more
field experience with the product in a wide variety of
operational conditions, we cannot be certain that problems will
not arise. We believe the VectorSeis Ocean seabed system is the
first system of its type, integrating digital sensors, radio
telemetry, data management and quality control systems, all
deployed on the seabed. As a result of its recent development
and advanced and complex nature, we continue to experience
occasional unrelated
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performance issues with the VectorSeis Ocean seabed system and
continue to refine the system and its components to reflect
field experiences encountered in their operation.
During 2004, we sold our first VectorSeis Ocean redeployable
seabed acquisition system to RXT, a start-up seismic contractor.
RXT is under contract with our subsidiary, GXT, to obtain
seismic data for a major oil company. RXT is using the
VectorSeis Ocean seabed system to acquire the data. If for any
reason RXT were unable to complete its obligations to acquire
the seismic data as required by the oil company, GXT could
potentially be liable to the oil company for certain contractual
remedies, including reimbursing the oil company for the excess
cost for acquiring the data by other means, which could possibly
cause a loss to GXT on the contract.
We may not gain rapid market acceptance for our
VectorSeis products, which could materially and adversely affect
our results of operations and financial condition.
We have spent considerable time and capital developing our
VectorSeis product lines. Because VectorSeis products rely on a
new digital sensor, our ability to sell our VectorSeis products
will depend on acceptance of our digital sensor and technology
solutions by geophysical contractors and exploration and
production companies. If our customers do not believe that our
digital sensor delivers higher quality data with greater
operational efficiency, our results of operations and financial
condition will be materially and adversely affected.
We have developed outsourcing arrangements with third
parties to manufacture some of our products. If these third
parties fail to deliver quality products or components at
reasonable prices on a timely basis, we may alienate some of our
customers and our revenues, profitability and cash flow may
decline.
As part of our strategic direction, we are increasing our use of
contract manufacturers as an alternative to our own manufacture
of products. As an example, in December 2004, we sold to another
company our Applied MEMS business that manufactures MEMS
products that are a necessary component in many of our products.
If, in implementing any outsource initiative, we are unable to
identify contract manufacturers willing to contract with us on
competitive terms and to devote adequate resources to fulfill
their obligations to us or if we do not properly manage these
relationships, our existing customer relationships may suffer.
In addition, by undertaking these activities, we run the risk
that the reputation and competitiveness of our products and
services may deteriorate as a result of the reduction of our
control over quality and delivery schedules. We also may
experience supply interruptions, cost escalations and
competitive disadvantages if our contract manufacturers fail to
develop, implement, or maintain manufacturing methods
appropriate for our products and customers.
If any of these risks are realized, our revenues, profitability
and cash flow may decline. In addition, as we come to rely more
heavily on contract manufacturers, we may have fewer personnel
resources with expertise to manage problems that may arise from
these third-party arrangements.
An oversupply of seismic data has adversely affected our
operations and significantly reduced our operating margins and
income and may continue to do so in the future.
Since the late 1990’s there has been an industry-wide
oversupply of speculative surveys conducted and collected by
geophysical contractors, who have lowered prices to their
customers for these surveys in order to recover investments in
assets used to conduct 3-D surveys. In recent years these
circumstances have adversely affected our results of operations
and financial condition. Particularly during periods of reduced
levels of exploration for oil and gas, the oversupply of seismic
data and downward pricing pressures limit our ability to meet
sales objectives and maintain profit margins for our products
and sustain growth of our business. These industry conditions
have reduced, and if continued into the future, will further
reduce, our revenues and operating margins.
Technological change in the seismic industry requires us
to make substantial research and development
expenditures.
The markets for our products are characterized by changing
technology and new product introductions. We must invest
substantial capital to maintain a leading edge in technology,
with no assurance that we will
36
receive an adequate rate of return on such investments. If we
are unable to develop and produce successfully and timely new
and enhanced products and services, we will be unable to compete
in the future and our business, our results of operations and
financial condition will be materially and adversely affected.
Our outsourcing relationships may require us to purchase
inventory when demand for products produced by third-party
manufacturers is low.
Under a few of our outsourcing arrangements, our manufacturing
outsourcers purchase agreed-upon inventory levels to meet our
forecasted demand. Since we typically operate without a
significant backlog of orders for our products, our
manufacturing plans and inventory levels are principally based
on sales forecasts. If demand proves to be less than we
originally forecasted, these manufacturing outsourcers have the
right to require us to purchase any excess or obsolete
inventory. Should we be required to purchase inventory under
these provisions, we may be required to hold inventory that we
may never utilize. To date, we have not been required to
purchase any significant amounts of excess inventory under our
outsourcing arrangements, and we have no existing obligation to
purchase any significant amounts of excess inventory.
We may be unable to obtain broad intellectual property
protection for our current and future products and we may become
involved in intellectual property disputes.
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.
Third parties inquire and claim from time to time that we have
infringed upon their intellectual property rights. Any such
claims, with or without merit, could be time consuming, result
in costly litigation, result in injunctions, require product
modifications, 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 operations and
financial condition.
Further consolidation among our significant customers
could materially and adversely affect us.
Historically, a relatively small number of customers has
accounted for the majority of our net sales in any period. In
recent years, our traditional seismic contractor customers have
been rapidly consolidating, thereby consolidating the demand for
our products. The loss of any of our significant customers to
further consolidation could materially and adversely affect our
results of operations and financial condition.
Our operations, and the operations of our customers, are
subject to numerous government regulations, which could
adversely limit our operating flexibility.
Our operations are subject to laws, regulations, government
policies and product certification requirements worldwide.
Changes in such laws, regulations, policies or requirements
could affect the demand for our products or result in the need
to modify products, which may involve substantial costs or
delays in sales and could have an adverse effect on our future
operating results. Our export activities are also subject to
extensive and evolving trade regulations. Certain countries are
subject to restrictions, sanctions and embargoes imposed by the
United States government. These restrictions, sanctions and
embargoes also prohibit or limit us from participating in
certain business activities in those countries. Our operations
are subject to numerous local, state and federal laws and
regulations in the United States and in foreign jurisdictions
concerning the containment and disposal of hazardous materials,
the remediation of contaminated properties and the protection of
the environment. These laws have been changed frequently in the
past, and there can be no assurance that future changes will not
have a material adverse effect on us. In addition, our
customers’
37
operations are also significantly impacted by laws and
regulations concerning the protection of the environment and
endangered species. Consequently, changes in governmental
regulations applicable to our customers may reduce demand for
our products. For instance, regulations regarding the protection
of marine mammals in the Gulf of Mexico may reduce demand for
our airguns and other marine products. To the extent that our
customer’s operations are disrupted by future laws and
regulations, our business and results of operations may be
materially and adversely affected.
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.
We may not be able to generate sufficient cash flows to
meet our operational, growth and debt service needs.
Our cash and cash equivalents declined from $59.5 million
at December 31, 2003 to $14.9 million at
December 31, 2004, a decrease of $44.6 million,
primarily related to our acquisitions of GXT and Concept Systems
in 2004 and costs of building inventory for anticipated sales.
Our ability to fund our operations, grow our business and to
make scheduled payments on our indebtedness and our other
obligations will depend on our financial and operating
performance, which in turn will be affected by general economic
conditions in the energy industry and by many financial,
competitive, regulatory and other factors beyond our control. We
cannot assure you that our business will generate sufficient
cash flow from operations or that future sources of capital will
be available to us in an amount sufficient to enable us to
service our indebtedness, including the notes, or to fund our
other liquidity needs.
If we are unable to generate sufficient cash flows to fund our
operations, grow our business and satisfy our debt obligations,
we may have to undertake additional or alternative financing
plans, such as refinancing or restructuring our debt, selling
assets, reducing or delaying capital investments or seeking to
raise additional capital. We cannot assure you that any
refinancing would be possible, that any assets could be sold,
or, if sold, of the timing of the sales and the amount of
proceeds that may be realized from those sales, or that
additional financing could be obtained on acceptable terms, if
at all. Our inability to generate sufficient cash flows to
satisfy debt obligations, or to refinance our indebtedness on
commercially reasonable terms, would materially and adversely
affect our financial condition and results of operations and our
ability to satisfy our obligations under the notes.
We are exposed to risks relating to the effectiveness of
our internal controls.
In connection with the audit of our financial statements as of
and for the year ended December 31, 2003, our management,
in consultation with PricewaterhouseCoopers LLP (PwC), our
independent accountants, identified and reported to the audit
committee of our board of directors certain matters involving
internal control deficiencies related to our Pelton subsidiary
that we and PwC considered to be a reportable condition under
the standards then in effect as established by the American
Institute of Certified Public Accountants. The identified
internal control deficiency concerned inadequate procedures in
place for the personnel at this subsidiary to perform and
complete an accurate year-end physical inventory count. However,
the control deficiency did not result in an audit adjustment.
During 2004, we implemented a number of procedures to strengthen
our internal controls, including procedures to prepare us to
comply with the new annual internal controls assessment and
attestation requirements under Section 404 of the
Sarbanes-Oxley Act of 2002 and the related SEC rules. While we
have completed our evaluation procedures and our management has
certified (and PwC has attested) that our internal control over
financing reporting was effective as of December 31, 2004,
we may experience controls deficiencies or weaknesses in the
future, which could adversely impact the accuracy and timeliness
of our future financial reporting and reports and filings we
make with the SEC.
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The addition of the GXT business may alienate a number of
our traditional seismic contractor customers with whom GXT
competes and adversely affect sales to and revenues from those
customers.
GXT’s business in processing seismic data competes with a
number of our traditional customers that are seismic
contractors. Many of these companies not only offer their
customers — generally major, independent and national
oil companies — the traditional services of conducting
seismic surveys, but also the processing and interpretation of
the data acquired from those seismic surveys. In that regard,
GXT’s processing services directly compete with these
contractors’ service offerings and may adversely affect our
relationships with them, which could result in reduced sales and
revenues from these seismic contractor customers.
Note: The foregoing 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 that 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 7A. 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, interest rates and foreign currency exchange rates. We
traditionally have not entered into significant derivative or
other financial instruments. We are not currently a borrower
under any material credit arrangements that feature fluctuating
interest rates, but we have $79.4 million of long-term
fixed rate debt outstanding at December 31, 2004. As a
result, we are subject to the risk of higher interest costs if
this debt is refinanced. If rates are 1% higher at the time of
refinancing, our interest costs would increase by approximately
$0.8 million annually.
Through our subsidiaries, we operate in a wide variety of
jurisdictions, including the Netherlands, United Kingdom,
Norway, Venezuela, Canada, Argentina, Russia, France, the United
Arab Emirates and other countries. Our financial results may be
affected by changes in foreign currency exchange rates. Our
consolidated balance sheet at December 31, 2004 reflected
approximately $11.0 million of net working capital related
to our foreign subsidiaries. A majority of our foreign net
working capital is within the Netherlands and United Kingdom.
The subsidiaries in those countries receive their income and pay
their expenses primarily in Euros and British pounds (GBP),
respectively. To the extent that transactions of these
subsidiaries are settled in Euros or GBP, a devaluation of these
currencies versus the U.S. dollar could reduce the
contribution from these subsidiaries to our consolidated results
of operations as reported in U.S. dollars. We have not
historically hedged the market risk related to fluctuations in
foreign currencies.
Item 8. Financial
Statements and Supplementary Data
The financial statements required by this item begin at page F-1
hereof.
Item 9. Changes
in and Disagreements with Accountants on Accounting and
Financial Disclosure
Not applicable.
Item 9A. Controls and Procedures
(a) Evaluation of Disclosure Controls and Procedures. We
have established disclosure controls and procedures designed to
provide reasonable assurance that material information relating
to I/ O and its consolidated subsidiaries is made known to the
officers who certify our financial reports and to other members
of senior management and our Board of Directors.
Based on their evaluation of the effectiveness of our disclosure
controls and procedures (as defined in Rules 13a-15(e) and
15d-15(e) under the Exchange Act) as of December 31, 2004,
our principal executive officer and principal financial officer
have concluded that such disclosure controls and procedures were
effective to ensure that the information required to be
disclosed by our company in the reports that it files or
39
submits under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified in SEC
rules and forms.
In designing and evaluating our disclosure controls and
procedures, our management recognizes that any controls and
procedures, no matter how well designed and operated, can
provide only reasonable assurance of achieving the desired
control objectives, and our management necessarily is required
to apply its judgment in evaluating the cost-benefit
relationship of possible controls and procedures. Our company
intends to review and evaluate the design, operation and
effectiveness our disclosure controls and procedures over time
in order to provide reasonable assurances that senior management
has timely access to all material financial and non-financial
information concerning our business. Future events affecting our
business may cause management to modify its disclosure controls
and procedures.
(b) Management’s Report on Internal Control Over
Financial Reporting. The management of our company is
responsible for establishing and maintaining adequate internal
control over financial reporting (as defined in
Rules 13a-15(f) and 15d-15(f) under the Exchange Act).
Under the supervision and with the participation of our
management, including our principal executive officer and
principal financial officer, we conducted an evaluation of the
effectiveness of our internal control over financial reporting
based on criteria established in Internal Control —
Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission.
Based on our evaluation under criteria established in
Internal Control — Integrated Framework, our
management concluded that the company’s internal control
over financial reporting was effective as of December 31,
2004. Our management’s assessment of the effectiveness of
our company’s internal control over financial reporting as
of December 31, 2004, has been audited by
PricewaterhouseCoopers LLP, an independent registered public
accounting firm, as stated in their report which is included
elsewhere in this Annual Report on Form 10-K. See
“Report of Independent Registered Public Accounting
Firm”.
During 2004, the Company acquired, in a purchase business
combination, GX Technology Corporation (GXT). In reliance on
guidance contained in a “Frequently Asked Questions”
interpretive release issued by the staff of the SEC’s
Office of Chief Accountant and Division of Corporation Finance
in June 2004 (and revised on October 6, 2004), our
management has determined to exclude GXT from the scope of its
assessment of our internal control over financial reporting as
of December 31, 2004. GXT is a direct wholly-owned
subsidiary of the Company. The total assets and total revenues
of GXT and its consolidated subsidiaries represent approximately
39% and 18%, respectively, of the total consolidated assets and
total consolidated revenues of the Company as of and for the
year ended December 31, 2004.
(c) Changes in Internal Controls. There were no changes in
our internal control over financial reporting during the
quarterly period ended December 31, 2004, that have
materially affected, or are reasonably likely to materially
affect, our internal control over financial reporting.
Item 9B. Other Information
Not applicable.
PART III
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| Item 10. |
Directors and Executive Officers of the Registrant |
The information required by Item 10 is included in our
definitive proxy statement for our 2005 Annual Meeting of
Stockholders under the headings “Item 1 —
Election of Directors,” “Executive Officers,”
“Section 16(a) Beneficial Ownership Reporting
Compliance,” “Board of Directors and Corporate
Governance” and “Committees of the Board.”
|
|
| Item 11. |
Executive Compensation |
The information required by Item 11 is included in our
definitive proxy statement for our 2005 Annual Meeting of
Stockholders under the headings “Director
Compensation” and “Executive Compensation.”
40
|
|
| Item 12. |
Security Ownership of Certain Beneficial Owners and
Management |
The information required by Item 12 is included in our
definitive proxy statement for our 2005 Annual Meeting of
Stockholders under the headings, “Ownership of Equity
Securities in I/ O” and “Executive Compensation-Equity
Compensation Plan Information.”
|
|
| Item 13. |
Certain Relationships and Related Transactions |
The information required by Item 13 is included in our
definitive proxy statement for our 2005 Annual Meeting of
Stockholders under the heading “Certain Transactions and
Relationships.”
|
|
| Item 14. |
Principal Accountant Fees and Services |
The information required by Item 14 is included in our
definitive proxy statement for our 2005 Annual Meeting of
Stockholders under the heading “Item 4 —
Ratification of Appointment of Independent Registered Public
Accounting Firm — Fees and Services.”
PART IV
|
|
| Item 15. |
Exhibits and Financial Statement Schedules |
(a) List of Documents Filed.
(1) Financial Statements
|
|
| |
The financial statements filed as part of this report are listed
in the “Index to Consolidated Financial Statements” on
page F-1 hereof. |
(2) Financial Statement Schedules
|
|
| |
The following financial statement schedule is listed in the
“Index to Consolidated Financial Statements” on page
F-1 hereof, and is included as part of this Annual Report on
Form 10-K: |
Schedule II — Valuation and Qualifying Accounts
All other schedules are omitted because they are inapplicable or
the requested information is shown in the financial statements
or noted therein.
(3) Exhibits
| |
|
|
|
|
|
|
| |
3 |
.1 |
|
— |
|
Restated Certificate of Incorporation dated August 31,
1990, filed on March 19, 2001 as Exhibit 3.1 to the
Company’s Transition Report on Form 10-K for the seven
months ended December 31, 2000 (Registration No.
001-12691), and incorporated herein by reference. |
| |
3 |
.2 |
|
— |
|
Certificate of Amendment to Restated Certificate of
Incorporation dated October 10, 1996, filed on
March 12, 2003 as Exhibit 3.2 to the Company’s
Annual Report on Form 10-K for the year ended
December 31, 2003 (Registration No. 001-12691), and
incorporated herein by reference. |
| |
3 |
.3 |
|
— |
|
Amended and Restated Bylaws, filed on March 8, 2002 as
Exhibit 4.3 to the Company’s Current Report on Form
8-K (Registration No. 001-12691), and incorporated herein by
reference. |
| |
4 |
.1 |
|
— |
|
Form of Certificate of Designation, Preference and Rights of
Series A Preferred Stock of Input/Output, Inc., filed as
Exhibit 2 to the Company’s Registration Statement on
Form 8-A dated January 27, 1997 (attached as Exhibit 1
to the Rights Agreement referenced in Exhibit 10.5), and
incorporated herein by reference. |
| |
4 |
.2 |
|
— |
|
Indenture dated as of December 10, 2003, filed on
January 27, 2004 as Exhibit 4.1 to the Company’s
Registration Statement on Form S-3 (Registration
No. 333-112263), and incorporated herein by reference. |
| |
4 |
.3 |
|
— |
|
Certificate of Rights and Designations of Series D-1
Cumulative Convertible Preferred Stock of Input/Output, Inc.
dated February 16, 2005, filed on February 17, 2005 as
Exhibit 3.1 to the Company’s Form 8-K (Registration
No. 001-12691), and incorporated herein by reference. |
41
| |
|
|
|
|
|
|
| |
**10 |
.1 |
|
— |
|
Amended and Restated 1990 Stock Option Plan, filed on
June 9, 1999 as Exhibit 4.2 to the Company’s
Registration Statement on Form S-8 (Registration
No. 333-80299), and incorporated herein by reference. |
| |
10 |
.2 |
|
— |
|
Lease Agreement dated as of August 20, 2001, between NL
Ventures III Stafford L.P. and Input/Output, Inc., filed on
November 14, 2001 as Exhibit 10.28 to the
Company’s Quarterly Report on Form 10-Q for the quarter
ended September 30, 2001 (Registration No. 001-12691), and
incorporated herein by reference. |
| |
**10 |
.3 |
|
— |
|
Input/Output, Inc. Amended and Restated 1996 Non-Employee
Director Stock Option Plan, filed on June 9, 1999 as
Exhibit 4.3 to the Company’s Registration Statement on
Form S-8 (Registration No. 333-80299), and
incorporated herein by reference. |
| |
10 |
.4 |
|
— |
|
Rights Agreement dated as of January 17, 1997, by and
between Input/Output, Inc. and Harris Trust and Savings Bank, as
Rights Agent, including exhibits thereto, filed on
January 27, 1997 as Exhibit 4 to the Company’s
Form 8-A (Registration No. 001-12691), and incorporated herein
by reference. |
| |
**10 |
.5 |
|
— |
|
Input/Output, Inc. Employee Stock Purchase Plan, filed on
March 28, 1997 as Exhibit 4.4 to the Company’s
Registration Statement on Form S-8 (Registration
No. 333-24125), and incorporated herein by reference. |
| |
10 |
.6 |
|
— |
|
First Amendment to Rights Agreement dated April 21, 1999,
by and between the Company and Harris Trust and Savings Bank, as
Rights Agent, filed on May 7, 1999 as Exhibit 10.3 to
the Company’s Current Report on Form 8-K (Registration No.
001-12691), and incorporated herein by reference. |
| |
10 |
.7 |
|
— |
|
Registration Rights Agreement dated as of November 16,
1998, by and among the Company and The Laitram Corporation,
filed on March 12, 2004 as Exhibit 10.7 to the
Company’s Annual Report on Form 10-K for the year ended
December 31, 2003 (Registration No. 001-12691), and
incorporated herein by reference. |
| |
**10 |
.8 |
|
— |
|
Input/Output, Inc. 1998 Restricted Stock Plan dated as of
June 1, 1998, filed on June 9, 1999 as
Exhibit 4.7 to the Company’s Registration Statement on
S-8 (Registration No. 333-80297), and incorporated herein by
reference. |
| |
**10 |
.9 |
|
— |
|
Input/Output Inc. Non-qualified Deferred Compensation Plan,
filed on April 1, 2002 as Exhibit 10.14 to the
Company’s Annual Report on Form 10-K for the year ended
December 31, 2001 (Registration No. 001-12691), and
incorporated herein by reference. |
| |
**10 |
.10 |
|
— |
|
Amendment No. 1 to the Input/Output, Inc. Amended and
Restated 1996 Non-Employee Director Stock Option Plan dated
September 13, 1999, filed on November 14, 1999 as
Exhibit 10.4 to the Company’s Quarterly Report on Form
10-Q for the fiscal quarter ended August 31, 1999
(Registration No. 001-12691), and incorporated herein by
reference. |
| |
**10 |
.11 |
|
— |
|
Input/Output, Inc. 2000 Restricted Stock Plan, effective as of
March 13, 2000, filed on August 17, 2000 as
Exhibit 10.27 to the Company’s Annual Report on Form
10-K for the fiscal year ended May 31, 2000 (Registration
No. 001-12691), and incorporated herein by reference. |
| |
**10 |
.12 |
|
— |
|
Input/Output, Inc. 2000 Long-Term Incentive Plan, filed on
November 6, 2000 as Exhibit 4.7 to the Company’s
Registration Statement on Form S-8 (No. 333-49382), and
incorporated by reference herein. |
| |
***10 |
.13 |
|
— |
|
Input/Output, Inc. Amended and Restated 1991 Outside Directors
Stock Option Plan. |
| |
**10 |
.14 |
|
— |
|
Amendment to the Input/Output, Inc. Amended and Restated 1991
Outside Directors Stock Option Plan, filed on August 28,
1997 as Exhibit 10.9 to the Company’s Annual Report on
Form 10-K for the fiscal year ended May 31, 1997
(Registration No. 001-12691), and incorporated herein by
reference. |
| |
**10 |
.15 |
|
— |
|
Amendment No. 2 to the Input/Output, Inc. Amended and
Restated 1991 Outside Directors Stock Option Plan, dated
September 13, 1999, filed on November 14, 1999 as
Exhibit 10.3 to the Company’s Quarterly Report on Form
10-Q for the fiscal quarter ended August 31, 1999
(Registration No. 001- 12691), and incorporated herein by
reference. |
| |
**10 |
.16 |
|
— |
|
Employment Agreement dated effective as of March 31, 2003,
by and between the Company and Robert P. Peebler, filed on
March 31, 2003 as Exhibit 10.1 to the Company’s
Current Report on Form 8-K (Registration No. 001-12691), and
incorporated herein by reference. |
42
| |
|
|
|
|
|
|
| |
**10 |
.17 |
|
— |
|
Employment Agreement dated effective as of January 1, 2004,
by and between the Company and J. Michael Kirksey, filed on
March 12, 2004 as Exhibit 10.21 to the Company’s
Annual Report on Form 10-K for the year ended December 31,
2003 (Registration No. 001-12691), and incorporated herein by
reference. |
| |
**10 |
.18 |
|
— |
|
Employment Agreement dated effective as of April 23, 2003,
by and between the Company and Jorge Machnizh, filed on
August 7, 2003 as Exhibit 10.28 to the Company’s
Quarterly Report on Form 10-Q for the fiscal quarter ended
June 30, 2003 (Registration No. 001-12691), and
incorporated herein by reference. |
| |
10 |
.19 |
|
— |
|
Stock Purchase Agreement dated as of May 10, 2004, by and
among the selling shareholders, GX Technology Corporation and
the Company, filed on May 10, 2004 as Exhibit 2.1 to
the Company’s Registration Statement on Form S-3 (Reg.
No. 333-115345), and incorporated herein by reference.. |
| |
10 |
.20 |
|
— |
|
First Amendment to Stock Purchase Agreement dated as of
June 11, 2004, by and among the selling shareholders, GX
Technology Corporation and the Company, filed on June 15,
2004 as Exhibit 10.2 to the Company’s Current Report
on Form 8-K/A (Registration No. 001-12691), and incorporated
herein by reference. |
| |
**10 |
.21 |
|
— |
|
Employment Agreement dated effective as of June 15, 2004,
by and between the Company and David L. Roland, filed on
August 9, 2004 as Exhibit 10.5 to the Company’s
Quarterly Report on Form 10-Q for the quarterly period ended
June 30, 2004 (Registration No. 001-12691), and
incorporated herein by reference. |
| |
**10 |
.22 |
|
— |
|
Executive Employment Agreement dated as of March 26, 2004,
by and between GX Technology Corporation and Michael K. Lambert,
filed on August 9, 2004 as Exhibit 10.2 to the
Company’s Quarterly Report on Form 10-Q for the quarterly
period ended June 30, 2004 (Registration No. 001-12691),
and incorporated herein by reference. |
| |
**10 |
.23 |
|
— |
|
First Amendment to Executive Employment Agreement dated as of
June 14, 2004, by and between GX Technology Corporation and
Michael K. Lambert, filed on August 9, 2004 as
Exhibit 10.3 to the Company’s Quarterly Report on Form
10-Q for the quarterly period ended June 30, 2004
(Registration No. 001-12691), and incorporated herein by
reference. |
| |
**10 |
.24 |
|
— |
|
Second Amendment to Executive Employment Agreement dated as of
June 14, 2004, by and between GX Technology Corporation and
Michael K. Lambert, filed on August 9, 2004 as
Exhibit 10.4 to the Company’s Quarterly Report on Form
10-Q for the quarterly period ended June 30, 2004
(Registration No. 001-12691), and incorporated herein by
reference. |
| |
**10 |
.25 |
|
— |
|
GX Technology Corporation Employee Stock Option Plan, filed on
August 9, 2004 as Exhibit 10.1 to the Company’s
Quarterly Report on Form 10-Q for the quarterly period ended
June 30, 2004 (Registration No. 001-12691), and
incorporated herein by reference. |
| |
10 |
.26 |
|
— |
|
Concept Systems Holdings Limited Share Acquisition Agreement
dated February 23, 2004, filed on March 5, 2004 as
Exhibit 2.1 to the Company’s Current Report on Form
8-K (Registration No. 001-12691), and incorporated herein by
reference. |
| |
10 |
.27 |
|
— |
|
Concept Systems Holdings Limited Registration Rights Agreement
dated February 23, 2004, filed on March 5, 2004 as
Exhibit 4.1 to the Company’s Current Report on
Form 8-K (Registration No. 001-12691), and incorporated
herein by reference. |
| |
**10 |
.28 |
|
— |
|
Form of Employment Inducement Stock Option Agreement for the
Input/Output, Inc. — Concept Systems Employment
Inducement Stock Option Program, filed on July 27, 2004 as
Exhibit 4.1 to the Company’s Registration Statement on
Form S-8 (Reg. No. 333-117716), and incorporated
herein by reference. |
| |
10 |
.29 |
|
— |
|
Second Amendment to Rights Agreement dated February 16,
2005, amending the terms of the Rights Agreement, as amended,
between the Company and Computershare Investor Services, LLC
(successor to Harris Trust and Savings Bank), as Rights Agent,
dated as of January 17, 1997, filed on February 17,
2005 as Exhibit 3.2 to the Company’s Form 8-K
(Registration No. 001-12691), and incorporated herein by
reference. |
| |
10 |
.30 |
|
— |
|
Agreement dated as of February 15, 2005 between
Input/Output, Inc. and Fletcher International, Ltd., filed on
February 17, 2005 as Exhibit 10.1 to the
Company’s Form 8-K (Registration No. 001-12691), and
incorporated herein by reference. |
| |
**10 |
.31 |
|
— |
|
Input/Output, Inc. 2003 Stock Option Plan, dated March 27,
2003 (incorporated by reference to Appendix B of the
Company’s definitive proxy statement on Schedule 14A filed
with the Securities and Exchange Commission on April 30,
2003). |
43
| |
|
|
|
|
|
|
| |
**10 |
.32 |
|
— |
|
Input/Output, Inc. 2004 Long-Term Incentive Plan, dated
May 3, 2004 (incorporated by reference to Appendix B of the
Company’s definitive proxy statement on Schedule 14A filed
with the Securities and Exchange Commission on May 13,
2004). |
| |
*21 |
.1 |
|
— |
|
Subsidiaries of the Company. |
| |
*23 |
.1 |
|
— |
|
Consent of PricewaterhouseCoopers LLP. |
| |
*24 |
.1 |
|
— |
|
The Power of Attorney is set forth on the signature page hereof. |
| |
*31 |
.1 |
|
— |
|
Certification of Chief Executive Officer Pursuant to
Rule 13a-14(a) or Rule 15d-14(a). |
| |
*31 |
.2 |
|
— |
|
Certification of Chief Financial Officer Pursuant to
Rule 13a-14(a) or Rule 15d-14(a). |
| |
*32 |
.1 |
|
— |
|
Certification of Chief Executive Officer Pursuant to
18 U.S.C. §1350 |
| |
*32 |
.2 |
|
— |
|
Certification of Chief Financial Officer Pursuant to
18 U.S.C. §1350. |
|
|
| ** |
Management contract or compensatory plan or arrangement. |
(b) Exhibits required by Item 601 of
Regulation S-K.
|
|
| |
Reference is made to subparagraph (a) (3) of this
Item 15, which is incorporated herein by reference. |
(c) Not applicable.
44
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, as amended, 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 March 16, 2005.
|
|
|
| |
By |
/s/ J. Michael Kirksey |
|
|
| |
|
| |
J. Michael Kirksey |
| |
Executive Vice President and |
| |
Chief Financial Officer |
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Robert P. Peebler and J.
Michael Kirksey and each of them, as his or her true and lawful
attorneys-in-fact and agents with full power of substitution and
re-substitution for him or her and in his or her name, place and
stead, in any and all capacities, to sign any and all documents
relating to the Annual Report on Form 10-K for the year
ended December 31, 2004, including any and all amendments
and supplements thereto, and to file the same with all exhibits
thereto and other documents in connection therewith with the
Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents full power and authority to do and
perform each and every act and thing requisite and necessary to
be done in and about the premises, as fully as to all intents
and purposes as he or she might or could do in person, hereby
ratifying and confirming all that said attorneys-in-fact and
agents or their or his substitute or substitutes may lawfully do
or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of
1934, as amended, this Annual Report on Form 10-K has been
signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
| |
|
|
|
|
|
|
| Name |
|
Capacities |
|
Date |
| |
|
|
|
|
| |
/s/ ROBERT P. PEEBLER
Robert
P. Peebler |
|
President, Chief Executive Officer and Director (Principal
Executive Officer) |
|
March 16, 2005 |
| |
/s/ J. MICHAEL KIRKSEY
J.
Michael Kirksey |
|
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer) |
|
March 16, 2005 |
| |
/s/ MICHAEL L. MORRISON
Michael
L. Morrison |
|
Controller and Director of Accounting (Principal Accounting
Officer) |
|
March 16, 2005 |
| |
/s/ JAMES M. LAPEYRE,
JR.
James
M. Lapeyre, Jr. |
|
Chairman of the Board of Directors and Director |
|
March 16, 2005 |
| |
/s/ BRUCE S. APPELBAUM
Bruce
S. Appelbaum |
|
Director |
|
March 16, 2005 |
| |
/s/ THEODORE H. ELLIOTT,
JR.
Theodore
H. Elliott, Jr. |
|
Director |
|
March 16, 2005 |
45
| |
|
|
|
|
|
|
| Name |
|
Capacities |
|
Date |
| |
|
|
|
|
| |
/s/ FRANKLIN MYERS
Franklin
Myers |
|
Director |
|
March 16, 2005 |
| |
/s/ S. JAMES NELSON,
JR.
S.
James Nelson, Jr. |
|
Director |
|
March 16, 2005 |
| |
/s/ JOHN N. SEITZ
John
N. Seitz |
|
Director |
|
March 16, 2005 |
| |
/s/ SAM K. SMITH
Sam
K. Smith |
|
Director |
|
March 16, 2005 |
46
INPUT/ OUTPUT, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
| |
|
|
|
|
|
| |
|
Page | |
| |
|
| |
|
Input/ Output, Inc. and Subsidiaries:
|
|
|
|
|
| |
|
|
|
F-2 |
|
| |
|
|
|
F-4 |
|
| |
|
|
|
F-5 |
|
| |
|
|
|
F-6 |
|
| |
|
|
|
F-7 |
|
| |
|
|
|
F-8 |
|
| |
|
|
|
S-1 |
|
All other schedules are omitted because they are not applicable
or the required information is shown in the financial statements
or notes thereto.
F-1
Report of Independent Registered Public Accounting Firm
To Board of Directors and
Stockholders of Input/ Output, Inc.:
We have completed an integrated audit of Input/ Output, Inc. and
Subsidiaries’ 2004 consolidated financial statements and of
its internal control over financial reporting as of
December 31, 2004 and audits of its 2003 and 2002
consolidated financial statements in accordance with the
standards of the Public Company Accounting Oversight Board
(United States). Our opinions, based on our audits, are
presented below.
Consolidated financial statements and financial statement
schedule
In our opinion, the consolidated financial statements listed in
the accompanying index, present fairly, in all material
respects, the financial position of Input/ Output, Inc. and its
subsidiaries at December 31, 2004 and 2003, and the results
of their operations and their cash flows for each of the three
years in the period ended December 31, 2004 in conformity
with accounting principles generally accepted in the United
States of America. In addition, in our opinion, the financial
statement schedule listed in the accompanying index presents
fairly, in all material respects, the information set forth
therein when read in conjunction with the related consolidated
financial statements. These financial statements and financial
statement schedule are the responsibility of the Company’s
management. Our responsibility is to express an opinion on these
financial statements and financial statement schedule based on
our audits. We conducted our audits of these statements in
accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we
plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material
misstatement. An audit of financial statements includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by
management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable
basis for our opinion.
As discussed in Note 1 to the consolidated financial
statements, in 2002, the Company changed its accounting for
goodwill as a result of adopting the provisions of Statement of
Financial Accounting Standards No 142 “Goodwill and
Other Intangible Assets.”
Internal control over financial reporting
Also, in our opinion, management’s assessment, included in
Management’s Report on Internal Control Over Financial
Reporting appearing under Item 9A, that the Company
maintained effective internal control over financial reporting
as of December 31, 2004 based on criteria established in
Internal Control — Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO), is fairly stated, in all material respects,
based on those criteria. Furthermore, in our opinion, the
Company maintained, in all material respects, effective internal
control over financial reporting as of December 31, 2004,
based on criteria established in Internal Control —
Integrated Framework issued by the COSO. The Company’s
management is responsible for maintaining effective internal
control over financial reporting and for its assessment of the
effectiveness of internal control over financial reporting. Our
responsibility is to express opinions on management’s
assessment and on the effectiveness of the Company’s
internal control over financial reporting based on our audit. We
conducted our audit of internal control over financial reporting
in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards
require that we plan and perform the audit to obtain reasonable
assurance about whether effective internal control over
financial reporting was maintained in all material respects. An
audit of internal control over financial reporting includes
obtaining an understanding of internal control over financial
reporting, evaluating management’s assessment, testing and
evaluating the design and operating effectiveness of internal
control, and performing such other procedures as we consider
necessary in the circumstances. We believe that our audit
provides a reasonable basis for our opinions.
A company’s internal control over financial reporting is a
process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. A company’s
internal control over financial reporting includes those
policies and procedures that (i) pertain to the maintenance
of records that,
F-2
in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the company;
(ii) provide reasonable assurance that transactions are
recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of
management and directors of the company; and (iii) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the
company’s assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
As described in Management’s Report on Internal Control
Over Financial Reporting, management has excluded GX Technology
Corporation (GXT) from its assessment of internal control
over financial reporting as of December 31, 2004 because it
was acquired by the Company in a purchase business combination
during 2004. We have also excluded GXT from our audit of
internal control over financial reporting. GXT is a wholly-owned
subsidiary whose total assets and total revenues represent 39%
and 18%, respectively, of the related consolidated financial
statement amounts as of and for the year ended December 31,
2004.
|
|
| |
PricewaterhouseCoopers LLP |
Houston, TX
March 16, 2005
F-3
INPUT/ OUTPUT, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
| |
|
|
|
|
|
|
|
|
|
|
| |
|
December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
| |
|
| |
|
| |
| |
|
(In thousands, | |
| |
|
except share data) | |
|
ASSETS |
|
Current assets:
|
|
|
|
|
|
|
|
|
| |
Cash and cash equivalents
|
|
$ |
14,935 |
|
|
$ |
59,507 |
|
| |
Restricted cash
|
|
|
2,345 |
|
|
|
1,127 |
|
| |
Accounts receivable, net
|
|
|
61,598 |
|
|
|
34,270 |
|
| |
Current portion notes receivable, net
|
|
|
10,784 |
|
|
|
14,420 |
|
| |
Unbilled revenue
|
|
|
7,309 |
|
|
|
— |
|
| |
Inventories
|
|
|
86,659 |
|
|
|
53,551 |
|
| |
Prepaid expenses and other current assets
|
|
|
7,974 |
|
|
|
3,703 |
|
| |
|
|
|
|
|
|
| |
|
Total current assets
|
|
|
191,604 |
|
|
|
166,578 |
|
|
Notes receivable
|
|
|
4,143 |
|
|
|
6,409 |
|
|
Net assets held for sale
|
|
|
— |
|
|
|
3,331 |
|
|
Property, plant and equipment, net
|
|
|
45,239 |
|
|
|
27,607 |
|
|
Multi-client data library, net
|
|
|
9,572 |
|
|
|
— |
|
|
Deferred income taxes
|
|
|
480 |
|
|
|
1,149 |
|
|
Investment at cost
|
|
|
3,500 |
|
|
|
— |
|
|
Goodwill
|
|
|
147,066 |
|
|
|
35,025 |
|
|
Intangible and other assets, net
|
|
|
77,512 |
|
|
|
9,105 |
|
| |
|
|
|
|
|
|
| |
|
Total assets
|
|
$ |
479,116 |
|
|
$ |
249,204 |
|
| |
|
|
|
|
|
|
| |
|
LIABILITIES AND STOCKHOLDERS’ EQUITY |
|
Current liabilities:
|
|
|
|
|
|
|
|
|
| |
Notes payable and current maturities of long-term debt and lease
obligations
|
|
$ |
6,564 |
|
|
$ |
2,687 |
|
| |
Accounts payable
|
|
|
40,856 |
|
|
|
12,531 |
|
| |
Accrued expenses
|
|
|
26,686 |
|
|
|
15,833 |
|
| |
Deferred revenue
|
|
|
8,423 |
|
|
|
2,060 |
|
| |
|
|
|
|
|
|
| |
|
Total current liabilities
|
|
|
82,529 |
|
|
|
33,111 |
|
|
Long-term debt and lease obligations, net of current maturities
|
|
|
79,387 |
|
|
|
78,516 |
|
|
Other long-term liabilities
|
|
|
2,688 |
|
|
|
3,813 |
|
|
Commitments and contingencies (Notes 18 and 22)
|
|
|
|
|
|
|
|
|
|
Stockholders’ equity:
|
|
|
|
|
|
|
|
|
| |
Common stock, $.01 par value; authorized
100,000,000 shares; outstanding 78,561,675 shares at
December 31, 2004 and 51,390,334 shares at
December 31, 2003, net of treasury stock
|
|
|
795 |
|
|
|
522 |
|
| |
Additional paid-in capital
|
|
|
480,845 |
|
|
|
296,663 |
|
| |
Accumulated deficit
|
|
|
(161,516 |
) |
|
|
(158,537 |
) |
| |
Accumulated other comprehensive income
|
|
|
2,449 |
|
|
|
1,292 |
|
| |
Treasury stock, at cost, 784,009 shares at
December 31, 2004 and 777,423 shares at
December 31, 2003
|
|
|
(5,844 |
) |
|
|
(5,826 |
) |
| |
Unamortized restricted stock compensation
|
|
|
(2,217 |
) |
|
|
(350 |
) |
| |
|
|
|
|
|
|
| |
|
Total stockholders’ equity
|
|
|
314,512 |
|
|
|
133,764 |
|
| |
|
|
|
|
|
|
| |
|
Total liabilities and stockholders’ equity
|
|
$ |
479,116 |
|
|
$ |
249,204 |
|
| |
|
|
|
|
|
|
See accompanying Notes to Consolidated Financial Statements.
F-4
INPUT/ OUTPUT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Years Ended December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
| |
|
(In thousands, except share and per share data) | |
|
Net sales
|
|
$ |
247,299 |
|
|
$ |
150,033 |
|
|
$ |
118,583 |
|
|
Cost of sales
|
|
|
175,705 |
|
|
|
122,192 |
|
|
|
101,018 |
|
| |
|
|
|
|
|
|
|
|
|
| |
|
Gross profit
|
|
|
71,594 |
|
|
|
27,841 |
|
|
|
17,565 |
|
| |
|
|
|
|
|
|
|
|
|
|
Operating expenses (income):
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Research and development
|
|
|
19,611 |
|
|
|
18,696 |
|
|
|
28,756 |
|
| |
Marketing and sales
|
|
|
23,758 |
|
|
|
12,566 |
|
|
|
11,218 |
|
| |
General and administrative
|
|
|
29,748 |
|
|
|
16,753 |
|
|
|
19,760 |
|
| |
(Gain) loss on sale of assets
|
|
|
(3,980 |
) |
|
|
(291 |
) |
|
|
425 |
|
| |
Impairment of long-lived assets
|
|
|
— |
|
|
|
1,120 |
|
|
|
6,274 |
|
| |
Goodwill impairment
|
|
|
— |
|
|
|
— |
|
|
|
15,122 |
|
| |
|
|
|
|
|
|
|
|
|
| |
|
Total operating expenses
|
|
|
69,137 |
|
|
|
48,844 |
|
|
|
81,555 |
|
| |
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
|
2,457 |
|
|
|
(21,003 |
) |
|
|
(63,990 |
) |
|
Interest expense
|
|
|
(6,231 |
) |
|
|
(4,087 |
) |
|
|
(3,124 |
) |
|
Interest income
|
|
|
1,276 |
|
|
|
1,903 |
|
|
|
2,280 |
|
|
Fair value adjustment and exchange of warrant obligation
|
|
|
— |
|
|
|
1,757 |
|
|
|
3,252 |
|
|
Impairment of investment
|
|
|
— |
|
|
|
(2,059 |
) |
|
|
— |
|
|
Other income (expense)
|
|
|
220 |
|
|
|
685 |
|
|
|
(373 |
) |
| |
|
|
|
|
|
|
|
|
|
|
Loss before income taxes
|
|
|
(2,278 |
) |
|
|
(22,804 |
) |
|
|
(61,955 |
) |
|
Income tax expense
|
|
|
701 |
|
|
|
348 |
|
|
|
56,770 |
|
| |
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
(2,979 |
) |
|
|
(23,152 |
) |
|
|
(118,725 |
) |
|
Preferred dividend
|
|
|
— |
|
|
|
— |
|
|
|
947 |
|
| |
|
|
|
|
|
|
|
|
|
|
Net loss applicable to common shares
|
|
$ |
(2,979 |
) |
|
$ |
(23,152 |
) |
|
$ |
(119,672 |
) |
| |
|
|
|
|
|
|
|
|
|
|
Basic and diluted loss per common share
|
|
$ |
(0.05 |
) |
|
$ |
(0.45 |
) |
|
$ |
(2.35 |
) |
| |
|
|
|
|
|
|
|
|
|
|
Weighted average number of common and diluted shares outstanding
|
|
|
65,960,967 |
|
|
|
51,236,771 |
|
|
|
51,014,505 |
|
| |
|
|
|
|
|
|
|
|
|
See accompanying Notes to Consolidated Financial Statements.
F-5
INPUT/ OUTPUT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Years Ended December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
| |
|
(In thousands) | |
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Adjustments to reconcile net loss to net cash (used in) provided
by operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Net loss
|
|
$ |
(2,979 |
) |
|
$ |
(23,152 |
) |
|
$ |
(118,725 |
) |
| |
|
Depreciation and amortization (other than multi-client library)
|
|
|
18,345 |
|
|
|
11,444 |
|
|
|
13,237 |
|
| |
|
Amortization of multi-client library
|
|
|
6,323 |
|
|
|
— |
|
|
|
— |
|
| |
|
Fair value adjustment and exchange of warrant obligation
|
|
|
— |
|
|
|
(1,757 |
) |
|
|
(3,252 |
) |
| |
|
Impairment of long-lived assets
|
|
|
— |
|
|
|
1,120 |
|
|
|
6,274 |
|
| |
|
Goodwill impairment
|
|
|
— |
|
|
|
— |
|
|
|
15,122 |
|
| |
|
Write-down of rental equipment
|
|
|
— |
|
|
|
2,500 |
|
|
|
— |
|
| |
|
Impairment of investment in Energy Virtual Partners, Inc. (EVP)
|
|
|
— |
|
|
|
2,059 |
|
|
|
— |
|
| |
|
Amortization of restricted stock and other stock compensation
|
|
|
925 |
|
|
|
(222 |
) |
|
|
417 |
|
| |
|
Deferred income tax
|
|
|
— |
|
|
|
— |
|
|
|
58,843 |
|
| |
|
Bad debt expense
|
|
|
6,346 |
|
|
|
569 |
|
|
|
2,701 |
|
| |
|
(Gain) loss on disposal of fixed assets
|
|
|
(3,980 |
) |
|
|
(291 |
) |
|
|
425 |
|
| |
Change in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Accounts and notes receivable
|
|
|
(27,849 |
) |
|
|
(17,059 |
) |
|
|
14,338 |
|
| |
|
Unbilled revenue
|
|
|
1,406 |
|
|
|
— |
|
|
|
— |
|
| |
|
Inventories
|
|
|
(40,508 |
) |
|
|
(4,877 |
) |
|
|
19,423 |
|
| |
|
Accounts payable and accrued expenses
|
|
|
21,569 |
|
|
|
(4,714 |
) |
|
|
(109 |
) |
| |
|
Deferred revenue
|
|
|
(123 |
) |
|
|
(2,815 |
) |
|
|
2,984 |
|
| |
|
Other assets and liabilities
|
|
|
482 |
|
|
|
4,125 |
|
|
|
1,974 |
|
| |
|
|
|
|
|
|
|
|
|
| |
|
|
Net cash (used in) provided by operating activities
|
|
|
(20,043 |
) |
|
|
(33,070 |
) |
|
|
13,652 |
|
| |
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Purchase of property, plant and equipment
|
|
|
(5,022 |
) |
|
|
(4,587 |
) |
|
|
(8,230 |
) |
| |
Investment in multi-client data library
|
|
|
(4,168 |
) |
|
|
— |
|
|
|
— |
|
| |
Proceeds from the sale of fixed assets
|
|
|
4,762 |
|
|
|
490 |
|
|
|
— |
|
| |
Proceeds from collection of long-term note receivable
|
|
|
5,800 |
|
|
|
— |
|
|
|
— |
|
| |
Business acquisitions
|
|
|
(176,850 |
) |
|
|
(1,267 |
) |
|
|
(3,151 |
) |
| |
Cash of acquired businesses
|
|
|
2,193 |
|
|
|
— |
|
|
|
501 |
|
| |
Disposition of Applied MEMS
|
|
|
(513 |
) |
|
|
— |
|
|
|
— |
|
| |
Investment in and liquidation of EVP
|
|
|
117 |
|
|
|
(2,167 |
) |
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
| |
|
|
Net cash used in investing activities
|
|
|
(173,681 |
) |
|
|
(7,531 |
) |
|
|
(10,880 |
) |
| |
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Net proceeds from issuance of long-term debt
|
|
|
— |
|
|
|
56,550 |
|
|
|
— |
|
| |
Payments on notes payable, long-term debt and lease obligations
|
|
|
(6,341 |
) |
|
|
(34,237 |
) |
|
|
(2,550 |
) |
| |
Deposit to secure a letter of credit
|
|
|
— |
|
|
|
(1,500 |
) |
|
|
— |
|
| |
Payments of preferred dividends
|
|
|
— |
|
|
|
— |
|
|
|
(411 |
) |
| |
Purchase of treasury stock
|
|
|
(98 |
) |
|
|
(81 |
) |
|
|
(160 |
) |
| |
Proceeds from employee stock purchases and exercise of stock
options
|
|
|
5,482 |
|
|
|
470 |
|
|
|
1,815 |
|
| |
Net proceeds from issuance of common stock
|
|
|
150,066 |
|
|
|
— |
|
|
|
— |
|
| |
Payments to repurchase preferred stock
|
|
|
— |
|
|
|
— |
|
|
|
(30,000 |
) |
| |
|
|
|
|
|
|
|
|
|
| |
|
|
Net cash provided by (used in) financing activities
|
|
|
149,109 |
|
|
|
21,202 |
|
|
|
(31,306 |
) |
| |
|
|
|
|
|
|
|
|
|
|
Effect of change in foreign currency exchange rates on cash and
cash equivalents
|
|
|
43 |
|
|
|
2,688 |
|
|
|
3,385 |
|
| |
|
|
|
|
|
|
|
|
|
|
Net decrease in cash and cash equivalents
|
|
|
(44,572 |
) |
|
|
(16,711 |
) |
|
|
(25,149 |
) |
|
Cash and cash equivalents at beginning of period
|
|
|
59,507 |
|
|
|
76,218 |
|
|
|
101,367 |
|
| |
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
|
$ |
14,935 |
|
|
$ |
59,507 |
|
|
$ |
76,218 |
|
| |
|
|
|
|
|
|
|
|
|
See accompanying Notes to Consolidated Financial Statements.
F-6
INPUT/ OUTPUT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY AND
COMPREHENSIVE INCOME (LOSS)
Years Ended December 31, 2004, 2003 and 2002
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Cumulative | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Convertible | |
|
|
|
|
|
|
|
Accumulated | |
|
|
|
Unamortized | |
|
|
| |
|
Preferred Stock | |
|
Common Stock | |
|
Additional | |
|
|
|
Other | |
|
|
|
Restricted | |
|
Total | |
| |
|
| |
|
| |
|
Paid-In | |
|
Accumulated | |
|
Comprehensive | |
|
Treasury | |
|
Stock | |
|
Stockholders’ | |
| |
|
Shares | |
|
Amount | |
|
Shares | |
|
Amount | |
|
Capital | |
|
Deficit | |
|
Income (Loss) | |
|
Stock | |
|
Compensation | |
|
Equity | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
| |
|
(In thousands, except share data) | |
|
Balance at January 1, 2002
|
|
|
55,000 |
|
|
$ |
1 |
|
|
|
50,865,729 |
|
|
$ |
516 |
|
|
$ |
360,147 |
|
|
$ |
(15,713 |
) |
|
$ |
(7,499 |
) |
|
$ |
(5,769 |
) |
|
$ |
(646 |
) |
|
$ |
331,037 |
|
| |
Comprehensive loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Net loss
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(118,725 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(118,725 |
) |
| |
Other comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Translation adjustment
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
5,119 |
|
|
|
— |
|
|
|
— |
|
|
|
5,119 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Total comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(113,606 |
) |
| |
Amortization of restricted stock compensation
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
417 |
|
|
|
417 |
|
| |
Issuance of restricted stock awards
|
|
|
— |
|
|
|
— |
|
|
|
28,450 |
|
|
|
— |
|
|
|
270 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(270 |
) |
|
|
— |
|
| |
Cancellation of restricted stock awards
|
|
|
— |
|
|
|
— |
|
|
|
(20,000 |
) |
|
|
— |
|
|
|
(158 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
158 |
|
|
|
— |
|
| |
Purchase treasury stock
|
|
|
— |
|
|
|
— |
|
|
|
(40,000 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(160 |
) |
|
|
— |
|
|
|
(160 |
) |
| |
Preferred dividend
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(947 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(947 |
) |
| |
Repurchase and exchange of preferred stock
|
|
|
(55,000 |
) |
|
|
(1 |
) |
|
|
— |
|
|
|
— |
|
|
|
(66,069 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(66,070 |
) |
| |
Exercise of stock options
|
|
|
— |
|
|
|
— |
|
|
|
126,884 |
|
|
|
2 |
|
|
|
990 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
992 |
|
| |
Issuance of stock for the Employee Stock Purchase Plan
|
|
|
— |
|
|
|
— |
|
|
|
117,876 |
|
|
|
1 |
|
|
|
822 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
823 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2002
|
|
|
— |
|
|
|
— |
|
|
|
51,078,939 |
|
|
|
519 |
|
|
|
296,002 |
|
|
|
(135,385 |
) |
|
|
(2,380 |
) |
|
|
(5,929 |
) |
|
|
(341 |
) |
|
|
152,486 |
|
| |
Comprehensive loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Net loss
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(23,152 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(23,152 |
) |
| |
Other comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Translation adjustment
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
3,672 |
|
|
|
— |
|
|
|
— |
|
|
|
3,672 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Total comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(19,480 |
) |
| |
Amortization of restricted stock compensation
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
498 |
|
|
|
498 |
|
| |
Issuance of restricted stock awards
|
|
|
— |
|
|
|
— |
|
|
|
260,038 |
|
|
|
2 |
|
|
|
1,047 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(1,049 |
) |
|
|
— |
|
| |
Cancellation of restricted stock awards
|
|
|
— |
|
|
|
— |
|
|
|
(206,640 |
) |
|
|
(2 |
) |
|
|
(1,259 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
542 |
|
|
|
(719 |
) |
| |
Purchase treasury stock
|
|
|
— |
|
|
|
— |
|
|
|
(16,939 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(81 |
) |
|
|
— |
|
|
|
(81 |
) |
| |
Exchange of warrant obligation
|
|
|
— |
|
|
|
— |
|
|
|
125,000 |
|
|
|
1 |
|
|
|
441 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
442 |
|
| |
Issuance of stock for the Employee Stock Purchase Plan
|
|
|
— |
|
|
|
— |
|
|
|
127,122 |
|
|
|
2 |
|
|
|
468 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
470 |
|
| |
Issuance of treasury stock
|
|
|
— |
|
|
|
— |
|
|
|
22,814 |
|
|
|
— |
|
|
|
(36 |
) |
|
|
— |
|
|
|
— |
|
|
|
184 |
|
|
|
— |
|
|
|
148 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2003
|
|
|
— |
|
|
|
— |
|
|
|
51,390,334 |
|
|
|
522 |
|
|
|
296,663 |
|
|
|
(158,537 |
) |
|
|
1,292 |
|
|
|
(5,826 |
) |
|
|
(350 |
) |
|
|
133,764 |
|
| |
Comprehensive loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Net loss
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(2,979 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(2,979 |
) |
| |
Other comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Translation adjustment
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
1,157 |
|
|
|
— |
|
|
|
— |
|
|
|
1,157 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Total comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,822 |
) |
| |
Amortization of restricted stock compensation
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
801 |
|
|
|
801 |
|
| |
Issuance of restricted stock awards
|
|
|
— |
|
|
|
— |
|
|
|
290,500 |
|
|
|
3 |
|
|
|
2,770 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(2,773 |
) |
|
|
— |
|
| |
Issuance of restricted stock units
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
48 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
48 |
|
| |
Cancellation of restricted stock awards
|
|
|
— |
|
|
|
— |
|
|
|
(24,562 |
) |
|
|
— |
|
|
|
(134 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
105 |
|
|
|
(29 |
) |
| |
Purchase treasury stock
|
|
|
— |
|
|
|
— |
|
|
|
(16,651 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(98 |
) |
|
|
— |
|
|
|
(98 |
) |
| |
Exercise of stock options
|
|
|
— |
|
|
|
— |
|
|
|
2,220,674 |
|
|
|
23 |
|
|
|
5,138 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
5,161 |
|
| |
Modification of stock option awards
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
795 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
795 |
|
| |
Assumption of GXT stock options
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
14,637 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
14,637 |
|
| |
Issuance of common stock
|
|
|
— |
|
|
|
— |
|
|
|
22,928,700 |
|
|
|
229 |
|
|
|
149,837 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
150,066 |
|
| |
Issuance of common stock in business acquisition
|
|
|
— |
|
|
|
— |
|
|
|
1,680,000 |
|
|
|
17 |
|
|
|
10,746 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
10,763 |
|
| |
Issuance of stock for the Employee Stock Purchase Plan
|
|
|
— |
|
|
|
— |
|
|
|
82,615 |
|
|
|
1 |
|
|
|
320 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
321 |
|
| |
Issuance of treasury stock
|
|
|
— |
|
|
|
— |
|
|
|
10,065 |
|
|
|
— |
|
|
|
25 |
|
|
|
— |
|
|
|
— |
|
|
|
80 |
|
|
|
— |
|
|
|
105 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2004
|
|
|
— |
|
|
$ |
— |
|
|
|
78,561,675 |
|
|
$ |
795 |
|
|
$ |
480,845 |
|
|
$ |
(161,516 |
) |
|
$ |
2,449 |
|
|
$ |
(5,844 |
) |
|
$ |
(2,217 |
) |
|
$ |
314,512 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying Notes to Consolidated Financial Statements.
F-7
INPUT/ OUTPUT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
| (1) |
Summary of Significant Accounting Policies |
General Description and Principles of Consolidation.
Input/ Output, Inc. and its wholly owned subsidiaries offer a
full suite of related products and services for seismic data
acquisition and processing, including products incorporating
traditional analog technologies and products incorporating the
proprietary VectorSeis, True Digital technology. The
consolidated financial statements include the accounts of Input/
Output, Inc. and its wholly owned subsidiaries (collectively
referred to as the “Company” or “I/ O”).
Inter-company balances and transactions have been eliminated.
Use of Estimates. The preparation of financial statements
in conformity with accounting principles generally accepted in
the United States of America requires management to make
estimates and assumptions that affect the reported amounts of
assets and liabilities at the date of the financial statements
and the reported amounts of revenues and expenses during the
reporting period. Significant estimates are made at discrete
points in time based on relevant market information. These
estimates may be subjective in nature and involve uncertainties
and matters of judgment and therefore cannot be determined with
exact precision. Areas involving significant estimates include,
but are not limited to, accounts and notes receivable, inventory
valuation, multi-client data libraries, goodwill valuation,
deferred taxes, and accrued warranty costs. Actual results could
differ from those estimates.
Cash and Cash Equivalents. The Company considers all
highly liquid debt instruments with an original maturity of
three months or less to be cash equivalents. At
December 31, 2004 and 2003 there were $2.3 million and
$1.1 million, respectively, of restricted cash used to
secure standby and commercial letters of credit.
Accounts and Notes Receivable. Accounts and notes
receivable are recorded at cost, less the related allowance for
doubtful accounts and notes. The Company considers current
information and events regarding the customers’ ability to
repay their obligations, such as the length of time the
receivable balance is outstanding, the customers’s credit
worthiness and historical experience. The Company considers an
account or note to be impaired when it is probable that the
Company will be unable to collect all amounts due according to
the contractual terms. When an account or note is considered
impaired, the amount of the impairment is measured based on the
present value of expected future cash flows or the fair value of
collateral. Impairment losses (recoveries) are included in
the allowance for doubtful accounts and notes through an
increase (decrease) in bad debt expense.
Notes receivable are collateralized by the products sold and
bear interest at contractual rates ranging from 5.1% to
8.0% per year. Cash receipts on impaired notes are applied
to reduce the principal amount of such notes until the principal
has been recovered and are recognized as interest income
thereafter. The Company records interest income on investments
in notes receivable on the accrual basis of accounting. The
Company does not accrue interest on impaired loans where
collection of interest according to the contractual terms is
considered doubtful. Among the factors the Company considers in
making an evaluation of the collectibility of interest are:
(i) the status of the loan, (ii) the fair value of the
underlying collateral, (iii) the financial condition of the
borrower and (iv) anticipated future events.
Inventories. Inventories are stated at the lower of cost
(primarily standard cost, which approximates first-in, first-out
method) or market. The Company provides reserves for estimated
obsolescence or excess inventory equal to the difference between
cost of inventory and its estimated market value based upon
assumptions about future demand for the Company’s products
and market conditions.
F-8
INPUT/OUTPUT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Property, Plant and Equipment. Property, plant and
equipment are stated at cost. Depreciation expense is provided
straight-line over the following estimated useful lives:
| |
|
|
|
|
| |
|
Years | |
| |
|
| |
|
Machinery and equipment
|
|
|
3-8 |
|
|
Buildings
|
|
|
12-20 |
|
|
Leased equipment and other
|
|
|
1-10 |
|
Expenditures for renewals and betterments are capitalized;
repairs and maintenance are charged to expense as incurred. The
cost and accumulated depreciation of assets sold or otherwise
disposed of are removed from the accounts and any gain or loss
is reflected in operations.
The Company periodically evaluates the net realizable value of
long-lived assets, including property, plant and equipment,
relying on a number of factors including operating results,
business plans, economic projections and anticipated future cash
flows. Impairment in the carrying value of an asset held for use
is recognized whenever anticipated future cash flows
(undiscounted) from an asset are estimated to be less than
its carrying value. The amount of the impairment recognized is
the difference between the carrying value of the asset and its
fair value.
Multi-Client Data Library. The multi-client data library
consists of seismic surveys that are offered for licensing to
customers on a nonexclusive basis. The capitalized costs include
costs paid to third parties for the acquisition of data and
related activities associated with the data creation activity
and direct internal processing costs, such as salaries,
benefits, computer-related expenses and other costs incurred for
seismic data project design and management. For the year ended
December 31, 2004, the Company capitalized, as part of its
multi-client data library, approximately $2.0 million of
direct internal processing costs. At December 31, 2004,
multi-client data library creation and accumulated amortization
consisted of the following:
| |
|
|
|
|
| |
|
December 31, | |
| |
|
2004 | |
| |
|
| |
|
Gross costs of multi-client data creation
|
|
$ |
15,895 |
|
|
Less accumulated amortization
|
|
|
(6,323 |
) |
| |
|
|
|
|
Total
|
|
$ |
9,572 |
|
| |
|
|
|
During the acquisition and processing phase, the Company
amortizes costs using the percentage of actual pre-funding
revenue to the total estimated revenue multiplied by the
estimated total cost of the project. Once a multi-client data
library is available for commercial sale, the Company amortizes
the remaining costs using the greater of (i) the percentage
of actual revenue to the total estimated revenue multiplied by
the estimated total cost of the remaining project or (ii) a
straight-line basis over the useful economic life of the data.
The straight-line amortization period for 2-D projects is two
years and three years for 3-D projects.
The Company estimates the ultimate revenue expected to be
derived from a particular seismic data survey over its estimated
useful economic life to determine the costs to amortize, if
greater than straight-line amortization. That estimate is made
by the Company at the project’s initiation and is reviewed
and updated periodically. If, during any such review and update,
the Company determines that the ultimate revenue for a survey is
expected to be less than the original estimate of total revenue
for such survey, the Company increases the amortization rate
attributable to future revenue from such survey. In addition, in
connection with such reviews and updates, the Company evaluates
the recoverability of the multi-client data library, and, if
required under Statement of Accounting Standards
(SFAS) No. 144 “Accounting for the Impairment
and Disposal of Long-Lived Assets,” records and
impairment charge with respect to such data.
Computer Software. In February 2004, the Company acquired
Concept Systems Holding Limited (Concept Systems). A portion of
the purchase price was allocated to software available for sale
and included
F-9
INPUT/OUTPUT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
within Intangible and Other Assets, net. The capitalized costs
of computer software is charged to costs of goods sold in the
period sold, using the percentage of actual sales to the total
estimated sales multiplied by the total costs of the software.
Software is also subject to a minimum amortization amount equal
to the software costs divided by its remaining estimated
economic life of seven years. At December 31, 2004, the
total cost of software was $14.1 million, less accumulated
amortization of $1.6 million.
Investments. Investments are accounted for under the cost
method. The Company reviews its investments for impairment when
it is estimated that the fair value of an investment has fallen
below the then-current carrying amount. When the Company deems
the decline to be other than temporary, the Company records an
impairment charge for the difference between the
investment’s carrying value and its estimated fair value at
the time.
Financial Instruments. Fair value estimates are made at
discrete times based on relevant market information. These
estimates may be subjective in nature and involve uncertainties
and matters of significant judgment and, therefore, cannot be
determined with precision. The Company believes that the
carrying amount of its cash and cash equivalents, accounts and
notes receivable and accounts payable approximate the fair
values at those dates. The fair market value of the
Company’s notes payable and long-term debt (all fixed
interest rates) was $160.1 million and $100.3 million
at December 31, 2004 and 2003, respectively.
Goodwill and Other Intangible Assets. The Company
performs an annual impairment test at fiscal year end for
goodwill. Goodwill is allocated to reporting units, which are
either the operating segment or one reporting level below the
operating segment. For purposes of performing the impairment
test for goodwill as required by SFAS No. 142, the
Company established the following reporting units: Land Imaging
Systems, Sensor Geophone, Marine Imaging Systems, Data
Management Solutions and Seismic Imaging Solutions.
SFAS No. 142 requires the Company to compare the fair
value of the reporting unit to its carrying amount on an annual
basis to determine if there is potential goodwill impairment. If
the fair value of the reporting unit is less than its carrying
value, an impairment loss is recorded to the extent that the
fair value of the goodwill within the reporting unit is less
than its carrying value. To determine the fair value of their
reporting units, the Company uses a discounted future returns
valuation method.
During the third quarter of 2002, the Company performed an
interim impairment test on its then analog land products
reporting unit and recorded an impairment charge of
$15.1 million. The need for this interim impairment test
was precipitated by a continued weakness in the traditional
analog land seismic markets and the financial condition of many
of the seismic contractors, coupled with an anticipated decrease
in demand for analog products. The annual impairment assessment
performed at December 31, 2004, 2003 and 2002 resulted in
no impairment of the Company’s goodwill.
Intangible assets other than goodwill relate to proprietary
technology, patents, customer lists, customer relationships,
trade names and non-compete agreements and are included in
Intangible and Other Assets, net. The Company reviews the
carrying values of these intangible assets for impairment if
events or changes in the facts and circumstances indicate that
their carrying value may not be recoverable. The carrying value
of an intangible asset is not recoverable if it exceeds the sum
of the undiscounted cash flows expected to result from use of
the intangible asset. Any impairment determined is recorded in
the current period and is measured by comparing the fair value
of the related asset to its carrying value.
F-10
INPUT/OUTPUT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Intangible assets are amortized primarily on a straight-line
basis over the following estimated useful lives:
| |
|
|
|
|
| |
|
Years | |
| |
|
| |
|
Proprietary technology
|
|
|
4-7 |
|
|
Patents
|
|
|
5-18 |
|
|
Customer list
|
|
|
8 |
|
|
Customer relationships
|
|
|
15 |
|
|
Non-compete agreements
|
|
|
2 |
|
|
Trade names
|
|
|
5 |
|
Revenue Recognition and Product Warranty. Revenue is
derived from the sale of data acquisition systems and other
seismic equipment as well as from imaging services. For the
sales of data acquisition systems, the Company follows the
requirements of SOP 97-2 “Software Revenue
Recognition,” and recognizes revenue when the system is
delivered to the customer and risk of ownership has passed to
the customer, or, in the limited case where a customer
acceptance clause exists in the contract, the later of delivery
or when customer acceptance is obtained. For the sales of other
seismic equipment, the Company recognizes revenue when the
equipment is shipped and risk of ownership has passed to the
customer.
Revenues from all services are recognized when persuasive
evidence of an arrangement exists, the price is fixed or
determinable and collectibility is reasonably assured. Revenues
from contract services performed on a day-rate basis are
recognized as the service is performed. Revenues from other
contract services, including pre-funded multi-client surveys,
are recognized as the seismic data is acquired and/or processed
on a proportionate basis as work is performed. Multi-client data
surveys are licensed or sold to customers on a non-transferable
basis. Revenues on completed multi-client data surveys are
recognized upon obtaining a signed licensing agreement and
providing customers access to such data.
The Company considers the proportionate basis to be the most
reliable and representative measure of progress on contract
services. At initiation of a project, the Company performs a
detailed analysis of the estimated costs and duration of the
project. As work progresses, the Company assesses the
proportionate basis by comparing the actual progress, which is
based upon costs incurred and work performed to date, to the
estimated progress of the project. Accordingly, changes in job
performance, job conditions, estimated profitability, contract
price, cost estimates, and availability of human and computer
resources are reviewed periodically as the work progresses and
revisions to the proportionate basis are reflected in the
accounting period in which the facts that require such
adjustments become known. Losses on contracts are recognized
during the period in which the loss first becomes probable and
can be reasonably estimated. The asset “Unbilled
Revenue” represents revenues recognized in excess of
amounts billed. The liability “Deferred Revenue”
represents amounts billed in excess of revenues recognized.
When separate elements such as a data acquisition system, other
seismic equipment and/or imaging services are contained in a
single sales arrangement, or in related arrangements with the
same customer, the Company allocates revenue to each element
based on its relative fair value, provided that such element
meets the criteria for treatment as a separate unit of
accounting. The Company limits the amount of revenue recognition
for delivered elements to the amount that is not contingent on
the future delivery of products or services. The Company
generally does not grant return or refund privileges to its
customers.
The Company generally warrants that its manufactured equipment
will be free from defects in workmanship, material and parts.
Warranty periods generally range from 90 days to three
years from the date of original purchase, depending on the
product. The Company provides for estimated warranty as a charge
to costs of sales at the time of sale.
Research and Development. Research and development costs
primarily relate to activities that are designed to improve the
quality of the subsurface image and overall acquisition
economics of the Company’s
F-11
INPUT/OUTPUT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
customers. The costs associated with these activities are
expensed as incurred. These costs include prototype material and
field testing expenses, along with the related salaries,
facility costs, allocated corporate costs, consulting fees,
tools and equipment usage, and other miscellaneous expenses
associated with these activities.
Income Taxes. Income taxes are accounted for under the
liability method. Deferred income tax assets and liabilities are
recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases
and operating loss and tax credit carry-forwards. Deferred
income tax assets and liabilities are measured using enacted tax
rates expected to apply to taxable income in the years in which
those temporary differences are expected to be recovered or
settled. The Company reserves for substantially all net deferred
tax assets and will continue to reserve for substantially all
net deferred tax assets until there is sufficient evidence to
warrant reversal (see Note 15 of Notes to Consolidated
Financial Statements). The effect on deferred income tax
assets and liabilities of a change in tax rates is recognized in
income in the period that includes the enactment date.
Costs Associated with Exit or Disposal Activities. In
June 2002, the Financial Accounting Standards Board
(FASB) issued SFAS No. 146, “Accounting
for Costs Associated with Exit or Disposal Activities,”
which addresses financial accounting and reporting for costs
associated with exit or disposal activities and nullified
Emerging Issues Task Force (EITF) Issue No. 94-3,
“Liability Recognition for Certain Employee Termination
Benefits and Other Costs to Exit an Activity (including Certain
Costs Incurred in a Restructuring).”
SFAS No. 146 requires that a liability for a cost
associated with an exit or disposal activity is recognized when
the liability is incurred. Under EITF Issue 94-3, a liability
for an exit cost was recognized at the date of an entity’s
commitment to an exit plan. The Company adopted the provisions
of SFAS No. 146 for all exit or disposal activities
that were initiated after December 31, 2002. For all exit
and disposal activities that were initiated on or before
December 31, 2002, the Company continued to follow EITF
No. 94-3.
Comprehensive Net Income (Loss). Comprehensive net income
(loss), consisting of net income (loss) and foreign currency
translation adjustments, is presented in the Consolidated
Statements of Stockholders’ Equity and Comprehensive Income
(loss). The balance in accumulated other comprehensive income
(loss) consists of foreign currency translation adjustments.
Net Income (Loss) per Common Share. Basic net income
(loss) per common share is computed by dividing net income
(loss) applicable to common shares by the weighted average
number of common shares outstanding during the period. Diluted
net income (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 total number of options outstanding at
December 31, 2004, 2003, and 2002 were 7,313,600, 5,588,832
and 4,998,043, respectively. In addition, diluted net income
(loss) per common share assumes the conversion to common shares
of the Company’s outstanding convertible senior notes,
which represents 13,888,890 total common shares. Basic and
diluted net income (loss) per share are the same for the years
ended December 31, 2004, 2003 and 2002, as all potential
common shares were anti-dilutive.
Foreign Currency Gains and Losses. Assets and liabilities
of the Company’s subsidiaries operating outside the United
States which account in a functional currency other than
U.S. dollars have been translated to U.S. dollars
using the exchange rate in effect at the balance sheet date.
Results of foreign operations have been translated using the
average exchange rate during the periods of operation. Resulting
translation adjustments have been recorded as a component of
“Accumulated Other Comprehensive Income (Loss)” in the
Consolidated Statements of Stockholders’ Equity and
Comprehensive Income (Loss). Foreign currency transaction gains
and losses are included in the Consolidated Statements of
Operations as they occur. Total foreign currency transaction
gains (losses) were $(0.1) million, $0.6 million, and
$0.2 million, for the years ended December 31, 2004,
2003 and 2002, respectively.
F-12
INPUT/OUTPUT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Concentration and Foreign Sales Risk. The Company relies
on a relatively small number of significant customers.
Consequently, the Company is exposed to the risks related to
customer concentrations. In 2004 and 2003, BGP, an international
seismic contractor and subsidiary of the China National
Petroleum Corporation (BGP), accounted for approximately 15% and
28%, respectively, of the Company’s consolidated net sales.
Total accounts receivable due from BGP at December 31, 2004
and 2003 were $10.6 million and $8.8 million,
respectively.
Sales outside the United States have historically accounted for
a significant part of the Company’s net sales. Foreign
sales are subject to special risks inherent in doing business
outside of the United States, including the risk of war, civil
disturbances, embargo and government activities, which may
disrupt markets and affect operating results.
Demand for products from customers in developing countries is
difficult to predict and can fluctuate significantly from year
to year. These changes in demand result primarily from the
instability of economies and governments in certain developing
countries, changes in internal laws and policies affecting trade
and investment, and because those markets are only beginning to
adopt new technologies and establish purchasing practices. These
risks may adversely affect future operating results and
financial position. In addition, sales to customers in
developing countries on extended terms can present heightened
credit risks.
Stock-Based Compensation. SFAS No. 123,
“Accounting for Stock-Based Compensation”
allows a company to adopt a fair value based method of
accounting for its stock-based compensation plans, or to
continue to follow the intrinsic value method of accounting
prescribed by Accounting Principles Board (APB) Opinion
No. 25, “Accounting for Stock Issued to
Employees”. The Company has elected to continue to
follow APB Opinion No. 25. If the Company had adopted
SFAS No. 123, net loss, basic and diluted loss per
common share for the periods presented would have been increased
as follows (in thousands, except per share amounts):
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Years Ended December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
|
Net loss applicable to common shares
|
|
$ |
(2,979 |
) |
|
$ |
(23,152 |
) |
|
$ |
(119,672 |
) |
|
Add: Stock-based employee compensation expense included in
reported net loss applicable to common shares
|
|
|
1,720 |
|
|
|
(222 |
) |
|
|
417 |
|
|
Deduct: Stock-based employee compensation expense determined
under fair value methods for all awards
|
|
$ |
(5,040 |
) |
|
$ |
(2,463 |
) |
|
$ |
(3,531 |
) |
| |
|
|
|
|
|
|
|
|
|
|
Pro forma net loss
|
|
$ |
(6,299 |
) |
|
$ |
(25,837 |
) |
|
$ |
(122,786 |
) |
| |
|
|
|
|
|
|
|
|
|
|
Basic and diluted loss per common share — as reported
|
|
$ |
(0.05 |
) |
|
$ |
(0.45 |
) |
|
$ |
(2.35 |
) |
| |
|
|
|
|
|
|
|
|
|
|
Pro forma basic and diluted loss per common share
|
|
$ |
(0.10 |
) |
|
$ |
(0.50 |
) |
|
$ |
(2.41 |
) |
| |
|
|
|
|
|
|
|
|
|
The weighted average fair value of options granted during the
years ended December 31, 2004, 2003 and 2002, for which the
exercise price was equal to the market price of the
Company’s common stock on the date of grant, was $4.55,
$2.05, and $4.90, respectively. The fair value of options
granted during the year ended December 31, 2003, for which
the exercise price exceeded the market price of the
Company’s common stock on the date of grant, was $1.46. The
fair value of each option was determined using the Black-Scholes
option valuation model. The key variables used in valuing the
options were as follows: average risk-free interest rate based
on 5-year Treasury bonds, an estimated option term of five
years, $0 dividends and expected stock price volatility of 60%
during the years ended December 31, 2004, 2003 and 2002.
As further discussed at Note 8 of Notes to Consolidated
Financial Statements, the Company sold all of the capital
stock of its wholly owned subsidiary, Applied MEMS, Inc.
(Applied MEMS). As part of the transaction, the Company modified
the outstanding stock options held by its Applied MEMS
employees. The
F-13
INPUT/OUTPUT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
modification amended the terms of those options to provide that
the sale of Applied MEMS would not be a termination event.
Therefore, these outstanding options maintained their original
vesting terms. Under the provision of FASB Interpretation
No. 44, “Accounting for Certain Transactions
Involving Stock Compensation”, the Company recorded an
expense of $0.8 million which represents the fair value of
the stock options at the modification date. This expense was
netted within the gain on sale of Applied MEMS.
Recent Accounting Pronouncements. In January 2003, the
FASB issued FIN No. 46, “Consolidation of
Variable Interest Entities, an Interpretation of ARB
No. 51”. The primary objective of the
interpretation is to provide guidance on the identification of
and financial reporting for entities over which control is
achieved through means other than voting rights; such entities
are known as variable-interest entities (VIEs).
FIN No. 46 provides guidance that determines
(a) whether consolidation is required under the
“controlling financial interest” model of Accounting
Research Bulletin No. 51, “Consolidated
Financial Statements,” or other existing authoritative
guidance, or, alternatively, (b) whether the
variable-interest model under FIN No. 46 should be
used to account for existing and new entities. In December 2003,
the FASB completed deliberations of proposed modifications to
FIN 46 (FIN 46-R) resulting in multiple effective
dates based on the nature as well as creation date of the VIE.
FIN No. 46, as revised, has been adopted by the
Company and did not have an impact on the Company’s results
of operations or financial position.
In December 2003, the SEC issued Staff Accounting Bulletin
(SAB) No. 104, “Revenue Recognition”,
which supersedes SAB No. 101, “Revenue
Recognition in Financial Statements.”
SAB No. 104’s primary purpose is to rescind
accounting guidance contained in SAB No. 101 related
to multiple element revenue arrangements, which was superseded
as a result of the issuance of EITF 00-21,
“Accounting for Revenue Arrangements with Multiple
Deliverables.” While the wording of
SAB No. 104 has changed to reflect the issuance of
EITF 00-21, the revenue recognition principles of
SAB No. 101 remain largely unchanged by the issuance
of SAB No. 104. The adoption of SAB No. 104
did not have a material effect on the Company’s results of
operations or financial position.
In March 2004, the FASB issued EITF Issue No. 03-1,
“The Meaning of Other-Than-Temporary Impairment and Its
Application to Certain Investments” which provides new
guidance for assessing impairment losses on debt and equity
investments. Additionally, EITF Issue No. 03-1 included new
disclosure requirements for investments that are deemed to be
temporarily impaired. In September 2004, the FASB delayed the
accounting provisions of EITF Issue No. 03-1; however, the
disclosure requirements remain effective and have been adopted
for the Company’s year ended December 31, 2004. The
Company will evaluate the effect, if any, of EITF Issue
No. 03-1 when final guidance is released.
In November 2004, the FASB issued SFAS No. 151,
“Inventory Costs — An amendment of ARB
No. 43, Chapter 4,” which requires that
abnormal amounts of idle facility expense, freight, handling
costs and spoilage should be expensed as incurred and not
included in overhead, and that allocation of fixed production
overheads to conversion costs should be based on normal capacity
of the production facilities. The provisions in SFAS
No. 151 are effective for inventory costs incurred during
fiscal years beginning after June 15, 2005. The Company
does not believe that the adoption of SFAS No. 151 will
have a significant impact on the Company’s financial
statements.
In December 2004, the FASB issued SFAS No. 123
(revised 2004) “Share-Based Payment”
(SFAS 123R), which replaces SFAS No. 123 and
supersedes APB Opinion No. 25. SFAS 123R requires all
share-based payments to employees, including grants of employee
stock options, to be recognized in the financial statements
based on their fair values, beginning with the first interim or
annual period after June 15, 2005, with early adoption
encouraged. The pro forma disclosures previously permitted under
SFAS 123 will no longer be an alternative to financial
statement recognition. The Company is required to adopt
SFAS 123R effective as of the quarter beginning
July 1, 2005. Under SFAS 123R, the Company must
determine the appropriate fair value model to be used for
valuing share-based payments, the amortization method for
compensation cost and the transition method to be used at date
of adoption. The transition methods include
F-14
INPUT/OUTPUT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
prospective and retroactive adoption options. Under the
retroactive options, prior periods may be restated either as of
the beginning of the year of adoption or for all periods
presented. The prospective method requires that compensation
expense be recorded for all unvested stock options and
restricted stock at the beginning of the first quarter of
adoption of SFAS 123R, while the retroactive methods would
record compensation expense for all unvested stock options and
restricted stock beginning with the first period restated. The
Company is evaluating the requirements of SFAS 123R and
expects that the adoption of SFAS 123R will have a material
impact on its consolidated results of operations and earnings
per share. The Company has not yet determined the method of
adoption or the effect of adopting SFAS 123R, and has not
determined whether the adoption will result in amounts that are
similar to the current pro forma disclosures under SFAS 123.
Reclassification. Certain amounts previously reported in
the consolidated financial statements have been reclassified to
conform to the current year presentation.
In June 2004, the Company purchased all the capital stock of GX
Technology Corporation (GXT), headquartered in Houston, Texas.
GXT is a leading provider of seismic imaging technology, data
processing and subsurface imaging services to oil and gas
companies. The purchase price was approximately
$152.5 million, consisting of $137.9 million in cash,
including acquisition costs, and the assumption of GXT
indebtedness and GXT stock options, which, effective upon the
acquisition date, became fully vested stock options to purchase
up to 2,916,590 shares of I/ O common stock, at a weighted
average exercise price of $1.98 per share. These assumed
options had an approximate fair value of $14.6 million. The
Company also issued to certain GXT key employees inducement
options to purchase up to 434,000 shares of its common
stock for an exercise price of $7.09 per share (the
then-current closing sales price per share on the New York Stock
Exchange (NYSE). The inducement options vest over a four-year
period. The Company acquired GXT as part of its strategy to
expand the range of offerings it can provide to its customers.
The combined company is now positioned to offer a range of
seismic imaging solutions that integrate both seismic
acquisition equipment and seismic imaging and data processing
services.
In February 2004, the Company purchased all the share capital of
Concept Systems. Concept Systems, based in Edinburgh, Scotland,
is a provider of software, systems and services for towed
streamer, seabed and land seismic operations. The purchase price
was approximately $49.8 million, consisting of
$39.0 million in cash, including acquisition costs, and
1,680,000 shares of the Company’s common stock, valued
at $10.8 million. The Company also issued to certain
Concept Systems key employees inducement options to purchase up
to 365,000 shares of its common stock for an exercise price
of $6.42 per share (the then-current closing sales price
per share on the NYSE). The options vest over a four-year
period. The Company acquired Concept Systems as part of its
strategy to develop solutions that integrate complex data
streams from multiple seismic sub-systems, including source,
source control, positioning, and recording in all environments,
including land, towed streamer, and seabed acquisition.
In July 2002, the Company acquired all of the outstanding
capital stock of AXIS Geophysics, Inc. (AXIS). AXIS is a seismic
data service company based in Denver, Colorado, which provides
specialized seismic data processing and integration services to
major and independent exploration and production companies. The
initial purchase price was approximately $2.5 million in
cash, including acquisition costs, and a $2.5 million
three-year unsecured promissory note. The Company was obligated
to pay additional consideration to the former shareholders of
AXIS at an amount equal to 33.33% of AXIS’ Adjusted EBITDA
for the years ended December 31, 2003, 2004 and 2005,
exceeding a minimum threshold of $1.0 million. There was no
ceiling limitation to the maximum additional consideration which
could have been paid under this formula. In August 2003, the
Company paid $1.3 million in additional consideration to
settle all future contingent obligations. This additional
consideration was recorded as an increase to goodwill. The
Company acquired AXIS as part of its strategy of deploying
VectorSeis technology for land, in-well and ocean bottom
F-15
INPUT/OUTPUT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
environments, by allowing the Company to offer both its
VectorSeis technology and a related service of interpreting
multi-component data.
In May 2002, the Company acquired certain assets of S/ N
Technologies (S/ N) for $0.7 million of cash. The assets
acquired from S/ N included proprietary technology applicable to
solid streamer products used to acquire 2D, 3D and
high-resolution marine seismic data. However, in May 2003 the
Company determined that it would no longer continue the internal
development of the solid streamer project. As such, the acquired
assets of S/ N were impaired and other assets associated with
this project were written off as of March 31, 2003. See
further discussion of this impairment at Note 16 of
Notes to Consolidated Financial Statements.
The acquisitions were accounted for by the purchase method, with
the purchase price allocated to the fair value of assets
purchased and liabilities assumed. The allocations of the
purchase prices, including related direct costs, for the
acquisitions are as follows (in thousands):
| |
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Acquired in 2004 | |
|
Acquired in 2002 | |
| |
|
| |
|
| |
| |
|
|
|
Concept | |
|
|
| |
|
GXT | |
|
Systems | |
|
AXIS | |
|
S/N | |
| |
|
| |
|
| |
|
| |
|
| |
|
Fair values of assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Net current assets (liabilities)
|
|
$ |
(4,475 |
) |
|
$ |
2,486 |
|
|
$ |
395 |
|
|
$ |
— |
|
| |
Property, plant and equipment
|
|
|
11,304 |
|
|
|
548 |
|
|
|
354 |
|
|
|
85 |
|
| |
Multi-client data library
|
|
|
11,727 |
|
|
|
— |
|
|
|
— |
|
|
|
603 |
|
| |
Deferred income taxes
|
|
|
— |
|
|
|
480 |
|
|
|
— |
|
|
|
— |
|
| |
Intangible assets
|
|
|
52,877 |
|
|
|
21,361 |
|
|
|
1,142 |
|
|
|
— |
|
| |
Goodwill
|
|
|
87,158 |
|
|
|
24,883 |
|
|
|
4,563 |
|
|
|
— |
|
| |
Capital lease obligations
|
|
|
(6,099 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
| |
Other long-term liabilities
|
|
|
— |
|
|
|
— |
|
|
|
(224 |
) |
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total allocated purchase price
|
|
|
152,492 |
|
|
|
49,758 |
|
|
|
6,230 |
|
|
|
688 |
|
|
Less non-cash consideration — note payable
|
|
|
— |
|
|
|
— |
|
|
|
(2,500 |
) |
|
|
— |
|
|
Less non-cash consideration — issuance of common stock
|
|
|
— |
|
|
|
(10,763 |
) |
|
|
— |
|
|
|
— |
|
|
Less non-cash consideration — fair value of fully
vested stock options issued
|
|
|
(14,637 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
Less cash of acquired business
|
|
|
(2,193 |
) |
|
|
— |
|
|
|
(501 |
) |
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for acquisition, net of cash acquired
|
|
$ |
135,662 |
|
|
$ |
38,995 |
|
|
$ |
3,229 |
|
|
$ |
688 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
The intangible assets of GXT relate to customer relationships,
proprietary technology, non-compete agreements and its trade
name, which are being amortized over their estimated useful
lives ranging from two to 15 years. The intangible assets
of Concept Systems relate to computer software, customer
relationships and its trade name, which are being amortized over
their estimated useful lives ranging from five to 15 years.
The intangible asset of AXIS relates to proprietary technology,
which is being amortized over a 4-year period. See further
discussion of goodwill and intangible assets at Notes 9 and
10 of Notes to Consolidated Financial Statements.
The consolidated results of operations of the Company include
the results of GXT, Concept Systems, AXIS and S/ N from the date
of acquisition. The following summarized unaudited pro forma
consolidated income statement information for the years ended
December 31, 2004, 2003 and 2002, assumes that the GXT and
Concept Systems acquisitions had occurred at the beginning of
each of the periods presented and exclude the pro-forma results
of AXIS and S/ N prior to the acquisition date as they were not
material to the Company’s consolidated results of
operations. The Company has prepared these unaudited pro forma
financial
F-16
INPUT/OUTPUT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
results for comparative purposes only. These unaudited pro forma
financial results may not be indicative of the results that
would have occurred if we had completed the acquisitions as of
the beginning of the period presented or the results that will
be attained in the future. Amounts presented below are in
thousands, except for the per share amounts:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Pro forma Years Ended December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
|
Net sales
|
|
$ |
281,362 |
|
|
$ |
211,456 |
|
|
$ |
161,035 |
|
|
Income (loss) from operations
|
|
$ |
876 |
|
|
$ |
(18,685 |
) |
|
$ |
(64,738 |
) |
|
Net loss
|
|
$ |
(5,013 |
) |
|
$ |
(21,714 |
) |
|
$ |
(120,959 |
) |
|
Basic and diluted loss per common share
|
|
$ |
(0.07 |
) |
|
$ |
(0.30 |
) |
|
$ |
(1.66 |
) |
|
|
| (3) |
Accounts and Notes Receivable |
A summary of accounts receivable is as follows (in thousands):
| |
|
|
|
|
|
|
|
|
| |
|
December 31, | |
|
December 31, | |
| |
|
2004 | |
|
2003 | |
| |
|
| |
|
| |
|
Accounts receivable, principally trade
|
|
$ |
64,751 |
|
|
$ |
35,820 |
|
|
Less allowance for doubtful accounts
|
|
|
(3,153 |
) |
|
|
(1,550 |
) |
| |
|
|
|
|
|
|
|
Accounts receivable, net
|
|
$ |
61,598 |
|
|
$ |
34,270 |
|
| |
|
|
|
|
|
|
Notes receivable are collateralized by the products sold, bear
interest at contractual rates ranging from 5.1% to 8.0% per
year and are due at various dates through 2006. The weighted
average interest rate at December 31, 2004 was 6.6%. A
summary of notes receivable, accrued interest and allowance for
doubtful notes is as follows (in thousands):
| |
|
|
|
|
|
|
|
|
| |
|
December 31, | |
|
December 31, | |
| |
|
2004 | |
|
2003 | |
| |
|
| |
|
| |
|
Notes receivable and accrued interest
|
|
$ |
20,820 |
|
|
$ |
23,442 |
|
|
Less allowance for doubtful notes
|
|
|
(5,893 |
) |
|
|
(2,613 |
) |
| |
|
|
|
|
|
|
|
Notes receivable, net
|
|
|
14,927 |
|
|
|
20,829 |
|
|
Less current portion notes receivable, net
|
|
|
10,784 |
|
|
|
14,420 |
|
| |
|
|
|
|
|
|
|
Long-term notes receivable
|
|
$ |
4,143 |
|
|
$ |
6,409 |
|
| |
|
|
|
|
|
|
At December 31, 2003, approximately $11.9 million of
the Company’s total notes receivable and accounts
receivable related to one customer, Laboratory of Regional
Geodynamics, Limited (LARGE), a subsidiary of Yukos which
experienced financial difficulties during 2004. These notes and
accounts receivable related to sales and leases of I/ O
equipment that the Company had entered into with LARGE in late
2001 through early 2003. During 2004, LARGE became delinquent in
payment of all of its existing indebtedness owed to the Company
and over the course of 2004, the Company attempted to
renegotiate the terms of these notes with LARGE and potential
new investors in LARGE. In September 2004 the Company
established a reserve of $5.2 million related to the LARGE
accounts and notes receivables.
In October 2004, LARGE reconveyed certain of the purchased
equipment to the Company in exchange for a reduction in the
total amounts outstanding owed by LARGE. As a result, the
Company reclassified approximately $5.0 million of LARGE
notes receivable indebtedness, net of allowance for doubtful
notes, to rental equipment. Certain of I/ O’s other
customers agreed to lease or purchase this repossessed
equipment. In December 2004, LARGE filed for bankruptcy
liquidation proceedings in the United Kingdom. The remaining
outstanding notes receivable balance, net of allowance for
doubtful notes, with LARGE was $2.1 million as of
F-17
INPUT/OUTPUT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2004, which represents the estimated fair
market value of equipment that the Company has recovered from
LARGE but for which title remains in dispute pending the outcome
of the LARGE liquidation, less estimated refurbishment costs.
In 2004, the Company sold its first VectorSeis Ocean system for
seabed acquisition. A portion of the purchase was financed by
the Company through a series of notes receivable. During 2004,
this system experienced unexpected warranty issues causing the
customer to delay its deployment of this system. As a result of
these issues, the customer has delayed payments on its scheduled
notes. The outstanding balance of the accounts and notes
receivable due from this customer at December 31, 2004 was
$10.0 million. The Company expects to be paid on all its
obligations in full once the issues have been resolved.
Therefore, no allowance has been established for this customer.
The activity in the allowance for doubtful notes receivable is
as follows (in thousands):
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Years Ended December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
|
Balance at beginning of period
|
|
$ |
2,613 |
|
|
$ |
10,228 |
|
|
$ |
10,735 |
|
|
Additions charged to bad debt expense
|
|
|
4,730 |
|
|
|
— |
|
|
|
158 |
|
|
Recoveries reducing bad debt expense
|
|
|
(1,450 |
) |
|
|
(1,291 |
) |
|
|
(664 |
) |
|
Write-offs charged against the allowance
|
|
|
— |
|
|
|
(6,324 |
) |
|
|
(1 |
) |
| |
|
|
|
|
|
|
|
|
|
|
Balance at end of period
|
|
$ |
5,893 |
|
|
$ |
2,613 |
|
|
$ |
10,228 |
|
| |
|
|
|
|
|
|
|
|
|
A summary of inventories, net of reserves, is as follows (in
thousands):
| |
|
|
|
|
|
|
|
|
| |
|
December 31, | |
|
December 31, | |
| |
|
2004 | |
|
2003 | |
| |
|
| |
|
| |
|
Raw materials and subassemblies
|
|
$ |
30,039 |
|
|
$ |
32,675 |
|
|
Work-in-process
|
|
|
5,100 |
|
|
|
5,872 |
|
|
Finished goods
|
|
|
51,520 |
|
|
|
15,004 |
|
| |
|
|
|
|
|
|
|
Total
|
|
$ |
86,659 |
|
|
$ |
53,551 |
|
| |
|
|
|
|
|
|
The Company provides for estimated obsolescence or excess
inventory equal to the difference between the cost of inventory
and its estimated market value based upon assumptions about
future demand for the Company’s products and market
conditions. For the years ended December 31, 2004, 2003 and
2002, the Company recorded inventory obsolescence and excess
inventory charges of approximately $0.7 million,
$1.0 million and $4.3 million, respectively. The
Company’s reserve for obsolescence or excess inventory was
$10.8 million and $11.9 million at December 31,
2004 and 2003, respectively. The reduction in reserves was
primarily due to reserved inventory which was sold or scrapped
during the year.
As part of the Company’s business plan, the Company is
increasing the use of contract manufacturers as an alternative
to in-house manufacturing. Under a few of the Company’s
outsourcing arrangements, its manufacturing outsourcers first
utilize the Company’s on-hand inventory, then directly
purchase inventory at agreed-upon quantities and lead times in
order to meet the Company’s scheduled deliveries. If demand
proves to be less than the Company originally forecasted
(therefore allowing the Company to cancel its committed purchase
orders with its manufacturing outsourcer), its outsourcer has
the right to require the Company to purchase inventory which it
had purchased on the Company’s behalf.
F-18
INPUT/OUTPUT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
|
| (5) |
Net Assets Held For Sale |
In August 2004, the Company completed the sale of its Alvin,
Texas manufacturing facility, receiving net proceeds of
$2.9 million and a promissory note for $2.0 million
due in 2006, resulting in a gain on the sale of
$2.4 million. At December 31, 2003, the facility and
related land had a net carrying value of $2.4 million and
was classified as “Held for Sale” under the provisions
of SFAS No. 144, “Accounting for the
Impairment or Disposal of Long-Lived Assets”. In
January 2004, the Company completed the sale of 16.75 acres
of land located across from its headquarters in Stafford, Texas,
receiving net proceeds of $1.5 million and resulting in a
gain on the sale of $0.6 million.
|
|
| (6) |
Supplemental Cash Flow Information and Non-Cash Activity |
Supplemental disclosure of cash flow information is as follows
(in thousands):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Years Ended December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
|
Cash paid (received) during the period for:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Interest
|
|
$ |
5,394 |
|
|
$ |
3,304 |
|
|
$ |
(137 |
) |
| |
Income taxes
|
|
|
1,825 |
|
|
|
(384 |
) |
|
|
15 |
|
In February 2004, the Company acquired all of the share capital
of Concept Systems. As part of the consideration, the Company
issued 1,680,000 of its common shares, valued at
$10.8 million. Also, in June 2004, the Company acquired all
the capital stock of GXT. As part of the purchase consideration
of the GXT acquisition, the Company assumed certain outstanding
GXT stock options, valued at $14.6 million. See further
discussion of these acquisitions at Note 2 of Notes to
Consolidated Financial Statements.
In 2004 and 2003 the Company transferred $8.3 million and
$2.4 million, respectively, of inventory at cost to
property, plant and equipment. Also, in both September 2004 and
2003, the Company financed $1.9 million of insurance costs
through a short-term notes payable and in 2004 the Company
financed $3.1 million of computer equipment purchases
through equipment loans. See further discussion at Note 12
of Notes to Consolidated Financial Statements.
In August 2002, the Company repurchased all of the then
outstanding shares of its Preferred Stock. In exchange for the
Preferred Stock, the Company paid $30.0 million in cash at
closing, issued a $31.0 million unsecured promissory note
due May 7, 2004 and granted a warrant to
purchase 2,673,517 shares of the Company’s common
stock at $8.00 per share through August 5, 2005. In
December 2003, the Company terminated the warrant by exchanging
125,000 shares of its common stock for the warrant.
F-19
INPUT/OUTPUT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
|
| (7) |
Property, Plant and Equipment |
A summary of property, plant and equipment, excluding net assets
held for sale (see Note 5), is as follows (in thousands):
| |
|
|
|
|
|
|
|
|
| |
|
December 31, | |
|
December 31, | |
| |
|
2004 | |
|
2003 | |
| |
|
| |
|
| |
|
Land
|
|
$ |
51 |
|
|
$ |
51 |
|
|
Buildings
|
|
|
23,869 |
|
|
|
21,848 |
|
|
Machinery and equipment
|
|
|
54,396 |
|
|
|
49,159 |
|
|
Leased equipment
|
|
|
17,331 |
|
|
|
13,288 |
|
|
Other
|
|
|
5,152 |
|
|
|
8,150 |
|
| |
|
|
|
|
|
|
| |
|
|
100,799 |
|
|
|
92,496 |
|
|
Less accumulated depreciation
|
|
|
55,560 |
|
|
|
64,889 |
|
| |
|
|
|
|
|
|
|
Property, plant and equipment, net
|
|
$ |
45,239 |
|
|
$ |
27,607 |
|
| |
|
|
|
|
|
|
Total depreciation expense for the years ended December 31,
2004, 2003 and 2002 was $12.9 million, $10.3 million,
and $11.8 million, respectively. At December 31, 2004,
there was $20.3 million of land and buildings, less
accumulated depreciation of $9.0 million, which are
recorded pursuant to a twelve-year non-cancelable lease
agreement (see Note 12 of Notes to Consolidated
Financial Statements) and are being depreciated over the
twelve-year lease term.
In December 2004, the Company sold all of the capital stock of
Applied MEMS, a wholly-owned subsidiary, to Colibrys Ltd.
(Colibrys), a privately-held firm based in Switzerland. Applied
MEMS manufactures micro-electro-mechanical-systems
(MEMS) accelerometers used in the Company’s VectorSeis
digital, full-wave seismic sensors, as well as products for
applications that include test and measurement, earthquake and
structural monitoring and defense. In exchange for the stock of
Applied MEMS, the Company received shares of Colibrys equal to
approximately 10% of the outstanding equity of Colibrys (valued
at $3.5 million), and the right to designate one member of
the board of directors of Colibrys. The investment is accounted
for under the cost method and as a result of the exchange, the
Company recorded a gain on sale of assets of approximately
$0.4 million in the fourth quarter of 2004.
To protect the Company’s intellectual property rights, the
Company retained ownership of its MEMS intellectual property,
and has licensed that intellectual property to Colibrys on a
royalty-free basis. Additionally, the Company received
preferential rights to Colibrys’ MEMS technology for
seismic applications involving natural resource extraction. The
Company also entered into a five-year supply agreement with
Colibrys and Applied MEMS, which provides for them to supply the
Company with MEMS accelerometers at agreed prices that are
consistent with market prices. The five-year minimum commitment
ranges between $7.0 million to $8.0 million per year
through 2009.
In April 2003, the Company invested $3.0 million in
Series B Preferred securities of Energy Virtual Partners,
Inc. (EVP) for 22% of the outstanding ownership interests
and 12% of the outstanding voting interests. EVP provided asset
management services to large oil and gas companies to enhance
the value of their oil and gas properties. This investment was
accounted for under the cost method. Robert P. Peebler, the
Company’s President and Chief Executive Officer, had
founded EVP in April 2001 and had served as EVP’s President
and Chief Executive Officer until joining I/ O in March 2003.
During the second quarter of 2003, EVP failed to close two
anticipated asset management agreements, which resulted in
EVP’s management re-evaluating its business model and
adequacy of capital. During
F-20
INPUT/OUTPUT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
August 2003, the board of directors of EVP voted to liquidate
EVP. For that reason, in the second quarter of 2003, the Company
wrote its investment down to its approximate liquidation value
of $1.0 million. Mr. Peebler offered, and the Company
agreed, that all proceeds Mr. Peebler received from the
liquidation of EVP were to be paid to the Company. In December
2003, the Company received liquidation payments of
$0.7 million from EVP and $0.1 million from
Mr. Peebler. In March 2004, the Company received final
liquidation payments of $0.1 million from EVP and
$0.01 million from Mr. Peebler.
The following is a summary of the changes in the carrying amount
of goodwill for the years ended December 31, 2004 and 2003:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Land | |
|
Marine | |
|
Data | |
|
Seismic | |
|
|
| |
|
Imaging | |
|
Imaging | |
|
Management | |
|
Imaging | |
|
|
| |
|
Systems | |
|
Systems | |
|
Solutions | |
|
Solutions | |
|
Total | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
Balance as of January 1, 2003
|
|
$ |
3,478 |
|
|
$ |
26,984 |
|
|
$ |
— |
|
|
$ |
3,296 |
|
|
$ |
33,758 |
|
|
Goodwill acquired during the year
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
1,267 |
|
|
|
1,267 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2003
|
|
|
3,478 |
|
|
|
26,984 |
|
|
|
— |
|
|
|
4,563 |
|
|
|
35,025 |
|
|
Goodwill acquired during the year
|
|
|
— |
|
|
|
— |
|
|
|
24,883 |
|
|
|
87,158 |
|
|
|
112,041 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2004
|
|
$ |
3,478 |
|
|
$ |
26,984 |
|
|
$ |
24,883 |
|
|
$ |
91,721 |
|
|
$ |
147,066 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
A summary of intangible assets, net, is as follows (in
thousands):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
As of December 31, 2004 | |
|
As of December 31, 2003 | |
| |
|
| |
|
| |
| |
|
Gross | |
|
Accumulated | |
|
|
|
Gross | |
|
Accumulated | |
|
|
| |
|
Amount | |
|
Amortization | |
|
Net | |
|
Amount | |
|
Amortization | |
|
Net | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
Proprietary technology
|
|
$ |
20,417 |
|
|
$ |
(7,879 |
) |
|
$ |
12,538 |
|
|
$ |
7,317 |
|
|
$ |
(6,571 |
) |
|
$ |
746 |
|
|
Patents
|
|
|
3,789 |
|
|
|
(1,917 |
) |
|
|
1,872 |
|
|
|
3,789 |
|
|
|
(1,688 |
) |
|
|
2,101 |
|
|
Customer list
|
|
|
300 |
|
|
|
(141 |
) |
|
|
159 |
|
|
|
300 |
|
|
|
(103 |
) |
|
|
197 |
|
|
Customer relationships
|
|
|
41,602 |
|
|
|
(1,356 |
) |
|
|
40,246 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
Non-compete agreements
|
|
|
700 |
|
|
|
(190 |
) |
|
|
510 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
Trade names
|
|
|
4,149 |
|
|
|
(473 |
) |
|
|
3,676 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
70,957 |
|
|
$ |
(11,956 |
) |
|
$ |
59,001 |
|
|
$ |
11,406 |
|
|
$ |
(8,362 |
) |
|
$ |
3,044 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total amortization expense or the years ended December 31,
2004, 2003 and 2002 was $3.9 million, $1.1 million,
and $1.4 million, respectively. A summary of the estimated
amortization expense for the next five years is as follows (in
thousands):
| |
|
|
|
|
| Years Ended December 31, |
|
|
| |
|
|
|
2005
|
|
$ |
6,379 |
|
|
2006
|
|
$ |
6,473 |
|
|
2007
|
|
$ |
6,429 |
|
|
2008
|
|
$ |
6,398 |
|
|
2009
|
|
$ |
6,297 |
|
F-21
INPUT/OUTPUT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
A summary of accrued expenses is as follows (in thousands):
| |
|
|
|
|
|
|
|
|
| |
|
December 31, | |
|
December 31, | |
| |
|
2004 | |
|
2003 | |
| |
|
| |
|
| |
|
Compensation, including compensation-related taxes and
commissions
|
|
$ |
8,022 |
|
|
$ |
6,223 |
|
|
Product warranty
|
|
|
3,832 |
|
|
|
3,433 |
|
|
Accrued property tax
|
|
|
1,101 |
|
|
|
1,691 |
|
|
Abandoned non-cancelable lease obligations (see Note 17)
|
|
|
336 |
|
|
|
640 |
|
|
Severance (see Note 17)
|
|
|
— |
|
|
|
192 |
|
|
Other
|
|
|
13,395 |
|
|
|
3,654 |
|
| |
|
|
|
|
|
|
|
Total accrued expenses
|
|
$ |
26,686 |
|
|
$ |
15,833 |
|
| |
|
|
|
|
|
|
The Company generally warrants that all manufactured equipment
will be free from defects in workmanship, materials and parts.
Warranty periods generally range from 90 days to three
years from the date of original purchase, depending on the
product. The Company provides for estimated warranty as a charge
to cost of sales at time of sale, which is when estimated future
expenditures associated with such contingencies become probable
and reasonably estimated. However, new information may become
available, or circumstances (such as applicable laws and
regulations) may change, thereby resulting in an increase or
decrease in the amount required to be accrued for such matters
(and therefore a decrease or increase in reported net income in
the period of such change). A summary of warranty activity is as
follows (in thousands):
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Years Ended December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
|
Balance at beginning of period
|
|
$ |
3,433 |
|
|
$ |
2,914 |
|
|
$ |
4,669 |
|
|
Accruals for warranties issued during the period
|
|
|
4,606 |
|
|
|
2,885 |
|
|
|
1,679 |
|
|
Settlements made (in cash or in kind) during the period
|
|
|
(4,207 |
) |
|
|
(2,366 |
) |
|
|
(3,434 |
) |
| |
|
|
|
|
|
|
|
|
|
|
Balance at end of period
|
|
$ |
3,832 |
|
|
$ |
3,433 |
|
|
$ |
2,914 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
| (12) |
Notes Payable, Long-term Debt and Lease Obligations |
The Company has entered into a series of equipment loans that
are due in installments for the purpose of financing the
purchase of computer equipment, in the form of capital leases
expiring in various years through 2007. Interest charged under
these loans range from 3.5% to 16.1% and are collateralized by
liens on the computer equipment. The assets and liabilities
under these capital leases are recorded at the lower of the
present value of the minimum lease payments or the fair value of
the assets. The assets are depreciated over the lesser of their
related lease terms or their estimated productive lives. At
December 31, 2004, the total cost of computer equipment
under these capital leases was $8.5 million, less
accumulated depreciation of $1.9 million. The unpaid
balance at December 31, 2004 was $6.5 million.
In December 2003, the Company issued $60.0 million of
convertible senior notes, which mature on December 15,
2008. The notes bear interest at an annual rate per annum of
5.5%, payable semi-annually. The notes, which are not redeemable
prior to their maturity, are convertible into the Company’s
common stock at an initial conversion rate of
231.4815 shares per $1,000 principal amount of notes (a
conversion price of $4.32 per share), which represents
13,888,890 total common shares. The Company paid
$3.5 million in underwriting and professional fees, which
have been recorded as deferred financing costs and are being
amortized over the term of the notes.
F-22
INPUT/OUTPUT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
In August 2002, in connection with the repurchase of its
Series B Preferred Stock, the Company issued a
$31.0 million unsecured promissory note due May 7,
2004, which bore interest at 8% per year until May 7,
2003, at which time the interest rate increased to 13% per
annum. Interest was payable in quarterly payments, with all
principal and unpaid interest due on May 7, 2004. The
Company recorded interest on this note at an effective rate of
approximately 11% per year over the life of the note. In
May 2003, the Company repaid $15.0 million of the note and
in December 2003, the Company repaid in full the remaining
outstanding principal balance of $16.0 million plus accrued
interest.
In August 2001, the Company sold its corporate headquarters and
manufacturing facility located in Stafford, Texas for
$21.0 million. Simultaneously with the sale, 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. The
Company has no purchase option under the lease. As a result of
the lease terms, the commitment was recorded as a twelve-year,
$21.0 million lease obligation with an implicit interest
rate of 9.1% per annum. The unpaid balance at
December 31, 2004 was $17.8 million. 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 lease obligation. At
June 30, 2003, the Company failed to meet the tangible net
worth requirement under this lease. Therefore, in the third
quarter of 2003, the Company provided a letter of credit to the
landlord of the property in the amount of $1.5 million. To
secure the issuance of the letter of credit, the Company was
required to deposit $1.5 million with the issuing bank.
This letter of credit will remain outstanding until the Company
is back in compliance with such tangible net worth requirement
for eight consecutive quarters, or until the expiration of the
eighth year of the lease in 2009. The deposit has been
classified as a long-term other asset.
A summary of future principal obligations under the notes
payable, long-term debt and capital lease obligations are as
follows (in thousands):
| |
|
|
|
|
|
|
|
|
| |
|
Notes Payable and | |
|
Capital Lease | |
| Years Ended December 31, |
|
Long-Term Debt | |
|
Obligations | |
| |
|
| |
|
| |
|
2005
|
|
$ |
2,808 |
|
|
$ |
4,134 |
|
|
2006
|
|
|
1,470 |
|
|
|
2,141 |
|
|
2007
|
|
|
1,610 |
|
|
|
746 |
|
|
2008
|
|
|
61,763 |
|
|
|
— |
|
|
2009
|
|
|
2,049 |
|
|
|
— |
|
|
2010 and thereafter
|
|
|
9,775 |
|
|
|
— |
|
| |
|
|
|
|
|
|
|
Total
|
|
$ |
79,475 |
|
|
|
7,021 |
|
| |
|
|
|
|
|
|
|
Imputed interest
|
|
|
|
|
|
|
(545 |
) |
| |
|
|
|
|
|
|
|
Net present value of capital lease obligations
|
|
|
|
|
|
|
6,476 |
|
|
Current portion of capital lease obligations
|
|
|
|
|
|
|
3,756 |
|
| |
|
|
|
|
|
|
|
Long-term portion of capital lease obligations
|
|
|
|
|
|
$ |
2,720 |
|
| |
|
|
|
|
|
|
|
|
| (13) |
Stockholders’ Equity |
Stockholders Rights Plan. The Company’s board of
directors has adopted a stockholder rights plan. The stockholder
rights plan was adopted to give the Company’s board of
directors increased power to negotiate in the Company’s
best interests and to discourage appropriation of control of the
Company at a price that is unfair to its stockholders. It is not
intended to prevent fair offers for acquisition of control
determined by the Company’s board of directors to be in the
best interest of the Company and its stockholders, nor is it
intended to prevent a person or group from obtaining
representation on or control of the Company’s board of
directors
F-23
INPUT/OUTPUT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
through a proxy contest, or to relieve the Company’s board
of directors of its fiduciary duty to consider any proposal for
acquisition in good faith.
The stockholder rights plan involved the distribution of one
preferred share purchase “right” as a dividend on each
outstanding share of the Company’s common stock to all
holders of record on January 27, 1997. Each right will
entitle the holder to purchase one one-thousandth of a share of
the Company’s Series A Preferred Stock at a purchase
price of $200 per one one-thousandth of a share of
Series A Preferred Stock, subject to adjustment. The rights
trade in tandem with the Company’s common stock until, and
become exercisable following, the occurrence of certain
triggering events. The board of directors retains the right to
discontinue the stockholder rights plan through the redemption
of all rights or to amend the stockholder rights plan in any
respect prior to the Company’s announcement of the
occurrence of any such triggering event, including the
acquisition of 20% or more of the Company’s voting stock by
an acquirer. The rights will expire at the close of business on
January 27, 2007, unless earlier redeemed by the Company.
Treasury Stock. In October 2001, the Company’s Board
of Directors authorized the repurchase of up to
1,000,000 shares of common stock in the open market and
privately negotiated transactions at such prices and at such
times as management deems appropriate. As of December 31,
2004, the Company had repurchased 501,900 shares of common
stock at an average price of $7.48 per share under this
repurchase program. At December 31, 2004, the Company owned
784,009 shares of treasury stock.
Stock Option Plans. The Company has adopted a stock
option plan for eligible employees, which, together with
previous plans, provides for the granting of options to purchase
a maximum of 12,200,000 shares of common stock. The options
under these plans generally vest in equal annual installments
over a four-year period beginning on the anniversary of the date
of grant, have a term of ten years and are granted at the
current market price. As further discussed at Note 2 of
Notes to Consolidated Financial Statements, the Company
issued to certain GXT and Concept Systems key employees
inducement options to purchase up to 434,000 and 365,000,
respectively, of its common stock and assumed GXT stock options
which represents fully vested stock options to purchase up to
2,916,590 shares of I/ O common stock.
The Company has also adopted a director’s stock option
plan, which provides for the granting of options to purchase a
maximum of 700,000 shares of common stock by non-employee
directors. The vesting schedule under this plan is determined
based upon the years of service. The maximum vesting period is
equal annual installments over a three-year period beginning on
the anniversary of the date of grant. The options have a term of
ten years.
Effective March 31, 2003, the Company granted its President
and Chief Executive Officer stock options to
purchase 1,325,000 shares of common stock of the
Company at an exercise price of $6.00 per share. The
options vest in equal monthly installments over a three-year
period beginning on the anniversary of the date of grant and
have a term of ten years. The market price of the Company’s
common stock at the close of business on March 31, 2003 was
$3.60.
F-24
INPUT/OUTPUT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
At December 31, 2004, 307,583 shares remained
available for issuance pursuant to these plans. Transactions
under the stock option plans are summarized as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Option Price | |
|
|
|
|
|
Available | |
| |
|
Per Share | |
|
Outstanding | |
|
Vested | |
|
for Grant | |
| |
|
| |
|
| |
|
| |
|
| |
|
January 1, 2002
|
|
$ |
3.50 — $30.00 |
|
|
|
4,860,800 |
|
|
|
2,451,762 |
|
|
|
1,447,108 |
|
| |
Granted
|
|
|
4.35 — 9.50 |
|
|
|
870,500 |
|
|
|
— |
|
|
|
(870,500 |
) |
| |
Vested
|
|
|
— |
|
|
|
— |
|
|
|
923,706 |
|
|
|
— |
|
| |
Exercised
|
|
|
3.50 — 8.19 |
|
|
|
(163,234 |
) |
|
|
(163,234 |
) |
|
|
— |
|
| |
Canceled/forfeited
|
|
|
3.50 — 23.88 |
|
|
|
(570,023 |
) |
|
|
(165,100 |
) |
|
|
233,500 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2002
|
|
|
3.91 — 30.00 |
|
|
|
4,998,043 |
|
|
|
3,047,134 |
|
|
|
810,108 |
|
| |
Increase in shares authorized
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
1,500,000 |
|
| |
Granted
|
|
|
3.30 — 6.00 |
|
|
|
2,425,500 |
|
|
|
— |
|
|
|
(2,425,500 |
) |
| |
Vested
|
|
|
— |
|
|
|
— |
|
|
|
1,154,970 |
|
|
|
— |
|
| |
Canceled/forfeited
|
|
|
3.35 — 29.69 |
|
|
|
(1,834,711 |
) |
|
|
(1,732,509 |
) |
|
|
468,750 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2003
|
|
|
3.30 — 30.00 |
|
|
|
5,588,832 |
|
|
|
2,469,595 |
|
|
|
353,358 |
|
| |
Increase in shares authorized
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
1,000,000 |
|
| |
Granted
|
|
|
4.51 — 10.81 |
|
|
|
1,025,000 |
|
|
|
— |
|
|
|
(1,025,000 |
) |
| |
Vested
|
|
|
— |
|
|
|
— |
|
|
|
1,087,998 |
|
|
|
— |
|
| |
Exercised
|
|
|
.01 — 9.38 |
|
|
|
(2,220,674 |
) |
|
|
(2,220,674 |
) |
|
|
— |
|
| |
Canceled/forfeited
|
|
|
.83 — 30.00 |
|
|
|
(795,148 |
) |
|
|
(615,898 |
) |
|
|
268,725 |
|
| |
Restricted stock granted out of option plans
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(289,500 |
) |
| |
Issuance of inducement stock options
|
|
|
6.42 — 7.09 |
|
|
|
799,000 |
|
|
|
— |
|
|
|
— |
|
| |
Assumption of GXT stock options
|
|
|
.01 — 4.99 |
|
|
|
2,916,590 |
|
|
|
2,916,590 |
|
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2004
|
|
$ |
1.73 — $30.00 |
|
|
|
7,313,600 |
|
|
|
3,637,611 |
|
|
|
307,583 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
Stock options outstanding at December 31, 2004 are
summarized as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
Weighted | |
|
|
|
|
|
|
| |
|
|
|
Average Exercise | |
|
Weighted | |
|
|
|
Weighted | |
| |
|
|
|
Price of | |
|
Average | |
|
|
|
Average Exercise | |
| |
|
|
|
Outstanding | |
|
Remaining | |
|
|
|
Price of Vested | |
| Option Price Per Share |
|
Outstanding | |
|
Options | |
|
Contract Life | |
|
Vested | |
|
Options | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
$1.73 — $3.93
|
|
|
1,593,546 |
|
|
$ |
2.63 |
|
|
|
6.2 |
|
|
|
1,083,167 |
|
|
$ |
2.29 |
|
|
3.94 — 7.85
|
|
|
3,476,479 |
|
|
$ |
6.03 |
|
|
|
7.7 |
|
|
|
1,367,369 |
|
|
$ |
5.84 |
|
|
7.86 — 11.78
|
|
|
1,771,950 |
|
|
$ |
9.83 |
|
|
|
7.8 |
|
|
|
717,450 |
|
|
$ |
9.87 |
|
|
11.79 — 15.70
|
|
|
8,400 |
|
|
$ |
12.54 |
|
|
|
5.9 |
|
|
|
6,400 |
|
|
$ |
12.57 |
|
|
15.71 — 19.63
|
|
|
166,225 |
|
|
$ |
17.44 |
|
|
|
1.6 |
|
|
|
166,225 |
|
|
$ |
17.44 |
|
|
19.64 — 23.55
|
|
|
205,800 |
|
|
$ |
21.70 |
|
|
|
3.0 |
|
|
|
205,800 |
|
|
$ |
21.70 |
|
|
23.56 — 27.48
|
|
|
11,000 |
|
|
$ |
24.63 |
|
|
|
3.3 |
|
|
|
11,000 |
|
|
$ |
24.63 |
|
|
27.48 — 30.00
|
|
|
80,200 |
|
|
$ |
29.36 |
|
|
|
1.9 |
|
|
|
80,200 |
|
|
$ |
29.36 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
|
7,313,600 |
|
|
$ |
7.20 |
|
|
|
7.05 |
|
|
|
3,637,611 |
|
|
$ |
7.60 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-25
INPUT/OUTPUT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The Company has elected to continue to follow the intrinsic
value method of accounting as prescribed by APB Opinion
No. 25. See Note 1 of Notes to Consolidated
Financial Statements for a summary of the net income (loss)
impact if the Company had adopted the fair value method of
accounting for stock-based compensation of
SFAS No. 123.
Restricted Stock Plans. The Company has adopted
restricted stock plans which provide for the award of up to
300,000 shares of common stock to key officers and
employees. In addition, the Company issued 289,500 shares
of restricted stock and restricted stock units under the
Company’s 2004 Long-Term Incentive Plan. Ownership of the
common stock will vest over a period as determined by the
Company in its sole direction. Shares awarded may not be sold,
assigned, transferred, pledged or otherwise encumbered by the
grantee during the vesting period. Except for these
restrictions, the grantee of an award of shares has all the
rights of a common stockholder, including the right to receive
dividends and the right to vote such shares. At
December 31, 2004, there were 365,197 shares of
unvested restricted stock outstanding and 24,000 restricted
stock units issued, with a combined weighted-average grant-date
fair value of $8.43 per share, which are scheduled to vest
through September 2007. At December 31, 2004 there were
81,214 shares available for future awards under these plans.
The market value of shares of common stock granted under the
restricted stock plans were recorded as unamortized restricted
stock compensation and reported as a separate component of
stockholders’ equity. The restricted stock compensation is
amortized over the vesting period. For the years ended
December 31, 2004, 2003 and 2002 the Company recognized
amortization of restricted stock of $0.8 million,
$(0.2) million, and $0.4 million, respectively. The
restricted stock credit for the year ended December 31,
2003 related to the cancellation of unvested restricted stock
associated with the Company’s former President and Chief
Operating Officer and its former Vice President of Business
Development.
Employee Stock Purchase Plan. In April 1997, the Company
adopted the Employee Stock Purchase Plan, which allows all
eligible employees to authorize payroll deductions at a rate of
1% to 15% of base compensation for the purchase of the
Company’s common stock. The purchase price of the common
stock will be the lesser of 85% of the closing price on the
first day of the applicable offering period (or most recently
preceding trading day) or 85% of the closing price on the last
day of the offering period (or most recently preceding trading
day). Each offering period is six months and commences on
January 1 and July 1 of each year. There were 82,615,
127,122, and 117,876 shares purchased by employees during
the years ended December 31, 2004, 2003 and 2002,
respectively.
|
|
| (14) |
Segment and Geographic Information |
The Company evaluates and reviews results based on four segments
(Land Imaging Systems, Marine Imaging Systems, Data Management
Solutions and Seismic Imaging Solutions) 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 income (loss) from operations.
In June 2004, the Company acquired GXT and combined the
operations of the Company’s existing Processing division
with GXT to form the Seismic Imaging Solutions segment. Prior to
December 31, 2003, the Company included the Processing
division within the Land Imaging Systems segment due to its
relatively low contribution margin to their operations. In
February 2004, the Company acquired Concept Systems and reports
its results of operations and assets as the Data Management
Solutions segment. See further discussion of the GXT and Concept
Systems acquisitions at Note 2 of Notes to Consolidated
Financial Statements. In addition, prior to 2004, the
Company included its Applied MEMS division within the Land
Imaging Systems segment due to its relatively insignificant
results of operations. Beginning June 30, 2004, the Company
has combined Applied MEMS within Corporate and Other. In
December 2004, the Company sold its Applied MEMS division in
exchange for an approximate 10% interest in the acquiring
company.
F-26
INPUT/OUTPUT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
A summary of segment information for the years ended
December 31, 2004, 2003 and 2002, reclassified for years
ended December 31, 2003 and 2002 to reflect the Seismic
Imaging Solutions segment and the combining of Applied MEMS
within Corporate and Other, is as follows (in thousands):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Years Ended December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
|
Net sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Land Imaging Systems
|
|
$ |
126,041 |
|
|
$ |
107,679 |
|
|
$ |
62,195 |
|
| |
Marine Imaging Systems
|
|
|
54,680 |
|
|
|
35,694 |
|
|
|
53,357 |
|
| |
Data Management Solutions
|
|
|
14,797 |
|
|
|
— |
|
|
|
— |
|
| |
Seismic Imaging Solutions
|
|
|
50,673 |
|
|
|
5,794 |
|
|
|
2,194 |
|
| |
Corporate and other
|
|
|
1,108 |
|
|
|
866 |
|
|
|
837 |
|
| |
|
|
|
|
|
|
|
|
|
| |
Total
|
|
$ |
247,299 |
|
|
$ |
150,033 |
|
|
$ |
118,583 |
|
| |
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Land Imaging Systems
|
|
$ |
17,643 |
|
|
$ |
1,976 |
|
|
$ |
(36,336 |
) |
| |
Marine Imaging Systems
|
|
|
4,596 |
|
|
|
(759 |
) |
|
|
6,874 |
|
| |
Data Management Solutions
|
|
|
3,200 |
|
|
|
— |
|
|
|
— |
|
| |
Seismic Imaging Solutions
|
|
|
(2,368 |
) |
|
|
974 |
|
|
|
(940 |
) |
| |
Corporate and other
|
|
|
(20,614 |
) |
|
|
(23,194 |
) |
|
|
(33,588 |
) |
| |
|
|
|
|
|
|
|
|
|
| |
Total
|
|
$ |
2,457 |
|
|
$ |
(21,003 |
) |
|
$ |
(63,990 |
) |
| |
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Land Imaging Systems
|
|
$ |
3,028 |
|
|
$ |
3,355 |
|
|
$ |
6,537 |
|
| |
Marine Imaging Systems
|
|
|
1,964 |
|
|
|
2,889 |
|
|
|
1,701 |
|
| |
Data Management Solutions
|
|
|
1,946 |
|
|
|
— |
|
|
|
— |
|
| |
Seismic Imaging Solutions
|
|
|
14,206 |
|
|
|
689 |
|
|
|
417 |
|
| |
Corporate and other
|
|
|
3,524 |
|
|
|
4,511 |
|
|
|
4,582 |
|
| |
|
|
|
|
|
|
|
|
|
| |
Total
|
|
$ |
24,668 |
|
|
$ |
11,444 |
|
|
$ |
13,237 |
|
| |
|
|
|
|
|
|
|
|
|
F-27
INPUT/OUTPUT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
| |
|
|
|
|
|
|
|
|
|
| |
|
December 31, | |
|
December 31, | |
| |
|
2004 | |
|
2003 | |
| |
|
| |
|
| |
|
Total assets:
|
|
|
|
|
|
|
|
|
| |
Land Imaging Systems
|
|
$ |
128,450 |
|
|
$ |
97,151 |
|
| |
Marine Imaging Systems
|
|
|
65,892 |
|
|
|
63,123 |
|
| |
Data Management Solutions
|
|
|
50,470 |
|
|
|
— |
|
| |
Seismic Imaging Solutions
|
|
|
198,582 |
|
|
|
8,133 |
|
| |
Corporate and other
|
|
|
35,722 |
|
|
|
80,797 |
|
| |
|
|
|
|
|
|
| |
Total
|
|
$ |
479,116 |
|
|
$ |
249,204 |
|
| |
|
|
|
|
|
|
|
Total assets by geographic area:
|
|
|
|
|
|
|
|
|
| |
North America
|
|
$ |
404,128 |
|
|
$ |
216,706 |
|
| |
Europe
|
|
|
68,853 |
|
|
|
26,842 |
|
| |
Middle East
|
|
|
5,279 |
|
|
|
5,601 |
|
| |
Other
|
|
|
856 |
|
|
|
55 |
|
| |
|
|
|
|
|
|
| |
Total
|
|
$ |
479,116 |
|
|
$ |
249,204 |
|
| |
|
|
|
|
|
|
Intersegment sales are insignificant for all periods presented.
Corporate assets include all assets specifically related to
corporate personnel and operations, a majority of cash and cash
equivalents, and all facilities that are jointly utilized by
segments. Depreciation and amortization expense is allocated to
segments based upon use of the underlying assets.
A summary of net sales by products and services is as follows
(in thousands):
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Years Ended December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
|
Equipment and system sales
|
|
$ |
176,135 |
|
|
$ |
136,244 |
|
|
$ |
112,846 |
|
|
Multi-client data library sales (including underwriting revenues)
|
|
|
32,469 |
|
|
|
— |
|
|
|
— |
|
|
Imaging services
|
|
|
16,803 |
|
|
|
3,659 |
|
|
|
1,041 |
|
|
Other revenues
|
|
|
21,892 |
|
|
|
10,130 |
|
|
|
4,696 |
|
| |
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
247,299 |
|
|
$ |
150,033 |
|
|
$ |
118,583 |
|
| |
|
|
|
|
|
|
|
|
|
A summary of net sales by geographic area follows (in thousands):
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Years Ended December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
|
North America
|
|
$ |
66,940 |
|
|
$ |
34,813 |
|
|
$ |
34,295 |
|
|
Middle East
|
|
|
16,868 |
|
|
|
10,231 |
|
|
|
2,013 |
|
|
Europe
|
|
|
45,054 |
|
|
|
19,976 |
|
|
|
34,151 |
|
|
Asia Pacific
|
|
|
53,352 |
|
|
|
44,693 |
|
|
|
15,312 |
|
|
Commonwealth of Independent States (CIS)
|
|
|
26,092 |
|
|
|
19,991 |
|
|
|
21,178 |
|
|
Latin America
|
|
|
13,681 |
|
|
|
15,438 |
|
|
|
7,227 |
|
|
Africa
|
|
|
25,312 |
|
|
|
4,876 |
|
|
|
4,050 |
|
|
Other
|
|
|
— |
|
|
|
15 |
|
|
|
357 |
|
| |
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
247,299 |
|
|
$ |
150,033 |
|
|
$ |
118,583 |
|
| |
|
|
|
|
|
|
|
|
|
F-28
INPUT/OUTPUT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Net sales are attributed to geographical locations on the basis
of the ultimate destination of the equipment or service, if
known, or the geographical area imaging services are provided.
If the ultimate destination of such equipment is not known, net
sales are attributed to the geographical location of initial
shipment.
In 2004 and 2003, BGP accounted for approximately 15% and 28%,
respectively, of the Company’s consolidated net sales. In
2002, two customers, Western Geco and LARGE, accounted for
approximately 11% and 10%, respectively, of consolidated net
sales.
Components of income taxes follows (in thousands):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Years Ended December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
|
Current:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Federal
|
|
$ |
— |
|
|
$ |
(1,968 |
) |
|
$ |
8 |
|
| |
State and local
|
|
|
(21 |
) |
|
|
402 |
|
|
|
403 |
|
| |
Foreign
|
|
|
722 |
|
|
|
1,914 |
|
|
|
(2,484 |
) |
|
Deferred
|
|
|
— |
|
|
|
— |
|
|
|
58,843 |
|
| |
|
|
|
|
|
|
|
|
|
|
Total income tax expense
|
|
$ |
701 |
|
|
$ |
348 |
|
|
$ |
56,770 |
|
| |
|
|
|
|
|
|
|
|
|
A reconciliation of the expected income tax expense on income
(loss) before income taxes using the statutory federal income
tax rate of 35% for the years ended December 31, 2004, 2003
and 2002 to income tax expense is as follows (in thousands):
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Years Ended December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
|
Expected income tax benefit at 35%
|
|
$ |
(797 |
) |
|
$ |
(7,981 |
) |
|
$ |
(21,684 |
) |
|
Foreign taxes, net
|
|
|
(315 |
) |
|
|
(1,487 |
) |
|
|
(1,547 |
) |
|
State and local taxes
|
|
|
(221 |
) |
|
|
261 |
|
|
|
262 |
|
|
Deferred tax asset valuation allowance
|
|
|
1,713 |
|
|
|
4,289 |
|
|
|
84,719 |
|
|
Nondeductible expenses
|
|
|
321 |
|
|
|
165 |
|
|
|
266 |
|
|
Return to provision
|
|
|
— |
|
|
|
5,106 |
|
|
|
(5,221 |
) |
|
Other
|
|
|
— |
|
|
|
(5 |
) |
|
|
(25 |
) |
| |
|
|
|
|
|
|
|
|
|
|
Total income tax expense
|
|
$ |
701 |
|
|
$ |
348 |
|
|
$ |
56,770 |
|
| |
|
|
|
|
|
|
|
|
|
F-29
INPUT/OUTPUT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The tax effects of the cumulative temporary differences
resulting in the net deferred income tax asset
(liability) are as follows (in thousands):
| |
|
|
|
|
|
|
|
|
|
|
|
| |
|
December 31, | |
|
December 31, | |
| |
|
2004 | |
|
2003 | |
| |
|
| |
|
| |
|
Current deferred:
|
|
|
|
|
|
|
|
|
| |
Deferred income tax assets:
|
|
|
|
|
|
|
|
|
| |
|
Accrued expenses
|
|
$ |
2,706 |
|
|
$ |
767 |
|
| |
|
Allowance accounts
|
|
|
5,323 |
|
|
|
5,786 |
|
| |
|
Inventory
|
|
|
384 |
|
|
|
397 |
|
| |
|
|
|
|
|
|
| |
|
|
Total current deferred income tax asset
|
|
|
8,413 |
|
|
|
6,950 |
|
| |
|
|
Valuation allowance
|
|
|
(8,413 |
) |
|
|
(6,950 |
) |
| |
|
|
|
|
|
|
| |
|
|
Net current deferred income tax asset
|
|
$ |
— |
|
|
$ |
— |
|
| |
|
|
|
|
|
|
|
Noncurrent deferred:
|
|
|
|
|
|
|
|
|
| |
Deferred income tax assets:
|
|
|
|
|
|
|
|
|
| |
|
Net operating loss carryforward
|
|
$ |
72,539 |
|
|
$ |
53,574 |
|
| |
|
Basis in research and development
|
|
|
21,571 |
|
|
|
29,908 |
|
| |
|
Basis in property, plant and equipment
|
|
|
2,688 |
|
|
|
— |
|
| |
|
Basis in identified intangibles
|
|
|
— |
|
|
|
10,372 |
|
| |
|
Alternative minimum tax credit
|
|
|
— |
|
|
|
1,336 |
|
| |
|
Other
|
|
|
2,289 |
|
|
|
1,664 |
|
| |
|
|
|
|
|
|
| |
|
|
Total deferred income tax asset
|
|
|
99,087 |
|
|
|
96,854 |
|
| |
|
|
Valuation allowance
|
|
|
(83,862 |
) |
|
|
(94,922 |
) |
| |
|
|
|
|
|
|
| |
|
|
Net non-current deferred income tax asset
|
|
|
15,225 |
|
|
|
1,932 |
|
| |
|
|
|
|
|
|
| |
Deferred income tax liabilities:
|
|
|
|
|
|
|
|
|
| |
|
Unbilled revenue
|
|
|
(2,272 |
) |
|
|
— |
|
| |
|
Basis in identified intangibles
|
|
|
(12,473 |
) |
|
|
— |
|
| |
|
Basis in property, plant and equipment
|
|
|
— |
|
|
|
(783 |
) |
| |
|
|
|
|
|
|
| |
|
Net non-current deferred income tax asset
|
|
$ |
480 |
|
|
$ |
1,149 |
|
| |
|
|
|
|
|
|
The Company continues to record a valuation allowance for
substantially all of its net deferred tax assets, which are
primarily net operating loss carryforwards. The Company
currently does not recognize a benefit from net operating
losses. The establishment of this valuation allowance does not
affect the Company’s ability to reduce future tax expense
through utilization of prior years net operating losses.
The valuation allowance was calculated in accordance with the
provisions of SFAS No. 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. The Company’s results for those periods were
heavily affected by both industry conditions, and 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. Nevertheless,
recent losses represented sufficient negative evidence to
establish an additional valuation allowance. The Company has
continued to reserve for substantially all net deferred tax
assets and will continue until there is sufficient evidence to
warrant reversal. At December 31, 2004, the Company had net
operating loss carry-forwards of approximately
$207 million, which expire from 2018 through 2024.
F-30
INPUT/OUTPUT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
United States income taxes have not been provided on the
cumulative undistributed earnings of the Company’s foreign
subsidiaries as it is the Company’s intention to reinvest
such earnings indefinitely.
During 2004, the Company recorded approximately $53 million
as identifiable intangible assets related to its purchase of
GXT. These intangible assets are not deductible for federal
income taxes. The deferred tax liability related to these
intangibles, along with a related reduction in the valuation
allowance, is included in the December 31, 2004 deferred
tax balance.
Included within Other Long-Term Liabilities at December 31,
2003 was $3.1 million which primarily consisted of reserves
for various foreign and state tax matters. As of
December 31, 2004, the balance had decreased by
$0.9 million, to $2.2 million due to closure of
certain foreign tax matters.
|
|
| (16) |
Impairment of Long-lived Assets |
During 2003, the Company’s Land Imaging Systems segment
incurred a $2.5 million charge to cost of sales related to
the write-down of rental equipment associated with the
Company’s first generation radio-based VectorSeis land
acquisition systems. This equipment was being utilized in North
America as part of the strategic marketing alliance between the
Company and Veritas DGC Inc. In May 2003, the strategic
marketing alliance was terminated. This equipment was an older
generation of the Company’s technology; therefore, the
market demand and its net realizable value was significantly
less than the Company’s current generation VectorSeis land
acquisition systems. The method of determining fair value was
based on the forecasted cash flows (discounted) for use of
the equipment. At December 31, 2004, the Company had
$0.3 million of this equipment available to sale or to
lease.
Also during 2003, the Company initiated an evaluation of its
solid streamer project and concluded it would no longer
internally pursue this product for commercial development. In
conjunction with this evaluation, certain fixed assets and
patented technology within the Marine Imaging Systems segment
were determined to be impaired in accordance with
SFAS No. 144. As a result, fixed assets of
$0.5 million and intangible assets of $0.6 million
were written off as a charge against earnings. In addition,
inventory associated with this project of $0.2 million was
written off and included within research and development
expenses.
In 2002, the Company began the process of vacating its Alvin,
Texas and Norwich, U.K. manufacturing facilities. Due to the
planned closures, the Company performed an impairment test in
accordance with SFAS No. 144. As a result of the
impairment tests, the Alvin facility, leasehold improvements of
the Norwich geophone stringing facility and certain related
manufacturing equipment were considered impaired and the Company
recorded impairment charges of approximately $6.3 million
in 2002, a majority of which was reflected within Corporate and
Other. The method of determining their fair values was based
upon quoted market prices for the facility and operating cash
flows during the interim period prior to closure for the
equipment and leasehold improvements. In 2003, the Company
assigned its right under the Norwich lease to a third party and
in 2004 the Company completed the sale of its Alvin, Texas
facility. See Note 5 of Notes to Consolidated Financial
Statements.
F-31
INPUT/OUTPUT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
|
| (17) |
Restructuring Activities |
A summary of the Company’s restructuring programs is as
follows (in thousands):
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
2003 | |
| |
|
|
|
Restructuring | |
| |
|
2002 Restructuring Plan | |
|
Plan | |
| |
|
| |
|
| |
| |
|
Severance | |
|
Abandoned | |
|
Severance | |
| |
|
Costs | |
|
Lease Costs | |
|
Costs | |
| |
|
| |
|
| |
|
| |
|
Accruals at January 1, 2002
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
Restructuring expense
|
|
|
3,419 |
|
|
|
1,933 |
|
|
|
— |
|
|
Cash payments during the period
|
|
|
(2,410 |
) |
|
|
(588 |
) |
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
|
Accruals at December 31, 2002
|
|
|
1,009 |
|
|
|
1,345 |
|
|
|
— |
|
|
Severance expense
|
|
|
— |
|
|
|
— |
|
|
|
1,303 |
|
|
Adjustment to accrual
|
|
|
(94 |
) |
|
|
(138 |
) |
|
|
— |
|
|
Cash payments during the period
|
|
|
(821 |
) |
|
|
(567 |
) |
|
|
(1,205 |
) |
| |
|
|
|
|
|
|
|
|
|
|
Accruals at December 31, 2003
|
|
|
94 |
|
|
|
640 |
|
|
|
98 |
|
|
Severance expense
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
Adjustment to accrual
|
|
|
(32 |
) |
|
|
66 |
|
|
|
(17 |
) |
|
Cash payments during the period
|
|
|
(62 |
) |
|
|
(370 |
) |
|
|
(81 |
) |
| |
|
|
|
|
|
|
|
|
|
|
Accruals at December 31, 2004
|
|
$ |
— |
|
|
$ |
336 |
|
|
$ |
— |
|
| |
|
|
|
|
|
|
|
|
|
Lessee. The Company leases certain equipment, offices and
warehouse space under non-cancelable operating leases. Rental
expense was $3.8 million, $1.4 million and
$2.1 million for the years ended December 31, 2004,
2003 and 2002, respectively.
A summary of future rental commitments under non-cancelable
operating leases is as follows (in thousands):
| |
|
|
|
|
| Years Ended December 31, |
|
|
| |
|
|
|
2005
|
|
$ |
4,279 |
|
|
2006
|
|
|
2,914 |
|
|
2007
|
|
|
1,699 |
|
|
2008
|
|
|
768 |
|
|
2009
|
|
|
651 |
|
| |
|
|
|
|
Total
|
|
$ |
10,311 |
|
| |
|
|
|
Lessor. The Company leases seismic equipment to customers
under operating leases of two years or less. At
December 31, 2004, the total cost of equipment leased or
held for lease was $17.3 million, less
F-32
INPUT/OUTPUT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
accumulated depreciation of $4.9 million. The Company also
leases under-utilized facilities under various lease and
sub-lease agreements. A summary of lease revenues is as follows
(in thousands):
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Years Ended December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
|
Equipment rental
|
|
$ |
4,984 |
|
|
$ |
4,348 |
|
|
$ |
2,750 |
|
|
Facility rental
|
|
|
1,749 |
|
|
|
981 |
|
|
|
1,297 |
|
| |
|
|
|
|
|
|
|
|
|
|
Total rentals
|
|
$ |
6,733 |
|
|
$ |
5,329 |
|
|
$ |
4,047 |
|
| |
|
|
|
|
|
|
|
|
|
A summary of future minimum non-cancelable lease and sublease
income is as follows (in thousands):
| |
|
|
|
|
|
|
|
|
| |
|
Equipment | |
|
|
| Years Ended December 31, |
|
Rental | |
|
Sublease | |
| |
|
| |
|
| |
|
2005
|
|
$ |
2,622 |
|
|
$ |
1,186 |
|
|
2006
|
|
|
— |
|
|
|
820 |
|
|
2007
|
|
|
— |
|
|
|
689 |
|
|
2008
|
|
|
— |
|
|
|
446 |
|
|
2009
|
|
|
— |
|
|
|
438 |
|
| |
|
|
|
|
|
|
|
Total
|
|
$ |
2,622 |
|
|
$ |
3,579 |
|
| |
|
|
|
|
|
|
401(k). The Company has a 401(k) retirement savings plan
which covers substantially all employees. Employees may
voluntarily contribute up to 60% of their compensation, as
defined, to the plan. The Company, effective June 1, 2000,
adopted a company matching contribution to the 401(k) plan. The
Company matches the employee contribution at a rate of 50% of
the first 6% of compensation contributed to the plan. GXT has a
401(k) retirement savings plan that has terms similar to the
Company’s existing plan. Company contributions to the plans
were $1.3 million, $1.0 million and $0.8 million,
during the years ended December 31, 2004, 2003 and 2002,
respectively.
Supplemental executive retirement plan. The Company had a
non-qualified, supplemental executive retirement plan (SERP).
The SERP provided for certain compensation to become payable on
the participants’ death, retirement or total disability as
set forth in the plan. The only remaining obligations under this
plan are the scheduled benefit payments to the spouse of a
deceased former executive.
Directors Plan. The Company had also adopted a
non-qualified, unfunded outside directors’ retirement plan,
under which any rights to benefits were frozen in 1996. The plan
provides for certain compensation to become payable on the
participants’ death, retirement or total disability as set
forth in the plan. The consolidated financial statements include
pension expense of $0.2 million for the year ended
December 31, 2002.
F-33
INPUT/OUTPUT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
|
| (20) |
Selected Quarterly Information — (Unaudited) |
A summary of selected quarterly information is as follows (in
thousands, except per share amounts):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three Months Ended | |
| |
|
| |
| Year Ended December 31, 2004 |
|
March 31 | |
|
June 30 | |
|
September 30 | |
|
December 31 | |
| |
|
| |
|
| |
|
| |
|
| |
|
Net sales
|
|
$ |
36,287 |
|
|
$ |
62,326 |
|
|
$ |
80,861 |
|
|
$ |
67,824 |
|
|
Gross profit
|
|
|
11,968 |
|
|
|
21,143 |
|
|
|
18,406 |
|
|
|
20,077 |
|
|
Income (loss) from operations
|
|
|
1,044 |
|
|
|
5,600 |
|
|
|
(3,343 |
) |
|
|
(844 |
) |
|
Interest expense
|
|
|
(1,496 |
) |
|
|
(1,497 |
) |
|
|
(1,623 |
) |
|
|
(1,615 |
) |
|
Interest and other income
|
|
|
485 |
|
|
|
430 |
|
|
|
297 |
|
|
|
283 |
|
|
Income tax expense (benefit)
|
|
|
591 |
|
|
|
347 |
|
|
|
305 |
|
|
|
(542 |
) |
|
Net income (loss) applicable to common shares
|
|
$ |
(558 |
) |
|
$ |
4,186 |
|
|
$ |
(4,974 |
) |
|
$ |
(1,634 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic loss per share
|
|
$ |
(0.01 |
) |
|
$ |
0.07 |
|
|
$ |
(0.07 |
) |
|
$ |
(0.02 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted loss per share
|
|
$ |
(0.01 |
) |
|
$ |
0.07 |
|
|
$ |
(0.07 |
) |
|
$ |
(0.02 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three Months Ended | |
| |
|
| |
| Year Ended December 31, 2003 |
|
March 31 | |
|
June 30 | |
|
September 30 | |
|
December 31 | |
| |
|
| |
|
| |
|
| |
|
| |
|
Net sales
|
|
$ |
41,177 |
|
|
$ |
34,562 |
|
|
$ |
30,307 |
|
|
$ |
43,987 |
|
|
Gross profit
|
|
|
8,457 |
|
|
|
2,974 |
|
|
|
5,219 |
|
|
|
11,191 |
|
|
Income (loss) from operations
|
|
|
(5,057 |
) |
|
|
(10,286 |
) |
|
|
(6,369 |
) |
|
|
709 |
|
|
Interest expense
|
|
|
(1,345 |
) |
|
|
(843 |
) |
|
|
(954 |
) |
|
|
(945 |
) |
|
Interest and other income
|
|
|
840 |
|
|
|
894 |
|
|
|
541 |
|
|
|
313 |
|
|
Fair value adjustment and exchange of warrant obligation
|
|
|
871 |
|
|
|
(1,712 |
) |
|
|
1,829 |
|
|
|
769 |
|
|
Impairment of investment
|
|
|
— |
|
|
|
(2,036 |
) |
|
|
— |
|
|
|
(23 |
) |
|
Income tax expense (benefit)
|
|
|
588 |
|
|
|
(297 |
) |
|
|
(133 |
) |
|
|
190 |
|
|
Net income (loss) applicable to common shares
|
|
$ |
(5,279 |
) |
|
$ |
(13,686 |
) |
|
$ |
(4,820 |
) |
|
$ |
633 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic loss per share
|
|
$ |
(0.10 |
) |
|
$ |
(0.27 |
) |
|
$ |
(0.09 |
) |
|
$ |
0.01 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted loss per share
|
|
$ |
(0.10 |
) |
|
$ |
(0.27 |
) |
|
$ |
(0.09 |
) |
|
$ |
0.01 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
F-34
INPUT/OUTPUT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
|
| (21) |
Summary of Significant Charges |
The table below summarizes the significant charges during the
periods presented (in thousands):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
Long-Lived | |
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
Asset and | |
|
Personnel/ | |
|
|
|
|
|
|
|
|
| |
|
Inventory | |
|
Goodwill | |
|
Facility | |
|
Tax | |
|
|
|
Reserve for | |
|
|
| |
|
Related | |
|
Related | |
|
and Other | |
|
Valuation | |
|
Impairment of | |
|
LARGE | |
|
|
| |
|
Charges | |
|
Charges | |
|
Charges | |
|
Allowance | |
|
Investment | |
|
Receivables | |
|
Total | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
Charges for year ended December 31, 2002 by business
segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Land Imaging Systems
|
|
$ |
2,958 |
|
|
$ |
15,946 |
|
|
$ |
3,030 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
21,934 |
|
| |
Marine Imaging Systems
|
|
|
1,384 |
|
|
|
244 |
|
|
|
576 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
2,204 |
|
| |
Seismic Imaging Solutions
|
|
|
— |
|
|
|
— |
|
|
|
674 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
674 |
|
| |
Corporate and Other
|
|
|
— |
|
|
|
5,206 |
|
|
|
1,072 |
|
|
|
58,843 |
|
|
|
— |
|
|
|
— |
|
|
|
65,121 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
$ |
4,342 |
|
|
$ |
21,396 |
|
|
$ |
5,352 |
|
|
$ |
58,843 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
89,933 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Charges for year ended December 31, 2002 by category:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Cost of sales
|
|
$ |
4,342 |
|
|
$ |
— |
|
|
$ |
1,924 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
6,266 |
|
| |
Research and development
|
|
|
— |
|
|
|
— |
|
|
|
2,171 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
2,171 |
|
| |
Sales and marketing
|
|
|
— |
|
|
|
— |
|
|
|
182 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
182 |
|
| |
General and administrative
|
|
|
— |
|
|
|
— |
|
|
|
1,075 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
1,075 |
|
| |
Impairment of long-lived assets
|
|
|
— |
|
|
|
6,274 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
6,274 |
|
| |
Goodwill impairment
|
|
|
— |
|
|
|
15,122 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
15,122 |
|
| |
Income tax expense
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
58,843 |
|
|
|
— |
|
|
|
— |
|
|
|
58,843 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
$ |
4,342 |
|
|
$ |
21,396 |
|
|
$ |
5,352 |
|
|
$ |
58,843 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
89,933 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Charges for year ended December 31, 2003 by business
segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Land Imaging Systems
|
|
$ |
957 |
|
|
$ |
2,500 |
|
|
$ |
709 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
4,166 |
|
| |
Marine Imaging Systems
|
|
|
267 |
|
|
|
1,120 |
|
|
|
345 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
1,732 |
|
| |
Corporate and Other
|
|
|
— |
|
|
|
— |
|
|
|
249 |
|
|
|
— |
|
|
|
2,059 |
|
|
|
— |
|
|
|
2,308 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
$ |
1,224 |
|
|
$ |
3,620 |
|
|
$ |
1,303 |
|
|
$ |
— |
|
|
$ |
2,059 |
|
|
$ |
— |
|
|
$ |
8,206 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Charges for year ended December 31, 2003 by category:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Cost of sales
|
|
$ |
1,054 |
|
|
$ |
2,500 |
|
|
$ |
691 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
4,245 |
|
| |
Research and development
|
|
|
170 |
|
|
|
— |
|
|
|
471 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
641 |
|
| |
Sales and marketing
|
|
|
— |
|
|
|
— |
|
|
|
(26 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(26 |
) |
| |
General and administrative
|
|
|
— |
|
|
|
— |
|
|
|
167 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
167 |
|
| |
Impairment of long- lived assets
|
|
|
— |
|
|
|
1,120 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
1,120 |
|
| |
Impairment of investment
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
2,059 |
|
|
|
— |
|
|
|
2,059 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
$ |
1,224 |
|
|
$ |
3,620 |
|
|
$ |
1,303 |
|
|
$ |
— |
|
|
$ |
2,059 |
|
|
$ |
— |
|
|
$ |
8,206 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Charges for year ended December 31, 2004 by business
segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Land Imaging Systems
|
|
$ |
241 |
|
|
$ |
— |
|
|
$ |
23 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
264 |
|
| |
Marine Imaging Systems
|
|
|
466 |
|
|
|
— |
|
|
|
205 |
|
|
|
— |
|
|
|
— |
|
|
|
5,200 |
|
|
|
5,871 |
|
| |
Seismic Imaging Solutions
|
|
|
— |
|
|
|
— |
|
|
|
9 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
9 |
|
| |
Corporate and Other
|
|
|
10 |
|
|
|
— |
|
|
|
6 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
16 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
$ |
717 |
|
|
$ |
— |
|
|
$ |
243 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
5,200 |
|
|
$ |
6,160 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Charges for year ended December 31, 2004 by category:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Cost of sales
|
|
$ |
717 |
|
|
$ |
— |
|
|
$ |
28 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
745 |
|
| |
Research and development
|
|
|
— |
|
|
|
— |
|
|
|
74 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
74 |
|
| |
Sales and marketing
|
|
|
— |
|
|
|
— |
|
|
|
141 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
141 |
|
| |
General and administrative
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
5,200 |
|
|
|
5,200 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
$ |
717 |
|
|
$ |
— |
|
|
$ |
243 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
5,200 |
|
|
$ |
6,160 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-35
INPUT/OUTPUT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
On January 12, 2005, a putative class action lawsuit was
filed against I/ O, its chief executive officer, its chief
financial officer and the president of GXT in the
U.S. District Court for the Southern District of Texas,
Houston Division. The action, styled Harold Read,
individually and on behalf of all others similarly
situated v. Input/ Output, Inc, Robert P. Peebler, J.
Michael Kirksey, and Michael K. Lambert, alleges violations
of Sections 10(b) and 20(a) of the Securities Exchange Act
of 1934, and Rule 10b-5 thereunder. The action was filed
purportedly on behalf of purchasers of I/O’s common stock
who purchased shares during the period from May 10, 2004
through January 4, 2005. The complaint seeks damages in an
unspecified amount plus costs and attorneys’ fees. The
complaint alleges misrepresentations and omissions in public
announcements and filings concerning our business, sales and
products. On February 4 and 10, 2005, and March 15,
2005, three similar lawsuits were filed in the
U.S. District Court for the Southern District of Texas,
Houston Division. The three complaints, styled Matt Brody,
individually and on behalf of all others similarly
situated v. Input/ Output, Inc, Robert P. Peebler and J.
Michael Kirksey, and Giovanni Arca vs. Input/ Output,
Inc., Robert P. Peebler, J. Michael Kirksey, and Michael K.
Lambert, and Schneur Grossberger, individually and on
behalf of all others similarly situated v. Input/Output,
Inc., Robert P. Peebler, J. Michael Kirksey, and Michael K.
Lambert, contain factual allegations similar to those in the
Read complaint. The Brody complaint, however,
contains additional allegations that the defendants failed to
disclose or misrepresented that (1) the Company’s
products were defective, (2) the Company’s customers
were wrongfully induced into buying the Company’s products
and (3) the Company violated Generally Accepted Accounting
Principles and SEC rules by failing to properly report and
disclose the allegedly illegal nature of its revenue during the
proposed class period. The Brody case is the only of the
purported class action cases where the defendants have been
served with process. A stipulation of the parties has been filed
in the Brody case that provides (i) the plaintiffs
shall move pursuant to the Private Securities Litigation Reform
Act for appointment of lead plaintiff and lead counsel on or
before March 14, 2005, (ii) the plaintiffs shall file
a consolidated class action complaint within 45 days after
the entry of an order appointing lead plaintiff and lead
counsel, (iii) the defendants shall answer or otherwise
respond within 45 days after a consolidated complaint is
filed, and (iv) if any defendant moves to dismiss the
consolidated complaint, then the response to the motion will be
filed within 45 days and the defendants will have
30 days to file a reply. No discovery has been conducted by
the parties in any of the cases, and discovery will be stayed
should the defendants file a motion to dismiss until there is a
ruling on that motion. Based on the Company’s review of the
complaints, management believes the lawsuits are without merit
and intends to defend the Company and its officers named as
parties vigorously. However, management is unable to determine
whether the ultimate resolution of these cases will have a
material adverse impact on the Company’s financial
condition, results of operation or liquidity.
In October 2002, the Company filed a lawsuit against Paulsson
Geophysical Services, Inc. (“PGSI”) and its owner in
the 286th District Court for Fort Bend County, Texas,
seeking recovery of approximately $0.7 million that was
unpaid and due to the Company resulting from the sale of a
custom product that PGSI asked the Company to construct in 2001.
In 2002, the Company fully reserved for all amounts due from
PGSI with regard to this sale. After the Company filed suit to
recover the PGSI receivable, PGSI alleged that the delivered
custom product was defective and counter-claimed against the
Company, asserting breach of contract, breach of warranty and
other related causes of action. The case was tried to a jury
during May 2004. The jury returned a verdict in June 2004, the
results of which would not have supported a judgment awarding
damages to either the Company or the defendants. In August 2004,
the presiding judge overruled the jury verdict and ordered a new
trial. The Company and the defendants have not yet scheduled a
new trial and continue to discuss the dispute. Company
management continues to believe that the ultimate resolution of
the case will not have a material adverse impact on the
financial condition or liquidity of the Company.
The Company has been named in various lawsuits or threatened
actions that are incidental to its ordinary business. Such
lawsuits and actions could increase in number as the
Company’s business expands and the
F-36
INPUT/OUTPUT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Company grows larger. Litigation is inherently unpredictable.
Any claims against the Company, whether meritorious or not,
could be time consuming, cause the Company to incur costs and
expenses, require significant amounts of management time and
result in the diversion of significant operational resources.
The results of these lawsuits and actions cannot be predicted
with certainty. Management believes that the ultimate resolution
of these matters will not have a material adverse impact on the
financial condition or liquidity of the Company.
In April 2003, the Company invested in Energy Virtual Partners,
an entity for whom the Company’s president was founder,
president and Chief Executive Officer. See Note 8 of
Notes to Consolidated Financial Statements.
Mr. Lapeyre is the chairman and a significant equity owner
of Laitram, L.L.C. (Laitram) and has served as president of
Laitram and its predecessors since 1989. Laitram is a privately
owned, New Orleans-based manufacturer of food processing
equipment and modular conveyor belts. Mr. Lapeyre and
Laitram together owned 10.7% of the Company’s outstanding
common stock as of February 20, 2005.
The Company acquired DigiCourse, Inc., the Company’s marine
positioning products business, from Laitram in 1998 and renamed
it I/ O Marine Systems, Inc. In connection with that
acquisition, the Company entered into a Continued Services
Agreement with Laitram under which Laitram agreed to provide the
Company certain accounting, software, manufacturing and
maintenance services. Manufacturing services consist primarily
of machining of parts for the Company’s marine positioning
systems. The term of this agreement expired in September 2001
but the Company continues to operate under its terms. In
addition, when the Company requests, the legal staff of Laitram
advises the Company on certain intellectual property matters
with regard to the Company’s marine positioning systems.
During 2004, we paid Laitram a total of approximately
$1,823,970, which consisted of approximately $1,166,700 for
manufacturing services, $623,270 for rent and other pass-through
third party facilities charges, and $34,000 for other services.
For the 2003 and 2002 fiscal years, we paid Laitram a total of
approximately $1.17 million and $1.9 million,
respectively, for these services. In the opinion of the
Company’s management, the terms of these services are fair
and reasonable and as favorable to the Company as those that
could have been obtained from unrelated third parties at the
time of their performance.
In February 2005, the Company issued to Fletcher International,
Ltd. (Fletcher), an affiliate of private investment firm
Fletcher Asset Management, Inc., 30,000 shares of a newly
designated Series D-1 Cumulative Convertible Preferred
Stock (Series D-1 Preferred Stock) in a
privately-negotiated transaction and received $30 million
in proceeds. The Series D-1 Preferred Stock may be
converted, at the holder’s election, into up to
3,812,428 shares of the Company’s common stock,
subject to adjustment, at an initial conversion price of
$7.869 per share, also subject to adjustment in certain
events.
The Company also granted Fletcher the right, commencing
August 16, 2005 and expiring on February 16, 2008
(subject to extension), to purchase up to an additional
40,000 shares of one or more additional series of
Series D Preferred Stock, having similar terms and
conditions as the Series D-1 Preferred Stock, and having a
conversion price equal to 122% of the prevailing market price of
our common stock at the time of its issuance, but not less than
$6.31 per share (subject to adjustment in certain events).
F-37
SCHEDULE II
INPUT/ OUTPUT, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Balance at | |
|
Charged to | |
|
|
|
|
| |
|
Beginning | |
|
Costs and | |
|
|
|
Balance at | |
| Year Ended December 31, 2002 |
|
of Year | |
|
Expenses | |
|
Deductions | |
|
End of Year | |
| |
|
| |
|
| |
|
| |
|
| |
| |
|
(In thousands) | |
|
Allowances for doubtful accounts
|
|
$ |
1,752 |
|
|
$ |
2,543 |
|
|
$ |
(2,620 |
) |
|
$ |
1,675 |
|
|
Allowances for doubtful notes
|
|
|
10,735 |
|
|
|
158 |
|
|
|
(665 |
) |
|
|
10,228 |
|
|
Reserves for excess and obsolete inventory
|
|
|
14,351 |
|
|
|
4,947 |
|
|
|
(1,131 |
)(b) |
|
|
18,167 |
|
|
Warranty
|
|
|
4,669 |
|
|
|
1,679 |
|
|
|
(3,434 |
) |
|
|
2,914 |
|
|
Allowance for net deferred tax assets
|
|
|
12,864 |
|
|
|
84,719 |
|
|
|
— |
|
|
|
97,583 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Balance at | |
|
Charged to | |
|
|
|
|
| |
|
Beginning | |
|
Costs and | |
|
|
|
Balance at | |
| Year Ended December 31, 2003 |
|
of Year | |
|
Expenses | |
|
Deductions | |
|
End of Year | |
| |
|
| |
|
| |
|
| |
|
| |
| |
|
(In thousands) | |
|
Allowances for doubtful accounts
|
|
$ |
1,675 |
|
|
$ |
569 |
|
|
$ |
(694 |
) |
|
$ |
1,550 |
|
|
Allowances for doubtful notes
|
|
|
10,228 |
|
|
|
— |
|
|
|
(7,615 |
)(a) |
|
|
2,613 |
|
|
Reserves for excess and obsolete inventory
|
|
|
18,167 |
|
|
|
1,224 |
|
|
|
(7,518 |
)(b) |
|
|
11,873 |
|
|
Warranty
|
|
|
2,914 |
|
|
|
2,885 |
|
|
|
(2,366 |
) |
|
|
3,433 |
|
|
Allowance for net deferred tax assets
|
|
|
97,583 |
|
|
|
4,289 |
|
|
|
— |
|
|
|
101,872 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Balance at | |
|
Charged to | |
|
|
|
|
| |
|
Beginning | |
|
Costs and | |
|
|
|
Balance at | |
| Year Ended December 31, 2004 |
|
of Year | |
|
Expenses | |
|
Deductions | |
|
End of Year | |
| |
|
| |
|
| |
|
| |
|
| |
| |
|
(In thousands) | |
|
Allowances for doubtful accounts
|
|
$ |
1,550 |
|
|
$ |
1,616 |
|
|
$ |
(13 |
) |
|
$ |
3,153 |
|
|
Allowances for doubtful notes
|
|
|
2,613 |
|
|
|
4,730 |
|
|
|
(1,450 |
) |
|
|
5,893 |
|
|
Reserves for excess and obsolete inventory
|
|
|
11,873 |
|
|
|
717 |
|
|
|
(1,768 |
)(b) |
|
|
10,822 |
|
|
Warranty
|
|
|
3,433 |
|
|
|
4,606 |
|
|
|
(4,207 |
) |
|
|
3,832 |
|
|
Allowance for net deferred tax assets
|
|
|
101,872 |
|
|
|
1,713 |
|
|
|
(11,310 |
) |
|
|
92,275 |
|
|
|
| (a) |
The deduction to the allowance for doubtful notes is due to the
recovery of previously reserved notes and due to certain notes
which have been written off during the year ended
December 31, 2003. |
|
|
|
|
(b) |
|
The deduction to the reserve for excess and obsolete inventory
is due to the sale or disposal of inventory which had been
previously reserved. |
S-1
INDEX TO EXHIBITS
| |
|
|
|
|
|
|
| Exhibit |
|
|
|
|
| Number |
|
|
|
Description |
| |
|
|
|
|
| |
3 |
.1 |
|
— |
|
Restated Certificate of Incorporation dated August 31,
1990, filed on March 19, 2001 as Exhibit 3.1 to the
Company’s Transition Report on Form 10-K for the seven
months ended December 31, 2000 (Registration No.
001-12691), and incorporated herein by reference. |
| |
3 |
.2 |
|
— |
|
Certificate of Amendment to Restated Certificate of
Incorporation dated October 10, 1996, filed on
March 12, 2003 as Exhibit 3.2 to the Company’s
Annual Report on Form 10-K for the year ended
December 31, 2003 (Registration No. 001-12691), and
incorporated herein by reference. |
| |
3 |
.3 |
|
— |
|
Amended and Restated Bylaws, filed on March 8, 2002 as
Exhibit 4.3 to the Company’s Current Report on Form
8-K (Registration No. 001-12691), and incorporated herein by
reference. |
| |
4 |
.1 |
|
— |
|
Form of Certificate of Designation, Preference and Rights of
Series A Preferred Stock of Input/Output, Inc., filed as
Exhibit 2 to the Company’s Registration Statement on
Form 8-A dated January 27, 1997 (attached as Exhibit 1
to the Rights Agreement referenced in Exhibit 10.5), and
incorporated herein by reference. |
| |
4 |
.2 |
|
— |
|
Indenture dated as of December 10, 2003, filed on
January 27, 2004 as Exhibit 4.1 to the Company’s
Registration Statement on Form S-3 (Registration
No. 333-112263), and incorporated herein by reference. |
| |
4 |
.3 |
|
— |
|
Certificate of Rights and Designations of Series D-1
Cumulative Convertible Preferred Stock of Input/Output, Inc.
dated February 16, 2005, filed on February 17, 2005 as
Exhibit 3.1 to the Company’s Form 8-K (Registration
No. 001-12691), and incorporated herein by reference. |
| |
**10 |
.1 |
|
— |
|
Amended and Restated 1990 Stock Option Plan, filed on
June 9, 1999 as Exhibit 4.2 to the Company’s
Registration Statement on Form S-8 (Registration
No. 333-80299), and incorporated herein by reference. |
| |
10 |
.2 |
|
— |
|
Lease Agreement dated as of August 20, 2001, between NL
Ventures III Stafford L.P. and Input/Output, Inc., filed on
November 14, 2001 as Exhibit 10.28 to the
Company’s Quarterly Report on Form 10-Q for the quarter
ended September 30, 2001 (Registration No. 001-12691), and
incorporated herein by reference. |
| |
**10 |
.3 |
|
— |
|
Input/Output, Inc. Amended and Restated 1996 Non-Employee
Director Stock Option Plan, filed on June 9, 1999 as
Exhibit 4.3 to the Company’s Registration Statement on
Form S-8 (Registration No. 333-80299), and
incorporated herein by reference. |
| |
10 |
.4 |
|
— |
|
Rights Agreement dated as of January 17, 1997, by and
between Input/Output, Inc. and Harris Trust and Savings Bank, as
Rights Agent, including exhibits thereto, filed on
January 27, 1997 as Exhibit 4 to the Company’s
Form 8-A (Registration No. 001-12691), and incorporated herein
by reference. |
| |
**10 |
.5 |
|
— |
|
Input/Output, Inc. Employee Stock Purchase Plan, filed on
March 28, 1997 as Exhibit 4.4 to the Company’s
Registration Statement on Form S-8 (Registration
No. 333-24125), and incorporated herein by reference. |
| |
10 |
.6 |
|
— |
|
First Amendment to Rights Agreement dated April 21, 1999,
by and between the Company and Harris Trust and Savings Bank, as
Rights Agent, filed on May 7, 1999 as Exhibit 10.3 to
the Company’s Current Report on Form 8-K (Registration No.
001-12691), and incorporated herein by reference. |
| |
10 |
.7 |
|
— |
|
Registration Rights Agreement dated as of November 16,
1998, by and among the Company and The Laitram Corporation,
filed on March 12, 2004 as Exhibit 10.7 to the
Company’s Annual Report on Form 10-K for the year ended
December 31, 2003 (Registration No. 001-12691), and
incorporated herein by reference. |
| |
**10 |
.8 |
|
— |
|
Input/Output, Inc. 1998 Restricted Stock Plan dated as of
June 1, 1998, filed on June 9, 1999 as
Exhibit 4.7 to the Company’s Registration Statement on
S-8 (Registration No. 333-80297), and incorporated herein by
reference. |
| |
**10 |
.9 |
|
— |
|
Input/Output Inc. Non-qualified Deferred Compensation Plan,
filed on April 1, 2002 as Exhibit 10.14 to the
Company’s Annual Report on Form 10-K for the year ended
December 31, 2001 (Registration No. 001-12691), and
incorporated herein by reference. |
| |
|
|
|
|
|
|
| Exhibit | |
|
|
|
|
| Number | |
|
|
|
Description |
| | |
|
|
|
|
| |
**10 |
.10 |
|
— |
|
Amendment No. 1 to the Input/Output, Inc. Amended and
Restated 1996 Non-Employee Director Stock Option Plan dated
September 13, 1999, filed on November 14, 1999 as
Exhibit 10.4 to the Company’s Quarterly Report on Form
10-Q for the fiscal quarter ended August 31, 1999
(Registration No. 001-12691), and incorporated herein by
reference. |
| |
**10 |
.11 |
|
— |
|
Input/Output, Inc. 2000 Restricted Stock Plan, effective as of
March 13, 2000, filed on August 17, 2000 as
Exhibit 10.27 to the Company’s Annual Report on Form
10-K for the fiscal year ended May 31, 2000 (Registration
No. 001-12691), and incorporated herein by reference. |
| |
**10 |
.12 |
|
— |
|
Input/Output, Inc. 2000 Long-Term Incentive Plan, filed on
November 6, 2000 as Exhibit 4.7 to the Company’s
Registration Statement on Form S-8 (No. 333-49382), and
incorporated by reference herein. |
| |
***10 |
.13 |
|
— |
|
Input/Output, Inc. Amended and Restated 1991 Outside Directors
Stock Option Plan. |
| |
**10 |
.14 |
|
— |
|
Amendment to the Input/Output, Inc. Amended and Restated 1991
Outside Directors Stock Option Plan, filed on August 28,
1997 as Exhibit 10.9 to the Company’s Annual Report on
Form 10-K for the fiscal year ended May 31, 1997
(Registration No. 001-12691), and incorporated herein by
reference. |
| |
**10 |
.15 |
|
— |
|
Amendment No. 2 to the Input/Output, Inc. Amended and
Restated 1991 Outside Directors Stock Option Plan, dated
September 13, 1999, filed on November 14, 1999 as
Exhibit 10.3 to the Company’s Quarterly Report on Form
10-Q for the fiscal quarter ended August 31, 1999
(Registration No. 001- 12691), and incorporated herein by
reference. |
| |
**10 |
.16 |
|
— |
|
Employment Agreement dated effective as of March 31, 2003,
by and between the Company and Robert P. Peebler, filed on
March 31, 2003 as Exhibit 10.1 to the Company’s
Current Report on Form 8-K (Registration No. 001-12691), and
incorporated herein by reference. |
| |
**10 |
.17 |
|
— |
|
Employment Agreement dated effective as of January 1, 2004,
by and between the Company and J. Michael Kirksey, filed on
March 12, 2004 as Exhibit 10.21 to the Company’s
Annual Report on Form 10-K for the year ended December 31,
2003 (Registration No. 001-12691), and incorporated herein by
reference. |
| |
**10 |
.18 |
|
— |
|
Employment Agreement dated effective as of April 23, 2003,
by and between the Company and Jorge Machnizh, filed on
August 7, 2003 as Exhibit 10.28 to the Company’s
Quarterly Report on Form 10-Q for the fiscal quarter ended
June 30, 2003 (Registration No. 001-12691), and
incorporated herein by reference. |
| |
10 |
.19 |
|
— |
|
Stock Purchase Agreement dated as of May 10, 2004, by and
among the selling shareholders, GX Technology Corporation and
the Company, filed on May 10, 2004 as Exhibit 2.1 to
the Company’s Registration Statement on Form S-3 (Reg.
No. 333-115345), and incorporated herein by reference.. |
| |
10 |
.20 |
|
— |
|
First Amendment to Stock Purchase Agreement dated as of
June 11, 2004, by and among the selling shareholders, GX
Technology Corporation and the Company, filed on June 15,
2004 as Exhibit 10.2 to the Company’s Current Report
on Form 8-K/A (Registration No. 001-12691), and incorporated
herein by reference. |
| |
**10 |
.21 |
|
— |
|
Employment Agreement dated effective as of June 15, 2004,
by and between the Company and David L. Roland, filed on
August 9, 2004 as Exhibit 10.5 to the Company’s
Quarterly Report on Form 10-Q for the quarterly period ended
June 30, 2004 (Registration No. 001-12691), and
incorporated herein by reference. |
| |
**10 |
.22 |
|
— |
|
Executive Employment Agreement dated as of March 26, 2004,
by and between GX Technology Corporation and Michael K. Lambert,
filed on August 9, 2004 as Exhibit 10.2 to the
Company’s Quarterly Report on Form 10-Q for the quarterly
period ended June 30, 2004 (Registration No. 001-12691),
and incorporated herein by reference. |
| |
**10 |
.23 |
|
— |
|
First Amendment to Executive Employment Agreement dated as of
June 14, 2004, by and between GX Technology Corporation and
Michael K. Lambert, filed on August 9, 2004 as
Exhibit 10.3 to the Company’s Quarterly Report on Form
10-Q for the quarterly period ended June 30, 2004
(Registration No. 001-12691), and incorporated herein by
reference. |
| |
**10 |
.24 |
|
— |
|
Second Amendment to Executive Employment Agreement dated as of
June 14, 2004, by and between GX Technology Corporation and
Michael K. Lambert, filed on August 9, 2004 as
Exhibit 10.4 to the Company’s Quarterly Report on Form
10-Q for the quarterly period ended June 30, 2004
(Registration No. 001-12691), and incorporated herein by
reference. |
| |
|
|
|
|
|
|
| Exhibit | |
|
|
|
|
| Number | |
|
|
|
Description |
| | |
|
|
|
|
| |
**10 |
.25 |
|
— |
|
GX Technology Corporation Employee Stock Option Plan, filed on
August 9, 2004 as Exhibit 10.1 to the Company’s
Quarterly Report on Form 10-Q for the quarterly period ended
June 30, 2004 (Registration No. 001-12691), and
incorporated herein by reference. |
| |
10 |
.26 |
|
— |
|
Concept Systems Holdings Limited Share Acquisition Agreement
dated February 23, 2004, filed on March 5, 2004 as
Exhibit 2.1 to the Company’s Current Report on Form
8-K (Registration No. 001-12691), and incorporated herein by
reference. |
| |
10 |
.27 |
|
— |
|
Concept Systems Holdings Limited Registration Rights Agreement
dated February 23, 2004, filed on March 5, 2004 as
Exhibit 4.1 to the Company’s Current Report on
Form 8-K (Registration No. 001-12691), and incorporated
herein by reference. |
| |
**10 |
.28 |
|
— |
|
Form of Employment Inducement Stock Option Agreement for the
Input/Output, Inc. — Concept Systems Employment
Inducement Stock Option Program, filed on July 27, 2004 as
Exhibit 4.1 to the Company’s Registration Statement on
Form S-8 (Reg. No. 333-117716), and incorporated
herein by reference. |
| |
10 |
.29 |
|
— |
|
Second Amendment to Rights Agreement dated February 16,
2005, amending the terms of the Rights Agreement, as amended,
between the Company and Computershare Investor Services, LLC
(successor to Harris Trust and Savings Bank), as Rights Agent,
dated as of January 17, 1997, filed on February 17,
2005 as Exhibit 3.2 to the Company’s Form 8-K
(Registration No. 001-12691), and incorporated herein by
reference. |
| |
10 |
.30 |
|
— |
|
Agreement dated as of February 15, 2005 between
Input/Output, Inc. and Fletcher International, Ltd., filed on
February 17, 2005 as Exhibit 10.1 to the
Company’s Form 8-K (Registration No. 001-12691), and
incorporated herein by reference. |
| |
**10 |
.31 |
|
— |
|
Input/Output, Inc. 2003 Stock Option Plan, dated March 27,
2003 (incorporated by reference to Appendix B of the
Company’s definitive proxy statement on Schedule 14A filed
with the Securities and Exchange Commission on April 30,
2003). |
| |
**10 |
.32 |
|
— |
|
Input/Output, Inc. 2004 Long-Term Incentive Plan, dated
May 3, 2004 (incorporated by reference to Appendix B of the
Company’s definitive proxy statement on Schedule 14A filed
with the Securities and Exchange Commission on May 13,
2004). |
| |
*21 |
.1 |
|
— |
|
Subsidiaries of the Company. |
| |
*23 |
.1 |
|
— |
|
Consent of PricewaterhouseCoopers LLP. |
| |
*24 |
.1 |
|
— |
|
The Power of Attorney is set forth on the signature page hereof. |
| |
*31 |
.1 |
|
— |
|
Certification of Chief Executive Officer Pursuant to
Rule 13a-14(a) or Rule 15d-14(a). |
| |
*31 |
.2 |
|
— |
|
Certification of Chief Financial Officer Pursuant to
Rule 13a-14(a) or Rule 15d-14(a). |
| |
*32 |
.1 |
|
— |
|
Certification of Chief Executive Officer Pursuant to
18 U.S.C. §1350 |
| |
*32 |
.2 |
|
— |
|
Certification of Chief Financial Officer Pursuant to
18 U.S.C. §1350. |
|
|
| ** |
Management contract or compensatory plan or arrangement. |