-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, VTh+d0DrTe69HRpqUxQNjXDZKq/DtmWcRpVjfbpvv3qGNKeY8jK2CB9woGhvf9YY jUcjDm+z1jzAdKjk54nYkw== 0000950129-02-004157.txt : 20020814 0000950129-02-004157.hdr.sgml : 20020814 20020814123332 ACCESSION NUMBER: 0000950129-02-004157 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20020630 FILED AS OF DATE: 20020814 FILER: COMPANY DATA: COMPANY CONFORMED NAME: INPUT OUTPUT INC CENTRAL INDEX KEY: 0000866609 STANDARD INDUSTRIAL CLASSIFICATION: MEASURING & CONTROLLING DEVICES, NEC [3829] IRS NUMBER: 222286646 STATE OF INCORPORATION: DE FISCAL YEAR END: 0531 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-12691 FILM NUMBER: 02733239 BUSINESS ADDRESS: STREET 1: 11104 W AIRPORT BLVD STREET 2: SUITE 200 CITY: STAFFORD STATE: TX ZIP: 77477 BUSINESS PHONE: 2819333339 MAIL ADDRESS: STREET 1: 11104 W AIRPORT BLVD STREET 2: SUITE 200 CITY: STAFFORD STATE: TX ZIP: 77477 10-Q 1 h99063e10vq.txt INPUT/OUTPUT, INC.- PERIOD ENDED JUNE 30, 2002 ================================================================================ FORM 10-Q SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2002 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 COMMISSION FILE NUMBER 1-13402 INPUT/OUTPUT, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 22-2286646 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 12300 PARC CREST DR., STAFFORD, TEXAS 77477 (Address of principal executive offices) (Zip Code) REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (281) 933-3339 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes: [X] No: [ ] At August 9, 2002 there were 51,069,732 shares of common stock, par value $0.01 per share, outstanding. INPUT/OUTPUT, INC. AND SUBSIDIARIES INDEX TO FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 2002
Page ---- PART I. Financial Information. Item 1. Financial Statements. Consolidated Balance Sheets June 30, 2002 (unaudited) and December 31, 2001............. 3 Consolidated Statements of Operations Three and six months ended June 30, 2002 (unaudited) and June 30, 2001 (unaudited)............................... 4 Consolidated Statements of Cash Flows Six months ended June 30, 2002 (unaudited) and June 30, 2001 (unaudited)................................... 5 Notes to Unaudited Consolidated Financial Statements........... 6 Item 2. Management's Discussion and Analysis of Results of Operations and Financial Condition.......................... 11 Item 3. Quantitative and Qualitative Disclosures about Market Risk..... 18 PART II. Other Information. Item 2. Changes in Securities and Use of Proceeds...................... 18 Item 4. Submission of Matters to a Vote of Security Holders............ 19 Item 6. Exhibits and Reports on Form 8-K............................... 19
2 INPUT/OUTPUT, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED) JUNE 30, DECEMBER 31, 2002 2001 ------------ ------------- ASSETS Current assets: Cash and cash equivalents...................................... $ 103,225 $ 101,681 Restricted cash................................................ 148 221 Accounts receivable, net....................................... 22,444 46,434 Current portion notes receivable, net.......................... 3,167 1,078 Inventories.................................................... 64,339 68,283 Deferred income tax asset...................................... -- 15,083 Prepaid expenses............................................... 2,908 3,115 ------------ ------------- Total current assets................................... 196,231 235,895 Notes receivable.................................................. 6,430 5,800 Deferred income tax asset......................................... -- 40,745 Property, plant and equipment, net................................ 43,569 47,538 Goodwill, net..................................................... 45,584 45,584 Other assets, net................................................. 7,672 7,609 ------------ ------------- Total assets........................................... $ 299,486 $ 383,171 ============ ============= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Current maturities of long-term debt........................... $ 1,726 $ 2,312 Accounts payable............................................... 6,417 10,169 Accrued expenses............................................... 18,248 18,814 ------------ ------------ Total current liabilities.............................. 26,391 31,295 Long-term debt, net of current maturities......................... 19,325 20,088 Other long-term liabilities....................................... 664 751 Stockholders' equity: Cumulative convertible preferred stock, $0.01 par value; authorized 5,000,000 shares; issued and outstanding 55,000 shares at June 30, 2002 and December 31, 2001 (liquidation value of $55 million at June 30, 2002)....................... 1 1 Common stock, $0.01 par value; authorized 100,000,000 shares; outstanding 51,009,054 shares at June 30, 2002 and 50,865,729 shares at December 31, 2001....................... 517 516 Additional paid-in capital..................................... 363,189 360,147 Accumulated deficit............................................ (100,602) (15,713) Accumulated other comprehensive loss........................... (3,855) (7,499) Treasury stock, at cost, 743,298 shares at June 30, 2002 and at December 31, 2001......................................... (5,769) (5,769) Unamortized restricted stock compensation....................... (375) (646) ------------ ------------- Total stockholders' equity.................................. 253,106 331,037 ------------ ------------- Total liabilities and stockholders' equity............. $ 299,486 $ 383,171 ============ =============
See accompanying notes to unaudited consolidated financial statements. 3 INPUT/OUTPUT, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) (UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, ------------------------------------ ---------------------------------- 2002 2001 2002 2001 -------------- -------------- -------------- -------------- Net sales...................................... $ 22,850 $ 59,868 $ 53,063 $ 102,277 Cost of sales.................................. 20,365 39,621 43,617 65,789 -------------- -------------- -------------- -------------- Gross profit.......................... 2,485 20,247 9,446 36,488 -------------- -------------- -------------- -------------- Operating expenses: Research and development.................... 8,667 7,659 15,688 15,196 Marketing and sales......................... 2,775 2,737 5,305 5,587 General and administrative.................. 4,709 4,717 9,336 9,610 Amortization of intangibles................. 321 1,185 637 2,321 -------------- -------------- -------------- -------------- Total operating expenses............. 16,472 16,298 30,966 32,714 -------------- -------------- -------------- -------------- Earnings (loss) from operations................ (13,987) 3,949 (21,520) 3,774 Interest expense............................... (461) (383) (496) (590) Interest income................................ 753 1,195 1,244 2,486 Other expense.................................. (207) (407) (343) (100) -------------- -------------- -------------- -------------- Income (loss) before income taxes.............. (13,902) 4,354 (21,115) 5,570 Income tax expense............................. 63,511 1,370 60,840 2,396 -------------- -------------- -------------- -------------- Net earnings (loss)............................ (77,413) 2,984 (81,955) 3,174 Preferred dividend............................. 1,479 1,395 2,934 2,785 -------------- -------------- -------------- -------------- Net earnings (loss) applicable to common shares............................... $ (78,892) $ 1,589 $ (84,889) $ 389 ============== ============== ============== ============== Basic earnings (loss) per common share......... $ (1.55) $ 0.03 $ (1.67) $ 0.01 ============== ============== ============== ============== Weighted average number of common shares outstanding................... 50,971,486 50,891,153 50,931,384 50,909,476 ============== ============== ============== ============== Diluted earnings (loss) per common share....... $ (1.55) $ 0.03 $ (1.67) $ 0.01 ============== ============== ============== ============== Weighted average number of diluted common shares outstanding................... 50,971,486 52,178,755 50,931,384 52,176,499 ============== ============== ============== ==============
See accompanying notes to unaudited consolidated financial statements. 4 INPUT/OUTPUT, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
SIX MONTHS ENDED JUNE 30, ---------------------------- 2002 2001 ---------- ----------- Cash flows from operating activities: Net earnings (loss).................................. $ (81,955) $ 3,174 Depreciation and amortization........................ 6,019 8,894 Amortization of restricted stock and other stock compensation................................. 113 207 Loss (gain) on disposal of fixed assets.............. 264 (64) Bad debt expense..................................... 140 288 Deferred income tax.................................. 59,992 -- Accounts and notes receivable........................ 21,263 (10,392) Inventories.......................................... 4,771 (6,816) Accounts payable and accrued expenses................ (9,274) 3,583 Income taxes payable/receivable...................... 335 (1,405) Other assets and liabilities......................... 556 (2,519) ---------- ----------- Net cash provided by (used in) operating activities................................... 2,224 (5,050) ---------- ----------- Cash flows from investing activities: Purchase of property, plant and equipment............ (1,932) (2,830) Business acquisition................................. (688) (6,183) Cash of acquired business............................ -- 2,032 ---------- ----------- Net cash used in investing activities.......... (2,620) (6,981) ---------- ----------- Cash flows from financing activities: Payments on long-term debt........................... (1,102) (966) Payments of preferred dividends...................... (275) (275) Proceeds from exercise of stock options.............. 551 1,736 Proceeds from issuance of common stock............... 457 371 Purchase of treasury stock........................... -- (456) ---------- ----------- Net cash (used in) provided by financing activities................................... (369) 410 ---------- ----------- Effect of change in foreign currency exchange rates on cash and cash equivalents....................... 2,309 882 ---------- ----------- Net decrease in cash and cash equivalents............ 1,544 (10,739) Cash and cash equivalents at beginning of period..... 101,681 92,376 ---------- ----------- Cash and cash equivalents at end of period..... $ 103,225 $ 81,637 ========== ===========
See accompanying notes to unaudited consolidated financial statements. 5 INPUT/OUTPUT, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (1) BASIS OF PRESENTATION The consolidated balance sheet of Input/Output, Inc. and its subsidiaries (collectively referred to as the "Company" or "I/O") at December 31, 2001 has been derived from the Company's audited consolidated financial statements at that date. The consolidated balance sheet at June 30, 2002, the consolidated statements of operations for the three and six months ended June 30, 2002 and 2001, and the consolidated statements of cash flows for the six months ended June 30, 2002 and 2001 have been prepared by the Company without audit. In the opinion of management, all adjustments, consisting only of normal and recurring adjustments, which are necessary to present fairly the consolidated financial position, results of operations and cash flows have been made. The results of operations for the three and six months ended June 30, 2002 are not necessarily indicative of the operating results for a full year or of future operations. These consolidated financial statements have been prepared using accounting principles generally accepted in the United States for interim financial information and the instructions to Form 10-Q and applicable rules of Regulation S-X of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements presented in accordance with accounting principles generally accepted in the United States have been omitted. The accompanying consolidated financial statements should be read in conjunction with the Company's Annual Report on Form 10-K for the year ended December 31, 2001. Certain amounts previously reported in the consolidated financial statements have been reclassified to conform to the current period's presentation. (2) SEGMENT INFORMATION The Company evaluates and reviews results based on two segments, Land and Marine, to allow for increased visibility and accountability of costs and more focused customer service and product development. The Company measures segment operating results based on earnings (loss) from operations. A summary of segment information for the three and six months ended June 30, 2002 and 2001 is as follows (in thousands):
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, ------------------------------ ----------------------------- 2002 2001 2002 2001 ----------- ----------- ----------- ----------- Net sales: Land........................ $ 10,823 $ 44,228 $ 28,434 $ 72,041 Marine...................... 12,027 15,640 24,629 30,236 ----------- ----------- ----------- ----------- Total....................... $ 22,850 $ 59,868 $ 53,063 $ 102,277 =========== =========== =========== =========== Depreciation and amortization: Land........................ $ 1,723 $ 1,822 $ 3,221 $ 4,107 Marine...................... 346 839 780 1,752 Corporate................... 958 1,468 2,018 3,035 ----------- ----------- ----------- ----------- Total....................... $ 3,027 $ 4,129 $ 6,019 $ 8,894 =========== =========== =========== =========== Operations: Land........................ $ (11,047) $ 5,652 $ (17,673) $ 5,981 Marine...................... 2,329 2,897 4,835 6,984 Corporate................... (5,269) (4,600) (8,682) (9,191) ----------- ----------- ----------- ----------- Total....................... $ (13,987) $ 3,949 $ (21,520) $ 3,774 =========== ============ ============ ===========
JUNE 30, DECEMBER 31, 2002 2001 ------------ ------------ Total assets: Land............................... $ 122,663 $ 139,978 Marine............................. 64,034 62,422 Corporate.......................... 112,789 180,771 ------------ ------------ Total.............................. $ 299,486 $ 383,171 ============ ============
6
JUNE 30, DECEMBER 31, 2002 2001 ------------ ------------ Total assets by geographic area: North America...................... $ 253,481 $ 340,375 Europe............................. 46,005 42,796 ------------ ------------ Total.............................. $ 299,486 $ 383,171 ============ ============
Intersegment sales are insignificant for all periods presented. Corporate assets include all assets specifically related to corporate personnel and operations, substantially all cash and cash equivalents, all facilities and manufacturing machinery and equipment that are jointly utilized by segments and all income taxes receivable and deferred income tax assets. Depreciation and amortization expense is allocated to segments based upon use of the underlying assets. A summary of net sales by geographic area is as follows (in thousands):
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, ------------------------------ ------------------------------ 2002 2001 2002 2001 ------------ ------------ ------------ ------------ North America..................... $ 7,621 $ 27,255 $ 18,685 $ 47,839 Middle East....................... 487 15,060 847 21,175 Europe............................ 8,355 5,802 16,313 11,116 Asia.............................. 2,147 3,168 3,591 5,976 Former Soviet Union............... 803 7,703 6,884 10,780 Other............................. 3,437 880 6,743 5,391 ------------ ------------ ------------ ------------ $ 22,850 $ 59,868 $ 53,063 $ 102,277 ============ ============ ============ ============
Net sales are attributed to individual countries on the basis of the ultimate destination of the equipment, if known; if the ultimate destination is not known, it is based on the geographical location of initial shipment. (3) INVENTORIES A summary of inventories is as follows (in thousands):
JUNE 30, DECEMBER 31, 2002 2001 ------------ ------------ Raw materials............................. $ 44,060 $ 46,729 Work-in-process........................... 2,576 4,191 Finished goods............................ 17,703 17,363 ------------ ------------ $ 64,339 $ 68,283 ============ ============
At June 30, 2002, some portion of the Company's inventory is in excess of near-term requirements based on the recent level of sales. Management has developed a program to reduce this inventory to more desirable levels over the near term and believes no loss will be incurred on its disposition in excess of current reserve estimates. Should the inventory reduction program not be successful, it is reasonably possible the estimated reserve could change and that the change could be material to the financial statements. (4) ACCOUNTS AND NOTES RECEIVABLE A summary of accounts receivable is as follows (in thousands):
JUNE 30, DECEMBER 31, 2002 2001 ------------ ----------- Accounts receivable, principally trade.............. $ 23,531 $ 48,186 Allowance for doubtful accounts..................... (1,087) (1,752) ------------ ----------- Accounts receivable, net............................ $ 22,444 $ 46,434 ============ ===========
7 The original recorded investment in notes receivable, excluding accrued interest, for which a reserve has been recorded was $13.6 million at June 30, 2002. A summary of notes receivable, accrued interest and allowance for loan loss is as follows (in thousands):
JUNE 30, DECEMBER 31, 2002 2001 ------------ ------------ Notes receivable and accrued interest................$ 20,268 $ 17,613 Less allowance for loan loss......................... (10,671) (10,735) ------------ ------------ Notes receivable, net................................ 9,597 6,878 Less current portion notes receivable, net........... 3,167 1,078 ------------ ------------ Long-term notes receivable...........................$ 6,430 $ 5,800 ============ ============
(5) EARNINGS (LOSS) PER COMMON SHARE Basic earnings (loss) per common share is computed by dividing net earnings (loss) applicable to common stock by the weighted average number of common shares outstanding during the period. Diluted earnings (loss) per common share is determined on the assumption that outstanding dilutive stock options have been exercised and the aggregate proceeds were used to reacquire common stock using the average price of such common stock for the period. The following table summarizes the calculation of weighted average number of common shares and weighted average number of diluted common shares outstanding for purposes of the computation of basic earnings (loss) per common share and diluted earnings (loss) per common share (in thousands, except share and per share amounts):
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, ------------------------------- -------------------------------- 2002 2001 2002 2001 ------------ ------------ ------------- ------------ Net earnings (loss) applicable to common shares........ $ (78,892) $ 1,589 $ (84,889) $ 389 Weighted average number of common shares outstanding... 50,971,486 50,891,153 50,931,384 50,909,476 Stock options and other common stock equivalents....... -- 1,287,602 -- 1,267,023 ------------ ------------ ------------ ------------ Weighted average number of diluted common shares outstanding......................................... 50,971,486 52,178,755 50,931,384 52,176,499 ============ ============ ============= ============ Basic earnings (loss) per common share................. $ (1.55) $ 0.03 $ (1.67) $ 0.01 ============ ============ ============= ============ Diluted earnings (loss) per common share: $ (1.55) $ 0.03 $ (1.67) $ 0.01 ============ ============ ============= ============
At June 30, 2002, and 2001, 4,792,785 and 4,996,173 respectively, of common shares subject to stock options were considered anti-dilutive and not included in the calculation of diluted earnings (loss) per common share. In addition, the outstanding convertible preferred stock is considered anti-dilutive for all periods presented and is not included in the calculation of diluted earnings (loss) per common share. (6) LONG TERM DEBT In August 1996, the Company obtained a $12.5 million, ten-year term loan collateralized by certain land and buildings. The term loan bore interest at a fixed rate of 7.875% per year and was repayable in equal monthly installments of principal and interest of $151,439. On August 20, 2001, the Company sold the same land and buildings for $21 million. As part of the transaction, the Company repaid the ten-year term loan. Simultaneous to the sale and loan repayment, the Company entered into a non-cancelable lease with the purchaser of the property. The lease has a twelve year term with three consecutive options to extend the lease for five years each. As a result of the lease terms, the commitment is recorded as a twelve year $21 million lease obligation with an implicit interest rate of 9.1%. The Company paid $1.7 million in commissions and professional fees which have been recorded as deferred financing costs and are being amortized over the twelve year term of the obligation. On January 3, 2001, in connection with the acquisition of Pelton Company, Inc. ("Pelton"), the Company entered into a $3 million two-year unsecured promissory note payable to the former shareholder of Pelton, bearing interest at 8.5% per year. Principal is payable in quarterly payments of $0.4 million plus interest, with final payment due in February 2003. The unpaid balance at June 30, 2002 was $0.9 million. 8 A summary of future principal obligations under the note payable and lease obligation is as follows (in thousands): YEARS ENDED DECEMBER 31, - ------------------------ 2002......................................... $ 917 2003......................................... 1,264 2004......................................... 973 2005......................................... 1,184 2006......................................... 1,470 2007 and thereafter.......................... 15,243 ---------- Total........................................ $ 21,051 ==========
(7) DEFERRED INCOME TAX The Company recorded a $68.4 million charge to establish an additional valuation allowance for its net deferred tax assets in the second quarter of fiscal year 2002. The valuation allowance was calculated in accordance with the provisions of Statement of Financial Accounting Standards (SFAS) 109, "Accounting for Income Taxes", which places primary importance on the Company's cumulative operating results in the most recent three-year period when assessing the need for a valuation allowance. Although management believes the Company's results for those periods were heavily affected by deliberate and planned business restructuring activities in response to the prolonged downturn in the seismic equipment market, as well as heavy expenditures on research and development primarily relating to the development of the Company's new VectorSeis(R) technology, the Company's cumulative loss in the most recent three-year period, including the net loss reported in the second quarter, represented sufficient negative evidence to establish an additional valuation allowance under the provisions of SFAS 109. The Company intends to maintain a full valuation allowance for its net deferred tax assets and net operating loss carryforwards until sufficient positive evidence exists to support reversal of the allowance. The establishment of this valuation allowance in no way affects the Company's ability to reduce future tax expense through utilization of net operating losses. (8) COMPREHENSIVE EARNINGS (LOSS) The components of comprehensive earnings (loss) are as follows (in thousands):
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, ------------------------------ ------------------------------ 2002 2001 2002 2001 ----------- ----------- ----------- ----------- Net earnings (loss)......................... $ (77,413) $ 2,984 $ (81,955) $ 3,174 Foreign currency translation adjustment..... 4,398 (1,425) 3,644 (2,885) ----------- ----------- ----------- ----------- Comprehensive earnings (loss)............... $ (73,015) $ 1,559 $ (78,311) $ 289 =========== =========== =========== ===========
(9) ACQUISITIONS On January 3, 2001, the Company acquired all of the outstanding capital stock of Pelton for approximately $6 million in cash and a $3 million two-year unsecured promissory note. Pelton is based in Ponca City, Oklahoma and designs, manufactures and sells seismic vibrator control systems, vibrator positioning systems and explosive energy control systems. 9 The acquisition was accounted for by the purchase method, with the purchase price allocated to the fair value of assets purchased and liabilities assumed. The final allocation of the purchase price, including related direct costs, for the acquisition of Pelton is as follows (in thousands): Fair values of assets and liabilities Net current assets.......................................... $ 5,266 Property, plant and equipment............................... 373 Intangible assets........................................... 4,969 ------------- Total allocated purchase price...................... 10,608 Less non-cash consideration -- note payable................... 3,000 Less cash of acquired business................................ 2,032 ------------- Cash paid for acquisition, net of cash acquired............... $ 5,576 =============
The consolidated results of operations of the Company include the results of Pelton from the date of acquisition. Pro-forma results prior to the acquisition date were not material to the Company's consolidated results of operations. (10) COMMITMENTS AND CONTINGENCIES In the ordinary course of business, the Company has been named in various lawsuits or threatened actions. While the final resolution of these matters may have an impact on its consolidated financial results for a particular reporting period, the Company believes that the ultimate resolution of these matters will not have a material adverse impact on its financial position, results of operations or liquidity. (11) RECENT ACCOUNTING PRONOUNCEMENTS On January 1, 2002, the Company adopted SFAS No. 142 "Goodwill and Other Intangible Assets". Under SFAS 142, existing goodwill will no longer be amortized, but will be tested for impairment using a fair value approach. SFAS No. 142 requires goodwill to be tested for impairment at a level referred to as a reporting unit, generally one level lower than reportable segments. SFAS No. 142 requires the Company to perform the first goodwill impairment test on all reporting units within six months of adoption. The first step is to compare the fair value with the book value of a reporting unit. If the fair value of the reporting unit is less than its book value, the second step will be to calculate the impairment loss, if any. After the initial adoption, the Company will test goodwill for impairment on an annual basis and between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. The Company completed its initial periodic tests for impairment during the second quarter of 2002, which did not indicate any impairment of our goodwill. The following is a reconciliation of reported net income to adjusted net income subsequent to the adoption, from January 1, 2002 of SFAS No. 142 (in thousands):
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, ----------------------------- -------------------------------- 2002 2001 2002 2001 ---------- ---------- ------------- ------------- Reported net earnings (loss) applicable to common shares.............................. $ (78,892) $ 1,589 $ (84,889) $ 389 Elimination of goodwill amortization.......... -- 972 -- 1,896 ---------- ---------- ------------- ------------- Adjusted net earnings loss applicable to common shares.............................. $ (78,892) $ 2,561 $ (84,889) $ 2,285 ========== ========== ============= =============
(12) SUBSEQUENT EVENTS On July 23, 2002, the Company acquired AXIS Geophysics, Inc., a seismic data service company based in Denver, Colorado. AXIS Geophysics provides specialized seismic data processing and integration services to major and independent exploration and production companies. The AXIS Interpretation-Ready Process(TM) ("IRP") integrates seismic and subsurface data to provide customers more accurate and higher quality data that can result in improved reservoir characterization. On August 6, 2002, the Company repurchased all of the 40,000 outstanding shares of its Series B Convertible Preferred Stock and all of the 15,000 outstanding shares of its Series C Convertible Preferred Stock (the "Preferred Stock") from the holder, SCF-IV, L.P. ("SCF"), a Houston-based private equity fund specializing in oil service investments. In exchange for the Preferred Stock, the Company paid SCF $30 million in cash at closing, issued SCF a $31 million unsecured promissory note due May 7, 2004 (the "Note") and granted SCF warrants to purchase 2,673,517 shares of the Company's common stock at $8.00 per share through August 5, 2005. The Note bears interest at 8% per year until May 7, 2003, at which time the interest rate will increase to 13%. Immediately preceding 10 the closing of this transaction, David C. Baldwin, the elected representative of the holder of the Preferred Stock, resigned from the Company's board of directors. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION SUMMARY REVIEW AND OUTLOOK In response to prevailing seismic industry conditions, we have concentrated on lowering our cost structure, consolidating product offerings and reorganizing into a products-based operating structure. We continue to evaluate additional restructuring and cost control solutions with the goal of achieving sustained profitability throughout industry cycles as quickly as practicable. Implementing these solutions could result in additional charges against future earnings. We are uncertain about the development of demand for seismic services and equipment in the near term. Recent world events and a weakened world economy indicate that demand for seismic equipment in the remainder of the year will be less robust than last year. Despite current conditions, we currently believe that revenue and operating profits for the latter half of 2002 will modestly improve compared to the first half of 2002. We believe long term fundamentals for the sector remain strong and that we should be well-positioned to benefit from new product sales and the widely anticipated strengthening sector fundamentals as demand rebounds from cyclical lows. RESULTS OF OPERATIONS Three Months Ended June 30, 2002 Compared to Three Months Ended June 30, 2001 Net Sales: Net sales of $22.9 million for the three months ended June 30, 2002 decreased $37.0 million, or 62%, compared to the corresponding period last year. The decrease is primarily due to decreased demand for products produced by our Land Division. Our Land Division's net sales decreased $33.4 million, or 76%, to $10.8 million primarily as a result of declining industry conditions. Our Marine Division's net sales decreased $3.6 million to $12.1 million, or 23%, compared to the corresponding period last year. Marine sales remain lackluster primarily due to over capacity in this sector and an abundance of marine library data. Cost of Sales: Cost of sales of $20.4 million for the three months ended June 30, 2002 decreased $19.3 million, or 49%, compared to the corresponding period last year. Cost of sales of our Land Division was $13.3 million and cost of sales of our Marine Division was $7.1 million. Cost of sales in the current quarter decreased as a result of the decrease in revenues offset partially by lower gross profit percentage on those revenues. Gross Profit and Gross Profit Percentage: Gross profit of $2.5 million for the three months ended June 30, 2002 decreased $17.8 million, or 88%, compared to the corresponding period last year. Gross profit percentage for the three months ended June 30, 2002 was 11% compared to 34% in the corresponding period last year. The decline in gross profit percentage is primarily due to under-absorbed manufacturing overhead, and to a lesser degree, severance for work force reductions. Research and Development: Research and development expense of $8.7 million for the three months ended June 30, 2002 increased $1.0 million, or 13%, compared to the corresponding period last year. Research and development expense remained at high levels as we develop a lightweight ground electronics system, ocean bottom system and next generation marine system that exploits our VectorSeis technology. The Company also incurred severance expenses and charges relating to the closure of our Austin, Texas software development facility in the current quarter. Marketing and Sales: Marketing and sales expense of $2.8 million for the three months ended June 30, 2002 remained relatively constant compared to the corresponding period last year due to severance expenses in the current quarter offset by lower commission expense. General and Administrative: General and administrative expense of $4.7 million for the three months ended June 30, 2002 remained constant compared to the corresponding period last year. This is primarily attributable to severance expenses in the current quarter offset by accruals for profit-based bonuses in the corresponding period last year for which no accrual has been recorded in the current quarter. 11 Amortization of Intangibles: Amortization of intangibles of $0.3 million for the three months ended June 30, 2002 decreased $0.9 million, or 73%, compared to the corresponding period last year. The decrease in amortization of intangibles primarily relates to the implementation of SFAS No. 142 in the current year, which among other things precludes the amortization of goodwill. Total Other Income: Total net interest and other income of $0.1 million for the three months ended June 30, 2002 decreased $0.3 million, or 79%, compared to the corresponding period last year. The decease is primarily due to fluctuations in exchange rates and falling interest rates on cash balances. Income Tax Expense: Income tax expense of $63.5 million for the three months June 30, 2002 increased $62.1 million compared to the corresponding period last year. The increase is due to a charge of $68.4 million to establish an additional valuation allowance for deferred tax assets. Although management expects that we will generate sufficient taxable income in future years to fully utilize our net operating losses, such expectation is subject to a significant amount of risk and uncertainty. In accordance with SFAS 109, we established an additional valuation allowance for our net deferred tax assets based on our cumulative operating results in the most recent three year period. Our results in this period were heavily affected by deliberate and planned business restructuring activities in response to the prolonged downturn in the seismic equipment market, as well as heavy expenditures on research and development of our VectorSeis technology. Nevertheless, recent losses represented sufficient negative evidence to establish an additional valuation allowance. We will continue to reserve all of our net deferred tax assets and net operating loss carryforwards until we have sufficient evidence to warrant reversal. This valuation allowance in no way affects our ability to reduce future tax expense through utilization of net operating losses. Preferred Stock Dividends: Preferred stock dividends for the three months ended June 30, 2002 and 2001 are related to outstanding Series B and Series C Preferred Stock. We recognize the dividends as a charge to retained earnings at a stated rate of 8% per year, compounded quarterly (of which 7% is accounted for as a non-cash event recorded to additional paid-in capital so as to reflect potential dilution upon preferred stock conversion and 1% is paid as a quarterly cash dividend). The preferred stock dividend charge for the three months ended June 30, 2002 was $1.5 million, compared to $1.4 million for the corresponding period last year. As discussed in "-- Repurchase of Series B and Series C Preferred Stock", we repurchased the preferred stock on August 6, 2002. Six Months Ended June 30, 2002 Compared to Six Months Ended June 30, 2001 Net Sales: Net sales of $53.1 million for the six months ended June 30, 2002 decreased $49.2 million, or 48%, compared to the corresponding period last year. The decrease is primarily due to decreased demand for products produced by our Land Division. Our Land Division's net sales decreased $43.6 million, or 61%, to $28.4 million primarily as a result of declining industry conditions. Our Marine Division's net sales decreased $5.6 million to $24.6 million, or 19%, compared to the prior year. Marine sales remain lackluster primarily due to over capacity in this sector and an abundance of marine library data. Cost of Sales: Cost of sales of $43.6 million for the six months ended June 30, 2002 decreased $22.2 million, or 34%, compared to the corresponding period last year. Cost of sales of our Land Division was $30.0 million and cost of sales of our Marine Division was $13.6 million. Cost of sales in the current quarter decreased as a result of the decrease in revenues, partially offset by lower gross profit percentage on those revenues. Gross Profit and Gross Profit Percentage: Gross profit of $9.4 million for the six months ended June 30, 2002 decreased $27.0 million, or 74%, compared to the corresponding period last year. Gross profit percentage for the six months ended June 30, 2002 was 18% compared to 36% in the prior year. The decline in gross profit percentage is primarily due to under-absorbed manufacturing overhead, and to a lesser degree, severance for work force reductions. Research and Development: Research and development expense of $15.7 million for the six months ended June 30, 2002 increased $0.5 million, or 3%, compared to the corresponding period last year. Research and development expense remained at high levels as we completed the final stages of VectorSeis commercialization and continue to develop a lightweight ground electronics system, ocean bottom system and next generation marine system and due to severance expenses and charges relating to the closure of our Austin, Texas software development facility in the current period. Marketing and Sales: Marketing and sales expense of $5.3 million for the six months ended June 30, 2002 decreased $0.3 million, or 5%, compared to the corresponding period last year. The decrease is primarily related to lower commission on sales partially offset by severance expenses in the current quarter. 12 General and Administrative: General and administrative expense of $9.3 million for the six months ended June 30, 2002 decreased $0.3 million, or 3%, compared to the corresponding period last year. The decrease in general and administrative expense is primarily attributable to accruals for profit-based bonuses in the corresponding period last year for which no accrual has been recorded in the current period, offset by severance expenses in the current period. Amortization of Intangibles: Amortization of intangibles of $0.6 million for the six months ended June 30, 2002 decreased $1.7 million, or 73%, compared to the corresponding period last year. The decrease in amortization of intangibles primarily relates to the implementation of SFAS No. 142 in the current year, which among other things, precludes the amortization of goodwill. Total Other Income: Total net interest and other income of $0.4 million for the six months ended June 30, 2002 decreased $1.4 million, or 77%, compared to the corresponding period last year. The decease is primarily due to fluctuations in exchange rates and falling interest rates on cash balances. Income Tax Expense: Income tax expense of $60.8 million for the six months June 30, 2002 increased $58.4 million compared to the corresponding period last year. The increase is due to a charge of $68.4 million to establish an additional valuation allowance for deferred tax assets. See discussion of Three Months Ended June 30, 2002 Compared to Three Months Ended June 30, 2001 -- Income Tax Expense. Preferred Stock Dividends: Preferred stock dividends for the six months ended June 30, 2002 and 2001 are related to outstanding Series B and Series C Preferred Stock. We recognize the dividends as a charge to retained earnings at a stated rate of 8% per year, compounded quarterly (of which 7% is accounted for as a non-cash event recorded to additional paid-in capital so as to reflect potential dilution upon preferred stock conversion and 1% is paid as a quarterly cash dividend). The preferred stock dividend charge for the six months ended June 30, 2002 was $2.9 million, compared to $2.8 million for the corresponding period last year. As discussed in "-- Repurchase of Series B and Series C Preferred Stock", we repurchased the preferred stock on August 6, 2002. LIQUIDITY AND CAPITAL RESOURCES We have typically financed operations from internally generated cash and funds from equity financings. Cash and cash equivalents were $103.2 million at June 30, 2002, an increase of $1.5 million, or 2%, compared to December 31, 2001. The increase is due to cash flows provided by operating activities and changes in foreign currency exchange rates, partially offset by cash flows used in investing activities. Net cash provided by operating activities was $2.2 million for the six months ended June 30, 2002 compared to the net cash used in operating activities of $5.1 million for the corresponding period last year. Positive operating cash flows were primarily due to a decrease in accounts receivable, partially offset by decreases in accounts payable and accrued expenses. Net cash used in investing activities was $2.6 million for the six months ended June 30, 2002 compared to net cash used in investing activities of $7.0 million for the corresponding period last year. The principal investing activities were capital expenditure projects. Planned capital expenditures for 2002 are approximately $9.9 million, including the purchase of advanced manufacturing machinery and additions of VectorSeis equipment for use in acquiring seismic data in conjunction with our North American alliance partner. Capital expenditures could increase should the Company enter into additional similar alliances to commercialize VectorSeis. We will reevaluate our capital expenditure plans for 2002 if industry conditions do not evolve as we anticipate. Net cash used in financing activities was $0.4 million for the six months ended June 30, 2002 compared to net cash provided by financing activities of $0.4 million for the corresponding period last year. The principal use was repayment of long-term debt and capital lease obligations offset by proceeds from issuance of common stock and exercise of stock options. On August 6, 2002, we repurchased all of the outstanding shares of Series B Preferred Stock and Series C Preferred Stock from the holder thereof for $30 million in cash, a $31 million unsecured promissory note due May 7, 2004 and a warrant to purchase 2,673,517 shares of our common stock at $8.00 per share through August 5, 2005. The note bears interest at 8 percent per annum until May 7, 2003, at which time the interest rate will increase to 13 percent. At August 9, 2002, we had approximately $71 million in unrestricted cash. See "-- Repurchase of Series B and Series C Preferred Stock". We believe the combination of existing working capital, current cash on hand and access to other financing sources will be adequate to meet anticipated capital and liquidity requirements for the foreseeable future. 13 REPURCHASE OF SERIES B AND SERIES C PREFERRED STOCK On August 6, 2002, we repurchased all of the 40,000 outstanding shares of its Series B Convertible Preferred Stock and all of the 15,000 outstanding shares of its Series C Convertible Preferred Stock from SCF-IV, L.P., a Houston-based private equity fund specializing in oil service investments. In exchange for the Preferred Stock, we paid SCF $30 million in cash at closing, issued SCF a $31 million unsecured promissory note due May 7, 2004 and granted SCF warrants to purchase 2,673,517 shares of our common stock at $8.00 per share through August 5, 2005. The Note bears interest at 8% per annum until May 7, 2003, at which time the interest rate will increase to 13%. Immediately preceding the closing of this transaction, David C. Baldwin, the elected representative of the holder of the Preferred Stock, resigned from our board of directors. The Preferred Stock was issued in 1999, at a purchase price of $1,000 per share (the "Stated Value"), for an aggregate of $55 million. Since that time, the Preferred Stock has earned an 8 percent dividend, of which we paid 1% quarterly in cash and we accrued the balance to increase the Adjusted Stated Value ($1,000 per share Stated Value plus accrued and unpaid dividends) of the Preferred Stock. The Adjusted Stated Value of the Preferred Stock as reflected in the equity section of the Company's June 30, 2002 balance sheet was $68.3 million. The comparable Adjusted Stated Value of the Preferred Stock as of August 6, 2002, was $68.8 million. The Preferred Stock became convertible at the option of SCF on May 7, 2002. Under its terms, the number of shares into which the Preferred Stock would have been convertible is the greater of (i) Stated Value divided by approximately $8.14 per share or (ii) Adjusted Stated Value divided by the average market price of our common stock during the ten-day trading period immediately prior to conversion. We had the right, without the holder's consent, to redeem for cash up to one-half of any Preferred Stock tendered for conversion based on the Adjusted Stated Value of such Preferred Stock on the conversion date. If SCF had converted all of the Preferred Stock on August 6, 2002, and we had declined to exercise our redemption rights, SCF would have received about 9.2 million shares of our common stock, representing 15.3% of the total outstanding common stock of the Company after giving effect to the conversion. Under the terms of a registration rights agreement, SCF has the right to demand that we file a registration statement for the resale of the shares of Common Stock SCF acquires upon exercise of the warrant. Sales or the availability for sale of a substantial number of our shares of Common Stock in the public market could adversely affect the market price for our Common Stock. CREDIT RISK A continuation of weak demand for the services of certain of our customers will further strain their revenues and cash resources, thereby resulting in lower sales levels and a higher likelihood of defaults in their timely payment of their obligations under credit sales arrangements. Increased levels of payment defaults with respect to credit sales arrangements could have a material adverse effect on our results of operations. Our principal customers are seismic contractors, which operate seismic data acquisition systems and related equipment to collect data in accordance with their customers' specifications or for their own seismic data libraries. In addition, we market and sell products to oil and gas companies. The loss of any one of these customers could have a material adverse effect on the results of operations and financial condition. See Management's Discussion and Analysis of Results of Operations and Financial Condition - Cautionary Statement for Purposes of Forward Looking Statements - Further consolidation among our significant customers could materially and adversely affect us. CAUTIONARY STATEMENT FOR PURPOSES OF FORWARD-LOOKING STATEMENTS We have made statements in this report which constitute forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934. Examples of forward-looking statements in this report include statements regarding: o our expected revenues, operating profit and net income for 2002 or the six months ended December 31, 2002; o future demand for seismic equipment and services; o future commodity prices; o future economic conditions; 14 o anticipated timing of commercialization and capabilities of our products under development; o our expectations regarding our future mix of business and future asset recoveries; o our expectations regarding realization of our deferred tax assets; o our belief regarding accounting estimates we make; o the result of pending or threatened disputes and other contingencies; and o our future levels of capital expenditures. You can identify these forward-looking statements by forward-looking words such as "believe," "may," "could," "will," "estimate," "continue," "anticipate," "intend," "seek," "plan," "expect," "should," "would" and similar expressions. These forward-looking statements reflect our best judgment about future events and trends based on the information currently available to us. Our results of operations can be affected by inaccurate assumptions we make or by risks and uncertainties known or unknown to us. Therefore, we cannot guarantee the accuracy of the forward-looking statements. Actual events and results of operations may vary materially from our current expectations. While we cannot identify all of the factors that may cause actual events to vary from our expectations, we believe the following factors should be considered carefully: Demand for our products will be materially and adversely affected if there is further reduction in the level of exploration expenditures by oil and gas companies and geophysical contractors. Demand for our products is particularly sensitive to the level of exploration spending by oil and gas companies and geophysical contractors. Exploration expenditures have tended in the past to follow trends in the price of oil and gas, which have fluctuated widely in recent years in response to relatively minor changes in supply and demand for oil and gas, market uncertainty and a variety of other factors beyond our control. Any prolonged reduction in oil and gas prices will depress the level of exploration activity and correspondingly depress demand for our products. A prolonged downturn in market demand for our products will have a material adverse effect on our results of operations and financial condition. We may not gain rapid market acceptance for our new products which could materially and adversely affect our results of operations and financial condition. Seismic exploration requires sensitive scientific instruments capable of withstanding harsh operating environments. In addition, our customers demand broad functionality from our products. We require long development and testing periods before releasing major new product enhancements and new products. We currently intend to release for commercial use our next generation land seismic data acquisition system and our next generation marine seismic data acquisition system. If our anticipated product introductions are delayed, our customers may turn to alternate suppliers and our results of operations and financial condition will be adversely affected. We have on occasion experienced delays in the scheduled introduction of new and enhanced products. In addition, products as complex as those we offer sometimes contain undetected errors or bugs when first introduced that, despite our rigorous testing program, are not discovered until the product is purchased and used by a customer. If our customers deploy our new products and they do not work correctly, our relationship with our customers may be materially and adversely affected. We cannot assure you that errors will not be found in future releases of our products, or that these errors will not impair the market acceptance of our products. If our new products are not accepted by our customers as rapidly as we anticipate, our business and results of operations may be materially and adversely affected. The rapid pace of technological change in the seismic industry requires us to make substantial capital expenditures and could make our products obsolete. The markets for our products are characterized by rapidly changing technology and frequent product introductions. We must invest substantial capital to maintain our leading edge in technology with no assurance that we will receive an adequate rate of return on such investments. If we are unable to develop and produce successfully and timely new and enhanced products, we will be unable to compete in the future and our business and results of operations will be materially and adversely affected. Competition for sellers of seismic data acquisition systems and equipment is intensifying and could adversely affect our results of operations. Our industry is highly competitive. Our competitors have been consolidating into better-financed companies with broader product lines. Several of our competitors are affiliated with seismic contractors, which forecloses a portion of the market to us. Some of our competitors have greater name recognition, more extensive engineering, manufacturing and marketing capabilities, and greater financial, technical and personnel resources than those available to us. 15 In recent years our competitors have expanded or improved their product lines, which has adversely affected our results of operations. For instance, one competitor recently introduced a lightweight land seismic system which we believe has made our current land system more difficult to sell at acceptable margins. In addition, one of our competitors has introduced a marine solid streamer product that competes with our oil-filled product. Our net sales of marine streamers have been, and will continue to be, adversely affected by customer preferences for solid products. We currently intend to commercially release a marine solid streamer in the fourth quarter of this year. We can not assure you, however, that we will find a cost-effective way to market a solid streamer product or that we will be able to compete effectively in the future for sales of marine streamers. Further consolidation among our significant customers could materially and adversely affect us. A relatively small number of customers account for the majority of our net sales in any period. During the prior year ended December 31, 2001, three customers (WesternGeco, Veritas and PGS) accounted for approximately 51% of our net sales. In recent years, our customers have been rapidly consolidating, shrinking the demand for our products. The loss of any of our significant customers to further consolidation or otherwise could materially and adversely affect our results of operations and financial condition. Large fluctuations in our sales and gross margin can result in operating losses. Because our products have a high sales price and are technologically complex, we experience a very long sales cycle. In addition, the revenues from any particular sale can vary greatly from our expectations due to changes in customer requirements. These factors create substantial fluctuations in our net sales from period to period. Variability in our gross margins compounds the uncertainty associated with our sales cycle. Our gross margins are affected by the following factors: o pricing pressures from our customers and competitors; o product mix sold in a period; o inventory obsolescence; o unpredictability of warranty costs; o changes in sales and distribution channels; o availability and pricing of raw materials and purchased components; and o absorption of manufacturing costs through volume production. We must establish our expenditure levels for product development, sales and marketing and other operating expenses based, in large part, on our forecasted net sales and gross margin. As a result, if net sales or gross margins fall below our forecasted expectations, our operating results and financial condition are likely to be adversely affected because only a relatively small portion of our expenses vary with our revenues. We may be unable to obtain broad intellectual property protection for our current and future products which may significantly erode our competitive advantages. We rely on a combination of patent, copyright and trademark laws, trade secrets, confidentiality procedures and contractual provisions to protect our proprietary technologies. We believe that the technological and creative skill of our employees, new product developments, frequent product enhancements, name recognition and reliable product maintenance are the foundations of our competitive advantage. Although we have a considerable portfolio of patents, copyrights and trademarks, these property rights offer us only limited protection. Our competitors may attempt to copy aspects of our products despite our efforts to protect our proprietary rights, or may design around the proprietary features of our products. Policing unauthorized use of our proprietary rights is difficult and we are unable to determine the extent to which such use occurs. Our difficulties are compounded in certain foreign countries where the laws do not offer as much protection for proprietary rights as the laws of the United States. We are not aware that our products infringe upon the proprietary rights of others. However, third parties may claim that we have infringed their intellectual property rights. Any such claims, with or without merit, could be time consuming, result in costly litigation, cause product shipment delays or require us to enter into royalty or licensing arrangements. Such claims could have a material adverse affect on our results of operation and financial condition. We derive a substantial amount of our net sales from foreign sales which pose additional risks. Sales to customers outside of the United States and Canada accounted for approximately 65% of our consolidated net sales for the six months ended June 30, 2002. United States export restrictions affect the types and specifications of products we can export. Additionally, to complete certain sales, 16 United States laws may require us to obtain export licenses and there can be no assurance that we will not experience difficulty in obtaining such licenses. Operations and sales in countries other than the United States are subject to various risks peculiar to each country. With respect to any particular country, these risks may include: o expropriation and nationalization; o political and economic instability; o armed conflict and civil disturbance; o currency fluctuations, devaluations and conversion restrictions; o confiscatory taxation or other adverse tax policies; o governmental activities that limit or disrupt markets, restrict payments or the movement of funds; and o governmental activities that may result in the deprivation of contractual rights. The majority of our foreign sales are denominated in United States dollars. While this practice protects the value of our assets as reported on our consolidated financial statements, an increase in the value of the dollar relative to other currencies will make our products more expensive, and therefore less competitive, in foreign markets. In addition, we are subject to taxation in many jurisdictions and the final determination of our tax liabilities involves the interpretation of the statutes and requirements of taxing authorities worldwide. Our tax returns are subject to routine examination by taxing authorities, and these examinations may result in assessments of additional taxes or penalties or both. Significant payment defaults under extended financing arrangements could adversely affect us. We often sell to customers on extended-term arrangements. Significant payment defaults by customers could have a material adverse effect on our financial position and results of operations. We are highly dependent on certain key personnel. Our future success depends upon the continued contributions of personnel, particularly management personnel, many of whom would be difficult to replace. Our success will also depend on our ability to attract and retain skilled employees. Changes in personnel, particularly technical personnel, could adversely affect operating results and continued changes in management personnel could have a disruptive effect on employees which could, in turn, adversely affect operating results. Our strategy of pursuing acquisitions and alliances has risks that can materially and adversely affect our business, results of operations and financial condition. One of our business strategies is to acquire operations and assets that are complementary to our existing business, or to enter strategic alliances that will extend our existing business. Acquisitions and alliances involve financial, operational and legal risks, including: o increased levels of goodwill subject to potential impairment; o increased interest expense or increased dilution from issuance of equity; o disruption of existing and acquired business from our integration efforts; and o loss of uniformity in standards, controls, procedures and policies. In addition, other potential buyers could compete with us for acquisitions and strategic alliances. Competition could cause us to pay a higher price for an acquisition than we otherwise might have to pay or reduce the available strategic alternatives. We might be unsuccessful in identifying attractive acquisition candidates, completing and financing additional acquisitions on favorable terms or integrating the acquired businesses or assets into our operations. Our operations are subject to numerous government regulations which could adversely limit our operating flexibility. Our operations are subject to laws, regulations, government policies and product certification requirements worldwide. Changes in such 17 laws, regulations, policies or requirements could affect the demand for our products or result in the need to modify products, which may involve substantial costs or delays in sales and could have an adverse effect on our future operating results. Certain countries are subject to restrictions, sanctions and embargoes imposed by the United States government. These restrictions, sanctions and embargoes prohibit or limit us from participating in certain business activities in those countries. Disruption in vendor supplies will adversely affect our results of operations. Our manufacturing processes require a high volume of quality components. Certain components used by us are currently provided by only one supplier. We may, from time to time, experience supply or quality control problems with suppliers, and these problems could significantly affect our ability to meet production and sales commitments. Reliance on certain suppliers, as well as industry supply conditions generally involve several risks, including the possibility of a shortage or a lack of availability of key components and increases in component costs and reduced control over delivery schedules; any of these could adversely affect our future results of operations. NOTE: THE FOREGOING REVIEW OF FACTORS PURSUANT TO THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 SHOULD NOT BE CONSTRUED AS EXHAUSTIVE. IN ADDITION TO THE FOREGOING, WE WISH TO REFER READERS TO OTHER FACTORS DISCUSSED ELSEWHERE IN THIS REPORT AS WELL AS OTHER FILINGS AND REPORTS WITH THE SEC FOR A FURTHER DISCUSSION OF RISKS AND UNCERTAINTIES WHICH COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE CONTAINED IN FORWARD-LOOKING STATEMENTS. WE UNDERTAKE NO OBLIGATION TO PUBLICLY RELEASE THE RESULT OF ANY REVISIONS TO ANY SUCH FORWARD-LOOKING STATEMENTS, WHICH MAY BE MADE TO REFLECT THE EVENTS OR CIRCUMSTANCES AFTER THE DATE HEREOF OR TO REFLECT THE OCCURRENCE OF UNANTICIPATED EVENTS. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK We may, from time to time, be exposed to market risk, which is the potential loss arising from adverse changes in market prices and rates. The Company traditionally has not entered into significant derivative or other financial instruments. We are not currently a borrower under any material credit arrangements which feature fluctuating interest rates. Market risk could arise from changes in foreign currency exchange rates. PART II - OTHER INFORMATION ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS On August 6, 2002, we repurchased all of the 40,000 outstanding shares of its Series B Convertible Preferred Stock and all of the 15,000 outstanding shares of its Series C Convertible Preferred Stock from SCF-IV, L.P., a Houston-based private equity fund specializing in oil service investments. We relied on Section 4(2) of the Securities Act of 1933 as an exemption from registration of the transaction because we only negotiated with one sophisticated party. In exchange for the Preferred Stock, we paid SCF $30 million in cash at closing, issued SCF a $31 million unsecured promissory note due May 7, 2004 and granted SCF warrants to purchase 2,673,517 shares of our common stock at $8.00 per share through August 5, 2005. The Note bears interest at 8% per annum until May 7, 2003, at which time the interest rate will increase to 13%. The note prohibits dividends to be paid in cash on our equity securities while the note is outstanding. Immediately preceding the closing of this transaction, David C. Baldwin, the elected representative of the holder of the Preferred Stock, resigned from our board of directors. The Preferred Stock was issued in 1999 at a purchase price of $1,000 per share (the "Stated Value"), for an aggregate of $55 million. Since that time, the Preferred Stock has earned an 8 percent dividend, of which we paid 1% quarterly in cash and we accrued the balance to increase the Adjusted Stated Value ($1,000 per share Stated Value plus accrued and unpaid dividends) of the Preferred Stock. The Adjusted Stated Value of the Preferred Stock as reflected in the equity section of the Company's June 30, 2002 balance sheet was $68.3 million. The comparable Adjusted Stated Value of the Preferred Stock as of August 6, 2002, was $68.8 million. The Preferred Stock became convertible at the option of SCF on May 7, 2002. Under its terms, the number of shares into which the Preferred Stock would have been convertible is the greater of (i) Stated Value divided by approximately $8.14 per share or (ii) Adjusted Stated Value divided by the average market price of our common stock during the ten-day trading period immediately prior to conversion. We had the right, without the holder's consent, to redeem for cash up to one-half of any Preferred Stock tendered for conversion based on the Adjusted Stated Value of such Preferred Stock on the conversion date. If SCF had converted all of the Preferred Stock on August 6, 2002, and we had declined to exercise its redemption rights, SCF would have received about 9.2 million shares of our common stock, representing 15.3% of the total outstanding common stock of the Company after giving effect to the conversion. 18 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS We held our annual meeting of stockholders in Stafford, Texas on May 21,2002. The following sets forth matters submitted to a vote of stockholders at the annual meeting: (a) Two directors were elected to our Board of Directors, each to serve until our annual meeting in 2004 and until their respective successors have been elected and qualified. Two directors were elected to our Board of Directors, each to serve until our annual meeting in 2005 and until their respective successors have been elected and qualified. One director was elected to our Board of Directors to serve until our annual meeting in 2003 and until his successor has been elected and qualified. The following four individuals were elected to the Board of Directors by the holders of our common stock and our Series B and Series C Convertible Preferred Stock, voting together: Nominee For Withheld ------- --- -------- Timothy J. Probert.................51,217,998 2,077,898 Franklin Myers.....................40,015,287 13,280,609 Robert P. Peebler..................51,611,661 1,684,235 Sam K. Smith.......................39,345,860 13,950,036 The holder of our Series B and Series C Preferred Stock elected David C. Baldwin to our Board of Directors. Mr. Baldwin was elected by a vote of 55,000 shares of Series B and Series C Preferred Stock, being all of the outstanding shares of Series B and Series C Preferred Stock outstanding. (b) The stockholders ratified the appointment of PricewaterhouseCoopers, LLP to audit our financial statements for the year ending December 31, 2002 by a vote of 51,779,215 shares of common stock, Series B Preferred Stock and Series C Preferred Stock, voting together, being more than a majority of the outstanding shares of common stock, Series B Preferred Stock and Series C Preferred Stock, voting together, with 1,478,784 shares voting against and 37,897 shares abstaining. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits. Exhibit Number Description -------- ----------- 99.1 Certification of Timothy J. Probert, Chief Executive Officer, Pursuant to 18 U.S.C. Section 1350. 99.2 Certification of C. Robert Bunch, Chief Administrative Officer, Pursuant to 18 U.S.C. Section 1350. (b) Reports on Form 8-K. On August 13, 2002, we filed a Current Report on Form 8-K reporting under Item 5. Other Events the repurchase of our series B and Series C Preferred Stock. 19 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized in the City of Stafford, State of Texas, on August 14, 2002. INPUT/OUTPUT, INC. By /s/ MARTIN B. DECAMP ------------------------------ Vice President-Accounting 20 EXHIBIT INDEX Exhibit Number Description -------- ----------- 99.1 Certification of Timothy J. Probert, Chief Executive Officer, Pursuant to 18 U.S.C. Section 1350. 99.2 Certification of C. Robert Bunch, Chief Administrative Officer, Pursuant to 18 U.S.C. Section 1350. EX-99.1 3 h99063exv99w1.txt CERTIFICATION OF TIMOTHY J. PROBERT, CEO EXHIBIT 99.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of Input/Output, Inc. (the "Company") on Form 10-Q for the period ending June 30, 2002 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Timothy J. Probert, President and Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ Timothy J. Probert President and Chief Executive Officer August 14, 2002 EX-99.2 4 h99063exv99w2.txt CERTIFICATION OF C. ROBERT BUNCH, CHIEF ADMIN.OFF. EXHIBIT 99.2 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of Input/Output, Inc. (the "Company") on Form 10-Q for the period ending June 30, 2002 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, C. Robert Bunch, Chief Administrative Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ C. Robert Bunch Chief Administrative Officer August 14, 2002 -----END PRIVACY-ENHANCED MESSAGE-----